Bitcoin and Gold
blog.oleganza.com
blog.oleganza.com
Here is where you lose me.
Other articles, just like this, fall apart in the same places.
Maybe it is the irony of this statement.
Why is it ironic?
I'm reading your blog post, hosted on Tumblr, on the east coast of the United States, judging on the pings from where I am in Germany. The communications travel over fiber-optic cable in the Atlantic Ocean. This cable was laid by a partnership between commercial telecommunications companies[1]. Tumblr is supported by this "mess" of an economic system, and thus gives you a platform to talk on. Tumblr's hosting provider leverages this "mess" of an economic system to invest in making it's infrastructure better, cheaper and more reliable for Tumblr.
Why is this rhetoric so unaware of history? Why does it carry such a negative outlook on the incredible things that this imperfect economic system has delivered us?
By all means continue questioning, improving or changing the system we have arrived at as a collective humanity. But please, do not pretend everything is a horrible mess that only some minor [crypto-currency, technology] can fix. Admit that what we've done so far has largely been pretty damn good.
Will the new ideas help? Hopefully, likely!
[1]: http://en.wikipedia.org/wiki/Transatlantic_communications_ca...
During Putin's regime computers got 12 times faster too. Is it thanks to "stability of the economy" that Putin provided?
The "mess" isn't suggesting that the world is an unlivable dystopia. It refers to the fact that there are a few people with a lot of money, and only they have the ability to handle that much money. Bitcoin flattens the playing field, thus resolving the "mess."
So this is not true. I would even argue it's very, very not true, and that the medieval economy illustrates this. It was a lot like a bitcoin economy : unfalsifiable money (gold) in limited supply. Most people unable to contribute in any meaningful sense.
What did we see ? Equitable distribution of goods and services (and gold) ? Hell, no.
Of course, bitcoin is in the moronically stupid position that it both depends on the economy it has doesn't exist (power, and bitcoins MUST be divided over many players that don't trust eachother for bitcoin to work) and it itself is a centralizing force.
And that's ignoring the fact that it depends on preimage-attack resistance of SHA256. That's currently true, but keep in mind that it's 12 years old and the previous standard, MD5, held out for ~17 years. Whilst I would say it'll likely last a bit longer than MD5, it's (overwhelmingly likely) not immortal.
While the statement is not explicitly clear, I wouldn't call the above assessment a fair characterization of its intent.
It is widely acknowledged that paper currencies evolved as a proxy for gold in day-to-day life, which gave rise to the fractional reserve system, which gave rise to paper currency as a measure of debt rather than a measure of value, which gave rise to the ever-widening wealth gap, and so on and so forth.
That is not widely acknowledged. While the wealth gap may be experiencing recent growth, especially in the postwar period, over the period in which paper currency replaced gold, the wealth gap has improved dramatically.
Therefore in most sciences (essentially outside of logic and theoretical mathematics) this argument is considered invalid. It's not wrong, but it's useless and counterproductive : it precludes most scientific progress.
Economics (the practical kind) is the study of a chaotic system that is formed by the intentions and actions of all humans on this planet, and lots of phenomena that don't even originate on this planet (e.g. the distribution of minable materials on our planet is the result of tiny pressure differences in our solar system's previous sun (the one that went nova and eventually re-coalesced into the current one)). Therefore you can obviously say that whatever economics comes up with is inaccurate (limited, and unknown, accuracy), and sometimes has chaotic phenomena (meaning theory and practice diverge a little bit, but the difference blows up quickly over time and prediction versus reality become unrecognizably different).
Even though random large changes are possible, and in fact chaotic phenomena happen regularly outside of economics too (the ejection of rocks from the asteroid belt is one example that is repeated daily), but we happily perform science as if it never does.
Is it correct ? No
Is there any other way ? No
1. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
1.1 How would Martians looking at ProofOfWork brute force SHA256 hashing and cryptographic scarcity feel any different?
2. “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”
2.1. Gold is inherently speculative. So is bitcoins, as a currency; with the caveat that it only exists if the p2p network still exists, if not there is absolutely no actual use for btc.
3. “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything."
3.1 IMHO bitcoins as a currency could not have emerged in any other time than in a time where the governments of the world are on a serious QE binge in a desperate bid to prevent a double dip and an extremely damageable deflation era, like the 33-39 one, that can only be resolved by the reset a global conflict brings. If we can snap out(inflate out) of the current slump, bitcoins as a currency will not hold up, nor will gold. Gold is already on the decline...
4. “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”
4.1 This is a key point for all the speculators out there. You will get burned. Buy solid earnings of management-owned moat-protected business. Invest in startups. Invest in brains. Dont get burned by this artificial bubble and the prospect of easy money. There is no such thing. Talk to all the house flippers. They were holding concrete: hard assets; protected solid future earnings is where value is. Growth in in brains.
5. “The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”
5.1 Gold is safer than bitcoins in the fact that it does not depend on an honest p2p network to exist individually.
6. “What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As 'bandwagon' investors join any party, they create their own truth — for a while."
6.1 This is the same for bitcoins, if when the expansion of demand comes to an end the whiplash is going to hurt. The bc protocol is a very interesting concept that IMHO will certainly find a use, and as such the POW will have a value; but it will eventually be indexed to the actual energy costs and expected future earnings.
7. “I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."
7.1 The goose is running miners. That opportunity is long gone for btc. If you are interested and fired up about bitcoin, I would suggest investing in a bitcoin startup. That's your best bet; investing in brains. Not things. Esp. not virtual things.
Cheers and good luck!
1. People do silly things because they have "reservation demand" and over time, speculatively, they figured out the most marketable commodity to hold for later spending (gold, silver, bitcoin etc.) Since it's purely speculative, not based on immediate consumption, and always kept in someone's cash balances, it may look silly to martians. But it's useful for people nonetheless. See: http://blog.oleganza.com/post/43378777734/on-circulation-of-...
2. See above. Yes, money is a speculative asset because it's what it is by definition. It's used only to satisfy "reservation demand", or need to hold something ultra-marketable for spending anytime because of uncertainty.
3. It's only fear for those who hedge against USD. There are many ways to do that, not only by buying gold or bitcoins. When you decide to invest particularly in Bitcoin, it's this particular speculation about future acceptance, not fear of USD going down.
4. Same argument that disregards reservation demand. Also: it does not make sense when all gold is a single cube owned by one man. Money is useful when there are many actors holding some portions of it and willing to hold even more. Then you have liquidity. If only you have something unique, it does not become money. Even if it's all gold in the world.
5. Bitcoin depends on p2p network the same way bitcoin and gold depend on the market to value them. Miners are highly motivated to play nice with each other to keep BTC value high. They are also motivated to censor bad spammy actors who try to destroy network or censor transactions. Like, every gold owner is motivated in having good ways to transfer, store and validate gold to keep their value and liquidity in place. There's no dependence on "good will", it's all driven by individual greed and speculation, like with gold.
6. This argument applies to all money, any money. Any good money would have to grow in price as demand for it grows (so it looks like a pyramid). Gold was growing in value too as it was more and more liquid and widely accepted. The quick growth does not tell us if it's tulip mania or real fantastic tool. In both cases the price would have to grow like crazy. You have to look into fundamentals - real reasons why people are making a bet that it will become a huge thing.
7. Another argument which misses reservation demand. Holding cash is useful to owner of that cash as it provides freedom to make choices any time. Holding a stable company allows keeping that cash balance above zero. People work for money directly or indirectly just for that - to have economic freedom to make decisions when they please, depending on the situation.
That being said, the idea of bitcoin p2p proof network and attached mining reward is fascinating. I dont think "reserve demand" is the killer app for it, something yet to come will be IMHO.
My current hand does not warrant investing my most precious asset of all, time, in this. But a killer app could at any moment change that.
I see you are looking at iOS applications. That may very well be where it resides.
Cheers and good luck,
Bitcoin is not gold. It's a currency at best. Even fiat currency is backed by the full faith in governement. Bitcoins seem to be valuable because a lot of people are hoarding them instead of using them. Looks like a bubble with people wanting in on the action...
https://bitcointalk.org/index.php?topic=583.msg11405#msg1140...
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose
and one special, magical property: - can be transported over a communications channel
If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.
Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.
I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.
(I'm using the word scarce here to only mean limited potential supply)
As I see it, BitCoins do qualify as money when they are used as currency — which they actually are — because they are present goods, the same way that software or an mp3 file are also a present goods. And they are useful as currency because they have good properties as a medium of exchange: They are scarce, homogeneus, difficult to fake, easy to identify (this could be improved), easy to transport, divisible, etc. The perceived utilitiy of these properties is what makes Bitcoins valuable. Purchasing power is a consequence of utility, not the opposite.
It would make the BitCoins value more stable if they could be used for a non monetary purpose. Maybe some cryptographic application? I think that it would be a good idea for the BitCoin community to research for a non monetary utility for the BitCoins.
As long as BitCoins don´t have a non monetary utility, Mises followers are correct when they say that if BitCoins loses its currency status, then their value would drop to zero, the question is, how much value would also lose silver or gold if they were not used as currency or store of value anymore? BitCoins are not risk-free, as nothing in life is risk-free. It´s a matter of choice.
Gold has been valuable for over 4.000 years, Bitcoins? 4, and that's already longer than the Tulip Mania ;-) We'll see how it works out but it sure is interesting.
http://eleconomistaprudente.wordpress.com/2011/06/06/bitcoin...
The bottom line is, there is a belief that there can be a currency bootstrapped into an exchange rate, with no compelling reason to have it other than to pass it on to the next. It's a hard one to argue either way, but I'm still holding out in camp "no".
Here's a simple engineering analogy since I'm among engineers. In both cases, valuation is based on some sort of subjective valuation (advocates love to point this one out, which is why I don't use the phase "intrinsic value" anymore, they're right that there's really no such thing). In both cases, prices can swing wildly. This is because there is a positive feedback loop constantly pushing prices in either direction, from people subjectively reacting to previous prices and wanting to follow suit. However the consumable commodity has an additional negative feedback loop, from people always ready to buy if prices get low enough, without regard to future expected prices, because they just want a pretty ring.
Finally, there is another form of speculation, which I will call "Hot Potato Speculation". This is the one you're talking about. This is speculation based purely on other people's speculation, which in turn is based on other people's speculation, ad infinitum. This is the "greater fool" scenario. It adds a lot of volatility to the market. Hot Potato speculation does surely exist in the gold market, just as it does in any market. But the valuation based on jewelry consumption serves as a negative feedback loop to keep it in check. Further, valuation based on gold's storability and transferability as a currency piggybacks on it and bolsters it further. Long-term, informed speculators, who will not be spooked by a small price fluctuation, bolster it further. So, the first three sources of value serve as protection against fluctuations from Hot Potato Speculation.
However for Bitcoin, Hot Potato Speculation is all that exists.
That may have been the case at some point, but it's taken on a life of its own, such that people value it for its own sake. Maybe that will leave the culture if gold's price drops, but I think it won't happen all at once. People care about gold specifically, and diamonds specifically, for weddings. For some reason, but it's there. And I use "shiny" as a half-joking way to describe desire for something unto itself.
A brilliant piece of marketing by De Beers, that.
What does this mean? Government won't give you another commodity in exchange for fiat. Is it faith that government will give you a dollar in exchange for a dollar?
I assert that they would not be my Bitcoin2's would be worth less. This highlights the observation that literally all of bitcoins value comes from confidence that the network of willing participants is permanent and robust. This makes it different than gold -- gold is gold, whereas one crypto-currency is entirely different than another crypto-currency. This also makes it different than other fiat currencies whose network of participants is compelled by law.
Universe wants one money, anyway: http://blog.oleganza.com/post/54121516413/the-universe-wants...
Bitcoin has been designed to have the same advantages. It's weaker because it's more complex to deal with (at the moment). But it's stronger than gold in that - so long as the algorithm holds - its scarcity is guaranteed, and it's easy to use for electronic transactions.
Bitcoins compete with gold for mindshare with people who want to be able to store value in a way that isn't subject to the whims of government - who can start printing lots of money at any time of their choosing and thereby wipe out people with savings.
I mean, why go My bank -> Debit card -> Bitcoin exchange -> My wallet -> Merchant's wallet -> Bitcoin exchange -> Bank transfer -> Merchant's bank when you could just go My bank -> Debit card -> Merchant's bank?
http://blog.oleganza.com/post/67362431718/you-can-own-bitcoi...
On altcoins: http://blog.oleganza.com/post/54121516413/the-universe-wants...
Bitcoins is more like stocks with Direct registration.
http://blog.oleganza.com/post/67362431718/you-can-own-bitcoi...
Bitcoin has many uses too, not only for reservation demand. It has scripts to protect contracts without expensive court system, blockchain can be used as a secure timestamp service, or a global name registry. It's full of opportunities apart from protecting your wealth.
Sure, you may not be able to purchase things locally with it, but it's just a computer program and information, you can hardly prohibit with any force. Look at tor.
1. Bittorrent is not shut down. And in average, people are getting freer with new tech, not more controlled. Some vocal revolutionaries are still easy to find and catch, just like in Jesus times. But average guy who is not specifically targeted, he's quite free.
2. Government is always a parasite on productive society. If it gets too heavy, it breaks the economy and dissolves without something to eat. If productive people start working with Bitcoin, that's where the value will be and govt will have to adjust and feed from that. BTC can be confiscated and monitored, but not outright banned. Gold was not destroyed when fractional reserve system was bootstrapping. It was relocated from weak hands to armed ones and then used to trade between other well-armed hands. Gold still maintained value, and very big one.
They're durable, portable, perfectly fungible and divisible, scarce and limited, easily recognizable, trivial to verify, impossible to counterfeit, and cheaper to store, protect, and transfer.
I'm saying that if bitcoins are valuable, then there are certain interesting properties of the new global economy that make it different from gold/oil/resource-based economy we have today.
In that sense, bitcoins are perfectly durable.
The derived value store has not much going for it IMHO. It suffers from a reverse network effect; as the block chain becomes heavier, it becomes clumsier, and a clone -- alt is more and more attractive, and a few simple clicks away. (no lock was a down side argument that was around when google became a home run(vs MS) but has yet to materialize; lately they might be setting themselves up for it to happen tho)
As soon as the expansion of demand(is all this demand really real?) comes to an end, bitcoins are susceptible to become tulip bulbs. You cannot pay any taxes in bitcoins, and this is how prices on everything are indexed in our fiat world.
But as a ledger gets bigger it gets more expensive to secure and harder to use; at one point the best economic alternative is to start a new one, based on the same principle, but not the same POW. And then start a new one. So the value resides in the p2p protocol not the currency itself which is a temporary corollary store that exists while the network is growing.
http://en.wikipedia.org/wiki/Gold#Applications
Gold seems not to be the best choice of materials for very many things.
It's valued because it's pretty and rare. That's basically it.
Holding it physically is an anachronism. Most people who own gold don't put it in a vault in their basement.
Today 90% of the economy needs connection and international trade. We rely on networks, computers and cryptography to support our lifestyle, remote labor, airplane travels and so on. Gold is almost useless for that. It's not programmable, it's not transferrable easily, there's a lot of risk and we all tried it already and we ended up with central banks having all the gold, promising none of the gold and printing tons of paper money which is backed by a promise to pay interest by issuing more of these promises. Small guys can't earn a lot of gold. It's way too easy to confiscate or control for someone who is bigger than you.
It's time to try something different, more suitable for modern era.
These guys would have to liquidate a lot of bitcoins smoothly to cover their massive costs and not to deeply disrupt the markets. And they are not interested in playing bad games with people's transactions as this will cause either of two things: the value of BTC may easily go down, and their blocks may be censored by other miners who don't like the value to go down. Every miner thus is motivated to be nice to everyone and maintain his business even if he has 80% of hashrate. Some pools were even addressing concerns of 50% power by limiting their own userbase. No pool wants BTC price to crash only because it got too big and frightens people.
The technology is really cool. It's just been unfortunately overshadowed by the get-rich-quick types, druggies, and libertarian/anarchists.
Please do not do this.
Please do not encourage people to use deterministic wallets, you are doing them a disservice.
Brainwallet is very dangerous, but also very powerful. It's not for mommy and daddy, but for people who know what they are doing and have reasons to hide money very well. There's nothing inherently bad with it. It all depends on the UI you are using. Decent UI may generate a deterministic list of private keys, so don't even lose privacy. Electrum does something similar, but you have to remember 12-word seed. With super-expensive KDF you may have decent protection even with a shorter passphrase (expensive meaning taking 30 seconds and 1 Gb of memory).
"Deterministic wallet" is the one which generates all the keys deterministically from the single seed. Preferably, it also uses deterministic signatures. This is much better than fully random one like in BitcoinQT because you can create a good random seed just once (using /dev/random plus some explicit random user input to protect against shitty or backdoored RNG) and then have a guarantee that all subsequent addresses and keys are not affected by an RNG you use. Also, you don't need to back up your wallet more than once if you can derive all future addresses from one seed. You only need a good cryptographic hash function for that. SHA256^2 or SHA3 seems like good enough to me.