After the Bust, Are Bitcoins More Like Tulip Mania or the Internet?
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It's so strange, because I love the ideology behind it and the decentralised technology, and by many measurements bitcoin and other crypto initiatives would be considered a somewhat success if we didn't have the price to look at. That I can pseudo anonymously (or completely anonymous with stuff like zCash/Monero) transfer a token of wealth over the internet without a central party is so cool.
But I'm afraid that almost all of the price increase is simply a hype/speculation/hold-cycle that inevitable never will survive.
There is a lot of money looking for a place to go and be safe (from loss and inflation). There are very few 'pure' ways to simply store that value, even gold is difficult to invest in, at least if you want actual ownership and not merely a promissory note. Bitcoin (or another cryptocurrency) could be one of these ways.
I have a hard time understanding digital scarcity. Bitcoins are scarce with respect to "the" Bitcoin network, but there's nothing preventing someone from forking or starting their own clone of the entire system. While that new chain would be missing all the historic transactions of the original, is that meaningful in any important way with respect to scarcity?
The number of cells in an Excel spreadsheet are also finite, but we don't tend to impart value on them. And it's trivial to create a new spreadsheet with a whole new set of cells. What am I missing?
Bitcoin code has been forked thousands of times. Only a few forks survive today, and those are worth a small fraction of the original.
That's because Bitcoin, like all money, is a social construct. It's an idea and belief shared among many people. Bitcoin, like all money, has no intrinsic value, but derives value from the network of people who find it useful.
It's much more difficult to fork a network of people and shared beliefs than it is to fork the code.
And I'll preempt the inevitable argument that dollars and renminbi are backed by the military, or by taxes, or by central banks, etc. That's all hogwash. Money isn't backed by anything other than shared belief and the promises we make to each other.
But my question was about Bitcoin's comparison to gold, specifically with respect to its scarcity.
Also, gold is shiny. Personally, I'd much rather have a gold bar in my safe, that I could take out and hold in my hands, than a memory stick with some Bitcoin on it.
https://hacked.com/wp-content/uploads/2017/11/gold-commodity...
People do get very fixated on the price. Anyone who bought into bitcoin at 16k or whatever is probably screwed at this point. If I were to guess on a long term settling price for bitcoin, I would place it somewhere between $400 and $4000 against the value of todays dollar.
Interestingly, it doesn't really impact me at all. I have a modest mining rig that brings in about $30 a month in random altcoins that I swap to either bitcoin or litecoin depending on where transaction fees are at. I then use that to buy stuff off aliexpress. That $30 is going out at about the same speed it's coming in so it doesn't really matter to me what the current price is. If the price goes up, more miners join and I get numerically less crypto but about the same value, and it goes the other direction if the price goes down.
Just curious, do you have any rational basis whatsoever for that range? Why not $4? Or $40000?
Is the price entirely arbitrary, and if not, what is it based on?
The last time I heard figures, it cost around $3300 in electricity for a given mining farm to mine a bitcoin on average.
That cost will go up and down based on the number of people mining but in my observation the cost of mining is usually pretty close to the value of a bitcoin. I can't prove that that isn't coincidence, but to me it makes sense. If the value of bitcoins goes up, people will online mining farms as it becomes profitable in areas with more expensive electricity, and the difficulty will go up. If the price drops, people offline their mining farms.
On the other hand, the approximate cost of mining a bitcoin is public knowledge since the current block difficulty is public knowledge. Anyone buying large amounts of bitcoin can make very accurate estimates of a miners profit margins with nothing more than the miners IP address and the block difficulty, which puts miners on the back foot for negotiation.
When it comes to the profit margin of miners, one component is the electricity price, but the other is amortizing the cost of the mining hardware. Graphics cards are relatively cheap ($200-800 depending), but ASICs can go for upwards of $12000-$15000. As the number of mining farms goes up, the pressure on mining hardware manufacturers to maintain a steady supply of mining hardware increases. If they cannot do so, the cost of replacement mining hardware increases and starts to eat into profits. If the supply gets too short, the cost of replacing the hardware can become so high that the real profit post-amortization is flagrantly not worth the effort, particularly in places with expensive electricity. Miners who are in it for the money usually want to see their profit completely amortize the cost of their hardware within three months of buying it. If it takes longer than that, you're straight up gambling that the current price won't drop before you can make a profit. GPU miners also often replace their cards on a 3 month cycle and sell the second hand ones on for gamers to use, which helps with the amortization situation.
My spitball estimate is that if ASICs remain dominant, $4000/BTC is the equilibrium point of it being profitable in some places but not others and the number of miners balancing the supply and cost of ASICs such that ASICs can be replaced at a steady rate without supply problems and still pay for themselves before they burn out or become obsolete due to a new generation of ASICs being developed.
$400 is the same spitball estimate, but assuming that ASICs fall out of favor, the difficulty drops, and all those etherium GPU rigs start moonlighting with bitcoin on the side.
Therefore there must be different models because people want to predict different things. And of course neither of them is how things really work.
"this is not how X works" doesn't need to be said, because yes that's the idea of using models. Otherwise you wouldn't use models.
"this is not how it works in principle" assumes that there is no model that would claim previously said statement. And since you can create unlimited amounts of models of course you can very often construct a model where the statement works.
I suggest instead of claiming such a thing it might be more interesting to think about how such a model would help more or less to predict things.
PS: I believe The Intelligent Investor or how that book was called and a social model called Communism are both promoting models that connect use-value to price-value. So it's not even far fetched. It's a very common thesis for discussing pricing of investments.
You need the extreme use cases like reducing the risk of hyper inflation early on, when the product is so raw, much like you might have with the first PC:
> [In the early PC days], Steve Jobs initially pitched the personal computer as a way to store recipes. It took years for the first killer use case, spreadsheets in the guise of VisiCalc, to appear.
By contrast, we've been assured that blockchain is going to fix transactions, financial asset storage, security, contract law, corporate governance, fundraising, logistics, bad government and hyperinflations that haven't actually happened and what we've actually got to show for the last decade is speculative assets some people use to make money off other speculators via means which sometimes look suspiciously like hyperinflation and a much smaller number of people to circumvent money transmission laws. (And the problem certainly isn't that we haven't got the hardware to support it or any means for blockchain enthusiasts to connect with other blockchain enthusiasts)
If you're a software developer, I'd really dismiss lots of what you read about new technology, whether it be crypto or MongoDB. Here's my media literacy guide for software engineers:
https://github.com/nemild/hack-the-media/blob/master/softwar...
(It's kinda fun to realize that by getting excited about cryptocurrency, I also got excited about the financial incentives behind the media ecosystem)
Also, be careful about throwing the baby (unfounded hype and speculation and charlatanism) with the bathwater (programmable money, open financial systems, digital scarcity).
This reasoning is repeated for every new technology.
"People are using [new thing] for [dangerous, speculative, immoral, hyped, trivial] purposes. Therefore [new thing] [will fail, will ruin civilization, should be banned]."
I've witnessed this way of thinking with laser discs, VHS tapes, personal computers, modems and BBSs, fidonet email, Usenet, Compuserve and AOL, graphical web browsers, mobile phones, the internet, online shopping, video games, strong encryption, Google search, Facebook, ephemeral messaging, cryptocurrencies, machine learning, IoT and bioengineering.
Maybe there were similar arguments about movable type, radio and television, I don't know.
I used to be a Cassandra about new things but I've learned from my mistakes to ask different questions now.
"If I ignore the [dangerous, immoral] uses of [new thing] is there still something worthwhile about it?"
"How might the [hyped, trivial] uses of [new thing] change how we live and become important in the future?"
Most of the other 'features' of blockchains are a negative - immutability/irreversibility, for example, or just a step backward in the capabilities provided by the mainstream systems.
The thing is, you can't test this unless and until you experience hyperinflation of "hard currencies" while at the same time Bitcoin price remains comparatively stable for use in actual transactions. Neither of those conditions has appeared. There is no sign of hyperinflation in the west. Even the turmoil of Brexit pushing the GBP/EUR rate from ~1.4 to ~1.1 over two years made no significant ground-level difference to consumer prices or wages in the UK.
Until then, it's a good way to sell tiger-repelling rocks.
https://en.wikipedia.org/wiki/Tulip_mania
Yet this episode continues to be trotted out whenever the Bitcoin exchange rate does something... unusual. It's been happening for eight years now.
Time to move on and either develop a new analogy, or finally decide that Bitcoin is unlike anything that's come before it.
I suspect a headline like "are bitcoins like the US housing market" probably wouldn't go down well though.
Personally, I take all mentions of Tulip Mania as a kind of memorable shorthand for "Hyper-speculative, with little or no trading on the basis of the underlying utility."
Why Tulips instead of houses? Because we as a society have been using the tulip analogy longer, that's really the only reason. It's not an assertion that tulips fit better than houses.
It's much the same as expressions like "Grandfathered in." Nobody worries about whether a particular law or regulation is actually being enacted as a way to deprive ex-slaves of their right to vote while guaranteeing it for illiterate whites. To almost everybody, it's just a phrase.
It is more like boiling water. One bubble after another. With no end in sight.
In a daily basis, it is just unpredictable. Monthly, it sometimes makes grown people cry. On a yearly basis, it has been slowly growing.
In most desirable-to-live places, prices have recovered and gone above and beyond 2008 levels. Of course it's really the value of land and not the structure itself, but still, the scarcity aspect remains unchanged.
Here's my own thoughts on why rational people — and media — get disruptive markets (like crypto) wrong:
> As someone who had worked in banking and and microfinance, I got excited about the idea of credible digital scarcity, programmable money, and open financial systems. I didn’t quite know the use cases that would follow, but it was clear to me that the world would never be the same.
> Mostly though, everyone I respected thought cryptocurrencies were stupid. One MBA classmate haughtily wrote off cryptocurrencies as only useful for drugs and pornography. My old management consulting friends—all from elite American universities—pooh poohed Bitcoin and other open cryptocurrencies as they fixated on the needs of their lucrative banking clients. The vast majority of successful, rational people disdained everything about cryptocurrency.
Do those in the cryptocurrency space see this a viable instrument for commerce or are they just happy to trade it like a commodity?
Regardless, I do think there's value to smart contracts, even with a volatile/speculative currency:
https://www.nemil.com/crypto/why-cryptocontracts-matter.html
Imo it has to be a viable instrument for commerce, that is the core value that drives the speculation, even if 95% of the price is a result of speculation.
-- Carl Sagan
Ethereum raised $15 million to fund their network, which now has a market cap around $18 billion.
Cosmos launched their mainnet yesterday, and now has a market cap over $1 billion. All of the employees can exit if they choose, who were given tokens rather than illiquid stock.
To be perfectly honest, this is a much fairer system for the average employee at a startup than our current ISO situation, where employees are diluted, forced to pay ridiculous AMT taxes on exercise, and basically screwed by the founders.
That's assuming there are enough willing buyers around who'll offer them cash for those tokens. I don't know anything about Cosmos in particular, but it often seems much easier to find facilities for exchanging fiat money for crypto tokens of some kind than vice versa.
Obviously, someone is selling the tokens and getting real money in exchange, but if we don't all have equal access to that market as sellers, something smells fishy...
After scanning the front page I'm no wiser as to what they're trying to deliver, what problems are addressed, what any use-cases might be. I'm getting the exact same architecture-astronaut feeling I get about most blockchain companies.
We have a highly scalable bar of interconnected, interchangeable fleems which will allow flurbles to foo more efficiently and faster!
We are still in the "creating the low-level protocols" phase of blockchain development, but essentially Cosmos is an SDK to create Proof of Stake blockchains easily, which has traditionally been extremely difficult. Then their SDK allows each chain to communicate easily, which is another extremely difficult feature.
Doesn't mean it won't be successful, whatever that means in this space, but it doesn't look much like a 'product' to me.
Cosmos is a very interesting and novel technology, and it makes creating an application-specific blockchain perhaps 100x easier (2 orders of magnitude).
I mean, to say that this project has delivered where others haven't, yet say what it has delivered is yet more blockchain infrastructure is odd to me. I could, sure, I could put in the time to learn the ins and outs of these protocols as you say, but I'm not sure why I would absent any actual use cases. And I'm not seeing any here -
It makes flurbing the flooz 100x easier!
OK, so .. what use is the flooz?
This question is still unanswered AFAICT, and cosmos does nothing to answer it. Or at least its front page does nothing to answer it or anything much else.
Of course, skeptics such as yourself will say, "all of that is worthless!" But I could not disagree more.
Is it?
I would say that's not really been shown yet. The vast majority of ICOs have absolutely nothing to show for it, many may well face SEC and other body legal proceedings in the coming years, and the bottom seems to have dropped out of the market.
> Cosmos launched their mainnet yesterday, and now has a market cap over $1 billion
This means nothing.
Sure, for the same reasons 37signals has a market cap of $100B. https://signalvnoise.com/posts/1941-press-release-37signals-...
The original Bitcoin whitepaper calls it an “electronic cash system”, but it’s obviously a total failure at that.
It's 10 years in, I think we can call it a failure now.
Bitcoin is responsible for moving hundreds of millions of dollars every single day[1]. That is not a reasonable definition of "failure". Similarly, your gran using it is not a singular definition of success.
[1]: https://data.bitcoinity.org/markets/price_volume/30d/USD?t=l...
We just had a legal fight about this definition.
If bitcoin has value it is only because the randomness is one of the methods used to make the bitcoin useful. Some usefulness appears to be there as is demonstrated by the real life usage of the bitcoin.
The question that we should ask is if bitcoin serves to a market need. From what I have seen, yes it does, though banks did react back when bitcoin started to gain traction and for example here in Sweden a free service to send and receive money instantaneously through a mobile app became extremely popular. Now the banks are trying to introduce fees into that service, and time will tell if the market will tolerate it, or if it will slowly fall in popularity until another free alternative (like bitcoin) replaces it.
The real point is that there's no reason to think that this is achievable.
There reason people want to send and receive money digitally has many sources. The cashless society change that Swedish governments and bank started a while back created a need for digital alternatives for activities that previously used physical cash. Transactions between individuals, flea markets, collections at church services, fees for clubs, sale of drinks/food at events. Credit cards are costly, includes minimum fees and use systems that tend to be slow and hard to use. A church collection does not work if a 1$ donation cost 1$ in credit card fees. Even donation services today like patreon currently looks down at such low donations as all the money get eaten by the credit card fees.
The benefits that people who advocated for Bitcoin in the early days talked about was mostly those. Ease of use. Cheap. Physical cash alternative. It was a time where paypall was the only alternative to credit cards and for many places the only way to pay unless you used direct bank transfer that take a minimum of 1 weekday transaction time.
Smartphone penetration is a relevant factor, but it was not the only one. The new bank service fulfilled a need which credit cards and paypall both did a poor job with. The question is if banks/government are willing to continue support what the market needs, or if systems like bitcoin will utilize the hole that remains when physical money is phased out.
https://www.smithsonianmag.com/history/there-never-was-real-...
Which Tulip bubble? The small one that actually happened and was largely a small group of wealthy people trying to outdo each other, or Mackay’s wildly exaggerated account that has seeped into popular legend?
Massive carbon footprint for no benefit...
For sure there are Lamborghinis out there bought with people's retirement money.
For sure, the founders of startups bought a lot of lambos with retail investors’ money, and the original VC’s dumped their equity on IPO day on the masses.
Just the fees to get in and out are over 3% total generally. Anybody betting their retirement on bitcoin deserves their fate, good or bad.
Oh yes, but sociopaths and foolish greed are not bitcoin-specific.
Bitcoin seems to annoy people at some fundamental level that I do not understand. Perhaps because it exposes that all money is an abstraction, that it really rests on nothing except some social narrative that we all share?
2009: Bitcoin is a nerdy pipe-dream. It will never be worth anything!
2011: Ok, bitcoin is worth something, but it is only used by drug dealers on the dark web.
2017: OMG I'm going to buy bitcoin and get rich!
2019: Bitcoin is worth nothing, exactly like the tulips, told you so!
2022: ...
etc etc
Thinking about cryptocurrencies by following the latest wave of hype is the way to neurosis. As with anything involving money & investments, I suspect.
At the moment I am writing this 1BTC ~= 5K Euros. This is only considered bad because there was am unsustainable spike when greed went viral. I suspect more events like this will come. Who cares what the trend-followers think?
The Internet is the completion of (the latest and vitally important phase of) the Network. The Network is like the Word, that's how big a deal it is.
Brief pause for definitions: The Word is the idea that makes language possible. Units of meaning that can be transmitted by one person and then received by other people, a revolutionary idea that by definition is prehistoric (history itself is an Application of the Word). The Network is a way for people to send and receive information over a distance, it works very well with the Word, and it's hard to imagine the Network without the Word, but it would actually stand on its own: sharing video of a cat studiously choosing a very expensive fragile object to knock off a narrow shelf works fine without the Word if you want a very concrete example from your modern experience. In our world that video would have a title, and thus need the Word, but truth be told the video stands on its own if you haven't invented the Word.
Note that the Word is not just the written word, writing is a (big) incremental improvement in the Word idea, but speech was already a big deal. Likewise the Network is not just the Internet, the Internet is a (big) incremental improvement in the Network idea, but telephony, newspapers and even travelling minstrels are already a big deal.
Anyway, scarcely anything is going to be as big a deal as even these incremental improvements to fundamentals like the Word or Network. You might think Money is a big idea, but that's _peanuts_ to the Word or the Network. If Bitcoin completely revolutionised Money (as if) that still wouldn't be anywhere near the difference the Internet makes.
So, Bitcoins are more like tulip mania because almost _everything_ is more like tulip mania. YA Fantasy novels, slogan T-shirts, pizza, marriage, any of these things is more like tulip mania than like the Internet.