The thing I find most interesting about cryptocurrency is something Bitcoin doesn't support: zero-knowledge proofs. Cryptographers have come up with very elaborate mathematical schemes by which it's possible to prove to someone that a fact is true and that you know it, without revealing to them what that fact is.
Right now the main use of this is in cryptocurrencies where nobody knows where transactions come from or where they go, yet they can still be certain that all the transactions add up correctly. (I'm deliberately not mentioning the names of these because I'm not a cryptocurrency promoter, but you can look them up if you care.)
But from my limited knowledge, the zero-knowledge proof technology is pretty general, and when you think about mixing it with smart contracts, things could get pretty futuristic. Like imagine a loan, where neither party has any way of knowing who the other is, but the creditor still knows with certainty that they are the most senior creditor.
Of course the problem remains that all this is internal to the blockchain, and the real-world legal system might happily just reach in and screw it all up.
You say: "Of course, there’s still the argument that Bitcoin will eventually die. I guess I see two ways that could happen. "
Isn't there a third problem? Proliferation of alternative cryptocurrencies is effectively a glut of supply in 'systemic risk hedging assets', no? A technically superior altcoin (say, one that requires less energy expenditure) could greatly dilute the value of any other coin serving the same purpose.
I like to think of Bitcoin as a very successful, proof of concept of a blockchain derived value store and exchange. But it's a one trick wonder. Great for money laundering, hard money speculation and ... Yeah. That's about it.
Where things get a lot more interesting is the new distributed finance stuff coming on line using ethereum. You and and all your closest buddies could each launch your very own stock market, lending platform and insurance company.
It's like the early feature phones with a couple of games on it compared to the iphone. A competent, but fixed function device vs a whole platform anyone can leverage to build thier own apps.
This doesn't mean bitcoin is doomed, but rather it will keep some high value, but eventually dwarfed by the vastly more flexible ecosystem surrounding it.
Just glanced at my update on my IRA. Been taking the RMD for 13 years. The value is the same factoring inflation, since the start of withdrawals. Considering my age, I should take more out and party more.
a) The average cost per bitcoin transaction is now in the $20s.
b) Stories are popping up constantly about how people lost their bitcoin/had it stolen/spent it foolishly on food or land.
Secondly, while 2017/2018 was a retail pump and dump - 2020/2021 is an institutional pump and dump.
Harris Kupperman detailed exactly what would happen in a series of posts at AdventuresinCapitalism.com from COVID start until the end of 2020:
1) Arbitragers making 40%+ a year risk free by shorting Grayscale and buying bitcoin drove BTC out of its $6K early COVID lows to above its multi-year trading range around $10K.
2) Once trading range was exceeded, a reflexive dynamic ensued. Hedge funds not in bitcoin are heavily pressured by relative performance stats and limited partners to get into it. Each buyin further pressures BTC prices up and hedge fund holdouts. And unlike stock (cough Tesla), bitcoin truly is limited without any requirements for earnings or delivery of product.
3) Speaking of Tesla: Elon's running in front of a crowd and calling it a parade means something. Not exactly sure what but he's a rock star among the pumpers.
So BTC the nerd art continues, but don't mistake a specific short term institutional phenomenon for something structural - any more than GameStop's short squeeze as anything but a generational trading blip.
Someone else in the comments has mentioned that it isn't that great a hedge against system collapse if it requires the internet to still work.
The quote about not mixing politics with investing seems like a non sequitur; the people discussed are mixing their politics with politics. Why should they feel positive about something with the emissions of a mid-sized country whose main utility seems to be buying drugs and illegal guns?
Also, you can always (for a reasonable timescale) mine more gold, but I thought the total number of bitcoins was fundamentally limited. Stross has stated that bitcoins would thus be too deflationary to use as a currency, although I don't know if there are ways around this.
If Bitcoin were the only crypto currency possible, there might be some
Value in it, like gold. The problem is you can easily make another crypto (as many have done). Why would a crypto ever be worth more than the marginal cost to produce? More inexplicable, why did Tesla spend $1.5B on crypto when the could easily have made their own? Why is Bitcoin worth more than other cryptos that do the same thing? The answer is, people are buying the brand. It’s Beanie Babies v. other collectible stuffed animals. People are paying for an entry in a public database.
Bitcoin is never going to be an effective currency because what many proponents view as a feature is a bug. There is no government and reserve bank behind it to keep it stable. Picture trying to enter a
long term (or even annual) contract denominated in Bitcoin—going to pay an employee 2 Bitcoin/yr?—good luck to you and the employee.
And mostly there aren’t really any business transactions in Bitcoin even where companies purport to accept it—the Bitcoin is converted to dollars. This is evident when you need a refund. You may have paid a Bitcoin when you made your purchase a month ago, but when you refund comes you are not going to get your Bitcoin back—you’re going to get an amount Bitcoin equal to the dollar value of the product when you purchase it. If Bitcoin doubled, your refund is only going to be half a Bitcoin.
I'd like to understand more about this concept of Bitcoin (or gold, etc.) being a "hedge against system failure." I get it with gold if we're talking about Krugerrands in your basement along with your cans of tuna fish. But is that how people own gold? I thought all the people bidding up the price of gold were obtaining *claims* of gold actually being held in some vault who knows where. If the system truly did collapse (apart from, say, just seeing really high inflation), how would you be sure that you could go get your gold pieces to keep you breathing in the Great Dystopia that follows?
And, obviously, the same for Bitcoin. It's totally reliant on a system that has at its foundation functioning government. If the government collapses, how do you know the Internet won't follow? And if that collapses what happens to all those wonderful Bitcoins in your "wallet"?
I don't really buy the hedge against collapse argument. I feel like Bitcoin is more like over-priced modern art. Who knows what the "true value" of a Warhol is (whatever that would mean), but you're cool to be one of the elite to have gotten possession of it, especially if you got in early on.
If Salvadoreans have been stashing USD as a risk hedge - it is not good for the state - as this stash is in cash - and pressures the local exchange and has no productive use
With BTC and the circulation of USD,if the USD cash starts circulating,it is good for the nation and the banks,and some of the USD will find its way into the banks,and be used for economic activity.
People will take out their hidden USD,buy BTC and SPEND THE MONEY or SPEND THE APPRECIATION IN THE BTC OR THE PROFIT - and that is a gain for the nation.If the banks sell the BTC,then the PHYSICAL DOLLARS,WILL MOVE INTO THE BANK - AND THE NATION CAN USE THE USD,NOT TAKE IMF LOANS,AND THE PEOPLE WILL HAVE DIGITAL DOLLARS WHICH CANNOT BE STOLEN,BURNT,TORN,COUNTERFEITED OR DAMAGED.
Boosting demand for a DIGITAL DOLLAR (BTC),is better than the PHYSICAL USD.
Money laundering cannot happen with the BTC,as the person WHO SELLS THE BTC TO THE STATE,AND RECEIVES USD IN HIS BANK - will have a name and identity,and will need to explain the proceeds,as the date of his acquisition of the BTC,is known.
Even if such a fool exists,he would be trapped by the state,with the BTC.
THE ADVANTAGE TO THE PEOPLE, IS THAT ALL BTC TRADES FOR BUYING BEER OR FOOD ETC.IS OUT OF THE TAX NET, FOR THE SHOPKEEPER , AS THE STATE WILL NEVER KNOW THE SALES MADE IN BTC - UNLESS THE SHOPKEEPER DISCLOSES IT TO THE STATE.
SO THE SHOPKEEPER MAY OFFER LOWER PRICES AND ALSO IF BTC FALLS,HE MAY NOT HIKE HIS RATES AS HE BOUGHT THE GOODS WHEN BTC WAS HIGHER - AND HE EXPECTS IT TO GO STILL HIGHER ! dindooo hindoo
The Govtt of Salvador,should commit that every Salavadorean,can surrender his BTC to the bank,and get USD,at any time.dindooohindoo
"Salvador has a debt burden and a bad economy".What should the govtt do ? Print more currency and move into hyper inflation,and civil war ?
Or adopt the US Dollar - which is like outsouring the treasury and monetary policy of Salvador,to the US Fed
The people with money need a currency to part their assets,from the point of safety and risk.If they pile into USD,the local currency will crash.If they exit Salvador,business and employment will collapse.
SOLUTION = ALT CURRENCY,which will keep the rich in Salvador,and give options to locals,to use USD or local exhange,or Alt-currency.
WHAT IS THE OPTION ?
CHINESE YUAN ?
EURO ?
OR BTC ?
EVEN THE PBOC CANNOT CONTROL FAKE YUAN/REMIMBI IN CHINA.
Enjoyed this one. Is anything happening on the Ledger of Record front that Balaji S Srinivasan @balajis says "will ultimately become the decentralized layer of facts that underpins all narrative"? https://twitter.com/balajis/status/1290326486382022656
The thing I find most interesting about cryptocurrency is something Bitcoin doesn't support: zero-knowledge proofs. Cryptographers have come up with very elaborate mathematical schemes by which it's possible to prove to someone that a fact is true and that you know it, without revealing to them what that fact is.
Right now the main use of this is in cryptocurrencies where nobody knows where transactions come from or where they go, yet they can still be certain that all the transactions add up correctly. (I'm deliberately not mentioning the names of these because I'm not a cryptocurrency promoter, but you can look them up if you care.)
But from my limited knowledge, the zero-knowledge proof technology is pretty general, and when you think about mixing it with smart contracts, things could get pretty futuristic. Like imagine a loan, where neither party has any way of knowing who the other is, but the creditor still knows with certainty that they are the most senior creditor.
Of course the problem remains that all this is internal to the blockchain, and the real-world legal system might happily just reach in and screw it all up.
You say: "Of course, there’s still the argument that Bitcoin will eventually die. I guess I see two ways that could happen. "
Isn't there a third problem? Proliferation of alternative cryptocurrencies is effectively a glut of supply in 'systemic risk hedging assets', no? A technically superior altcoin (say, one that requires less energy expenditure) could greatly dilute the value of any other coin serving the same purpose.
This is spectacular. Thank you for this
First time reader. This was great.
You made me curious about my bitcoin holdings... I had forgot about them... damn.
I like to think of Bitcoin as a very successful, proof of concept of a blockchain derived value store and exchange. But it's a one trick wonder. Great for money laundering, hard money speculation and ... Yeah. That's about it.
Where things get a lot more interesting is the new distributed finance stuff coming on line using ethereum. You and and all your closest buddies could each launch your very own stock market, lending platform and insurance company.
It's like the early feature phones with a couple of games on it compared to the iphone. A competent, but fixed function device vs a whole platform anyone can leverage to build thier own apps.
This doesn't mean bitcoin is doomed, but rather it will keep some high value, but eventually dwarfed by the vastly more flexible ecosystem surrounding it.
Just glanced at my update on my IRA. Been taking the RMD for 13 years. The value is the same factoring inflation, since the start of withdrawals. Considering my age, I should take more out and party more.
Bitcoin has zero fundamental value:
a) The average cost per bitcoin transaction is now in the $20s.
b) Stories are popping up constantly about how people lost their bitcoin/had it stolen/spent it foolishly on food or land.
Secondly, while 2017/2018 was a retail pump and dump - 2020/2021 is an institutional pump and dump.
Harris Kupperman detailed exactly what would happen in a series of posts at AdventuresinCapitalism.com from COVID start until the end of 2020:
1) Arbitragers making 40%+ a year risk free by shorting Grayscale and buying bitcoin drove BTC out of its $6K early COVID lows to above its multi-year trading range around $10K.
2) Once trading range was exceeded, a reflexive dynamic ensued. Hedge funds not in bitcoin are heavily pressured by relative performance stats and limited partners to get into it. Each buyin further pressures BTC prices up and hedge fund holdouts. And unlike stock (cough Tesla), bitcoin truly is limited without any requirements for earnings or delivery of product.
3) Speaking of Tesla: Elon's running in front of a crowd and calling it a parade means something. Not exactly sure what but he's a rock star among the pumpers.
So BTC the nerd art continues, but don't mistake a specific short term institutional phenomenon for something structural - any more than GameStop's short squeeze as anything but a generational trading blip.
Someone else in the comments has mentioned that it isn't that great a hedge against system collapse if it requires the internet to still work.
The quote about not mixing politics with investing seems like a non sequitur; the people discussed are mixing their politics with politics. Why should they feel positive about something with the emissions of a mid-sized country whose main utility seems to be buying drugs and illegal guns?
Also, you can always (for a reasonable timescale) mine more gold, but I thought the total number of bitcoins was fundamentally limited. Stross has stated that bitcoins would thus be too deflationary to use as a currency, although I don't know if there are ways around this.
If Bitcoin were the only crypto currency possible, there might be some
Value in it, like gold. The problem is you can easily make another crypto (as many have done). Why would a crypto ever be worth more than the marginal cost to produce? More inexplicable, why did Tesla spend $1.5B on crypto when the could easily have made their own? Why is Bitcoin worth more than other cryptos that do the same thing? The answer is, people are buying the brand. It’s Beanie Babies v. other collectible stuffed animals. People are paying for an entry in a public database.
Bitcoin is never going to be an effective currency because what many proponents view as a feature is a bug. There is no government and reserve bank behind it to keep it stable. Picture trying to enter a
long term (or even annual) contract denominated in Bitcoin—going to pay an employee 2 Bitcoin/yr?—good luck to you and the employee.
And mostly there aren’t really any business transactions in Bitcoin even where companies purport to accept it—the Bitcoin is converted to dollars. This is evident when you need a refund. You may have paid a Bitcoin when you made your purchase a month ago, but when you refund comes you are not going to get your Bitcoin back—you’re going to get an amount Bitcoin equal to the dollar value of the product when you purchase it. If Bitcoin doubled, your refund is only going to be half a Bitcoin.
Perfect post! What about the possibility that in the end it's only a XXIst century's Ponzi scheme?
I'd like to understand more about this concept of Bitcoin (or gold, etc.) being a "hedge against system failure." I get it with gold if we're talking about Krugerrands in your basement along with your cans of tuna fish. But is that how people own gold? I thought all the people bidding up the price of gold were obtaining *claims* of gold actually being held in some vault who knows where. If the system truly did collapse (apart from, say, just seeing really high inflation), how would you be sure that you could go get your gold pieces to keep you breathing in the Great Dystopia that follows?
And, obviously, the same for Bitcoin. It's totally reliant on a system that has at its foundation functioning government. If the government collapses, how do you know the Internet won't follow? And if that collapses what happens to all those wonderful Bitcoins in your "wallet"?
I don't really buy the hedge against collapse argument. I feel like Bitcoin is more like over-priced modern art. Who knows what the "true value" of a Warhol is (whatever that would mean), but you're cool to be one of the elite to have gotten possession of it, especially if you got in early on.
SALVADOR NEEDS BTC AS THE GAME PLAN IS DIFFERENT
If Salvadoreans have been stashing USD as a risk hedge - it is not good for the state - as this stash is in cash - and pressures the local exchange and has no productive use
With BTC and the circulation of USD,if the USD cash starts circulating,it is good for the nation and the banks,and some of the USD will find its way into the banks,and be used for economic activity.
People will take out their hidden USD,buy BTC and SPEND THE MONEY or SPEND THE APPRECIATION IN THE BTC OR THE PROFIT - and that is a gain for the nation.If the banks sell the BTC,then the PHYSICAL DOLLARS,WILL MOVE INTO THE BANK - AND THE NATION CAN USE THE USD,NOT TAKE IMF LOANS,AND THE PEOPLE WILL HAVE DIGITAL DOLLARS WHICH CANNOT BE STOLEN,BURNT,TORN,COUNTERFEITED OR DAMAGED.
Boosting demand for a DIGITAL DOLLAR (BTC),is better than the PHYSICAL USD.
Money laundering cannot happen with the BTC,as the person WHO SELLS THE BTC TO THE STATE,AND RECEIVES USD IN HIS BANK - will have a name and identity,and will need to explain the proceeds,as the date of his acquisition of the BTC,is known.
Even if such a fool exists,he would be trapped by the state,with the BTC.
THE ADVANTAGE TO THE PEOPLE, IS THAT ALL BTC TRADES FOR BUYING BEER OR FOOD ETC.IS OUT OF THE TAX NET, FOR THE SHOPKEEPER , AS THE STATE WILL NEVER KNOW THE SALES MADE IN BTC - UNLESS THE SHOPKEEPER DISCLOSES IT TO THE STATE.
SO THE SHOPKEEPER MAY OFFER LOWER PRICES AND ALSO IF BTC FALLS,HE MAY NOT HIKE HIS RATES AS HE BOUGHT THE GOODS WHEN BTC WAS HIGHER - AND HE EXPECTS IT TO GO STILL HIGHER ! dindooo hindoo
The Govtt of Salvador,should commit that every Salavadorean,can surrender his BTC to the bank,and get USD,at any time.dindooohindoo
"Salvador has a debt burden and a bad economy".What should the govtt do ? Print more currency and move into hyper inflation,and civil war ?
Or adopt the US Dollar - which is like outsouring the treasury and monetary policy of Salvador,to the US Fed
The people with money need a currency to part their assets,from the point of safety and risk.If they pile into USD,the local currency will crash.If they exit Salvador,business and employment will collapse.
SOLUTION = ALT CURRENCY,which will keep the rich in Salvador,and give options to locals,to use USD or local exhange,or Alt-currency.
WHAT IS THE OPTION ?
CHINESE YUAN ?
EURO ?
OR BTC ?
EVEN THE PBOC CANNOT CONTROL FAKE YUAN/REMIMBI IN CHINA.
Only way is BTC.dindooohindoo
Enjoyed this one. Is anything happening on the Ledger of Record front that Balaji S Srinivasan @balajis says "will ultimately become the decentralized layer of facts that underpins all narrative"? https://twitter.com/balajis/status/1290326486382022656
Kikusui hontou ni Oishi Katta