The Deflationary Economics of the Bitcoin Money Supply

Putting $400M of Bitcoin on your company balance sheet

Also posted on my blog as usual. Read it there if you can, there are footnotes and inlined plots.
A couple of months ago, MicroStrategy (MSTR) had a spare $400M of cash which it decided to shift to Bitcoin (BTC).
Today we'll discuss in excrutiating detail why this is not a good idea.
When a company has a pile of spare money it doesn't know what to do with, it'll normally do buybacks or start paying dividends. That gives the money back to the shareholders, and from an economic perspective the money can get better invested in other more promising companies. If you have a huge pile of of cash, you probably should be doing other things than leave it in a bank account to gather dust.
However, this statement from MicroStrategy CEO Michael Saylor exists to make it clear he's buying into BTC for all the wrong reasons:
“This is not a speculation, nor is it a hedge. This was a deliberate corporate strategy to adopt a bitcoin standard.”
Let's unpack it and jump into the economics Bitcoin:

Is Bitcoin money?

Or rather BTC doesn't act as money and there's no serious future path for BTC to become a form of money. Let's go back to basics. There are 3 main economic problems money solves:
1. Medium of Exchange. Before money we had to barter, which led to the double coincidence of wants problem. When everyone accepts the same money you can buy something from someone even if they don't like the stuff you own.
As a medium of exchange, BTC is not good. There are significant transaction fees and transaction waiting times built-in to BTC and these worsen the more popular BTC get.
You can test BTC's usefulness as a medium of exchange for yourself right now: try to order a pizza or to buy a random item with BTC. How many additional hurdles do you have to go through? How many fewer options do you have than if you used a regular currency? How much overhead (time, fees) is there?
2. Unit of Account. A unit of account is what you compare the value of objects against. We denominate BTC in terms of how many USD they're worth, so BTC is a unit of account presently. We can say it's because of lack of adoption, but really it's also because the market value of BTC is so volatile.
If I buy a $1000 table today or in 2017, it's roughly a $1000 table. We can't say that a 0.4BTC table was a 0.4BTC table in 2017. We'll expand on this in the next point:
3. Store of Value. When you create economic value, you don't want to be forced to use up the value you created right away.
For instance, if I fix your washing machine and you pay me in avocados, I'd be annoyed. I'd have to consume my payment before it becomes brown, squishy and disgusting. Avocado fruit is not good money because avocadoes loses value very fast.
On the other hand, well-run currencies like the USD, GBP, CAD, EUR, etc. all lose their value at a low and most importantly fairly predictible rate. Let's look at the chart of the USD against BTC
While the dollar loses value at a predictible rate, BTC is all over the place, which is bad.
One important use money is to write loan contracts. Loans are great. They let people spend now against their future potential earnings, so they can buy houses or start businesses without first saving up for a decade. Loans are good for the economy.
If you want to sign something that says "I owe you this much for that much time" then you need to be able to roughly predict the value of the debt in at the point in time where it's due.
Otherwise you'll have a hard time pricing the risk of the loan effectively. This means that you need to charge higher interests. The risk of making a loan in BTC needs to be priced into the interest of a BTC-denominated loan, which means much higher interest rates. High interests on loans are bad, because buying houses and starting businesses are good things.

BTC has a fixed supply, so these problems are built in

Some people think that going back to a standard where our money was denominated by a stock of gold (the Gold Standard) would solve economic problems. This is nonsense.
Having control over supply of your currency is a good thing, as long as it's well run.
See here
Remember that what is desirable is low variance in the value, not the value itself. When there are wild fluctuations in value, it's hard for money to do its job well.
Since the 1970s, the USD has been a fiat money with no intrinsic value. This means we control the supply of money.
Let's look at a classic poorly drawn econ101 graph
The market price for USD is where supply meets demand. The problem with a currency based on an item whose supply is fixed is that the price will necessarily fluctuate in response to changes in demand.
Imagine, if you will, that a pandemic strikes and that the demand for currency takes a sharp drop. The US imports less, people don't buy anything anymore, etc. If you can't print money, you get deflation, which is worsens everything. On the other hand, if you can make the money printers go brrrr you can stabilize the price
Having your currency be based on a fixed supply isn't just bad because in/deflation is hard to control.
It's also a national security risk...
The story of the guy who crashed gold prices in North Africa
In the 1200s, Mansa Munsa, the emperor of the Mali, was rich and a devout Muslim and wanted everyone to know it. So he embarked on a pilgrimage to make it rain all the way to Mecca.
He in fact made it rain so hard he increased the overall supply of gold and unintentionally crashed gold prices in Cairo by 20%, wreaking an economic havoc in North Africa that lasted a decade.
This story is fun, the larger point that having your inflation be at the mercy of foreign nations is an undesirable attribute in any currency. The US likes to call some countries currency manipulators, but this problem would be serious under a gold standard.

Currencies are based on trust

Since the USD is based on nothing except the US government's word, how can we trust USD not to be mismanaged?
The answer is that you can probably trust the fed until political stooges get put in place. Currently, the US's central bank managing the USD, the Federal Reserve (the Fed for friends & family), has administrative authority. The fed can say "no" to dumb requests from the president.
People who have no idea what the fed does like to chant "audit the fed", but the fed is already one of the best audited US federal entities. The transcripts of all their meetings are out in the open. As is their balance sheet, what they plan to do and why. If the US should audit anything it's the Department of Defense which operates without any accounting at all.
It's easy to see when a central bank will go rogue: it's when political yes-men are elected to the board.
For example, before printing themselves into hyperinflation, the Venezuelan president appointed a sociologist who publicly stated “Inflation does not exist in real life” and instead is a made up capitalist lie. Note what happened mere months after his gaining control over the Venezuelan currency
This is a key policy. One paper I really like, Sargent (1984) "The end of 4 big inflations" states:
The essential measures that ended hyperinflation in each of Germany,Austria, Hungary, and Poland were, first, the creation of an independentcentral bank that was legally committed to refuse the government'sdemand or additional unsecured credit and, second, a simultaneousalteration in the fiscal policy regime.
In english: *hyperinflation stops when the central bank can say "no" to the government."
The US Fed, like other well good central banks, is run by a bunch of nerds. When it prints money, even as aggressively as it has it does so for good reasons. You can see why they started printing on March 15th as the COVID lockdowns started:
The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.
In english: We're going to keep printing and lowering rates until jobs are back and inflation is under control. If we print until the sun is blotted out, we'll print in the shade.

BTC is not gold

Gold is a good asset for doomsday-preppers. If society crashes, gold will still have value.
How do we know that?
Gold has held value throughout multiple historic catastrophes over thousands of years. It had value before and after the Bronze Age Collapse, the Fall of the Western Roman Empire and Gengis Khan being Gengis Khan.
Even if you erased humanity and started over, the new humans would still find gold to be economically valuable. When Europeans d̶i̶s̶c̶o̶v̶e̶r̶e̶d̶ c̶o̶n̶q̶u̶e̶r̶e̶d̶ g̶e̶n̶o̶c̶i̶d̶e̶d̶ went to America, they found gold to be an important item over there too. This is about equivalent to finding humans on Alpha-Centauri and learning that they think gold is a good store of value as well.
Some people are puzzled at this: we don't even use gold for much! But it has great properties:
First, gold is hard to fake and impossible to manufacture. This makes it good to ascertain payment.
Second, gold doesnt react to oxygen, so it doesn't rust or tarnish. So it keeps value over time unlike most other materials.
Last, gold is pretty. This might sound frivolous, and you may not like it, but jewelry has actual value to humans.
It's no coincidence if you look at a list of the wealthiest families, a large number of them trade in luxury goods.
To paraphrase Veblen humans have a profound desire to signal social status, for the same reason peacocks have unwieldy tails. Gold is a great way to achieve that.
On the other hand, BTC lacks all these attributes. Its value is largely based on common perception of value. There are a few fundamental drivers of demand:
Apart from these, it's hard to argue that BTC will retain value throughout some sort of economic catastrophe.

BTC is really risky

One last statement from Michael Saylor I take offense to is this:
“We feel pretty confident that Bitcoin is less risky than holding cash, less risky than holding gold,” MicroStrategy CEO said in an interview
"BTC is less risky than holding cash or gold long term" is nonsense. We saw before that BTC is more volatile on face value, and that as long as the Fed isn't run by spider monkeys stacked in a trench coat, the inflation is likely to be within reasonable bounds.
But on top of this, BTC has Abrupt downside risks that normal currencies don't. Let's imagine a few:

Blockchain solutions are fundamentally inefficient

Blockchain was a genius idea. I still marvel at the initial white paper which is a great mix of economics and computer science.
That said, blockchain solutions make large tradeoffs in design because they assume almost no trust between parties. This leads to intentionally wasteful designs on a massive scale.
The main problem is that all transactions have to be validated by expensive computational operations and double checked by multiple parties. This means waste:
Many design problems can be mitigated by various improvements over BTC, but it remains that a simple database always works better than a blockchain if you can trust the parties to the transaction.
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Australians, you need to start buying as much crypto as you can.

I’m Australian, this isn’t meant to be an alarmist or sensationalist post, but the economic situation in our country is a lot more serious than most of us think.
First off, the current economic situation.
Simply put, our economy is fucked. Our housing market is dangerously overleveraged and because of policies by our government at the time, we never experienced the correction the US and most of the rest of the world did during the 2008 Global Financial Crisis. And now the chickens are coming home to roost. Australians are up to their eyeballs in debt, almost half of the housing loans are interest only, it’s the reason the Reserve Bank of Australia hasn’t raised the interest rates since 2016. Because as soon as they do, even by 0.01%, tens of thousands of Australians are going to default on their mortgages. It’s no secret that our housing market is one of the most expensive in the world, and anyone living in our country already knows this. The market value of Australian homes is 4 times the GDP of the country. Our housing market is beyond the point of saving and the bubble is about to pop. And while our mainstream media is trying to convince us that it will deflate slowly, history paints a different picture.
And that’s just the start of our problems. It’s no secret that China is our biggest trading partner. We rely on China more than any other developed country in the world. And what is currently happening on the greater global stage? Our most important military ally has engaged in a trade war with China, and the effects of that trade war are starting to be felt. Chinese stocks are in freefall, and that’s only going to be the beginning of the negative effects from Trump’s hardline approach to dealing with China. It doesn’t take a genius to see that this is going to have a devastating effect on our economy.
Our biggest trading partner is having a financial gunfight with the USA, which is going to result in them buying less of our stuff. And still that isn’t the end of it. Mining is down. Commodities prices are down. Our manufacturing sector is almost dead. The only thing we have going for us at the moment is agriculture and that can’t prop up the entire economy. You wanna turn white? Read this article from last year. Our economy is teetering on the precipice.
You think I’m being dramatic? Well even the Australian MSM can no longer ignore it. With articles like this appearing almost on the daily. Our dollar is in serious trouble, anyone who knows the slightest bit about TA go look at the graphs in that article. Our country is in serious economic trouble. And we don’t know shit about it because our media is a duopoly that makes most of its money from their real estate arms. All signs are pointing to our dollar about to be worth a hell of a lot less than it currently is.
What can we do?
Since this is the crypto subreddit the solution to this impending economic shitstorm should be painfully obvious. Buy fucking Bitcoin. Not the solution for the country, for you. The country isn’t going to do shit for anyone of us except saddle us with debt and a cooked economy that is going to take generations to get out of, if ever. So we should be diversifying. Sure buying gold probably isn’t a stupid idea either, but if you think that is proof against state intervention, read a history book. Even then, gold still needs to be converted into cash to be useful, and anyone paying attention can see that Australia is gearing up for a war on cash that borders on tyrannical. The only way for us as individuals to protect our wealth at the moment is to convert it into cryptocurrency.
But Bitcoin is low at the moment!
No shit. But if you think it’s going to stay that way you are 1. In the wrong subreddit, and 2. No paying attention to the macro factors of crypto. Wall St is gearing up to enter. The bank that runs the world is getting involved. And not just American banks. Bitcoin may be low now but if you know anything about market cycles, you know that it’ll be back. Here is a good comparison of BTC a few years ago as opposed to now. It’s almost at the point where it’s irresponsible not to be buying bitcoin, and I’m not the only one that holds this opinion. Worst case scenario, bitcoin falls to USD 3k. What do you think is going to happen after that? Bitcoin and crypto aren’t going anywhere and you’re kidding yourself if you think that the value of bitcoin isn’t going to be much higher in the years to come.
Of course the RBA is telling people that Bitcoin is dead, probably because they don’t want Australians to dump their soon to be worthless fiat currency. In fact one any given day you’ll see a bunch of anti-crypto propaganda on our MSM. The same MSM that has been telling us all to buy as many houses as we can for the last 20 years. The same MSM that up until now hasn’t said shit about the direction our economy is heading in.
The writing’s on the wall people. If we keep our wealth in AUD it’s going to be worth considerably less sooner rather than later. Our property sector is going to crash, our dollar is going to crash, our personal wealth is going to be stripped away from us. If you want to avoid this, if you want to protect your wealth, ensure a future that isn’t financial hardship, then we really only have one choice. Buy bitcoin. Personally I am converting half my pay each week into BTC and just holding it. Not putting it into alts. Just btc. I’d advise you do the same as well. I understand that this sounds super risky. But if you read the articles I’ve linked to in this post I’m sure you’ll see that the only risky move is doing nothing. This isn’t a joke or a false alarm. The notion that our economy has always been fine up until now isn’t valid anymore. If you want to protect your personal wealth and purchasing power in the next few years, you really should be buying as much btc as you can while it is this low. This is what crypto is for, avoiding the negative financial downturns of specific countries. It’s a globally traded commodity that is accessible by anyone with a computer. Our economy tanking isn’t going to affect the price one bit.
I hope some of this has been useful. Listen to me, don’t listen to me, it’s your choice. But this is the digital age, there’s no excuse for ignorance anymore.
submitted by Sendmyabar to CryptoCurrency [link] [comments]

The fundamentals of bitcoin as an asset exist and they are stupider than you can imagine

tldr; tldr; Hodling is deflationary and all those wild price swings from bitcoin are changes in the fundamental value of bitcoin. Really.
tldr; Imagine there is a market where $100 worth of goods are sold every day using 100 bitcoins which cycle around. Then each bitcoin would be worth $1. Now suppose that 50 of the bitcoins were being held in anticipation of growing in value so only 50 bitcoins were cycling each day. For all the goods in the market to be sold every day each bitcoin will now be worth $2.
Introduction There has been a lot of discussion about what the fundamental value of bitcoin is. The consensus view in this subreddit is that the fundamental value is zero. I argue in this post that the fundamental value of bitcoin is whatever the price is right now, or a something close to it. This is because the fundamentals of bitcoin are stupid. Unimaginably stupid.
Bitcoin as Currency Bitcoin is a terrible currency compared to normal statist filthy fiat. Bitcoins are often permanently lost due to hacking or easily made mistakes. Transactions take considerable time to be confirmed. The price is highly volatile. But this post isn’t going into those issues in depth.
There is little evidence for mainstream Bitcoin use. A report by Morgan Stanley on the acceptance of Bitcoin from online retailers found that only 3 out of the 500 online retailers tracked accepted Bitcoin payments, a decrease from 5 in the previous year. The report concluded: “Bitcoin acceptance is virtually zero and shrinking”.
The number of transaction on darknet markets is large. On darknet markets users buy illegal products using cryptocurrencies (not just Bitcoin). Due to their illegal nature, it is impossible to know the exact value of transactions that take place on them. Between February 2011 and July 2013 the darknet market Silk Road had 1,229,465 transactions comprising 9,519,644 bitcoins in revenue. Darknet markets, along with ransomware payments are the only uses where there is evidence of a substantial number of bitcoin transactions taking place.
To work at scale darknet markets require cryptocurrency to pay for goods on sale. The anonymous nature of cryptocurrency allows transactions to take place without the buyer or the seller knowing anything about each other (although if a buyer has drugs mailed to them the seller will know who they are). If darknet markets used another form of payment then law enforcement could buy something and then track both the money going to the seller and the commission paid to the darknet market. It isn’t true as many people have claimed that nothing backs bitcoin. Bitcoin is backed by darknet markets.
There are a few kinds of people who buy bitcoin and want to spend it. They include drug buyers, those who need to pay off ransomware, money launders, fraudsters, and a few others but for simplicity’s sake I will just call them drug buyers. Likewise, there are a few types of people who sell products for bitcoin but again for simplicity’s sake I will call them drug sellers.
Non-circularity Bitcoin is a currency with a property that I call non-circularity. With Actual Money, when I buy something in a shop, the money I paid with goes towards the wages of the staff, rent and the products themselves among other expenses. This money then flows on to others. When a drug seller receives bitcoin in exchange for their drugs they can’t use the bitcoin to pay for their groceries or to pay their rent. They must exchange the bitcoin for filthy fiat to buy food. The inability to use bitcoin for further purchases means it is a non-circular currency. Bitcoin is a medium of a medium of exchange.
A full bitcoin transaction thus consists of three parts:
  1. A drug buyer goes to a bitcoin exchange to get bitcoin in exchange for filthy fiat
  2. The drug buyer goes to the DNM to exchange bitcoin for drugs from the drug seller
  3. The drug seller goes to the bitcoin exchange to get filthy fiat in exchange for bitcoin
An exchange is any place which matches buyers and sellers of bitcoin. This includes online exchanges like Coinbase as well as LocalBitcoins which matches people for face to face transactions. As nobody receives bitcoin for payment except drug dealers, the only place for drug buyers to get bitcoin is an exchange. The extreme volatility of bitcoin means that drug buyers and sellers try to complete the process as quickly as possible and avoid holding onto bitcoin.
Perfect Price Unstickiness For normal currencies prices are sticky. That means that nominal prices do not respond quickly to changing economic conditions. In contrast bitcoin has what I call perfect price unstickiness so the price of goods in bitcoin changes almost perfectly to changes in the value of bitcoin.
This is because prices for items which can be bought with bitcoin are never actually set in bitcoin, probably due to the high volatility. Instead they are set in fiat. The amount in fiat can either be listed directly, so $US50 for these drugs, or the price can be listed in the converted amount of bitcoin, 0.005BTC if 1 BTC = $US10,000. Changes in the price of bitcoin on exchanges are instantly reflected in the prices of drugs in bitcoins on darknet markets.
Hodling Another feature of bitcoin that should be considered is that people hodl bitcoin. The word comes from a typo of ‘hold’. Bitcoin is often bought on exchanges not for use as a currency to buy drugs, but as an asset in expectation of a price rise. Hodlers are the third type of user of bitcoin along with drug buyers and drug sellers. Although they don’t use it.
What’s the difference between an asset that is held and one that is hodled? This is admittedly vague, but an asset is hodled if it is being held, it can be held for long periods at low costs, it can but isn’t generating any income and there are no plans to generate income from it soon.
Cash under the mattress is being hodled, cash in my wallet that I am going to buy stuff with soon is not. Money in my bank account is generating income and so is not hodled. Bitcoin held in anticipation of price rises is being hodled. Bitcoin bought to buy drugs but which has not been used yet is not. Gold stored in a vault is being hodled, gold used for electronics purposes is not (jewellery is a harder case). A vacant block of land with no plans to develop it or use it for anything is being hodled but one that is soon going to have an apartment block built on it is not.
Commodities can be held and do not generate income until sold but it is expensive to hold most commodities for long periods of time. This prevents most commodities from being hodled.
Velocity The velocity of money is the average number of times a unit of fiat changes hands in a period. You can skip the next three paragraphs as they are a little annoying and you can get by without them. Just know that I am defining the velocity of bitcoin as what the velocity of bitcoin would be if no bitcoin was being hodled.
Due to hodling, the velocity of bitcoin under the conventional definition can vary wildly. Consider two cases. Both have 100 bitcoins, 100 transactions a day and all non-hodled bitcoins are spent each day. The first has no hodled bitcoins, the second 50 hodled bitcoins. The first has a velocity of bitcoin of 1 transaction per day, the second is 0.5 per day.
I want a definition of velocity of bitcoin that is not impacted by changes in hodling. I did consider doing this analysis through changes in velocity but the final formula is easier to understand if we find a definition of velocity of bitcoin that is independent of the level of hodling.
The definition that achieves this is (Length of Time)/(Average length of time to complete transaction). When there is no hodling the two definitions agree but the new definition is unchanged by any rise or fall in the level of hodling, which is what we need. From this point on when I refer to the velocity of bitcoin I am referring to the second definition.
The actual time to complete a bitcoin transaction seems to be over a week. In an interview one vendor claimed that it took one week for the bitcoin to be released from escrow and longer to convert it to actual money.
Intuitive argument Assume that the amount of drugs sold on darknet markets changes little from week to week. If the price of bitcoin doubles over the week then the number of bitcoins flowing through the darknet markets will halve. So where have the bitcoins gone? Drug buyers and sellers don’t have them. The only option is hodlers. In fact, it was the hodlers buying the bitcoins that caused the price to change.
Formula The conventional formula for the relationship between velocity of money (V), nominal amount of money (M), price level (P) and real economic activity (Q) is
V*M = P*Q
I am going to change that equation slightly so it now concerns the velocity of bitcoin (V), the total number of bitcoins (M), the price level of bitcoin (P), the total value in fiat of all economic transactions (Q) and the proportion of bitcoins that are hodled (h). If h*M bitcoins are being hodled then there are (1-h)*M bitcoins being used in economic transactions. The new equation is
V*(1-h)*M = P*Q
Next we isolate P:
P = V*(1-h)*M/Q
If the price level changes from 1 to 1.1 that means that there has been 10% inflation over the period and that the value of bitcoin has fallen. To find the value of a single bitcoin we have to take the reciprocal of P and that gives a formula for the true value of bitcoin:
1/P = Q/[V*(1-h)*M]
In the rest of the post when I write the price of bitcoin I mean the price bitcoin sells for on exchanges. I establish in the next section that this price must be close to the true value of bitcoin.
Equilibrium This section uses the flow of bitcoin model established earlier. We assume no activity from hodlers and that economic users do not hodl bitcoin (not true but it simplifies and does not hurt the model). Furthermore, we assume that all activity on the bitcoin exchanges happens, then all activity on the darknet markets happens. Drug sellers sell their bitcoin to drug buyers, then drug buyers use the bitcoin to buy drugs on the darknet markets. Neither the exchanges or the darknet markets charge commissions. I use specific numbers but my reasoning is easily generalizable.
To establish why the equation is true we must consider what happens if the actual price is higher or lower than the price given by the formula. First let us suppose that the price is lower than the price predicted by the formula. Over the time period of a day suppose that Q = 100 (so $100 worth of transactions a day), V = 1 (transactions take a day), M = 100 (100 bitcoins) and h = 0.5 (50 bitcoins are hodled). This gives a predicted price of $2. Suppose the price is instead $1.
Every day there are $100 worth of drugs available to be sold and buyers willing to buy $100 worth of drugs. At a price of $1 and with only 50 bitcoins available for economic use each day that means that only $50 worth of drugs can be sold. This would drop Q to 50 and immediately correct the equation.
However, there are buyers and sellers who want more drug dealing than that. Some buyers are not going to be able to get their drugs given the current price. Some of them will be willing to pay higher prices for bitcoin to guarantee they can have their drugs. Suppose that the drug sellers have 50 bitcoins (hodlers also have 50). They want to sell their 50 bitcoins to drug buyers on an exchange. Some drug buyers then bid the price of bitcoin up to $1.10 (for example). This benefits other drug buyers as now $55 worth of drug transactions can take place each day. In this way, the price will be bid up to $2, the equilibrium price.
If the price is $1 and the drug buyers have the 50 bitcoins then they will spend the bitcoins to buy $50 worth of drugs and then we are in the situation above.
Now suppose the reverse happens and the actual price is higher than the predicted price. Let the actual price be $4, with all the same example values from the previous example, so the predicted price is $2. On the exchange drug sellers have 50 bitcoins worth $200 to sell. Drug buyers want to buy $100 worth of bitcoin. At this price only 25 bitcoins are sold. To ensure they sell more of their bitcoin, drug buyers bid down the price. If the price does not immediately reach $2 then the left-over bitcoins will be held by the drug sellers until the next day when the price will be bid down again.
The drug sellers holding bitcoin for a few extra days is not the same as hodling because they are actively trying to sell them on an exchange but they haven’t because the price isn’t in equilibrium. They could instead decide to sell only 25 bitcoins and hodl the other 25. This would raise h to 0.75 and the price would be in equilibrium again.
Now suppose that the drug buyers have 50 bitcoins and the price is $4. Then $100 worth of drugs are bought with 25 bitcoins. The drug sellers will not be able to sell their bitcoin as drug buyers already have enough bitcoin to buy the next round of drugs they want. The drug buyers spend their last 25 bitcoin and drug sellers now have 50 bitcoins and the situation is as above.
In conclusion, the price of Bitcoin is fundamentally determined by speculators and brought into equilibrium by criminals.
Inflows and Outflows of Hodling The previous section treated the level of hodling as constant, except when drug buyers or sellers decide to hodl extra bitcoins that are in their possession. Now we will treat the amount of hodled bitcoins as changing. The next topic to consider is the relationship between filthy fiat spent to hodl bitcoins and the bitcoin price.
To calculate how much it costs to raise the hodl ratio from 0 to h we assume that the bitcoins are bought continuously. We integrate the function Q/[M*V*(1-t/M)] between 0 and h*M. The result is (Q/V)ln[1/(1-h)].
To double the price of bitcoin by taking h from 0 to 0.5 will cost (Q/V)ln(2). In fact, it will always cost this amount to double the price of bitcoin as we can see by finding the difference between the total value of hodled bitcoin when we consider hodling levels of h and (h+1)/2.
This means that the price of bitcoin rises exponentially when a constant amount of new money buys bitcoin to hodl. I would illustrate this with a log-scale graph but I don’t know where to find one. It also means that the market capitalisation of a cryptocurrency gives very little idea about how much the cryptocurrency is worth. It is an impossibility for all hodlers to receive the Actual Money that they think their bitcoin is worth.
Volatility People hoping to get rich and their buying and selling bitcoin is what causes bitcoin’s extreme volatility. Theoretically this could be stopped if there was a bank where hodlers could deposit their bitcoins and earn interest. However, for this to work would require the existence of a bitcoin bank which is not a Ponzi which seems like an unlikely outcome.
Hodling Gold A quick digression into gold, but I suspect someone has already thought of what follows. We can consider gold like a conventional commodity with conventional supply and demand curves (the real world for all commodities is more complicated but this is going to be quick). But people also hodl gold. If hodlers decide to buy $100 million worth of gold produced in the year, then that will change the equilibrium price. The new price is such that the difference between the quantity demanded by non-hodlers and the quantity supplied at that price multiplied by the price is 100 million.
If the overall level of hodling declines then the reverse happens. The hodlers sell an amount of gold, that amount is the difference between the amount supplied and demanded. The hodlers earn that amount multiplied by the new lower price. (I assumed people bought a fiat amount of gold and sold a volume of gold to make things easier).
Without another hodler to take on the gold or an improvement in market conditions, the hodlers are guaranteed a loss. To make a profit hodling gold you need there to be hodlers to sell it on to (or an improvement in the underlying factors). It follows that all the gold hodled in the world today cannot be sold without causing the fundamentals of gold to collapse. With 40% of the gold produced in 2017 being hodled this will eventually become a significant issue.
Full Reserve Banking Another place where we can consider the impact of hodling is full reserve banking. It is a form of banking where banks are required to have cash on hand equal to the full amount in all demand deposit accounts. The bank does not lend this money. This contrasts with the present system where banks are only required to have a certain fraction of this amount on hand, called fractional reserve banking. Money in a fractional reserve bank account is not being hodled (or is, but to a more limited degree) as it is being lent on to other people and it is generating income for the depositor.
Deposits under full reserve banking are hodling. They are like cash stuffed under a mattress but have better security. In a recession people increase their saving rates. Much of this additional saving will be in liquid assets because of fears of economic trouble. This rise in deposits under full reserve is an increase in hodled cash which then causes deflation. This is a big problem in a recession. (Somebody else has probably already made this observation).
Velocity and Value Consider the equation of bitcoin’s value again. Notice that the value increases when V decreases. Which means that the length of time to complete a transaction has increased. Bitcoin is an asset and a currency and its value as an asset increases as the length of time it takes to complete a transaction increases. This is a minor bit of stupidity which surprised me but seems obvious in retrospect as if bitcoins take longer to be processed then they must be worth more so that all transactions can happen. (This is assuming that a decrease in V does not also cause a decrease in Q which might be caused by drug buyers and sellers switching to a different cryptocurrency).
Hodler Behavior With one exception which I might make in another post I make no assumptions about hodler behaviour. I think they are buying and selling with no rational basis. But there are two rational reasons why someone would expect the price of bitcoin to rise: increased economic activity using the cryptocurrency in the darknet markets or an increased level of hodling in the future. The DNM is an actual economic activity but due to its illegality knowing anything about the amounts involved is impossible for almost everyone as is predicting their trends. Future hodling levels are also impossible to predict, unless you run a pump and dump. We can’t expect any sort of rational behavior from hodlers.
Nakamoto Scheme Preston Byrne developed the concept of a Nakamoto Scheme to describe cryptocurrencies because of how they differed from Ponzis and pyramid schemes. While bitcoin has been frequently called a Ponzi or pyramid scheme it is clearly something different. There are no “dividends” paid or any sort of organised structure. There are similarities, notably early adopters make their money at the expense of later adopters. Like in pyramid schemes hodlers try to convince new people to join in.
It is best to consider bitcoin as a type of asset which is uniquely suited for a pump and dump. When hodlers buy bitcoin, and encourage others to do the same (the pump) the fundamental price of bitcoin really is raised by these actions which helps the pump.
To add to Byrne’s work, we should put the properties of cryptocurrency assets at the centre of the scheme. A Nakamoto scheme works like this: first create a cryptocurrency and keep most of it for yourself. Then release it and try to get as many other people hodling as possible and try to get the darknet markets to adopt it (I’m looking at you Monero). This increases the fundamental value of the asset. Then dump your hodlings. Pocket the actual money. This is probably legal right now. But I’m not a law-knowing person.
For the hodler the Nakamoto scheme is like going to a party. You arrive and leave later on. If there are more people at the party when you leave compared to when you arrived then you’ve made a profit. There is also drug dealing going on at the party. The change in the level of drug dealing also impacts your profits. You have to try and get more people to come to the party and be careful of everyone else at the party who have the exact same incentives as you. It is a weird new form of scam.
Lower bound on price While the price of bitcoin can theoretically be infinitely high there is a lower bound on the price when the hodling ratio is zero. For given levels of Q, V and M the value of bitcoin can never go below Q/[V*M] (the highest possible price for bitcoin is when 1 satoshi is equal to the value of a transaction).
Some bitcoins have been permanently lost due to people losing their wallet keys or bitcoins being sent to the wrong address. If we suppose that H is the proportion of coins that have been permanently lost then the actual lower bound is Q/[V*(1-H)*M]. Note that a hodler losing their coins does not change the present fundamental value of bitcoin.
What could cause bitcoin’s price to go lower? Besides a mass hodler sell-off the obvious reason is a permanent decline in Q. What could cause this? Law enforcement have successfully shut down many darknet markets but others have replaced them quickly. What could really hurt darknet markets is increased government scrutiny of exchanges. When governments realise that bitcoin has no use beyond criminal transactions and speculation they might decide to treat every bitcoin transaction as inherently suspicious and regulate exchanges heavily. This will make bitcoin much harder to use for criminal transactions and thus greatly decrease Q and the value of bitcoin.
Previous work This post is not entirely original. Satoshi himself said that if a bitcoin user wanted to give a donation to everyone else then they should delete the keys to their wallet and increase the value of everybody else’s bitcoins. I realised that someone who hodled a bitcoin would temporarily have the same effect.
More significantly Joseph C Wang came up with a formula very similar to mine. A significant difference is that he thought increased economic activity with bitcoin would not cause an increase in bitcoin’s value but an increase in its velocity. My model has nominal prices of drugs in bitcoin falling when Q increases. Wang has prices remaining the same and the velocity of bitcoin increasing to handle the extra transactions. I developed my formula before I became aware of Wang’s work.
Further Topics This post is over 4000 words so I have not gone into depth on a few subjects like the costs of block rewards (higher than you think), shocks like darknet market shutdowns, why bitcoin can’t fall to a liquidity trap, how to value a cryptocurrency that isn’t being used for economic transactions and why it makes sense that bitcoin and bcash had a higher combined value at the time of the fork compared to bitcoin alone. If there is demand I’ll put together a second post which will cover these issues.
submitted by GBerkeley1734 to Buttcoin [link] [comments]

New rule! Also are cryptocurrencies an investment, will there be a crash? Everything answered here!

This is going to be the only crypto post for now and an announcement:
Rule 6: Bitcoins & cryptocurrenies should be discussed in CryptoCurrency. Posts regarding this topic will be automatically removed.
If there's a stock correlated with cryptocurrencies, like coinbase going IPO, then that's fine, you might have to message the mods after posting to have it approved, no big deal.
Also if you're questioning whether something is an investment or not, just search for it on personalfinance. For general currency trading strategies, see forex .
If you're wondering if bitcoins are an investment or if there will be a crash, read on.

Are cryptocurrencies an investment?

This post is going to deal with bitcoins & cryptocurrencies as an investment... they're more speculative. All currencies are speculative mostly due to how the forex market works, but more because of exchange rates between countries keep currencies balanced (including inflation, country debt, interest rates, political & economic stability, etc), so you can only profit in price fluctuations.
Sure you could buy the currency of a depressed country, like Mexico decades ago, and then hold in the hopes it'll go up (which it did for Mexico), but that's also speculation (no one knew Mexico would pay off so much debt).
Bitcoins are also affected by other countries' currency values, but more so by the future expectation of legitimacy, world wide adoption, limited gains from mining, and eventual limit in supply. But at any given moment the United States could pay off more debt, raise interest rates to reduce inflation (or cause deflation), grow GDP, or even reduce the supply of USD all of which would increase the value of USD (keep in mind bitcoins can't do any of these things).
Far too many people are treating cryptocoins as an investment because currently (June 5th 2017) a lot of crypto investors are worth a lot of money, god bless you people, so this post will also help you determine if we're headed for a crypto crash and maybe you can keep those profits.

Should I invest in cryptocurrencies?

Understand that an investment is something you hope will go up in the future or provide income, both of which for the long term vs speculation which profits on short term inefficiencies.
Speculative securities are typically commodities, options, bonds, and currencies, but also stocks that are volatile enough to give you extreme returns or extreme loses.

Examples of investments:

Examples of speculation:

Reducing the risk of speculation

Typically for speculation you reduce risk by reducing your trade size and timeframe, but since you're trying to invest into something that is speculative, you can try:
Asset allocation, a strategy that reduces risk.. If you're 80% stocks, 15% bonds, 4% gold, and 1% bitcoins, if something were to happen to bitcoins, you still have 99% of your money.
But even very aggressive long term portfolios leave speculation out completely and just go 100% stocks because stocks benefit from growth while speculative securities like gold benefit from global turmoil in the short term. Only mid risk & mid term portfolios can take advantage of gold's speculative returns.
I also mention asset allocation because many crypto investors have been using this strategy on a portfolio of 100% crypto coins, but that doesn't help you reduce the overall risk of crypto coins, you're just reducing the risk of 1 speculative asset with another speculative asset. 100% crypto portfolio would face the same risks such as being made illegal, IRS aggressively hunting down crypto profits, a drop in correlated coin markets, or just a loss of popularity would all cause a sell off. Even the USD or Chinese currencies becoming more valuable would reduce the value of crypto coins.

Should I buy coins right now?

Cryptocoins are a better investment after a period of consolidation when volatility has stabilized:

Bitcoin 2013/2014 speculation, chart

Bitcoin 2015 consolidation, chart

Source Bitstamp exchange, while the volume is #2 to GDAX, Bitstamp is better to look at for historical price/data, more charts here.

RSI & MACD key for above charts and primer

Analyzing overbought signals

So the first chart above have RSI & MACD screaming that bitcoin is overbought and you shouldn't invest in 2013/2014.
The black squares in the 2nd chart show consolidation and reduced volatility, a "better" time to invest. If you were trading short term, it would be a whole different story, and there would be opportunities to buy & short, but since this is written for investing, the small overbought signals are ignored, so if you were to buy Bitcoin at $300 inside the first blacksquare (2nd chart) and then it suddenly drops to 25%, it's okay because the volatility is much lower compared to previous price movements (nothing compared to 80% loss in the 1st chart). Any investor would tell you a 25% drop is terrible, but bitcoins are speculative and that kind of drop is pretty damn good for this level of volatility.

Nothing goes straight up forever

and anything that comes near this vertical incline will eventually lose 80% to near 100%, always happens, it's usually preceded by emotions (price euphoria), attention, and increased volume, all classic signs that something is becoming riskier.
Other speculative securities gaining multiples and then losing 80% to near 100% of value:

Notable comments on reddit:

*This is just to get you guys looking at different subs on this topic, and yeah it's mostly anti-crypto, but don't let that discourage you.

Is Bitcoin going to crash?

Maybe, the signals are getting louder, you tell me: The only chart you wanted to see this entire time.
So based on the above chart, is bitcoin overbought? MACD levels are the same as 2013's crash, but the increased in value is around 4.3x or 2.4x (depending on which you look at), so maybe we'll see another spike before a crash, I don't know, it's up to interpretation right now. There's the emotional price levels of 3000 and 4000 that we might have no problem getting to in an overbought environment before a correction. And how big will the correction be? I think 80%, but it very well could be around 50% down to $1200, the previous level of resistance which would become support.
I put everything above in its own wiki here.
Well I hope that helps everyone. Sorry to anyone that may feel butthurt on classifying cryptocoins as speculation, I hope you understand the facts. Feel free to argue or agree with this. If I made any mistakes and you point them out, I'll correct them and give you credit for it in an update to this post and the wiki.
Also the automod will is just going to blanket remove posts (not comments) with the following keywords {crypto, bitcoin, btc, etherium, altcoin} (see update 4 below) (this will eventually get relaxed if Coinbase ever IPOs) and then it'll send the user this message:
"Sorry your post[link] was removed in stocks because of rule 6: Bitcoins & cryptocurrenies should be discussed in CryptoCurrency. You can find more information in our are-cryptocurrencies-investments wiki. If you're trying to discuss a non-OTC stock related to cryptocoins like Coinbase IPO, or this was just a mistake, message the mods and they'll approve your post, thanks."
Update: Created wiki, added relevant websites and sub reddits. Also turned on automod reply.
Update2: those relavant websites and subreddits I put into the wiki, thanks u/dross99 for recommending ethereum

Relevant websites/wikis

Relevant subreddits

  • CryptoCurrency - main sub to learn about all bit & altcoins
  • ethtrader - trading eth
  • ethereum - for more eth information
  • btc - the place to have bitcoin discussions or r/CryptoCurrency; while Bitcoin does have a lot of information on Bitcoins in general, you'll find many reddit subs completely opposed to Bitcoin for heavy censorship of discussions, especially those critical of bitcoins, so you're better off reading the sub's wikis and discussing bitcoins in btc & r/CryptoCurrency
  • personalfinance
Update3: Shoutout to the mods on CryptoCurrency
Update4: Updated auto mod keywords, it's not a blanket catch all, a little completed to understand if you don't know regex but it looks like this
"crypto ?(trading|investing)","(should(| I)|could(| I)|can(| I)|how to|is it worth) (buy|sell|mine|min)(|ing) (btc|btcs|bitcoin|ether|etherium|eth|litecoin|ripple|altcoin)" 
submitted by provoko to stocks [link] [comments]

Adam Back & Greg Maxwell are experts in mathematics and engineering, but not in markets and economics. They should not be in charge of "central planning" for things like "max blocksize". They're desperately attempting to prevent the market from deciding on this. But it *will*, despite their efforts.

Adam Back apparently missed the boat on being an early adopter, even after he was personally informed about Bitcoin in an email from Satoshi.
So Adam didn't mine or buy when bitcoins were cheap.
And he didn't join Bitcoin's Github repo until the price was at an all-time high.
He did invent HashCash, and on his Twitter page he proudly claims that "Bitcoin is just HashCash plus inflation control."
But even with all his knowledge of math and cryptography, he obviously did not understand enough about markets and economics - so he missed the boat on Bitcoin - and now he's working overtime to try to make up for his big mistake, with $21+55 million in venture-capital fiat backing him and his new company, Blockstream (founded in November 2014).
Meanwhile, a lot of the rest of us, without a PhD in math and crypto, were actually smarter than Adam about markets and economics.
And this is really the heart of the matter in these ongoing debates we're still forced to keep having with him.
So now it actually might make a certain amount of economic sense for us to spend some of our time trying to get adam3us Adam Back (and nullc Gregory Maxwell) to stop hijacking our Bitcoin codebase.
Satoshi didn't give the Bitcoin repo to a couple of economically clueless C/C++ devs so that they could cripple it by imposing artificial scarcity on blockchain capacity.
Satoshi was against central economic planners, and he gave Bitcoin to the world so that it could grow naturally as a decentralized, market-based emergent phenomenon.
Adam Back didn't understand the economics of Bitcoin back then - and he still doesn't understand it now.
And now we're also discovering that he apparently has a very weak understanding of legal concepts as well.
And that he also has a very weak understanding of negotiating techniques as well.
Who is he to tell us we should not do simple "max blocksize"-based scaling now - simply because he might have some pie-in-the-sky Rube-Goldberg-contraption solution months or years down the road?
He hasn't even figured out how to do decentralized path-finding in his precious Lightning Network.
So really what he's saying is:
I have half a napkin sketch here for a complicated expensive Rube-Goldberg-contraption solution with a cool name "Lightning Network"...
which might work several months or years down the road...
except I'm still stuck on the decentralized path-finding part...
but that's only a detail!
just like that little detail of "inflation control" which I was also too dumb to add to HashCash for years and years...
and which I was also too dumb to even recognize when someone shoved a working implementation of it in my face and told me I might be able to get rich off of it...
So trust me...
My solution will be much safer than that "other" ultra-simple KISS solution (Classic)...
which only involved changing a 1 MB to a 2 MB in some code, based on empirical tests which showed that the miners and their infrastructure would actually already probably support as much as 3 MB or 4 MB...
and which is already smoothly running on over 1,000 nodes on the network!
That's his roadmap: pie-in-the-sky, a day late and a dollar short.
That's what he has been trying to force on the community for over a year now - relying on censorship of online forums and international congresses, relying on spreading lies and FUD - and now even making vague ridiculous legal threats...
...but we still won't be intimidated by him, even after a year of his FUD and lies, with his PhD and his $21+55 million in VC backing.
Because he appears to be just plain wrong again.
Just like he was wrong about Bitcoin when he first heard about it.
Adam Back needs to face the simple fact that he does not understand how markets and economics work in the real world.
And he also evidently does not understand how negotiating and law and open-source projects work in the real world.
If he didn't have Theymos theymos supporting him via censorship, and austindhill Austin Hill and the other venture capitalists backing him with millions of dollars, then Adam Back would probably be just another unknown Bitcoin researcher right now, toiling away over yet another possible scaling solution candidate which nobody was paying much attention to yet, and which might make a splash a few months or years down the road (provided he eventually figures out that one nagging little detail about how to add the "decentralized path-finding"!).
In the meantime, Adam Back has hijacked our code to use as his own little pet C/C++ crypto programming project, for his maybe-someday scaling solution - and he is doing everything he can to suppress Satoshi's original, much simpler scaling plan.
Adam is all impeding Bitcoin's natural growth in adoption and price, through:
Transactions vs. Price graph showed amazingly tight correlation from 2011 to 2014. Then Blockstream was founded in November 2014 - and the correlation decoupled and the price stagnated.
Seriously, look closely at the graph in that imgur link:
What's going on in that graph?
So it seems logical to formulate the following hypothesis:
This, in a nutshell, is the hypothesis which the market is eager to test.
Via a hard-fork.
Which was not controversial to anyone in the Bitcoin community previously.
Including Satoshi Nakamoto:
Satoshi Nakamoto, October 04, 2010, 07:48:40 PM "It can be phased in, like: if (blocknumber > 115000) maxblocksize = largerlimit / It can start being in versions way ahead, so by the time it reaches that block number and goes into effect, the older versions that don't have it are already obsolete."
Including adam3us Adam Back:
Adam Back: 2MB now, 4MB in 2 years, 8MB in 4 years, then re-assess
Including nullc Greg Maxwell:
"Even a year ago I said I though we could probably survive 2MB" - nullc
Including theymos Theymos:
Theymos: "Chain-forks [='hardforks'] are not inherently bad. If the network disagrees about a policy, a split is good. The better policy will win" ... "I disagree with the idea that changing the max block size is a violation of the 'Bitcoin currency guarantees'. Satoshi said it could be increased."
And the market probably will test this. As soon as it needs to.
Because Bitstream's $21+55 million in VC funding is just a drop in the bucket next to Bitcoin's $5-6 million dollars in market capitalization - which smart Bitcoin investors will do everything they can to preserve and increase.
The hubris and blindness of certain C/C++ programmers
In Adam's mind, he's probably a "good guy" - just some innocent programmer into crypto who thinks he understands Bitcoin and "knows best" how to scale it.
But he's wrong about the economics and scaling of Bitcoin now - just like he was wrong about the economics and scaling of Bitcoin back when he missed the boat on being an early adopter.
His vision back then (when he missed the boat) was too pessimistic - and his scaling plan right now (when he assents to the roadmap published by Gregory Maxwell) is too baroque (ie, needlessly complex) - and "too little, too late".
A self-fulfilling prophecy?
In some very real sense, there is a risk here that Adam's own pessimism about Bitcoin could turn into a self-fulfilling prophecy.
In other words, he never thought Bitcoin would succeed - and now maybe it really won't succeed, now that he has unfairly hijacked its main repo and is attempting to steer it in a direction which Satoshi clearly never intended.
It's even quite possible that there could be a subtle psychological phenomenon at play here: at some (unconscious) level, maybe Adam wants to prove that he was "right" when he missed the boat on Bitcoin because he thought it would never work.
After all, if Bitcoin fails (even due to him unfairly hijacking the code and the debate), then in some sense, it would be a kind of vindication for him.
Adam Back has simply never believed in Bitcoin and supported it the way most of the rest of us do. So he may (subconsciously) actually want to see it fail.
Subconscious "ego" issues may be at play.
There may be some complex, probably subconscious "ego" issues at play here.
I know this is a serious accusation - but after years of this foot-dragging and stonewalling from Adam, trying to strangle Bitcoin's natural growth, he shouldn't be surprised if people start accusing him (his ego, his blindness, his lack of understanding of markets and economics) of being one of the main risk factors which could seriously hurt Bitcoin.
This is probably a much more serious problem than he himself can probably ever comprehend. For it goes to one of his "blind spots" - which (by definition), he can never see - but the rest of the community can.
He thinks he's just some smart guy who is trying to help Bitcoin - and he is smart about certain things and he can help Bitcoin in certain ways.
For example, I was a big fan of Adam's back when I read his posts on about "homomorphic encryption" (which I guess now has been renamed as "Confidential Transactions" - "CT").
But, regarding his work on the so-called "Lightning Network", many people are still unconvinced on a few major points - eg:
  • LN would be quite complex and is still unproven, so we actually have no indication of whether it might not contain some minor but fatal flaw which will prevent it from working altogether;
  • In particular, there isn't even a "napkin sketch" or working concept for the most important component of LN - "decentralized path-finding":
  • It is simply unconscionable for Adam to oppose simpler "max blocksize"-based, on-chain scaling solutions now, apparently due to his unproven belief that a more complex off-chain and still-unimplemented scaling solution such as LN later would somehow be preferable (especially when LN still lacks a any plan for providing the key component of "decentralized path-finding").
Venture capitalists and censors have made Adam much more important than he should be.
If this were a "normal" or "traditional" flame war on a dev mailing list (ie, if there were no censorship from Theymos helping Adam, and no $21-55 million in VC helping Adam) - then the community would be ignoring Adam.
He'd be just another lonely math PhD toiling away on some half-baked pet project, ignored by the community instead of "leading" it.
So Adam (and Greg) are not smart about everything.
In particular, they do not appear to have a deep understanding how markets and economics work.
And we have proof of this - eg, in the form of:
Satoshi was an exception. He knew enough about markets and math, and enough about engineering and economics, to release the Bitcoin code which has worked almost flawlessly for 7 years now.
But guys like Adam and Greg are only good at engineering - they're terrible at economics.
As programmers, they have an engineer's mindset, where something is a "solution" only if it satisfies certain strict mathematical criteria.
But look around. A lot of technologies have become massively successful, despite being imperfect from the point of view of programming / mathematics, strictly speaking.
Just look at HTML / JavaScript / CSS - certainly not the greatest of languages in the opinions of many serious programmers - and yet here we are today, where they have become the de facto low-level languages which most of the world uses to interact on the Internet.
The "perfect" is the enemy of the "good".
The above saying captures much of the essence of the arguments continually being made against guys like Adam and Greg.
They don't understand how a solution which is merely "good enough" can actually take over the world.
They tend to "over-engineer" stuff, and they tend to ignore important issues about how markets and programs can interact in the real world.
In other words, they fail to understand that sometimes it's more important to get something "imperfect" out the door now, instead of taking too long to release something "perfect"...
... because time and tide waits for no man, and Bitcoin / Blockstream / Core are not the only cryptocurrency game in town.
If Adam and Greg can't provide the scaling which the market needs, when it needs it, then the market can and will look elsewhere.
This is why so many of us are arguing that (as paradoxical and deflating as it may feel for certain coders with massive egos) they don't actually always know best - and maybe, just maybe, Bitcoin would thrive even better if they would simply get out of the way and let the market decide certain things.
Coders often think they're the smartest guys in the room.
Many people involved in Bitcoin know that coders like Adam and Greg are used to thinking that they're the smartest guys in the room.
In particular, we know this because many of us have gone through this same experience in our own fields of expertise (but evidently most of us have acquired enough social skills and self awareness to be able to "compensate" for this much better than they have).
So we know how this can lead to a kind of hubris - where they simply automatically brush off and disregard the objections of "the unwashed masses" who happen to disagree with them.
Many of us also have had the experience of talking to "that C/C++ programmer guy" - in a class, at a seminar, at a party - and realizing that "he just doesn't get" many of the things that everyone else does get.
Why is why some of us continue to lecture Adam and Greg like this.
Because we know guys like them - and we know that they aren't as smart about everything as they think they are.
They should really sit down and seriously analyze a comment such as the following:
He [Greg Maxwell] is not alone. Most of his team shares his ignorance.
Here's everything you need to know: The team considers the limit simply a question of engineering, and will silence discussion on its economic impact since "this is an engineering decision."
It's a joke. They are literally re-creating the technocracy of the Fed through a combination of computer science and a complete ignorance of the way the world works.
If ten smart guys in a room could outsmart the market, we wouldn't need Bitcoin.
~ tsontar
Adam and Greg probably read comments like that and just brush them off.
They probably think guys like tsontar are irrelevant.
They probably say to themselves: "That guy doesn't have a PhD in mathematics, and he doesn't know how to do C pointer arithmetic - so what can he possibly know about Bitcoin?"
But history has already shown that a lot of times, a non-mathematician, non-C-coder does know more about Bitcoin than a cryptography expert with a PhD in math.
Clearly, tsontar understands markets way better than adam3us or nullc.
Do they really grasp the seriousness of the criticism being leveled at them?
They are literally re-creating the technocracy of the Fed through a combination of computer science and a complete ignorance of the way the world works.
If ten smart guys in a room could outsmart the market, we wouldn't need Bitcoin.
Do Adam and Greg really understand what this means?
Do they really understand what a serious indictment of their intellectual faculties this apparently off-handed remark really is?
These are the real issues now - issues about markets and economics.
And as we keep saying: if they don't understand the real issues, then they should please just get out of the way.
After months and months of them failing to mount any kind of intelligent response to such utterly scathing criticisms - and their insistence on closing their eyes and pretending that Bitcoin doesn't need a simple scaling solution as of "yesterday" - the Bitcoin-using public is finally figuring out that Adam and Greg cannot deliver what we need, when we need it.
One of the main things that the Bitcoin-using public doesn't want is the artificial "max blocksize" which Adam and Greg are stubbornly and blindly trying to force on us via the code repo which they hijacked from us.
One of the main things the Bitcoin-using public does want is for Bitcoin to be freed from the shackles of any artificial scarcity on the blockchain capacity, which guys like Adam and Greg insist on imposing upon it - in their utter cluelessness about how markets and economics and emergent phenomena actually work.
People's money is on the line. Taking our code back from them may actually be the most important job many of us have right now.
This isn't some kind of academic exercise, nor is it some kind of joke.
For many of us, this is dead serious.
There is currently $ 5-6 billion dollars of wealth on the line (and possibly much, much more someday).
And many people think that Adam and Greg are the main parties responsible for jeopardizing this massive wealth - with their arrogance and their obtuseness and their refusal to understand that they aren't smarter than the market.
So, most people's only hope now is that the market itself stop Adam and Greg from interfering in issues of markets and economics and simple scaling which are clearly beyond their comprehension - ie (to reiterate):
And after a year of their increasingly desperate FUD and lies and stone-walling and foot-dragging, it looks like the market is eventually going to simply route around them.
submitted by ydtm to btc [link] [comments]

Deflation means no more debt

While it's becoming abundantly clear that I need to find a new subreddit to stalk, /Bitcoin has yet again provided me with material. In this episode, we have SearchForTruthNow2's assertion that
Bitcoin cannot prevent loaning [sic.] but discourages it due to deflation unlike fiat
For the sake of good-sportsmanship, I should note that my singling him out is a bit unfair since this is a sentiment that I have seen several times. And, to be fair, it should be admitted that deflationary shocks make debt harder to repay. However, the bitcoin-style expected deflation is something that can be easily factored into the terms of a loan. In fact, in a simple Fisher effect model, one would expect the (continuously compounded) interest rate on a loan to be (expected inflation) + (risk premium) + (minimum acceptable real profit). In other words, the difference between lending under 2% deflation and 2% inflation is that you just charge the guy 4% less. That is not a disincentive to lend. It is a disincentive to borrow at the same rate as one would borrow under different macro-economic circumstances. Further, at the risk of stereotyping, one might suspect that the typical payday loan customer (what's being discussed there, and whom I am assuming are not, typically speaking, the most financially savvy) would be more inclined to borrow at 14% under 2% deflation than at 18% under 2% inflation, because 14 < 18.
Now for the fiat part (because the Dunning-Krugernauts' constant use of that term to dismiss actual currency really grinds my gears): The currency's being asset-backed or fiat has nothing to do with debt. Behold, I present you with total US household mortgage debt as a fraction of GDP. Before the Nixon Shock in 1971, the USD was pegged to gold. Shockingly, real mortgage debt existed before then. Not only that, but one might reasonable look at the graph and suspect that debt creation has nothing to do with the currency's backing. Shocking!
Of course, what really confuses me here is why on earth would you want to eliminate borrowing? Imagine for a minute a world in which houses must be bought for cash, in which cities can't float bonds to build bridges, and companies can't take out loans to build factories.
This is not to suggest that there is nothing wrong with predatory lending (because there definitely, definitely is), but that Bitcoin and deflation are not magical economy wands that will suddenly make people engage in prudent financial planning.
Edit: Typos
submitted by ajmarks to badeconomics [link] [comments]

[finance] [theory] Supply inflation vs Price inflation

This is a critical basic concept for understanding the discussion of "inflation" around cryptocurrency. When inflation is discussed for fiat currencies, price inflation is generally referred to. When inflation is discussed for cryptocurrencies, supply inflation is generally referred to. This is part of the crux of why mainstream, traditional economics considers cryptocurrency completely backwards, and it's the source of a lot of confusion among cryptocurrency enthusiasts.
They are somewhat inverse concepts, and when determining monetary policy, only one can be controlled, and the other will be affected. The names are somewhat self-explanatory: supply inflation is a growth in the amount of the currency. Price inflation is a decrease in the purchasing power of a unit of the currency.
The Federal Reserve targets a particular level of price inflation. Because there continues to be growth in the demand for USD, this means that they increase the supply of USD in order to maintain the desired level of price inflation. There are a few different ways of measuring the supply of USD, referred to a M0, M1, M2 and so on, with each step counting more "cashlike" assets, like checking accounts. Here's a site with a graph of M0; the 10 year view is worth looking at. Now, an increase in the monetary supply doesn't mean that anyone other than banks necessarily have any more money. Here's an article arguing that M0 increase doesn't matter because banks don't lend the money anyhow. So while more money is being created, the amount of money actually circulating isn't necessarily increasing as a result. However, looking at M2 over the ten year view, we also see a steady increase.
The mainstream economists debunk the hyperinflationists claiming that a massive increase in monetary supply will necessarily lead to a massive increase in price inflation. The question is whether this can last indefinitely. For now, however, despite the routine claims to the contrary, there is obvious, massive "printing" of money. The fact that this doesn't cause larger price inflation is because of the growth of productivity and other economic growth. So the USD economy (broader than simply the US economy) continues to grow larger, while the individual unit continues to slowly lose value, per design.
Cryptocurrency targets a particular supply inflation instead of controlling price inflation. This is in large part a pragmatic choice, as it's far easier to write an algorithm with a fixed emission rate than it is to vary the supply of a currency to maintain a price level, in particular with an underlying economy (here referring to whatever economic activity is done with a given currency) that can be rapidly growing or shrinking. Because of this choice, far greater price volatility is naturally expected and seen.
If there is no supply inflation, then if the economy grows, the individual unit will grow in value. As an extremely simplified example, if there were 10 apples in the economy, and 10 units of currency, then we might expect 1 apple = 1 unit of currency (this is quite over simplified, but we'll pretend that "all currency can buy all of the economy" for this example). Then if the economy grew such that we now have 20 apples and still only 10 units of currency, 2 apples = 1 unit of currency, and we see that the additional value is gained by the holders of the currency. This is called "deflation", when prices fall. This is a Very Bad Thing (tm) according to conventional economics, which is ostensibly why fiat currencies are targeted to a particular inflation rate.
The central argument for why this would be bad involves investing and lending. If money is getting more valuable on its own, no one will ever invest, is the argument. And it will be impossible for anyone to repay a loan if money is getting more valuable over time.
In my opinion, this is willfully ignorant groupthink. The rate at which the currency is becoming more valuable is the growth rate of the economy. If an investment cannot exceed the growth rate of the economy overall, then it seems reasonable to consider it uneconomical. Same argument for lending. So while some lending and investment might not happen, I consider it the inflationary side which is making the economic mistake: when currency is becoming less valuable, an investment can yield a small return, and yet have less value at the end than at the beginning. More investment and lending is encouraged, certainly, as otherwise the money "rots" from inflation, but it seems more prone to creating bubbles than wise investment.
The counter argument for why it is good to limit supply inflation is that there is value in encouraging saving and that this is best done by a currency which is not guaranteed to lose value. While the USD loses value slowly enough that short-term savings in it make sense, it is economically irrational to simply maintain large cash reserves long-term. Instead, it must be put into a bond or other security which can try to maintain value, or at least lose value more slowly. With a strong store of value, buying and holding should be a reasonable long-term strategy.
The central question is where gains from growth in the underlying economy should go. Should the currency be diluted by the central bank to ensure that savers will not gain value, and the new currency given to banks so they can charge the public for borrowing it? Or should any growth in an economy be retained by those who hold the currency? Obviously I believe in the latter, or I wouldn't be here. I agree with the characterization of inflation as "the silent tax", but further, I believe the lack of deflation which would otherwise have occurred to be part of the same theft.
Of course cryptocurrencies have a lot of challenges to deal with before they are the strong stores of value which can actually demonstrate the advantage of this approach well, although Bitcoin has given an early example. And the idea of what builds the value / economy of a given currency is non-trivial in my opinion; a topic for another post. Any mainstream economic thinker will ridicule this as completely backwards, discredited monetary theory. I'm not the sort to bow to consensus, however. "Anti-scientific", "psychotic", "contrarian for the sake of being contrarian", and similar labels have been applied to me in other disagreements with mainstream, consensus expert opinion. I think there is no more anti-intellectual attitude than believing that the majority of paid professionals in a field should always be believed. History is full of examples of expert opinion being wrong. I see no reason to believe that this is the first era in human history where experts were infallible. I find it critical that people dare to think for themselves and to delve into the fields that interest them, learn as much as they can, and form their own opinions. I think there is no more heretical idea in modern society than the notion that you are capable of thinking for yourself, and coming to valid conclusions, even when opposed by vociferous critics who mock you for not submitting your mind to the pre-digested conclusions of others.
This is my no means the most controversial position I will take. Many of them will not seem relevant to cryptocurrency. But Nyancoin is about philosophy in the most basic sense of the term: a love of wisdom. This makes epistemology (the theory of knowledge) a central topic for us, and it makes any controversial issue a potential example for us. We will not blindly follow experts, nor shall we indulge in mere speculation or unreasonable beliefs. At the least, we can expect to be mocked. But we shall value truth and pursue it.
submitted by coinaday to nyancoins [link] [comments]

Bitcoins price in USD or any fiat currency for that matter is 'literally' irrelevant.. and here's why.. Post directed at Mike Maloney if he is listening

After learning way more than I should have about monetary history and the global economic trajectory (time consuming but just so addictive). It is important to note that it is not bitcoins dollar price that matters, it will be its purchasing power relative to other assets that counts.
Bare with my following explantion as it is hard to articulate this concept in depth.
We are in my opinion about to experience real deflation on a global basis, to which central banks will overreact and provide even more extreme stimulating monetary policies. At which point confidence even in tier one national currencies starts to come into question, not only by nation states holding debt denominated in those currencies but also by average citizens who will start to see the cost of living rising faster than they are already accustomed to.
It is at this point that safe haven assets like Gold, Silver and bitcoin start to look not only attractive as an investment, but a must have asset to hedge against this uncertainty.
As global currencies start to loose value (not from bitcoin but from central bank interventionism) the price of other asset classes will start to appear more expensive in dollar terms but will be loosing real purchasing power. However the price of safe haven assets like bitcoin will be rising by orders of magnitude more rapidly in dollar terms. The result being if you hold national currencies during this period you will loose everything. If you hold stocks etc you will look like your gaining but the value of other safe haven assets will be gaining so much more that in relative terms you will actually be loosing wealth.
Property values will collapse again relative to other assets, along with every asset class that has been bid up into a bubble due to global monetary stimulus policies.
Bottom line is if this does play out, almost every investment will loose you purchasing power. While only precious metals and bitcoin will grow your purchasing power.
Even if you dont think this scenario will play out, but you do think bitcoin will go mainstream at some point in the future, its adoption as money will undoubtedly cause this scenario to unfold anyway.
So its meaningless to look at bitcoin in dollar terms, however it is extremely relevant to look at bitcoin priced in realestate, or oil, or the dow jones industrial average etc. As this shows the true growth of the purchasing power of this new monetary protocol, while simultaneously removing the distortion of its value that comes from pricing it in dollars.
If anyone out there has the time to chart some graphs pricing bitcoin in realestate, oil, DJIA etc we would all be very grateful. (Im looking at you Mike Moloney)
submitted by slvbtc to Bitcoin [link] [comments]

Bitcoin Q&A: Is Inflation Necessary for the Economy to Work? Bitcoin & Austrian Economics  Stephan Livera  Broken Silicon 37 How The Economic Machine Works by Ray Dalio - YouTube Is Bitcoin deflationary? BITCOIN COLLAPSE? RECESSION - DEFLATION ft Ivan on Tech

Proponents of Bitcoin and other cryptocurrencies aren’t concerned about a dwindling money supply. They point to Bitcoin’s infinite divisibility as one solution. As BTC gets more valuable, we’ll just use smaller units, like Satoshis, to transact.Some economists agree with that logic, saying a deflationary currency system could fundamentally change all our assumptions about money. In the bitcoin frame, we are experiencing extreme deflation. Since 2011, bitcoin-CPI is -99.98. Of course, the bitcoin bugs don’t mention the balance sheet implications of this. Suppose a business is doing perfectly fine, except that it uses bitcoin as its unit of account—called numeraire. It made an initial investment of $1,000,000 in 2011 ... Economics Bitcoin Inflation Deflation Gold Money Currency Inflation is commonly defined as “ a general increase in prices and fall in the purchasing value of money .” For example, if a six-pack of beers cost $8 last year, but this year the same six-pack costs $16 then the annual inflation rate was 100 percent. Source: St. Louis Fed. This inelasticity makes Bitcoin and any other similarly constructed crypto-currency…. Deflationary. A deflationary currency is closely related to being inelastic, but we need to look specifically at the deflationary aspects of Bitcoin because conventional economic thought is that “deflation is bad,” and it is — if you’re using debt for money. The graph below shows a growing household net worth in spite of massive QE in the wake of the global downturn beginning in 2007. Since the Great Recession, the monetary base has increased by ...

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Bitcoin Q&A: Is Inflation Necessary for the Economy to Work?

Welcome back you amazing peeps! Today we're talking about the fall in the traditional equity markets, recession, deflation and BTC dominance. Don't forget to subscribe! ️ ByBit Exchange $190 ... Let's compare the difference between Fiat currency which is issued by governments and their Central Banks vs Bitcoin. One is inflationary and the other deflationary. Watch this explainer video to ... We dive in with Nicholas Merten of Data Dash- We talk about the current markets, the bitcoin halving and deflation. We get a little into the conceptual as I always seem to ask stoner questions! So ... Economics 101 -- "How the Economic Machine Works." Created by Ray Dalio this simple but not simplistic and easy to follow 30 minute, animated video answers t... With a limit of 21 million, Bitcoin is deflationary, however, popular economic theory states that inflation is necessary for economic growth. Could bitcoin u...