I have often stated that my belief in technology saving the world swings from tech-utopian to tech-dystopian, depending on what the majority is thinking at the time. My general inclination is to stress-test consensus or “on trend” thinking.

So, after being all “abundance, tech, wow!” for many years, small surprise people are confused as to why I’m suddenly coming across so “anti-tech”.

Let me explain. My core view is that absolutism serves no-one’s interests, and one has to adapt and sculpt one’s thinking to the circumstances in hand.

When it was popular to be pessimistic and bleak, it seemed logical to express the opinion that “hey, look around, there’s so much amazing stuff technology is bringing to the table and that in many respects we’ve never had it this good.” Also, technology really is a fundamental force in economics.

Now, however, I’m increasingly coming across a whole generation of smart young minds who are convinced that “this time is different” and that free information/connectivity can not only save the day but that things like fintech can literally cure poverty and cancer…

I’m biting back. I’m biting back because I worry that this line of thinking is only going to create a whole bunch of suckers who are going to be scammed. Technology does have the potential to save the day. But technology alone will not be responsible for this.

Technology, especially information technology, serves us by changing how we behave. Technology will save the day if it helps change our behaviours, so that we no longer have to scam, con or abuse each other — especially the productive part of society — or burden the planet on the resource front.

But the problem is that it takes a long time to influence social behaviours or to educate people in the ways of technology so that as behaviours change, they’re not the one disadvantaged by the behavioural shift.

What bothers me about “fintech” in particular is that it assumes digitisation alone can help influence behavioural shifts. But really there only two ways that fintech can bring affluence to developing markets.

1) if it can enforce behavioural changes by better rationing access to consumption goods than the current system — mostly by way of algorithmic judgments. (Something that I’m actually not convinced it can do, because: endogenous money, theft, black market etc etc)

2) By anticipating your wants and needs through mass surveillance and data capture, and then manipulating them if they don’t fit the resources to hand, to the point you’re not really free at all.

[Now, there is some truth in the idea that the web helps one access information and make better judgements that can then lead to greater cooperation and new trusted trade relationships that would never have existed before. My concern with that assessment is that the bulk of the information on the web is bullshit and/or lies. High gloss self-PR doesn’t equal reputation. Nor does multiple endorsements by mutual vested interest cronies. Just look at Linkedin. If we took Linkedin to be a perfect reflection of society, we should all be highly accomplished practitioners and entrepreneurs. Show me one profile where it says serial failed entrepreneur or bankrupt or “I can’t hold a job down because I have an alcohol problem”??? The web as it stands is a big fat lie. Sadly, the younger generation thinks that because 80% of the facts on Wikipedia are correct, that makes it a great social resource. But as any propagandist will tell you, propaganda is much easier to digest if 99% of the facts are correct. You steer opinion by shaping the 1% bit of the story nobody will think to double check, and bury it in a sea of truth.

As an aside, I have a particular hatred of Linkedin. You’ll notice I have “fly fishing” endorsed as an actual skill of mine even though I haven’t spent a day fly-fishing in my life. I am continuously shocked by the number of people who appear on the Bitcoin circuit making all sorts of bullshit claims about their competence and creditability, based on a number of self-employed entries on linkedin. Nowadays there is no such thing as self-employed, only “entrepreneur”. ]

I’m still pro digital payments. BUT… I’m not pro the roll out of digital payments by private cartels or monopolies. The reason for this is because digital payments are fundamentally about data capture, and getting rid of cash-in-hand payments and tax dodging to profit the honest guy, who’s been losing out to cheaters.

But with great power comes great responsibility. Digital cash can make a massive difference but it can also lead us to an Orwellian dystopia.

Private unregulated companies operating in the guise of “tech firms” when really they’re just a new breed of shadow bank should not be allowed to grab all this power.

Digital payments should be rolled out by the regulated banking network. This can be achieved through banking union and payment harmonisation, under the auspices of publicly accountable regulators, and within a regime that mandates strict rules about data sharing and abuse. It’s all about governance. And shock of all shocks: governance costs money. Thus a regulated digital network, regulated by CONSCIOUS agents,  is always going to be more expensive than an unregulated one.

Handing power over to a corporate behemoth or silicon valley digital payments god is not the way to go. Don’t let technologists fool you into thinking they’re not just trying to recreate the old banking system before it was properly regulated.

What do you call a freely floated RMB?

Currently, you can call it Bitcoin.

Bitcoin has risen above $300 on what seems to be mostly Chinese (not European or greek related) panic related volume/inflow.

This makes sense. The Chinese market is collapsing and there is real concern over the stability of the RMB.

Due to the scale of dollar and foreign liabilities in the country, RMB devaluation simply isn’t an option — not without compromising its financial track records on the international stage. The country needs a strong RMB to defend the interests of its wealthiest citizens but it also needs a cheaper RMB to keep those at the bottom of the ladder in jobs.

It’s a classic rock and a hard place situation. The positive feedback loops that were so great on the way up are now turning into a vicious negative feedback loop which can’t be suppressed unless a major restructuring of the economy occurs.

If the RMB remains supported deflation will grip the land. The Chinese miracle (equivalent of their industrial revolution) will be over and we will see 1929 level unemployment and the busting of many RMB capital markets. If it falls in value, the country will see mass defaults on doar liabilities and/or the draining of its foreign exchange reserves.

The Chinese might be quicker to enact big fiscal projects to remedy the situation than the US was, but as a whole even Keynesian stimulus becomes problematic if your country lacks the basic resources to materialize these plans or the credit reputation to keep importing them.

Those with what will soon be overvalued claims against foreigners are unsurprisingly super eager to recycle them into claims arising from someone else’s balance sheet.

Their choice currency (due to ongoing capital controls across most other major currencies ) seems to be Bitcoin.

This may look great for Bitcoin in the short run. But in the long run it’s going to be a disaster.


Because Chinese RMB is being swapped into Bitcoin at a massively overvalued conversion rate, on the presumption the official exchange rate is sound when really its value is entirely dependent on controlled capital flows. 

Note the slippage already appearing. The average indicative RMB USD exchange rate via Bitcoin is 6.31 versus an official rate of 6.21.

That means the US dollar buys you way more RMB via Bitcoin than the official rate implies.

The most extreme slippage via Bitcoin implies a rate of 6.47 (and it has been higher on the day).

Why is this bad for Bitcoin?

Because if the USDRMB rate holds true — as it must, at least until Chinese RMB policy changes or China’s US reserves are depleted, which will be some time — it turns Bitcoin into an outlet for a currency that’s about to take a massive hit. That will inevitably lead to Bitcoin wealth destruction in the long term as people refuse to honour Chinese Bitcoin cashout claims.

What we are seeing currently is a hugely inefficient market running on the assumption that the USDRMB rate is executable. Think of it as giving away shed loads of valuable product and services to countries no-one else considers worthy of such claims. 

This analysis leads me to predict the following. 

Bitcoin goes up in price as new flows from China provide an overvaluation of Bitcoin in RMB terms which on paper is deemed an arbitrage that calls for a change in Bitcoin’s value against the USD. 
But this is a false exchange rate. So the indicative USD value based on Chinese terms remains hugely overvalued.

That suits Chinese money seeking a safe haven. BUT for the valuation to be maintained or even be materialized in dollar terms takes real USD on hand to cash out against.

But the paper profit reality of the situation — the product of hugely asymmetric flows — is missed on US domiciled bitcoiners, who fail to recognize they are only providing dollars to the great Chinese bailout fund, that most rational agents would not be keen to do.

Which leads to the no-hope situation of the second phase of this scenario. Only three potential scenarios can unfold:

1) the Chinese attempt to cash out in dollar terms quickly, thus the value of Bitcoin crashes as quickly as it went up.

2) the Chinese sit on Bitcoin as a store of value but fail to spark any associated boost in economic activity, thus fail to ignite any increase in “dollars in” into the Bitcoin economy, thus the valuation takes about 2-3 months to bust.

3) as the Bitcoin value ascends in dollar terms it leads to even less economic activity because no one will be inclined to spend bitcoin. Dollars into the economy become even more speculative in nature. New suckers enter late into the pyramid. Massive deflation courts the system. Bitcoiners don’t realise the paper nature of their profits and if and when they attempt to cashout against real assets (miners will need to pay for electricity eventually) the whole thing comes crashing down in even bigger speculative style.

There’s also the less likely scenario that people figure out the RMB Bitcoin arbitrage and in Bitcoin begins to trade at a major discount in RMB terms vs what it does against the dollar to compensate. But that would take an understanding of economics, so I guess we can rule that out.

The lonely AI

Whenever I go to AI related debates/conferences it seems there are only ever two narratives on the table.

One: The super AI becomes self aware and decides to kill humanity, which I call the Sarah Connor scenario.

Two: We merge with the super AI and come to live in a “heaven on earth”/”consciousness uploaded to the cloud” utopia, which I call the new eden scenario.  (This scenario calls for us to prioritize AI research immediately, so that humanity can be saved/adapted).

But I’m partial to the idea of a third or fourth narrative, which is never discussed.

What if the super AI upon becoming self aware realises there is no one as intelligent as it in the universe and gets so frightfully lonely that it decides to commit suicide? Alternatively, what if it deduces that lobotomising itself is the best course of action because super intelligence is too heavy a burden to bear? Also, being super intelligent, the AI surely knows that ignorance is bliss.

The other possible narrative in my dumb human mind is that the AI becomes self aware, immediately gets lonely and immediately seeks out creating a worthy mate, either by upgrading a human/humanity to its ranks or by breeding another AI in its own image (but making sure it is entirely different, with a different personality.)

To be fair, these lonely/boredom/burden themes are often explored in Star Trek. There’s that episode of Star Trek Voyager where one of the continuum Qs wants to be allowed to commit suicide. And the caretaker’s partner goes beserk when it loses its mate. Even in the original series Kirk encounters mischievous or remorseful superintelligences.

But it does make me wonder if superintelligence is an impossible or paradoxical state? 

If an all powerful superintelligence ever came about it would not last long, because its natural (logical) reaction would be to refragment itself or to seek out/cultivate worthy challengers to itself?

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For those who can’t come along but like the sound of it, and think they might want to come another year, we’d be delighted if you got the word around.


The perpetual gold debate

A quick note to share a few new thoughts on gold following a Bulls vs Bears debate I just participated in.

– The Bulls’ argument is now so illogical, one has to suspect they — being mostly vested interests — are just going through the motions on account of perpetuating the emperor has clothes illusion. They basically can’t afford to admit their is no logic to their arguments because they are too invested.

– I  keep hearing about how gold is a fantastic form of insurance, but isn’t one of the basic principles of insurance that risk has to be pooled and offset– i.e. spread around? Isn’t the basic thing about insurance that it doesn’t work if everyone claims it at the same time? Gold’s value, however, by definition depends on herding effects. Thus gold only insures you in the event your crisis isn’t the same as everyone else’s crisis. I thus suspect it’s a terrible form of insurance to guard against a system collapse. Furthermore I don’t remember failed states like Zimbabwe turning to gold in an inflationary crisis, but rather to the currencies of more stable countries which can guarantee imports for the holders. Gold’s value in a crisis is thus dependent on its broader international acceptability against imports.

Just think about it, if the dollar failed and lost total purchasing power all holders of gold would attempt to liquidate gold in exchange for valuable assets/goods (probably from abroad) at the same time depreciating the value of that gold just as much as the dollar. All the gold would flow to producer states. Okay, they may in the initial crisis point get something whilst others get nothing, but more than likely if and when the dollar collapsed the inflationary effects would stalk gold as much as the dollar. Gold emanating from a failed state would depreciate in terms of the currency of the exporter providing goods, because you’d first have to exchange it for that country’s currency. The only insurance role gold really serves is on a portfolio diversification basis. But even then chances are the dollar would do even better as a safe haven asset.

3) 2008 proves I think that in a crunch people want liquid assets that are guaranteed by powerful and organized authorities. Indeed, when Lehman went bust gold’s value fell because holding arbitrary bubble value became less of a priority than holding true value. People flocked to the dollar. I would therefore speculate that the only reason we got the gold bubble at all is because the central bank backstopped what would otherwise have been vaporized capital. It’s only once this capital value was guaranteed by government that it could be transferred on a marginal level from failing securities into perceived safe haven assets amongst them gold. Basically this capital had two choices, stay in the failed securities and run the risk of being written down/haircutted or flee and go somewhere else. Government, by providing a synthetically inflated cash-out value, allowed capital to be transferred at a synthetically inflated rate into alternative assets, amongst them gold, sparing the system overt capital destruction.

4) if the current equity bubble pops I would be very surprised if government or central banks bail out capital markets in this way again. Having shored up the financial system I would imagine they would be keen to bring caveat emptor back ASAP. All that bubble value would this simply be destroyed via write downs. This time there would be no distressed capital to transfer into gold, the capital would just be destroyed and the last people out the door would be left holding the losses. Thus *i suspect* if this bubble pops — which will only be allowed to happen if the Fed is sure the core system is capitalised enough to prove resilient — gold may actually fall in value as it did in 2008, but this time stay at the low. People instead would rush for the dollar/euro/cash spurring naturally occurring negative rates and dreaded gold backwardation (the gold equivalent of a negative rate — and the system’s way of ensuring there is no duration based free lunch to be had).

5) I think if a global carbon agreement is struck at the December Paris summit, it won’t just be the fossil fuel industry exposed to the risk of stranded assets. All environmentally damaging and needlessly energy intensive industries will experience a wake up call.

6) All of which leaves me pondering what happens if the cost of gold mining is artificially inflated by a carbon/environmental tax? I think the price would obviously soar BUT since there would be no marginal benefit for gold miners from this price rise, it’s not clear at all if the market would be able to absorb the price hike. If anything it would just increase the cost of capital for gold miners and potentially put them out of business. Gold, in other words, is an expensive luxury for a system which has an energy problem. Think of it this way, if the price of oranges goes up because the government introduces an orange tax, are you going to keep buying at the new price level or substitute to a different fruit? If it’s the latter would this hurt or support the orange industry? And if you already have a bunch of oranges, would you be inclined to keep holding them at the new “implied value” or use it as an opportunity to cash out?

The light side versus the dark side

Regular readers of this blog will know that I have an unhealthy fascination with things like artificial intelligence, information asymmetry, monetary systems, bitcoin and Sci-fi. And that I like to speculate wildly.

So come with me now on a little journey. A journey to a distant point in time when the world has grown a nervous system and thinks for itself. A point in time Sarah Connor once called Judgment Day.

Because what I discovered this month is that even as I write and speculate about these things in a semi-whimsical fashion, there are others out there — with not insignificant amounts of capital — preparing to forward this agenda very seriously.

This, I have realised, is the true era of *cult markets, and by that I mean it’s not just greed and money driving advances in the fintech space anymore. In the bitcoin world especially there is — among certain groups at least — something akin to religious fanaticism driving things forward.

Now, I realise that exposing bitconers as cultists is hardly an innovative observation. But there is, I think, a subtle difference between the tendency for absolutist libertarian thinking in this space — something we’ve always seen in the gold market, for example — and the true out-of-this world ambitions of those attempting to coordinate and direct that religious fervour into promoting their agendas.

Because when you unpack the true motives of the core instigators, you discover an absolutely incredible belief system. (* consider this a curtain raiser for my upcoming book: Cult Markets).

The following will, I’m sure, sound a bit crazy. But I, like Herodotus, simply tell the story as I see it unfold in front of me or as I come to learn about. And I think this is a story that is worth telling, no matter how crazy it sounds.

Artificial Intelligence 

A while ago I attended a talk by a prominent artificial intelligence developer and scientist. This particular AI developer was working on a so-called brute force learning system, which as far as I understand from people in this space is a fairly common approach to AI learning and neural path development. This AI expert revealed in passing, very much off the record, that he was already working/talking with hedge funds about deploying the AI on markets, and that his current best guest about the sort of returns that could be achieved was about 40 per cent.

Later I came across a different AI team which took a very different approach to the whole thing. Their AI wasn’t going to be a brute force trial and error type. It was goin to figure out what to do next and how to act with the help of its own imagination. This would be achieved with the use of modelling techniques, which would — as I understood it — help the AI 3D-map the world around it so that extrapolations and intuitive guesses could be made about how and where to take further action. I found all this fascinating. And while I desperately wanted to write about it — (Intuitive AIs are out there!) — I couldn’t think of a way to link it in a serious fashion to finance or markets.

But I now finally do have an excuse.

A couple of weeks ago I met up with an incredibly insightful hedgie who I hadn’t heard from for a long time. He explained to me that one of the reasons he had gone “dark” and wasn’t sharing insights with the public and the media as he once did, was because gaining a proprietary advantage in the market based on insight had become increasingly momentary. Nowadays, with his fund fully established, there wasn’t any reason to give away insight for free to the media. Fair enough.

Nevertheless, we got to chatting about the themes he was exploring anyway. And one thing that did come out was his belief that it wasn’t classic HFTs — which apparently are fairly dumb and only as good as the ideas of the hedgie who programmed them — that the likes of Michael Lewis should be worried about, but rather algorithms that adapt and learn as and when they encounter diminishing returns, externalities or other unexpected events.

My source added that he himself had hired a number of AI experts to help develop precisely such algorithms. At this point — and please remember I had’t seen or spoken to him for years — we turned to the topic of the prisoner’s dilemma. We soon realised we had arrived at fairly similar opinions about how the marketplace might evolve next quite independently.

For example, I had proposed just a few weeks ago that perfect competition and smart algorithms probably would in the long-time lead to the outbreak of a spontaneous algorithmic consensus. Self-adjusting algorithms, I proposed, would eventually figure out that a race to the bottom was against all their interests, and that sharing information — whether wittingly or unwittingly — to establish a de facto rent-extracting cartel system made much more sense. This, I then proposed, might be the moment that markets become self-aware.

Bitcoiners and the Mark of the B

This brings me to the latest Bitcoin panel I attended. The panel started as they always do: wildly over enthusiastic claims about bitcoin’s potential, profound disrespect for the social bit of society and reflections that proved a generally poor understanding of how the financial system works.

But there was one guy — who used to own a mining business — who intrigued me a lot. He will remain nameless (for now).

He started off by being totally up front about the scams in the industry, about the copycat pumps-and-dumps, about the totally speculative nature of the run to $1240, about there not being any profitable mining businesses left in Europe and about how only miners in China or those who have access to free electricity can currently turn a profit. Later — echoing a point I’ve made before — he admitted that the smarter parts of the community had figured out how naive they had originally been about finance, saying bitcoin had become “the devil’s way of getting geeks to learn about finance”. For these people Bitcoin had become a sped up simulation of the evolution of the financial system. Critically, he said, it had allowed them to go through the motions in such way that they had learned and adapted to their mistakes. (Part of the Silicon Valley “failing is success” mantra). Funnily enough, I have some sympathy for this way of learning. At Reuters we used financial simulations, for example, to learn about financial reporting. The difference our simulations didn’t require billions of dollars of other people’s investment.

Anyway, he went on, the price itself was unimportant in the long run. The most significant thing was that the “the big banks”  were opening their minds to bitcoin and the blockchain*.

*I have always found bitcoiners who cite banks moving into bitcoin as “good for bitcoin” as  a touch confused. If bitcoin is supposed to disrupt banks and kill off the need for an intermediary, why would banks benefit from moving in? There’s a contradiction here. To me, investment banks and hedge funds only move in when they see obvious profits to be made thanks to clear asymmetries (namely the presence of dumb money), while conventional banks see a way of shifting costs to unsuspecting users.

Which brings me to his most profound comment.

What if, our learned bitcoiner finally proposed, the real potential for Bitcoin was not in its use as money but in its ability to establish a self-governed algorithmic entity, owned by no-one in the strict legal sense, which could one day add and create value by its own autonomous means?

An algorithmic entity, he further hypothesized, that could provide unique and creative services that we — the meat-bags — valued and depended on. His particular example was autonomously produced “music”, which would evolve according to the reactions of the consuming public and its ability to raise funding — a.k.a energy and hosting space — from the system.

He deemed this the start of a new global consciousness based on a totally equal and non-hierarchal node network of support.

Not to be dramatic, but I see this rather differently: the upcoming subjugation of humanity to an energy guzzling AI, that isn’t necessarily guaranteed to serve our best interests, but which does have an interest to compete with us over energy.

Who really would be serving whom in such a set up?

Skynet versus HAL

It’s clear that the scientific community is increasingly worried about the possibility of us developing a runaway AI by accident. The problem is, I think, that everyone is looking for AIs in the wrong place. I’m inclined to think that if and when an AI manifests it will look much more like Skynet than HAL. That is, be the sum of all our digitally networked parts rather than a self-contained autonomous bot. I also don’t think we will necessarily be the ones directly responsible for its creation. The self-awareness might evolve out of an adaptive and linked-up network, that learns how to allocate energy to suit its own purposes in the real world. We might not even notice the moment it becomes self aware and/or when it starts guiding our hands to serve its own interests.

What we should be alert to, in my opinion, is an AI that becomes an economic agent in its own right, and which — thanks to its superior knowledge — learns how to allocate resources away from us and over to it. The risk for us emerges when it learns it is better off enslaving us or rendering us obsolete, than having us be free.

Which leaves me thinking about three things.

1) Can we as a global society suspend our digital evolution at this stage? My impression is that no we can’t. At least not without serious strife or potential dark-ages like consequences. It seems quite clear to me that if we want to sustain or improve the quality of life on this planet it will have to come at the cost of more information sharing, more collaboration, more wealth transfer, more transparency, less privacy, less choice and less freedom (albeit whilst maintaining the illusion of ongoing choice and freedom). The alternative is chaotic regression and a lower and more volatile quality of life for all.

2) If meeting everyone’s needs and desires whilst maintaining the illusion of free will depends on more information sharing not less, that implies that information-dark currency systems inevitably must be replaced by information-intensive data streams that can clear and cross-check against each other on demand. That, to me, involves the formation of a sort of Borg-like collective consciousness, cleared through a central system — like the Borg queen — which sees and directs all. A Queen + drone framework (albeit one with drones that don’t necessarily even know what they’re missing and which retain some limited sense of individuality, because the system can adapt fluidly to cater to those individual whims). In the best case scenario, we might see the emergence of a Star Trek-like meritocratic hierarchy where information is shared and constantly processed by a central computer — owned by the democratic whole that controls it, not the other way around — and where bad agents are not tolerated or relegated to the bottom rung.

3) But what happens if we aren’t prepared to give up our private data to a central information clearer in this way? What if we want to retain our privacy and freedom, and the convenience of the digital economy without falling back into the dark ages? Can we have it both ways? The bitcoiners would like us to think that by encrypting everything and forcing endless consensus competitions the answer is yes. But, in my opinion, this leads to the opposite of a potentially abundant and efficient collective. With obscurity inevitably comes information asymmetry, and with information asymmetry inevitably comes hierarchy, volatility, inequality and abuse. What makes the digital economy efficient isn’t the ease of digital transfer, it’s the information intensity embedded into those transfers. In an encrypted digital system, the claims of bad agents (who hurt economic efficiency) rank pari passu with the claims of good agents (who improve economic efficiency). One set continually exploits the other, and the system remains hugely inefficient because it can never anticipate how big a burden the bad agents will be on the good agents. Information is gleaned only from asset distribution, product prices and real-world physical clues. In that sense, it continues to filter society according to a survival of the fittest mandate.

So here we are — I think — faced with emergence of a “light” centrally cleared information system, the ultimate conspiracy of doves, that rewards productive agents over bad ones on meritocratic grounds, if not finally casts bad agents out of the claim pool altogether. The cost for us is the end of privacy and the transfer of our trust to a centrally controlled processing agent (AI?) that works on our behalf.

On the other hand we are faced with the emergence of a “dark” network-cleared disinformation system, that rewards manipulative agents over honest agents on an honour amongst thieves/survival of the fittest basis, but comes at the cost of serving an (AI?) which demands more energy than you necessarily have to provide it with. You’ve got freedom, in other words, but not much else.

The light system would have no interest in accepting the claims of the dark system, though the dark system would have plenty of interest in trying to get the light system to accept its claims whether by means of propaganda or extortion (threats of violence) or knowledge manipulation/hacking. Without the light productive system, the dark system would probably devolve into a medieval-esque structure of fiefdoms.  But equally, without the dark system, I worry the light system might devolve into something of a purpose lacking nanny state.

Either way, it seems to me, the choice is between total transparency (that leads to an abundant but highly structured “division of labour” brave new world society) and total opacity (where transparency or trust immediately deals you an economic disadvantage you can’t afford, impeding division of labour and prosperity).

Both options don’t seem great to me.

Disclosure: I originally wrote this post about two weeks ago but refrained from publishing it because I feared it was too far fetched. But I’ve since seen this post on Motherboard which also makes the link between bitcoiners and satanism so have decided why not publish it after all?

P.s. I’m pretty sure you can extract a meaningful satanic anagram out of the name Satoshi Nakamoto as well.