Mark E. Jeftovic

Author Archives: Mark E. Jeftovic

Mark E. Jeftovic is the founder of Guerrilla Capitalism and CEO of easyDNS.com, a company he co-founded in 1998 which has been operating along the lines described within these pages. No stranger to competing with 800 lb gorillas, easyDNS has consistently "punched above its weight" in a field dominated by behemoths such as Godaddy and Web.com. Since 2013 the company has successively achieved YoY all-time high revenues and profitability despite the entry of Amazon, Google and Oracle into the space as direct competitors.

1

Welcome to Bitcoin’s “Trough of Disillusionment”

 

The Gartner Group is widely credited with formulating the “Hype Cycle”, a trend curve that is said to model the adaptation of a new technology or paradigm.

Simply put it looks like this:

via: https://en.wikipedia.org/wiki/Hype_cycle

(read on Medium)

It certainly seems to have held sway regarding the Internet revolution, where the Peak of Inflated Expectations culminated in the Nasdaq blow-off-top of 2000 and the ensuing “Tech Wreck” crash. I remember that well, for a number of reasons including that my co-founders and I were still in “start-up” mode with our company, easyDNS.  I remember profoundly misunderstanding what was happening in those final few months.

I remember thinking, literally “this is an entirely new economy, it’s not about running profitable businesses anymore, it’s about running up your stock price.” There was a Sun Microsystems commercial that was near music video length, set to the soundtrack of the iconic rock track “Hocus Pocus” whose sole call-to-action at the end of the ad was the “SUNW” ticker symbol. And then it all imploded. That was when I started seriously learning about economics, history and finance.

I remember sitting in a diner one night having a coffee with a friend, mere months before the crash. Bullshit .COM’s were getting funded all over the place and everybody else, except me it seemed, were becoming millionaires overnight. Read on

5

Is Bitcoin Racist? (Review of “The Politics of Bitcoin”)

It is not only those who see themselves as libertarians who, through the adoption of Bitcoin and the political communities around it, routinely distribute political and economic views that are grounded in conspiratorial, far-right accounts of the Federal Reserve and the nature of representative government…

David Golumbia, “The Politics of Bitcoin: Software as Right-Wing Extremism”

The Cryptocurrency / Blockchain revolution is the second technological seismic shift to occur within the past 40 years.  The first was of course, the Internet, and once that achieved critical mass the detractors and those who feared the erosion of centralized power that the net signalled began subtly promulgating the memes of  The Four Horsemen of the Internet Apocalypse to warn off the population and justify centralized control (those were: terrorists, drug dealers, pedophiles, and organized crime. I recently dubbed “Fake news” the fifth horseman of the Internet Apocalypse). Read on

5

This Time is Different Part 2: What Bitcoin Really Is.

[Read on Medium]

To me and many others, bitcoin is not a technical revolution as much as it is a triumph of political and economic incentives.

— Two  Bit Idiot

“Systems like Ethereum (and Bitcoin and NXT, and Bitshares, etc) are a fundamentally new class of cryptoeconomic organisms — decentralized, jurisdictionless entities that exist entirely in cyberspace, maintained by a combination of cryptography, economics and social consensus”

— Vitalik Buterin

In Part I we took a look at “What Bitcoin Isn’t”, where all the usual comparisons and analogies around Bitcoin were shown to be poor fits in explaining what the phenomenon really is, ending on the obvious next question:

What is Bitcoin then?

Money is one of those “aquarium characteristics” of life. Aside from worrying about our bills or investments, the general structure  of “money” is a background medium that underpins everything and for the most part we don’t really pay attention to it. Other examples are the base utilities like electricity and running water.

As we live our lives in these “aquariums”, we don’t really question the nature or the delivery mechanisms of these structural/cultural mediums we’re immersed in, unless they stop working or until they undergo a radical change. Read on

8

This Time Is Different Part I: What Bitcoin Isn’t

 

“[Bitcoin] won’t end well, it’s a fraud…worse than tulip bulbs…[but] if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,”

— Jamie Dimon: CEO, JP Morgan

Headline: JPMorgan Guilty of Money Laundering, Tried To Hide Swiss Regulator Judgement

— via Cointelegraph

 

(Read on Medium)

Given the current, latest successive series of spikes to all time highs for Bitcoin, the detractors are working overtime to make the case that the crypto-currency is a Ponzi, a scam, a phantasm or at the very least, a bubble. Oddly, many of these same detractors spend a lot of time cheerleading “the other bubble”, that everything-bubble, stocks, bonds, real estate, even ETFs of ETFs, you name it.

It’s easy to make superficial apples-to-screwdrivers comparisons about why Bitcoin is doomed to fail. Until you really take some time to look into it. When first was exposed to the idea back in 2013 and researched it, I realized that “this really is different”, and the reason why was because of something John Kenneth Galbraith had once written which (until then) had invariably held up as true. In “A Short History of Financial Euphoria” Galbraith said:

“The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.

(emphasis added)

When one looks at the history this accurately maps every financial bubble from Tulipmania (which we will debunk as a suitable metaphor for Bitcoin shortly) right up to 2008 and beyond.

However one place where it isn’t applicable, is to the phenomenon of Bitcoin. Crypto-currencies, at least at present, have no leverage and are near impossible to purchase on credit. In other words, if asset bubbles get that way largely through leverage, and there is comparatively no leverage in Bitcoin, then something else has to be driving it.

That said…

The Price of Bitcoin is a Side Show.

Granted, at the moment it’s a very exciting sideshow for those who are on the train. A long time customer emailed me as I was writing this asking “at what point has easyDNS’ profits from accepting and holding bitcoin exceeded the actual operating profits of the company?” I had never considered that but some quick math revealed that even after cashing a chunk out to buy gold (not my greatest trade), that happened last year.

But the price action around this isn’t what is exciting about Bitcoin and the crypto-currency revolution. What is exciting is that the centralized, bankster controlled monopoly over the issuance of money itself is finished. It’s over. Even if they successfully manage to co-opt some major crypto-currencies or issue their own, Gresham’s Law will assert itself as capital managers will select a truly decentralized crypto-currency wherein they control, or have the option to control, their own private keys to safely store their wealth while they’ll use the government version to pay taxes, etc.

Whatever state issued “digital cash” comes out in the near future, I’m suspecting it will be centralized with mandatory key private key custody or escrow. When that happens it shouldn’t even be called crypto-currency, call it something else like “pseudo-crypto” or “fauxcoin” to differentiate.

Given the mostly bad analogies and unfounded criticisms being levelled at Bitcoin, let’s first take a serious look at what Bitcoin isn’t. Then in Part II we’ll look at what it is and why its different.

What Bitcoin Isn’t

“Backed by nothing”

This is the goto criticism for people who simply don’t understand that crypto-currencies are based upon mathematics, zero-trust, open-source and consensus. They think that bitcoins can simply be created “at will” and are backed by nothing.

They also say that as if the world’s reserve currency, the US dollar, isn’t, literally, “backed by nothing” and hasn’t been since 1972; and as if can’t be created at will, which it most certainly has, with a vengeance.

Source: St Louis Fed

Indeed as Galbraith continued in our earlier passage:

“This was true in one of the earliest seeming marvels: when banks discovered that they could print bank notes and issue them to borrowers in excess of the hard-money deposits in the banks’ strong rooms”.

All fiat currencies today really are backed by nothing and can be created at will (that’s what the word “fiat” actually means), and perhaps unbeknownst to many we are right now in a protracted, global currency war. Every nation is “racing to the bottom”, trying to devalue their currency against their trading partners so they can:

  1. give their exporters a competitive advantage
  2. pull stronger currencies in to make money on the exchange, and
  3. service their ever expanding debts back with devalued, cheaper currency

This is why everybody’s purchasing power is going down despite tenured academics and central bankers incessantly complaining about “low inflation” and political spokesmodels always talking up a “strong currency”.

Bitcoin isn’t: “Backed by nothing”
What is? The USD and every other fiat currency in the world.

“Bitcoin is a ponzi”

The idea that Bitcoin or most crypto-currencies are “a Ponzi” is easily debunked by understanding what a Ponzi actually is.

As observed in CryptoAssets (Burniske & Tartar, 2017), it’s very simple: new investors pay old investors.

It is important to realize that in a Ponzi, the earlier investors are literally paid with funds being injected by the new investors in a “flow through” fashion (as distinct from later investors having to pay higher prices to earlier ones to induce them to part with an asset).

As long as the number of new investors and thus the influx of funds is growing at a rate faster than the payouts to the earlier investors, the Ponzi scheme thrives. When the expected payouts exceed the rate of input, it dies.

One doesn’t have to look very far to find mechanisms that fit the definition exactly: Social security programs are all classic ponzis. The demographic reality today is that with the entry of the “Baby Boom” generation into retirement, given that the subsequent generations are so much smaller in size, additionally penalized by falling real wages, rising or multiple taxation, decaying purchasing power on their money and returns on any savings they can eek out suppressed into negative nominal yields; this Ponzi is in its terminal phase.

(Given that these exacerbating headwinds which face later generations can be summed up with the phrase “financial repression”, it is only logical that capital would “flee” to some asset or currency which appears resistant to them.)

Granted, the current ICO craze probably includes some ponzis. The Cryptoassets book describes the OneCoin Ponzi as well as how to spot a ponzi in crypto-currencies. I would have been hesitant to even call OneCoin a crypto-currency at all. It wasn’t open source and had no public blockchain.

In Bitcoin or other true crypto-currencies, early holders are not receiving bitcoin from later entrants. In fact, quite the opposite is happening. Later entrants must entice earlier ones to part with their bitcoin. Since Bitcoin cannot be created at will, it must be mined at a rate that drops over time (this year approximately 640K new bitcoin will be mined, about 3.8% of the total supply).

Demand for bitcoin is simply outstripping supply of new coins being mined (for reasons we will discuss in Part II). If said price action rises dramatically (like for example, Bitcoin suddenly became the highest performing asset class in the world) then a feedback loop would occur.  Ever higher prices would be required to induce earlier holders to sell.

Bitcoin Isn’t: A ponzi
What is: Social Security

Tulipmania

What is described above is the same dynamic that occurs in any “bull market”, as buying begets more buying, and “fear of missing out” kicks in. It is said one of the most accurate gauges of “happiness” correlates closely to how much wealth one has when compared to one’s brother-in-law.  Alex J Pollock describes it in “Boom and Bust: Financial Cycles and Human Prosperity”, as “The disturbing experience of watching one’s friends get rich”.

The trick would be to have some understanding of when a strong bull market has crossed into Bubble territory. One of the more popular analogies for Bitcoin is Tulipmania: the financial bubble that occurred in 1630’s Amsterdam with none other than tulip bulbs. Bitcoin is compared to Tulipmania so often I decided to take a closer look at Tulipmania to see if the comparison was valid.

What I found was that it most of what we know today about Tulipmania is superficial and self-referential, deriving primarily Charles Mackay’s chapter on Tulipmania in his seminal “Extraordinary Delusions and the Madness of Crowds” (1841). It is a scant 9 pages and is purely anecdotal, describing ridiculous prices paid by the otherwise pragmatic and level-headed Dutch and then it all just blew up like all bubbles do.

Finally I found Anne Goldgar’s Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, which is the most in-depth investigation to the rise and subsequent fall of Tulipmania extant today. In it we learn about the circular references that went on to inform our present time about Tulipmania:

“If we trace these stories back through the centuries, we find how weak their foundations actually are. In fact, they are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism. From there we have our modern story of tulipmania.”

She traces the lineage of MacKay’s chapter:

“Mackay’s chief source was Johann Beckmann, author of Beytrage zur Geschichte der Erfindungen, which, as A History of Inventions, Discoveries and Origins, went through many editions tions in English from 1797 on. Beckmann was concerned about financial speculation in his day, but his own sources were suspect.

He relied chiefly on Abraham Munting, a botanical writer from the late seventeenth century. Munting’s father, himself a botanist, had lost money on tulips, but Munting, writing in the early 1670s, was himself no reliable eyewitness. His own words, often verbatim, come chiefly from two places: the historical account of the chronicler, Lieuwe van Aitzema in 1669, and one of the longest of the contemporary pieces of propaganda against the trade, Adriaen Roman’s Samen-spraech tusschen Waermondt ende Gaergoedt (Dialogue logue between True-mouth and Greedy-goods) of 1637. As Aitzema was himself basing his chronicle on the pamphlet literature, we are left with a picture of tulipmania based almost solely on propaganda, cited as if it were fact.”

(emphasis added)

Goldgar helps the reader in pursuit of truly understanding Tulipmania by rewinding to the late 1590’s, when there were no tulips in what is now Holland, or in fact Europe. Gardens were purely functional, for growing food, herbs or medicinals. Then tulips and other curiosities began coming into the country and Europe from merchant vessels trading in the Mediterranean and Far East.

The “flower garden” arose for the first time, and it was spectacular – giving rise to an entire movement of collectors and aficionados, whom in the early days were as a rule well-to-do and affluent. In later years, more people sought out, and then speculated in the tulip trade to not only profit, but to lay their own claims on what they perceived to be a higher economic class or status.

At the risk of over simplifying her work, the Tulip trade became intertwined and inseparable from, art.

“The collecting of art seemed to go with the collecting of tulips. This meant that the tulip craze was part of a much bigger mentality a mentality of curiosity, of excitement, and of piecing together connections between the seemingly disparate worlds of art and nature. It also placed the tulip firmly in a social world, in which collectors strove for social status and sought to represent themselves as connoisseurs to each other and to themselves.”

The more I delved into understanding Tulipmania, the more I couldn’t escape thinking that the analogy was much more applicable to a different “asset class” which did enjoy a momentous bubble in recent times, but it wasn’t bitcoin or crypto-currencies. To belabour my point, Bitcoin was impelled not by art, beauty or any semblance of collectibility but emerged primarily as a resistance to financial repression.

Something that was driven by uniqueness and fostered an aristocratic in-club all it’s own and until recently enjoyed stratospheric price action, was the aftermarket in domain names. This isn’t the place to conduct a post-mortem on that bubble, but suffice it say that the distinct characteristics of domain names more closely resembled that of tulip bulbs than Bitcoin does. (For the reader interested, I have written at length about the domain aftermarket here and here).

Bitcoin isn’t: Tulipmania
What was like Tulipmania? Domain names.

If Bitcoin isn’t a digital fiat backed by nothing, nor a ponzi nor Tulipmania, then what is it? Why has this come out of literally nowhere to become the strongest performing and fastest growing asset / currency in the world?

When I started writing this post I wasn’t sure myself. I had to go back through my library and look at history and try to find some historical antecedent for what was happening. After looking back through the origins of money itself and working forward I still wasn’t any closer to a mental model that “worked”.

Then around 2am the other night I woke up with the idea that I was looking in the wrong place, and it hit me with such force that I had a hard time getting back to sleep – even though I had made an “off the cuff” tweet that captured the basic idea of it a few weeks earlier (which I can’t find now).

I’ll take you through it in Part II. (Hope to have it up soon). But in the meantime, I’ll leave you with another megabank CEO who’s take on all this is very different from Jamie Dimon’s. Goldman Sachs’ CEO Lloyd Blankfein here muses on why it’s entirely plausible that money may evolve from being based on fiat to being based on consensus. Some truly extraordinary remarks coming from a man in his position.


 

Also See:

2

The Transition Overview: Building Companies That Matter

“The terms transition towntransition initiative and transition model refer to grassroots community projects that aim to increase self-sufficiency to reduce the potential effects of peak oil, climate destruction, and economic instability.” (Wikipedia)

https://en.wikipedia.org/wiki/Transition_town

Overview

The Transition Town phenomenon is a self-organizing movement to create resilient communities that can prosper in the oncoming era beyond cheap oil.

I was drawn to this concept when I first encountered it and was pleasantly surprised to find out that I lived not far away from one, Dundas Ontario is just a few miles away from my home in the west end of Toronto, Canada.

Even still, the prospect of pulling up stakes and moving there wasn’t practical when I came across the idea. But thinking about it made me realize that there was a community that I was already a part of, had been working closely with for nearly 20 years and was populated by people who held a lot of these “transition values”. Most of us are health conscious, long-term thinkers and independently minded. A few of us already source large portions of our food from a nearby farm, and we had collectively eschewed the “groupthink” of mainstream economics and politics, of perpetual “growth for growth’s sake” and ever expanding debt, and seeing it as for the most part leading society to what will prove to be counter-productive.

That community of course, easyDNS the company I had co-founded back in 1998. So while I realize that maybe personally it would be unrealistic to buy a hobby farm anytime soon, it was entirely possible for the business to someday invest in one (we haven’t yet, but we could).

Out of this realization I began researching the premise of “The Transition Company” or the “Transitional Corporation” or just a “TransitionCo” for short. Read on

Canadian Government’s Controversial Tax Proposals. Where are we now?

By Peter Weissman FCPA, FCA, TEP who has been tirelessly advocating against the current administrations’ plans to “supertax” small business “passive income” at 73%. (I also wrote my own reaction to the hypocrisy of this proposal on my personal blog).

Concerns regarding Finance Minister Bill Morneau’s controversial July 18, 2017 proposed changes to tax rules for private corporations are still numerous and significant. Ever since the ill conceived proposals were announced, anxiety levels have been high. Some business owners have put growth decisions on hold while others have decided to move or fund growth outside of Canada. While the Prime Minister and Minister Morneau recently announced some retreat from their initial attack the devil will be in the details, none of which have been disclosed. The government’s attack on private businesses has villainized this back bone of our economy, created unnecessary anxiety and created distrust of our government and its motives.

Some of the anxiety and distrust could have been alleviated had Mr Morneau responded in good faith to the flaws and risks of the tax proposals that were identified by businesses and professionals.  Instead, the government further undermined its credibility by the manner in which it chose to respond. Selfishly, the government made business owners wait while responses were announced without details, slowly, over the course of National Small Business Week. The governments choice to prolong business anxiety in order to market its climb down from some of the most controversial tax proposals we have seen in decades was insensitive and indicative of its lack of respect for small businesses.

As modern day Trojan Horses, Minister Morneau and Prime Minister Trudeau announced their intentions to continue their battle with small businesses from within actual small business venues.

On October 16, from a Pizzeria north of Toronto, the Minister announced he will simplify the income sprinkling proposals. All he actually did was state that the proposed subjective “reasonability” test will be based on a shareholder’s contribution to the business. Professionals have largely agreed that income sprinkling is an area that can be tightened up but have recommended the use of unambiguous solutions such as precluding income sprinkling to children until they are 25. These quantifiable or “bright line” tests are imperative in order to eliminate uncertainty, allow the CRA to audit efficiently and avoid overwhelming taxpayers and the already overburdened tax court with expensive litigation the use of subjective terms like “meaningful contributions” will create.

Yet the Minister has chosen to proceed with an ambiguous reasonability test.  In his November 1 statement to the Standing Senate Committee on National Finance, the Minister stated that there are reasonability tests in other areas of tax so this is nothing new.  This type of uninformed self-serving statement is infuriating.  The general public might accept such a rational but tax specialists cannot let the Minister get away with this disingenuous comment.  Reasonability tests exists with respect to items like salaries where there are comparables.  There are no comparables to use for private company dividends and no jurisprudence to provide guidance.

The decision to abandon restrictions on the use of the lifetime capital gains exemption was good news but there are many unanswered questions.  Will the exemption be available to inactive shareholders?  Will gains above the exemption amount be re-characterized as high rate dividends, as is currently written in the July 18 proposals?

Missing from the October 16 announcements were any references to the most troublesome components of his income splitting proposals.

At this press conference the government also announced the reduction in the small business tax rate. Most Canadians don’t realize that the nominal benefits to businesses, from this change, will be offset by an increase in the personal tax rate on dividends. The benefits of a preferential  small business tax are questionable and some professionals have even suggested eliminating the small business tax rate.

On October 18, from Hampton, New Brunswick, the Minister announced he will move ahead with plans to penalize private companies that retain capital with taxes totalling 73% if passive income earned is in a small business. An exemption for the first $50,000 of annual passive income was announced. Even with the arbitrary $50,000 exemption, these proposals are ill-conceived and should be scrapped. The necessity to accumulate capital reserves is undisputed and the ability to accumulate more capital keeps Canada a relatively attractive place to do business. In his testimony before the Standing Senate Committee on National Finance, the Minister acknowledged that the government has not even determined how much revenue the passive income measures will generate nor the economic impact they will have. It is irresponsible and mean spirited for our government to announce such a significant policy without even understanding the pros and cons.

Tax professionals have performed the analysis and the results are shocking.  The value of a Canadian private business will be hugely impacted if the passive income proposals are enacted.  Already, Canadian businesses do not grow to the same extent as companies in many other industrialized countries. The passive income proposals will further reduce the value of private businesses by millions of dollars.  This effect is enough to make even the most patriotic of Canadians move, grow or build their businesses outside of Canada. By his own admission, Mr. Morneau is not aware of this reality nor does he have his own projections. For these reasons the passive income proposals must be totally withdrawn.

Finally, on October 19, from a farm in Erinsville, Ontario where the only person “out standing in his field” was the farmer, Mr. Morneau said he will not move forward with proposals that would have made transfers of the family business to the next generation taxable at almost double the rate of a sale to a third party. Mr. Morneau, however, made it clear that changes will come. He stated

“In the coming year, the Government will continue its outreach to farmers, fishers, and other business owners to develop proposals to better accommodate intergenerational transfers of businesses while protecting the fairness of the tax system”.

Protecting the fairness of the tax system is our government’s code for “increasing taxes on small businesses”.

Finally, no proposed legislation for the revised rules has been released but they will be effective on January 1, 2018. Further showing his contempt for small businesses, the Minister Morneau has stated that, despite the effective date of January 1, draft rules will not be released until mid to late January and won’t be tabled for approval until the spring 2018 budget.

Think about this. The government is forcing punitive tax measures on small businesses but won’t tell us the details until well after the clock starts. Why is there such a rush? This ominous uncertainty is unhealthy for our economy, has paralyzed businesses, and is unnecessary and irresponsible.

Private businesses are the most vulnerable to tax changes and can least afford what is being forced on them. Yet the government continues to tell Canadians it is only making our tax system “fairer”. Perhaps the Prime Minister and Mr. Morneau have been sampling edibles that will become legal in January.

The Minister, the Prime Minister and all Liberal MP’s should not misjudge the apparent silence from the small business community as approval for the state of these tax proposals. Our message hasn’t changed. The proposals, even in their apparent current form, are not acceptable. Prior to the October announcements the proposals could have been salvaged with appropriate modifications.  The government ignored the feedback it received and has made the remaining rules even worse.  At this point, the only responsible approach is for the proposals to be totally abandoned in favour of a fresh start, with proper collaboration.

Once again, I urge the government to slow down and get this right. Don’t mistake the business and tax communities’ silence as approval. We have not gone away.  We’re just resting.

Don’t have a Mission Statement. Be On A Mission.

[ Originally published November 24, 2014 on the easyDNS blog and included here to build up some base material ahead of launch – markjr] 

The 800lb Gorilla in your space has a Mission Statement. Possibly complimented by a Vision Statement and maybe even a Values/Ethics Statement for good measure.

These were either outsourced to a consulting firm or dreamed up in a series of team-building workshops.

They encapsulate values of ethics, morality, diversity, commitment to excellence, customer service and a dedication to quality.

When employees of the Gorilla hear the Mission Statement, their eyes glaze over. By the end of the Values/Ethic Statement they are comatose.

Most of the people inside the Gorilla company couldn’t tell you the Mission Statement if you asked them and none of these statements have any impact on what actually goes on inside the company.

By contrast, you are On A Mission. You have a singular purpose that drives your every move. It is what Jim Collins calls “your hedgehog concept”. It gets you up in the morning. It keeps you awake at night. You live and breathe your mission and you let nothing distract you from it. Your mission is your obsession.

Our mission easyDNS (my company) has always been “To Drive A Stake Through The Heart of Lock-In In All Its Forms”.

When my partners and I started the company back in ’98, “lock-in” was the perpetual bogeyman that made our lives, and the lives of our customers miserable. So we set out to kill lock-in. Nearly 20 years later almost every strategic move we make can still be reduced to that same core principle:

Does it set our customers free? Then we do it. Does it box them in? Then we don’t. That’s a mission.