The Bitcoin Bubble and the Future of Currency
medium.com
medium.com
Yes, it's true. As of right now, there are 182 official currencies worldwide[1], most of which you've never heard of in your life, and many of which have total market capitalization lower than Bitcoin.[2] Others are subject to extreme sociopolitical, economic, or military-conflict risks. Would you rather own bitcoins, which are traded globally, or, say, Libyan dinars, North Korean wons, Syrian pounds, etc.?
Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]
If Bitcoin survives the horrific economic crises in countries like Spain, Greece, and Cyprus, and the even more horrific military conflicts in countries like Syria and Sudan, it will continue gaining credibility as the currency of last resort -- the global digital commodity that will survive even if your country or economy goes to hell.
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Edit: changed "most currencies in existence" to "many currencies in existence," which is what I actually intended to write.
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PS. I posted this on the other thread linking to the same article: https://news.ycombinator.com/item?id=5486100
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[1] http://en.wikipedia.org/wiki/List_of_circulating_currencies_...
[2] http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-v...
The USD and the Euro, in comparison to BTC, are magnificently stable.
Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.
If it is to be adopted widely, at some point it has to go from being distributed among a few million, to being distributed among a few billion. The continual price rise will correlate with that adoption continuing to happen.
So yeah, I understand all these arguments about volatility, but the reason they don't bother me is because they don't seem to point out anything bad about bitcoin in principle, in the long-term, they only point out the negative aspects of using it as a currency while its undergoing its adoption phase. I don't think there's actually any argument that using bitcoin as a currency right now isn't going to work as well as dollars/euros.
That's right, and it's a feature, not a bug.
Those that do have wealth to protect should be encouraged to use it for productive investments. Mild inflation is one way to do that, and it is healthy. Massive inflation to fund overseas adventurism on the other hand, is not healthy.
As the author of this piece correctly points out, deflation leads to hording behavior. In a world where everyone used bitcoin, the wealth disparity would only grow faster.
Elasticity simply refers to whether the supply can react to price. In bitcoin's case, it cannot, since the supply is determined by an algorithm.
Sentiments along the lines of: "For bitcoin to be adopted, it should be stable first" don't make sense, because adoption (demand) drives the instability. That statement is the equivalent of saying "For bitcoin to grow, it should not be growing."
Assuming you manage your life with some other currency (USD), you would ideally want something that has reasonable value when converted to your other currency.
Bitcoins are one asset among many, and just as prone to booms and busts.
Now your post appears to talk about the first point, which I agree, I only do not see how you jump to the conclusion that bitcoin is more stable than Swiss francs for example, stability is the guarantee that you'll not lose money if you trade all your wealth from one state to another, I do not see how bitcoin guarantees that (no store of value does), the only real alternative to not lose value is diversification, put your money in as many different things as you possibly could, never let a bank have more than 20% of your entire cash money, buy as many different investments as you could, precious metals, stocks, solid bonds and let them be on safes or clearing houses that's not attached to a bank.
And most important stay away from banks from countries with large public debt.
And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.
Because they have business there, so in a sense they do live there.
> And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.
Maybe that's the logic leap I have to take to use bitcoins: I don't consider that I buy things from the Internet, I use the Internet to buy things from stores. Maybe when we have a Snow-Crash-type Metaverse I'll start using virtual currencies :)
I can't wait to see the face of doomsayers once Planetary Resources (or other company) starts mining gold from asteroids. I'm sure Gold's intrinsic value will hold up, with the increased supply...
If we needed to buy everything in the US but store all of our wealth in Euros, this would be the right comparison. But since we don't, "stability" means low and predictable inflation for the Euro and the dollar. The exchange rate matters for Bitcoin because wages, goods, and services are all denominated in non-Bitcoin currency. Look at inflation over the same period and you'll see that the dollar really is a "bastion of stability" (in that narrow sense, the Euro is too... but the Euro's got other problems beyond the scope of this discussion that make me reluctant to vigorously defend its stability).
In fact your comparison exposes the biggest problem with Bitcoin: it's a solution in search of a problem. The USD has a long track record as the best managed currency in the world. The 70's stagflation debacle was a minor hiccup by world standards, and the current quantitative easing policy is nothing. Why would anyone in their right mind convert their dollars into Internet funny money? I mean, sure, back in 2009 when Bitcoin started, people were panicking having witnessed the Lehman collapse and TARP. But now we know the world isn't coming to an end, so why bother?
I think the issue is that you are speaking from a position of comfort from the US. Of course USD seems fine to you, the US suffers the least in all these recessions. But for people outside the US, they often see their entire life's savings vanish. In Argentina inflation is not something that is only academically talked about, it has a real effect on every day life, the government understands this (and exploits it), and thus works hard to prevent everyone from fleeing the currency. Bitcoin does offer a real new alternative in this regard. Whether it will prove to be any better is admittedly an open question, but the idea that USD is some saving grace for foreigners is naive.
P.S. Correct me if I'm wrong, but didn't Argentina go through a dollarization phase at some point?
Brief Economist coverage here: http://www.economist.com/blogs/americasview/2011/11/argentin...
There was a decade in which pesos were directly convertible to USD at 1:1 exchange. That system collapsed when the government became insolvent.
With regard to "dollarization" in Argentina - Yes, and it should serve as another counterexample to your point. During the 90s when everything was fine Argentina "backed ever peso with a dollar". At stores no one cared if you used dollars or pesos as they were 1-to-1. (Similar to how the US used to back every dollar with gold). Then when things went south they "undollarized" (once again robbing people of their money as devaluation soon followed).
And sure, a country could crack down on holders of Bitcoin too. But the point is that it is a lot harder to catch someone purchasing with bitcoin, or even holding bitcoin, than it is to catch someone with dollars in their mattress or trying to buy something in a physical black market with physical dollars. Its really hard to catch someone with bitcoin "on hand" in general.
Just out of curiousity, is it easier for Argentines to get Bitcoins than USD? I find BTC really hard to get even in the United States.
At the end of the day, when a currency becomes worthless people start trading in something else, whether that be USD or cigarettes (like in post-war Germany). The attraction of Bitcoin is that it is basically tailor made for this and additionally is accepted by people outside your country.
Only time will tell of course. My point is simply that it is not just trivially "just another currency" where all the same rules apply. That being said -- it may crash and fail for completely unrelated reasons.
Are these movements different than a historical norm? You provide numbers with no context - it seems as if a movement of 100% in 6 years is meant to be shocking because 100% is a big number.
As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.'
Meanwhile, total global economic output is around $7.9e14 USD.
Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.)
Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small.
In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base.
That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price.
I'm not sure where things will go from here, but I'm sure it'll be interesting.
I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
Price deflation is a good thing. I'm typing on something which is a "living" proof of these.
If everything is becoming cheaper because everything is getting more efficient, that's super awesome.
If things are getting "cheaper" because the currency is becoming more valuable, that is a disaster. You have society-wide rent-seeking instead of wealth creation.
Now tell me again, how this is awful?
EDIT: As for the rent seeking.. If you hold your money for a while, while the productivity soars, then after a while you can buy more stuff, but only because the stuff has become cheaper.
As a fraction of total buying power you are still were you were before. Do you really call it rent-seeking?
Uh, what the hell gave you that idea? Another way would be people hoarding cash, making the rest of it more valuable -> deflationary spiral.
It will lead to a new equilibrium. The greater the cash balances and lower the prices the greater the temptation to spend, and to break the spiral.
b) Marginal utility of every extra unit of money decreases when a person holds more of them. Couple that with falling prices and you have the killer of deflationary spiral.
A nice theory, though. The deflationary spiral one. But just a theory. Never happened.
You have no concept of history or the problems associated with a gold standard do you?
b) Are saying the well-off never squander money on stupid things?
Is the last sentence some kind of "ad hominem"? Because, it would be a pity.
b) I really have no idea where you're trying to take b.
"Is the last sentence some kind of "ad hominem"? Because, it would be a pity."
An ad hominem would be if I said your arguments were invalid because of who you are, that's what it means. I was making an observation about your ignorance based on the content of your arguments, entirely different.
I think that's not applicable to bitcoin since it's as comfortable to pay with microbitcoins as with bitcoins.
"but then a deflationary spiral started in 1931."
Yes, there was a deflationary event. As there were many before, and the last one before in 1920-1921, when the wholesale prices fall by a whopping 40%. But a deflationary event does not make a deflationary spiral.
There were also a lot silly activism both from the part of the Hoover and Roosevelt. The later speaking, beside other things about outright nationalization, and driving thus the busyness investment into ground..
So a lot happened than which make the Great Depression Great but deflationary spiral is not THE explanation.
(And before you ask, I'm posting this using pen and paper with IP-over-carrier-pigeon.)
It doesn't have to stop all purchases to have a negative economic effect.
Capital can make money because it increases productivity. If you use your 10,000 quatloos to buy a machine that makes a worker more productive, your reward comes from the interest on that. Everyone can increase the value of their savings if everyone does this.
If everyone is hiding their quatloos in the mattress, there is no input of capital to increase productivity. Yet a deflationary spiral exactly encourages people to hide their quatloos in their mattress. Why bother taking even minimal market risks when you can make 10% from the growth of the rest of the economy?
And economies can grow not just from increased productivity.
EDIT: As a fraction of total buying power you are still were you were before.
This is a really, really, really bad idea.
If I have shillings equal to 5% of GDP, and I put myself into cryosleep for 100 years, there is no reason I should expect my uninvested shillings to still have 5% of GDP. This is a child's view of an economy.
Until you tell me that, we are measuring woomdums in quatloos and while that can be kind of fun.. it not very rewarding.
If you speaking about physical output.. than the only way achieve this is to learn to produce woomdums cheaper.. Then there is no harm in selling them cheaper.
So do I want the money to grow to a degree that it will anihiliate the increase in productivity? Certainly not.
Can your elaborate? Actually it an argument against the idea that hoarding gives some kind rent. It doesn't.
But again, can you elaborate? If own 5% of land and go to a cryosleep for a hundred years, how much of that do you expect to own when you wake up?
If you were to just abandon your land, there is no reason to expect it to belong to you when you come back 100 years later.
Instead, say you set up a corporation and hire people to use the money made renting it out to pay for taxes and management on it. You might still own the land in 100 years. Or not, if the people you left in charge of it couldn't manage it well enough. But people got to use the land in the meantime, so there was economic activity being assisted by your asset.
This would not, of course, give you any claim on any new land that is made, like new landfill in Boston.
Bitcoins sitting out on the chain while you are sleep do not provide any benefit to growing the economy. They have not bought any factory equipment. They have not trained any workers. They have not invented any new technology.
Any system in which people can end up with the same portion of an economy after sitting both their labor and their capital out on the sidelines for 100 years is fundamentally broken. Exactly how is an exercise for the reader, but like anyone purporting to have a perpetual motion machine, while the exact problem may be different from machine to machine, the laws of physics mean that there is some definite failure in it.
Assertions. Words. Some of those strong..
To be frank, I'm disappointed, but.. I'll manage that, no need to worry.
That's actually a very interesting possibility.
To illustrate, let's assume that BTC are used for all transactions, but no one holds them. Everyone holds dollars, or euros, or gold, or whatever. When they need to make a transaction they hop on an exchange, buy some BTC, and buy their cup of coffee with the BTC. Then the coffee-seller unloads his new BTC immediately and holds gold or silver or tulip bulbs as his store of value.
Given a reasonably automated system, each transaction might take 1 minute. This means that you need 79 trillion _dollar-minutes_ per year, or about $150 million at any given moment. Dividing this by 21 million BTC gives a price of about $7.15 per BTC.
Even if people do hold all of their liquid value in BTC, they aren't going to hold it all for a year before spending it. A more realistic estimate might be 79 trillion $ * 3 days -- most people and businesses are operating pretty hand-to-mouth. 237 trillion dollar-days per year comes out to $648 billion at any given moment. This does give a fairly appealing target price for BTC-optimists, about $31k per BTC, and puts the upper bound on the value of a satoshi at $0.0003.
US GDP ~$15 trillion USD (notes and coins) >$1 trillion; USD (M1 aggregate) >$2 trillion
i.e. a dollar gets "spent" on activities that contribute to GDP between 7 and 15 times a year, depending on what aggregate you count as a dollar (of course the actual picture is complicated by a lot more non-productive transfers not counted in GDP)
Velocity of circulation (the ratio of national income to money supply) in real world economies is a surprisingly low number, and whilst Bitcoins are a little more efficient to transact with than electronic bank interchanges, they're also not designed to be inflationary to encourage turnover.
That said, I can't think of a back-of-the-envelope type calculation that I'm happy with, though I'll grant that my crude calculation is likely too high.
Does anybody have any idea what the rate of bitcoins being 'stranded' is?
In 1913 terms, 37 cents of today's money was the equivalent of 2 cents, only double their smallest coinage.
Would you really be upset if any particular transaction was rounded up or down by 18 cents? Yes, if you're buying a single gumball, the price might be a little high today. But you let me know when gumball machines start taking bitcoins. For anything else, a resolution of +-18 cents is perfectly acceptable.... over any reasonable number of transactions, the round ups and round downs will come out to the same value anyway.
I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?
How many computers within that botnet will have the appropriate GPU? That's not counting the computing power of the network as a whole either; Imagine something like BitcoinMiner@Botnet. I think it could easily be lucrative enough to make it worthwhile.
Assuming the average CPU runs around 2 Mhash/s that's 60,000,000 Mhash/s which is the equivalent of about 75,000 ModMiner Quad @800Mhash/s which would cost 75 million, so you would probably still top the mining charts.
Of course, botnets are frequently on older machines, so the actual computational power of BredoLab probably wouldn't have been enough. Also, as popularity increases, this will become less reasonable.
Deflation is (might be) a problem with money as a wealth-storage facility; it's not a problem for a wealth-transfer technology. People get confused about this because government-issued currencies serve both purposes. Let's untangle them.
As a money transfer tool, you convert your wealth into BTC, spend them, and the receiver converts them back into his own currency (or other liquid commodity) of choice. If both conversions occur fast enough, you're both protected from BTC fluctuations. That's what non-speculators will do as long as the BTC remains highly volatile; by doing so, they keep the BTC liquid against their wealth-storing currencies.
As a speculative tool, what makes BTC valuable is the fact that you can buy actual stuff with it. The value of the BTC will adjust so that the active BTCs (those already mined and regularly exchanged, rather than stored for speculation) will represent the value necessary for the liquid trade of BTC-priced goods. In the long term, an investment in BTC is indexed on the BTC economy. Since the cumulated value of all BTC-traded goods can't indefinitely grow faster than the actual economy, the value of a BTC can't indefinitely grow faster than a derivative indexed on the world's economic health.
Conclusion: the BTC will asymptotically converge, either toward 0, or toward very-large-spread indexes such as S&P500.
Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected. When you make wealth by hoarding a deflationary money, you bet that a government will reward you for not lending your wealth to someone who will put it to work. Nobody can make BTC do that: if less BTC-purchasable wealth is available, the liquid portion of BTCs lose value, and so does the speculative portion, thus counteracting the deflationary trend.
And anyway, when was the last time economists accurately predicted anything but the past? :)
Well, you can, but you'd be wrong.
Can somebody help me understand something? Might be very basic, and perhaps I should understand this already, but...
How is it possible for the "value of all the bitcoins in the world" to be anything, in truth?
I understand that this comes from saying "1 BTC is selling on average for $X USD, and there are X Bitcoins in circulation, therefore the total market size is $1BN"
But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them. Nobody would pay $1BN for all of them, because that would render them all worthless.
Even if 10% of them were sold in one day, surely the value would drop precipitously, therefore slashing the total "value" of all the bitcoins to maybe half or a tenth of its current estimation.
So I ask again, how can the "value of all the bitcoins in the world" be any figure, let alone $1BN?
You are right, the article uses sloppy terminology. You are also right that you couldn't actually sell all those bitcoins for $1bm. Nonetheless, this is standard financial language you have to take at face value.
This is why people say that the current amount of bitcoin multiplied by their value makes more than $1 billion dollars.
EDIT: Of course, you can't sell it all by the current market price since supply will be then much higher than demand and price will go down
Not to nitpick, but do you mind elaborating on how so? As long as there's still demand for bitcoints, you could argue that they are worth approx. infinitively more.
Bitcoins will still be a scarce good. The demand will determine if they're worthless.
A recent (perhabs a bit far fetched) example of this is the bad loans in CDOs. Although they were rendered worthless, they increased in value because those who had insurances on the value of CDOs going bad, still had to buy the actual CDO in order to exchange it for cash. This happend because more insurances existed at AIG for the CDOs, than actual CDOs - thus an increase in demand at fixed supply so to speak.
Say I owe money in those bills for instance :)
I don't understand how this is any different from a fiat currency. The value of bitcoins are currently being quantified by its exchange rate in USD. Sure, someone could buy all BTC and drive its exchange rate (and thus its value) down. Someone could also print more USD which would create a mass inflation and the exchange rate would be driven up. The exchange rate of all currencies would all be driven up, and the value of USD would go down.
If someone buys it like crazy, why would the price go down?
> Someone could also print more USD...
The use of the word "also" here is wrong since btcs can't be "printed" by "someone" like the dollar.
If someone has all the bitcoin in the world, why would anyone want some?
Dollars also have value because they can be used to pay taxes and settle other debts in the United States. It is not like people woke up one morning thinking that the US dollar was a great currency to use; it has actual utility.
Only because you can sell/trade it.
Wow very scientific, over time any hockey stick can look like a bump in the road.
I don't know whether bitcoin is in a bubble or not (it does seem likely), but the rising slope of a sigmoid graph can also look exponential until you get out further in time.
- Bitcoins will continue to increase and then plateau to their real market value (which later on, in hindsight, everyone will claim has always been very rational.) This will make them take a share in between the available global currencies, and then everyone will continue life normally.
- Bitcoins will be continue to increase in value such that no one can ignore them anymore. This will effectively destroy the old notion of currency and push economy into a totally new realm.
I really hope it's at least the second option. I am not sure I want the last option to be true, since I haven't invested in Bitcoins enough yet.
On the speculative side: The way I see it is, Bitcoin is currently feeding on an open field of existing wealth. It hasn't even started to be used as a currency of exchange, as many have said. When that starts happening on a wider scale, there's really nothing that will stop Bitcoin from eating the whole market of currencies, and becoming the defacto coin of exchange (except the ridiculous large spans of time that are required for verification).
- Govt's try to crack down on BTC. The usual asperger reaction "haha, it's mathematically unbreakable" is followed by a tug-of-war and probably ends with taxes levied on exchanges and merchants.
- BTC become a speculator's haven like penny stocks, the endless boom/bust cycles driving out merchants (except for drugs) and consumers
- The protocol weaknesses overwhelm BTC (e.g. it takes hours for any transaction to clear) - scaling P2P is goddamn hard.
Of course...in order to prove something was a bubble you'd have to define "bubble" which is surprisingly hard.
"A single asset class that rises in price sharply and continually for years due to some underlying cause. This cause is usually central bank inflation. But a particular asset market, for reasons unknown, becomes the focus of this flow of funds. Other markets do not. This is what makes it a bubble."
I hope you misplaced your quotes because this is by no means part of the definition, nor is it true. Bad central bank policy can indirectly contribute to bubbles, but inflation and bubbles are two orthogonal concepts.
>for reasons unknown
Actually in a bubble the reason is almost always known. An economist friend of mine put it well: "there is always an underlying story attached to a bubble that is believable and often true". The tech bubble of 2000 for example had a true story behind it: that tech was going to change the world and mint several world-changing companies.
For one, arguing that the cause is usually central bank inflation would eliminate a great deal, including the dutch tulip bubble.
What about bubbles that took place before central banks existed or were powerful?
What about bubbles that had nothing to do with inflation like the tech bubble?
Must other markets remain stagnant to satisfy this definition of bubble? What if one market goes up a little, and another goes up a lot?
If there is an underlying cause, how can the movement be "for reasons unknown"?
Can bubble tendencies occur in only one direction? Is it not possible to have a bubble in negativity towards something?
[1] I may be an armchair economist, but my armchair is located at a large academic institution.
"What about bubbles that took place before central banks existed or were powerful?"
Quoting wikipedia: The term "bubble", in reference to financial crises, originated in the 1711–1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. This was one of the earliest modern financial crises; other episodes were referred to as "manias", as in the Dutch tulip mania.
https://en.wikipedia.org/wiki/Economic_bubble
I am a bit rushed and cannot respond to all your questions immediately, but I will say that definitions are tricky things, and I admit there are many nuances we can spend years exploring.
Not saying that bitcoin isn't where some or a lot of it ended up, but the black market was basically the first adopter of bitcoin, and black markets (and pornographers) are traditionally early adopters of any new technology.
Sort of the price we pay.
Doesn't mean it's a pump and dump. If it is where international criminal syndicates (who probably have more economic power than some nations) decide to bank long term in bitcoins it might actually be a stabilizing force.
Why do people keep repeating this crap as a reason for the impending failure of Bitcoin? People didn't abandon cash or even banks because of John Dillinger.
"The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers."
Shawshank Redemption.
"Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million."
This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)
Bitcoin is decentralized and doesn't rely on trusted parties, but that doesn't mean you can't or shouldn't rely on trusted parties if you choose.
I fully expect most people will use a Bitcoin bank/wallet service/whatever, the problem is most of them are amateurs right now. It turns out these are essentially banks, and need bank level security.
If only.
I think this is only really a problem if you need to convert between the two very frequently, no? If bitcoin grows enough, it seems like this may not be such an issue.
Most likely we have no good data and you'd be making educated guesses.
Bitfinex - The place to trade bitcoins - Easy - Secure - Margin trading, lending market, bitcoins exchange: https://www.bitfinex.com/
ICBIT - Bitcoin Derivatives Market and Exchange: https://icbit.se/
Goodluck.
How do you suppose to get your $10,000 back? Hint: you won't.
"ICBIT currently is in process of incorporating in an offshore jurisdiction."
Even better.
https://encrypted.google.com/search?hl=en&q=is%20there%2...
there you go.
https://www.hnsearch.com/search#request/all&q=way+to+sho...
FYI asking this question does not make you seem like a financial genius nor is it a witty reply.
As mentioned elsewhere in the thread, two that allow shorting look pretty sketchy.
So I guess it sort of is a joke. When do the markets for bitcoins start acting like actual markets instead of hype machines for bitcoins?
> the perfect digital currency: they’re frictionless, anonymous[...]
seem to suggest that the author has read a lot about bitcoin (by other authors), but not investigated that deeply. (As for the content: It's bogus mainly because they're at best pseudo-anonymous, or rather: Actual anonymous payment via bitcoin takes a lot of effort to conceal. And it may only be frictionless for now - looking at the way transaction fees develop in the future is one of the most exciting concepts about it, to me.)
> Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities.
I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad?
I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.
> And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.
Again, wouldn't the result just be that you only hire people who create more value than deflation? And wouldn't "nobody paying anybody anything" eventually cause inflation?
Finally, a lot of the arguments employed seem rather shoddy.
This is the argument against being your own bank:
> In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal.
This is the argument trying to discredit bitcoins principle of mistrust:
> Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto.
So far so half-good...
It’s nihilistic[...].
Nope, does not follow.
> I do have hope that in the future, someone, somewhere, is going to learn from bitcoin’s mistakes, and build a better system.
The author seems to suggest that this is his conclusion, but I thought that was the main idea in bitcoin itself. That it's artificial limit is a rather clear "we will have to come up with something better by then". Not as a "we will never need more bitcoins than this many".
I may be wrong here, but didn't Satoshi set up bitcoin precisely to be a testing ground? Beta Software? The author seems to be a little too occupied putting words in his mouth to actually read the concepts. Instead, he claims that Satoshi wants bitcoin "to be the perfectly anonymous payment mechanism for a digital world". I don't think that's true.
Would it be better to have government responsible for most investment ? I don't really care about consumers hoarding their cash - they'll buy the things they really need or want. But I am concerned if investors are better served by hoarding than by demand deposits or any other kind of debt instrument. This could drive up interest rates to unprecedented levels. Higher interest rates mean higher cost of goods and thus higher costs for consumers.
Your reply actually raised more questions than it answered. I get that high interest rates are bad for a market that is built mostly on credit and I can kinda-sorta see how that would slow down an economy. But I don't see how that completely eliminates investment.
At some point, people have to exchange goods. People have labor to provide and goods to sell and services that they need provided and goods to buy. How is credit the only thing that enables that? Or is the argument that only credit enables it at the level that we see in current day capitalism?
The central bank prints money. That is a fact. What people forget is the fact that this is useful to an economy. The central bank can abuse its power, and inflate away your cash holdings. (ie: print too much money). That is why BTC are pegged at 21 Million coins.
So the question now is, what will an economy based off of a heavily depreciating asset look like. What are the risks?
So on the contrary, Bitcoins are a deflationary economy. Deposits will have a negative interest rate (ie: holding your money in a bitcoin bank will correlate to fees), and borrowing BTC means you only will have to return bits of it. (ie: if I borrow 100 BTC from you today, I only will have to repay you 75 BTC two months from now).
It is only fair, as people learn to expect BTC to keep growing in price.
I don't think its a very healthy economy to be in, but its a completely different endgame scenario than what you describe.
Interest is almost* always non-negative. I'll only lend you those 100 BTC if you pay me something more than I'll have if I didn't lend them.
That makes a BTC based economy more prone to hoarding, and less prone to investing (what is clearly a bad thing), and also more prone to hoarding and less prone to spending (what economists think is a bad thing - I have no idea why).
* The exceptions to this rule are not systemic, normaly appearing in times of disruption. You can't base an economy on them.
That said, plenty of people are "banking" with online BTC wallets. Instawallet, Coinbase, etc. etc. The economics for these services work against them, and they are hopelessly doomed to failure.
And yeah, the author seems to miss a lot of the things in the bitcoin website. The whole thing presumes there are unforeseen consequences, that something will replace or complement it, and that it will be remarkably volatile for some time. It is first in breed and very well aware of that.
Yeah, I too found that to be conspicuously missing in the article.
With productivity steadily rising in the developed countries it's gonna be tricky employing 6 billion people. as an example: if all the farmers were as productive as US farmers, we'd need to employ about 0.3% to feed the world. a lot of the "useless" products and services (think about the back office of your local government, which is printing documents, scanning them again and the typing them into a computer form) actually employs a large part of the population - have you thought about the implications if 90% of the population is not required to work?
We need inflation, we need people who keep spending their money and hence we'll ultimately need some sort of devaluation. A possible scenario: inflation will be introduced by new cryptocurrencies, which broaden the monetary base. hence it's ultimately the consumers who will steer the rate of inflation (and the adoption of new crypto currencies) and that seems to me like the most democratic thing that ever happened to a currency.
It's an issue with macro economics, not the individual. Sure, having people buy less useless stuff is great, but they all still need to agree on a medium for exchange, else doing anything with currency becomes impossible. Individuals buying and selling goods and services don't make currency markets, money flowing through the exchanges does. Market prices are set mostly based on leading indicators from these transactions. When a currency starts deflating, these numbers start looking bad. This is when things start to snowball. Currency worth more tomorrow than today? Stop exchanging BTC for USD(or any other currency). Investments going south and BTC doing well due to scarcity? Then pull out of the markets and hoard BTCs. Market crashed? Get all your BTC out of the bank. At a certain point it all falls apart and everyone is left holding worthless digital currency. This happened before with the great depression and has been studied in great detail. Hence the movement away from the gold standard. Again, very little of this has anything to do with buying TVs and stereos(micro vs macro economics). People don't really need currency to do that anyways. Currency is needed for the exchange of derivatives(specifically debt, AKA loans).
Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. People say land was wealth before industry, but "owning" it just means having the means to defend it (which could, in modern times, be a legal claim; no one wants most land enough to take it by force) so what you really needed was the metal to fund an army. You were rich if you had gold and could defend the land you had and get more if needed.
Between 1800 and ~2075, wealth is debt from an establishment like a nation state or corporation. Being rich means that you can call in favors. You use this debt to build an industrial or business process that gives you a good return on investment. You don't need to own the gold; you just need a certificate saying you had the legal right to it or that someone owes it to you.
In 2025, wealth is going to be access to talent. I'm writing a monstrously large blog series and the penultimate post (21 of 22) is going to hint at the economics of that. I'm afraid to get too specific; that might compromise a startup idea that's been percolating in my mind for a few years and might be ripe in the mid-late 2010s. But we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it. The new currency (post-2075, I'd guess, because people are conservative when it comes to money; metal and debt currencies aren't going out of business any time soon) will be some proof-of-work model related to technical talent but I've got no idea what it will look like.
How to define money in that world is an open question. That said, I don't think we need to get rid of fiat currencies just yet; I don't know what would replace them.
With BitCoin, there's no intrinsic value. Someone else could create a ZitCoin with similar structure but not that stupid enforced deflation designed to enrich the first entrants. Now it's a red-ocean with a zillion copycats, so we have ZitCoin and FitCoin (for gym memberships) and PitCoin (for dog breeders) and LitCoin (for getting drunk) and a couple of other *itCoins too crude to mention. Now it's just about branding; most of these alternative currencies (which are too volatile to be real currencies) fail.
There's this idea that BitCoin is going to become the next Black Lotus (a $1000 Magic card) but the vast majority of Magic cards have lost value (and all of the cards from the copycat TCGs that flooded the market in '90s). I remember when Shivan Dragons were $25 because a 5/5 flying creature for 6 mana was badass. Last I checked, they were about $2. The thing about a Black Lotus is that (a) it's extremely scarce and indivisible unlike BTC, and (b) there's actually something you can do with it, which is play a powerful Magic card legally.
Until you can get 3 mana of any color out of a BitCoin, or drop it from at least 12 inches and destroy permanents based on table position, I'm going to be skeptical.
Creating Zoogle, Foogle, Poogle and Loogle is kind of trivial at this day and age, and many people have a go at doing that. None of which seem to take away anything from Google.
That said, do you remember the first search engine? I don't. I'm sure I could look it up, but it's irrelevant.
There will be demand for something like a cryptocurrency. I doubt it will be Bitcoin. Once people realize that it was set up to transfer wealth to early adopters, they're going to hate it and Bitcoin will have a real brand-image problem. It might overcome that; who knows? I'm just saying that it's too speculative to take it seriously as a currency.
People can get over the idea of wealth transfer to early adopters if they find some unique benefits that they can't get with other currencies. That said, you're right. It's still in the early nascent stages and could just as easily be another betamax.
Why's a dollar valuable? It's debt from a powerful nation state.
Why is the Black Lotus valuable? Richard Garfield deployed his talents to making a game that people really wanted to play, and the BL is a scarce, in-game resource.
Why is BTC valuable? Someone deployed computational talent to make a cryptocurrency work. It's non-trivial work, and I'd probably take a BitCoin course on Coursera to really get into the guts of how the problem is solved.
I don't like BTC. I don't like the enforced deflation that, as we've noted, give the profits away to the ones who get in early, and create what has the potential to be an enormous asset bubble. (No one can predict such things; it could go to $1000 or $10,000 before it finally crashes, but I'm pretty damn sure its long-term destination is zero.)
I saw this with Magic and it sucked. That time, though, it wasn't intentional. They didn't take "the power 9" out of print to payoff early adopters on the secondary market; they did it to balance the game. No one expected, at that time, that these cards would eventually be worth over $1000 each. (Now I feel like an idiot; when I got into Magic, Moxen were out of print but only $100-125. Unaffordable for a teenager; a computer science textbook, at 29.)
So there are already processes that turn talent into a currency, but those are one-shot. It'd be more interesting to see a continuous, reliable proof-of-work system to turn talent into currency that isn't beholden to some corporation.
However, this is complicated by the fact that talent is intermittent. Proof-of-work systems work for commodity work (concave) but talent shines on the convex. Convexity is the defining economic problem of the 21st century, and for more than you'd ever want to read on this topic, start here:
http://michaelochurch.wordpress.com/2013/04/03/gervais-macle...
Is this really a new condition?
>"The new currency... will be some proof-of-work model related to technical talent"
So other types of talent will all be secondary to technical talent? That would be quite a revolution, even with a 65-year timeframe.
Actually, yes. In less than 20 hours (probably) I'm going to release a gigantic blog post (the 2nd-to-last in my Gervais/MacLeod series; I'm finishing that up because I have technical projects I want to start and will probably be starting a new job soon) that gets into the economics of it.
Essentially, convexity pertains to work that's hard and where the maximal possible performance isn't well-defined. Now, Sharpe Ratio (ratio of yield to risk) is an affine exponential that decays as the work gets harder. In other words, it's exponentially favorable for easiness on concave work, but for convex work (no matter how difficult) the yield/risk curve is almost constant.
Old, industrial work: favor concavity because the limiting factor is how much capital you have to put at risk. Though convex work has more yield, it's yield-per-risk is unfavorable.
If work is concave, we can define "perfect completion" (it's a commodity) and machines can be programmed to do it. So they're pushing us out of that. The convex work is all that's left for humans. It won't all be technical; there is convex service work.
Financial risk (not smart people with good ideas) was the limiting factor for old-style industrial processes, but all that concave work is being given over to machines by the convex labor of programming them. With convex work in the technological era, the Sharpe Ratio is constant and irrelevant. Your limiting factor, instead, is the time and attention of the highly talented people capable of doing (usually specialized) convex work.
Check my blog in about 6-18 hours and there'll be more on this topic than you'd ever want to see.
>"With convex work in the technological era... your limiting factor, instead, is the time and attention of the highly talented people"
Right, not capital, which is why I thought it odd you said capital was scarce in comparison to talent. I think you meant abundant.
Over 15 kilowords, though. I doubt many people will read it in 1 sitting. :)
ETA: http://michaelochurch.wordpress.com/2013/04/03/gervais-macle...
...because weapons made out of gold work so very well?
This was typically because gold was required to pay taxes.
Yep..