The Cryptocurrency Singularity
medium.com
medium.com
"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."
IMHO this is what Bitcoin is all about. Not a get-rich-quick scheme or whatever insults some people throw at it, but a sound, arguably better alternative to fiat currencies.
Aside: If you haven't yet gotten into the fancy dancy, drama sprinkled ICO, Scamcoin, and Altcoin world I cannot recommend it enough. It's hilarious, like the cambrian explosion of cryptomoney.
See them while they last.
Fiat money is great as a medium of exchange in your local jurisdiction. Start moving across borders and you have problems. Save long-term in your bank account, and inflation will eat its value away. Have political or religious views that run counter to an oppressive regime, and you will find your accounts seized or frozen. Live through a war or serious economic downturn, and you may find that all your previous cash and savings are completely worthless.
Bitcoin doesn't have take-backs if you mess up: a bit of lax security and a hacker can get all your money. Insufficient backup solution also loses all your coins. Using on-chain transactions for daily point-of-sale purchases is slow due to the block times. Speculative pressures drive wild swings in prices due to illiquid markets for crypto.
There are plenty of reasons to avoid each type of currency, and each has its own advantages.
You have similar problems with bitcoin except they manifest themselves in a different part of the process, namely when you have to convert the transferred funds into local currency in order to use it for goods and service. Trying to coordinate in-person meet ups to exchange bitcoin for spendable money is inconvenient, unsafe and comes with a high markup, it's also a non-starter if you have to transfer the funds to a region with limited electricity/internet access or you're dealing with a non-technical recipient.
> Save long-term in your bank account, and inflation will eat its value away.
Bitcoin does not solve this "problem". The logic behind inflationary economic incentives aside, there is no guarantee that bitcoin's price will continue to rise, it could easily crash to half price tomorrow and recent history shows us that nobody really knows what events cause the price to swing wildly.
> Have political or religious views that run counter to an oppressive regime
As I said, not being operated by a central authority is one of the only benefits of bitcoin, however, in the case of an oppressive regime, bitcoin's usefulness begins to approach 0 since the oppressive regime could eliminate your ability to access the internet or they could just imprison or kill you.
The programmability aspect is cool and novel but mostly useless in practice, .e.g smart contracts and similar tech have yielded close to zero in terms of useful applications. Besides internet gambling I cannot think of a single useful application for smart contracts even in theory, in practice they are non-existent.
Moreover, the applications developed as a result of token funding can generate economic activity and increase efficiency. And it's not out of the question that traditional companies will issue security-tokens that provide a legal claim (or perhaps a claim that while not contractually guaranteed, is guaranteed by collateral put up by the firm, and which is held by a larger trusted third party that acts as an adjucator) on the company's underlying assets and revenues, especially in countries that are not well connected to the international financial system and thus have difficulty receiving payments from foreign investors. Token securities could also be an opportunity for smaller companies that have difficulty meeting the regulatory requirements for issuing traditional securities and which operate in countries where issuing such tokens is not illegal.
In any case, this particular contention is somewhat beside the central point I was trying to make, which is that the programmatic and geography/identity-transcending nature of cryptocurrency gives it abilities that traditional currencies don't have, and will obviously find use-cases in an enormous number of applications overtime.
National currencies are better for buying a cup of coffee and paying your taxes.
But over the last 9 years, Bitcoin has proven to be a far superior store of value.
Maybe Bitcoin's role will be as a reserve currency, the "gold standard" of both national currencies and cryptocurrencies.
Bitcoin is slow, stable, secure and reliable. So save in Bitcoin. Move large quantities across borders in Bitcoin.
But do routine transactions in whatever is most convenient for each transaction.
Ubiquitous usage by "the masses" to buy coffee isn't what makes Bitcoin valuable, since that's not its role.
And despite its 500% price appreciation this year, Bitcoin's volatility is much lower now than in years past.
Here's a chart of volatility since 2010: http://imgur.com/a/CY1j6
If what you want is something which holds its value from day to day and is secure against normal levels of inflation, bonds and interest-paying savings accounts have been around for a very long time
We can't trust fiat currencies but we didn't have any other choice for a very long time so we got used to them. There is no way for you to carry hundreds of notes and coins on you and feel secure let alone convenient.
As for ease of use, I remember when the Euro was introduced many people were super confused with the new currency.
-It is lighter--I can carry it in my head
-It travels faster
-It is not inflated by 2% a year
-It cannot be forged
-It can cross borders
You cannot carry those big numbers in your head comfortably. Heck, it is tricky to carry a wallet ID. Even trickier to get a physical transaction done with BTC.
I think it may be that bitcoin makes a better gold than cash, but it remains to be seen. Volatility is trending down, long-term.
Not just that, but most importantly in term of scalability.
At the moment we have less than 5,000 transactions per 10 minutes, which are less than 100 per second. Compared to what old-fashioned fiat banks handle, this is a joke.
Bitcoin does have its place in the world, but not as a full substitute of fiat currencies.
A few years ago I was in SV trying to network and raise money for the crypto options and futures exchange I had just built. I ended up being invited to a "Bitcoin poker" game at a Google exec's house up in the hills with other Bitcoin entrepreneurs, including Charlie Lee (founder of Litecoin and at the time chief engineer at Coinbase). We were playing Texas Hold 'em with a buy in of I think 100mBTC and feeling very revolutionary for having a poker game with no cash on hand.
Except the buy in took about half an hour. The exec's home was way up in the hills and half of us got very poor cell reception. Those of us using Coinbase (including Charlie Lee I recall) couldn't send our transactions to the pot address because we couldn't receive our 2FA text messages from Coinbase (which cascaded in after we left that night). After a lot of lunacy including running around in the backyard and driveway looking for a spot of coverage, we finally settled on a system of handwritten IOU notes, and most people had to buy in twice and have an appointed stranger promise to send them BTC later.
I would argue that there were few people savvier than our group when it came to Bitcoin, and we were having this experience? I realized I was maybe a little too immersed in the hype to see where Bitcoin was falling short in usability.
Access to cheap power, powerful electronics, and reliable Internet connectivity are not generally what I think of when I consider the downfall of society.
Ironically, this is not too different from how the financial industry solved the problem of having trouble moving large quantities of precious metals. Lots and lots of IOU notes. Eventually, the IOU notes were so ubiquitous that the underlying precious metals could be dispensed with entirely, and we got fiat.
Then this:
> When the singularity is reached, I think people will be more likely to choose to spend their inflationary fiat currency instead of their deflationary cryptocurrency.
I'm lost here. People already prefer to spend USD over Bitcoin. So I understand the change would be if Bitcoin inflates faster, because then people will prefer to spend Bitcoin. But the article sais the opposite.
Or doesn't "stable against USD" mean that Bitcoin will inflate/deflat at around the same rate as USD?
Interesting article, I'd love to understand it! Anyone?
Bitcoin is going up in value, and according to the market predictions it will go way higher, so it's deflationary.
Bitcoin holders will prefer to spend cash money to bitcoins anytime in speculation of future gains.
I see bitcoin more of a speculative investment at the moment, than a type of currency. Only the ones that are riding the bitcoin trains seems to think this is the future of money. Outside that bubble nobody really uses it.
Just as an example: I don't see why the US government couldn't adopt the best parts of crypto (e.g. the public ledger) but also be able to control it and how that kind of move wouldn't make it instantly the most trusted cryptocurrency vs all the ones we speculate on today.
[1] https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-in... [2] https://www.coindesk.com/how-bitcoin-helps-afghan-girls-achi...
I don't think he has a good understanding of what money is or how it works.
It seems he thinks that there is limited quantity of dollars (or whatever) stacked under mattresses or something and that people is going to start spending them in order not to get stuck with them. It's funny.
Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity.
This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these tokens.
Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics.
The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough.
It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly).
It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility keeps the speculation wild and cryptocoins unstable.
Like most investments there will be a trade-off of risks vs returns but both currencies will in the long run, be poor investments compared to income generating assets tied to real production.
I don't think gold is the right medium for the singularity because it is not easy to obtain and subdivide. It needs to be in the the vicinity of choosing the inflated coin on one hand, and the more valuable coin on the right.
Perhaps it's this trait that will keep Bitcoin volatile? Because it's easy to go in and out of it, volatility will remain high?
Intrinsic value discussion aside (which is its own discussion worth having), I would certainly like to keep more of my money in gold vs my local currency if gold were easy to get and keep. Peter Schiff says goldmoney.com does this, but I'm not interested in owning a certificate.
You bring up a good point though. The closer I imagine ourselves being at the event horizon, the fuzzier the details become. For example, I don't know what "stable enough" is exactly. I guess the question is now, will it ever get close enough to go past the event horizon?
I don't think crypto-currencies will ever get that popular though. It would require governments to be on board and foolishly march towards the 1929 thing again. But you never know, as they say, history rhymes.
[1] https://mises.org/library/history-money-and-banking-united-s... (free audio book, epub, and pdf available)
There are other currencies which are not-inflationary, trustless and decentralized, and many more currencies with various levels of those properties, some are more centralized and require trust in a few in various ways, and some are decentralized trust-less but still inflationary.
There is even cryptocurrencies which do not use Proof-of-Work, or Proof-of-Stake, or Proof-of-Anything - but still can reach consensus in open distributed network.
Similarly, I'm unclear on why confirmation times aren't considered a serious problem. It seems like BTC enthusiasts like to discuss a hypothetical future in which the BTC infrastructure is so mature that you can buy coffee without worrying about fees and confirmation times, but I don't see how we get there from here. Either the payment takes hours to confirm (leaving the coffee shop vulnerable to double-spending) or it goes through an off-chain processor (who would demand to know my identity). Either way you're losing one of the main selling points of using a cryptocurrency in the first place.
It's a more long term view of the impact of cryptocurrencies concerning government issued currencies.
There are other reasons, also, why Bitcoin or it's ilk would be particularly bad commodities to show this effect- notably, that the Bitcoin system can handle only a finite volume of transactions efficiently, and while it's capacity can be increased, the community managing it is (so far) still too disorganized to do so quickly (and without dramatic measures like forks and such.) Gold trading, as far as I know, already has none of these limitations, so cryptocurrencies have catching up to do, on that front.
rofl
If you want people to use currency more, you make it inflate faster. This guy does not understand macroeconomics.
A: They use decimals.
Honestly, I'm kind of scared/surprised more people aren't talking about this.
What I'm trying to say is that if people have a choice, they'll keep their wealth in a currency that destroys their wealth the least slowly. This, I suspect, will have a runaway effect. We probably wouldn't be able to stop it if we tried, which sounds a lot like the AI singularity.
You are also effectively demoting the US dollar to the current inferior currency of the two to support your little adage, which I find a bit strange.
I believe your intention was just to write a little thought experiment, which is cool. I'm just a little baffled the way some people follow along for the ride without question.
Perhaps obvious, but I hold no cryptocurrency. I'm not saying I never would, but the sheer amount of dreamy speculation like this is exactly what keeps me away from the market.
I appreciate your replies - not sure if I mentioned it earlier to you, but I posted it here in HN because there is no shortage of smart people willing to express their thoughts.
You are talking about the singularity being the point that we switch to crypto currency. I suppose my argument is that the singularity may not come because of deflation counteracting and convincing people to continue holding.
All in all I'm glad it's been such a diplomatic discussion. I would engage people the same way if I were you and appreciate that you seek new information.
It sounds like what you said is that the singularity may not happen because cryptocurrency deflation will make cryptocurrencies more attractive to hold compared to inflationary fiat. I'm fairly certain I understood it wrong.
Won't people move more of the money into deflationary currencies if they are accessible and exchange friction between the inflationary one and deflationary one is acceptable?
I appreciate the appreciation!
However, the author's broader point appears to be that the economic impact of a deflationary currency is largely unknown, and as expressed is worth considering. IANAE, but it seems at least conceptually possible that there could be an economy in which every actor's rational decision was to always buy some token because it appreciated so reliably. Consider, e.g., Shubik's "Dollar Auction" paradox, in which a sequence of rational decisions can lead to an ultimately irrational final outcome. Coupled with Bitcoin's expenditure of energy as proof of work, Bitcoin could prove to behave like a kind of superintelligence akin to one of Bostrom's paperclip maximizers, except it's one that consumes more and more energy resources as it attempts to maximize the value of Bitcoin.
+
'people are hoarding bitcoin'
(does not imply)
'bitcoin is a higher valued currency'
Inflation is bad, but so is deflation because it encourages saving your money which, in turn, hurts liquidity in the marketplace (i.e. the amount of cash freely flowing around). Liquidity is essential to keep the economy moving.
Isn't what we want really a currency with just a little bit of inflation that keeps people spending their dollars today rather than saving them for tomorrow?
Think of it more from a general level and on even bigger purchases like a house. Everyone stopping buying houses for a year because they think sitting on their own currency (regardless of interest rates and the housing market) will make it cheaper is not a good thing.
As time goes on, the notion that coffee or meals are suitable to be paid in bitcoin seems more absurd. You would no more pay for a meal with a gold bar than you would with a Krugerrand. It will be seen as decadent for all those pizzas, controlled substances and ransoms to have been paid in BTC -- a kings ransom for pizza?
Bitcoin will likely never be a general purpose payment network. Lightning MAY if it obtains support from legacy services like VISA and MASTERCARD. I suspect V/MC will be the lightning nodes with the most payment channel volume.
A few months back I wrote a tongue in cheek version about if the DAO hack was to prevent the singularity [1]. But I'd be curious if it were actually possible.
1. http://arthur-johnston.com/essay/2016/06/26/Rokos_DAO.html
That doesn't make it a good or economical idea.
Those who think a digital currency of some kind _won't_ displace cash are going to be made fools.
About the article ... there are a lot of questions here.
I guess the main thrust of the article is that Bitcoin's volatility is declining, and thus it is becoming more attractive for use as a tool for buying lunch (where lunch is a stand-in for common day-to-day transactions). That hinges on the idea that Bitcoin wasn't attractive for that purpose before, because its value was too volatile.
1) The graph the article uses to demonstrate that Bitcoin is becoming less volatile seems to indicate, to me, that Bitcoin is just as volatile as it ever was. If I'm reading the graph correctly, the average of volatility is the same, but the std deviation of volatility has been decreasing. In other words, Bitcoin is just as volatile, but it's more consistently volatile. That's ... a weird metric to measure. Either I'm reading the graph incorrectly, or OP is.
2) The OP says "I wanted to keep them because Bitcoin has, since its inception, on average increased in value at about 150% per year". So why bring up volatility? Volatility isn't relevant to whether Bitcoin goes up in value over time or not. It's clear that, as long as Bitcoin continues to be useful, it will continue to deflate long term. So it's clear that Bitcoin will always have this "issue".
3) But that presumes that deflation is an issue to begin with. Is it? I'm naive on the subject. For the majority of human history we used deflationary currencies; precious metals. The world didn't stop turning then. But then the question is, are inflationary currencies better? Is our modern use of them an evolution, then?
On the one hand, we can think of it as horrible that the majority of people are storing their value in a currency that is decreasing in value over time. Their work, their labor, earns them wealth that decreases over time. That's disturbing.
But maybe it _should_ be that way? Having people store their wealth in inflationary stores of value implies that work is only valuable in the immediate time frame. And that kind of makes sense. A burger I flip today is valuable today, but not so much years from now, let alone decades from now. Paying me a deflationary currency today for that burger flip is weird, then, because you've traded something that increases in value over time for something that decreases in value over time.
So you could argue that in today's economy employers trade cash, something that decreases in value over time, for work that also decreases in value over time. And ... doesn't that make sense?
And yet, if given the opportunity and knowledge, wouldn't everyone want to store their value in deflationary vehicles? And if that's the case, wouldn't everyone, as the article implies, only _have_ deflationary vehicles to trade with ... so we'd just re-evolve to using deflationary currencies again.
Does the average person even _know_ that their currency is inflationary? I doubt it. Maybe the choice of deflationary/inflationary doesn't even matter.
I dunno, it's just a complicated question. I don't think it's clear cut that a deflationary currency is better or worse.
My point is, the deflationary property of Bitcoin doesn't necessarily preclude its use as a daily driver. Volatility sure might, but deflation I'm not so sure.
It's probably irrelevant to the average person. The average person will see value in replacing HSBC, who would normally freeze their bank account randomly and destroy their business.
4) It's important to mention that, at this point, we have reason to believe that Bitcoin and clones based on its model can never be used to buy lunch (and other such small transactions). The cost of decentralization is too high, and we have no way to decrease those costs by the orders of magnitude needed to handle the transactional loads of things like buying lunch. We are working to decrease them, and have recently succeeded in a modest improvement on the Bitcoin network, but orders of magnitude is ... out of reach without some massive innovation.
It's more likely that on-top-of networks like Lightning Network and its evolutions built on top of Bitcoin will be the thing people interact with on a daily basis.
The average person will get their paycheck in Bitcoin, but do their daily transactions using IOU networks like Lightning that settle behind the scenes on a less frequent basis. This allows the average person to use Bitcoin as their store of value, giving them by default the advantages that traditionally only a small fraction of the population have had, but still allowing cheap daily transactions for buying lunch.
That doesn't change the meaning of the article. But it's important to mention how Bitcoin is evolving to fulfill the future the article proposes.
So ... maybe that's the future. Or maybe a side chain will evolve with inflationary properties and we just use that to buy lunch and get paid. Maybe every country will have their own cryptocurrency, pseudo-centrally controlled, with atomic swaps for global trade.
But one thing I know for sure. Software is eating the world. You either choose to ride that wave, or you get eaten by it.