Bitcoin & Other Cryptocurrencies

markrkingston1

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For clarity: I did not argue that value fluctuation is a sign of a scam. Values of all sorts of legitimate commodities fluctuate.
Yup, although I think that my comment about value fluctuation was directed to INT21 rather than to anything you said.

I argued that a number of factors make Bitcoin a ripe opportunity for scammers.
This is true. I just take this as "life as normal".

As for the definition of "bubble", I am not an economist, but I draw the distinction between:

1) Normal fluctuation in value, both up and down, due to the informed speculation of the normal players in the market.

2) The situation in which the reputation of a commodity comes to the attention of people who would not normally be players in the market and new, unskilled, investors hoping for an easy profit increase the demand. With increased demand comes increased price, which causes a number of "feedback loops" which cause the value to increase substantially faster than would be the case in normal circumstances. Wise investors ride the wave and bail out in time; unwise investors stay in too long and when the crash comes, they lose out. This is what I would call a "bubble": the accelerated inflation in value caused by a sudden increase in investment by people who would not normally be in the market. This may not be the standard definition, but it describes a phenomenon that can be observed to exist.
Fair enough. I am also not an economist but I prefer to think of a bubble as being when an asset, commodity or currency is valued way beyond what its underlying, fundamental worth suggests should be the case (and I think this can entrap seasoned investors just as much as amateurs).

One could argue that the underlying worth of a Bitcoin is nothing at all (or is perhaps the cost of the energy that went into making it) but my view is that, like other currencies that are successful in terms of having people agree to view them as a store of value, there are potential economic factors that can tell us what the real value of a Bitcoin could or 'should' be. In this context, Bitcoin is still hugely undervalued.

Bitcoin is essentially a good idea, but as with all financial commodities, greedy and ignorant amateur investors are likely to be a target for scams riding on the back of the phenomenon. This is why so much of the spam that I receive has "B1tc01n" in the title, and comes from hidden email addresses.
I agree. To my mind, it's just how it is. Buyer beware, as the old saying goes. Where there is opportunity there is also risk; and yet opportunity in general means that risk must be tolerated and accepted.
 
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Mikefule

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The underlying worth of a Bitcoin is about the same as that of a small oblong piece of paper with a picture of the head of state on one side.

The expression "pearls before swine" brings to mind Othello referring to the "...base Indian [who] threw away a pearl richer than all his tribe."

A currency, like a pearl, has only the value that common consent gives to it.

In the Great Depression, German kids made kites from bank notes because it was cheaper than buying paper.
 

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Mythopoeika

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The underlying worth of a Bitcoin is about the same as that of a small oblong piece of paper with a picture of the head of state on one side.

The expression "pearls before swine" brings to mind Othello referring to the "...base Indian [who] threw away a pearl richer than all his tribe."

A currency, like a pearl, has only the value that common consent gives to it.

In the Great Depression, German kids made kites from bank notes because it was cheaper than buying paper.
Bank notes, while inherently worthless, do at least have the backing of a country's taxpayers. Bitcoin doesn't have that.
Gold, silver and platinum all have a real value apart from their use as currency (there is demand for those metals in industrial processes and for use in jewellery). So - Bitcoin and paper money are only worth what people believe them to be (they may as well be hot air), whereas precious metals are 'real money'.
 

INT21

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INT21 said:


So if an economy was based on Bitcoin, how would QE be applied; assuming the quantity of Bitcoins to be finite ?

Non-sensical question error. ;)

On the face of it, this seems like a good question but I don't think it can be meaningfully answered. I'll address it as best I can:-

(a) An "economy based on Bitcoin" doesn't truly make sense when considered in detail. One may choose to use Bitcoin (or Ripple, or Pounds, or Dollars, or Rolexes, or Ethereum, or sexual favours) as a payment medium but it is not really true to say that an economy is based upon them. The UK's economy, despite most transactions being denominated in Pounds, is not truly based on Pounds. One can choose to use any other payment medium at any time.
...

But if Bit coin can only be created by very expensive computer searches, what happens if the Fed wanted to pump , say, $100 Billion into the economy (or a Bitcoin equivalent ) ? It can't just print Bitcoins in the same way it prints Dollar bills.


You mention above that the price of shares in not related to the value of a company.

I was under the impression that the share price was related to some multiple of the company value at the time of the IPO.

Anyway, I am now thoroughly confused.

And will continue to watch the value of Bitcoin fluctuate from the sidelines.

I still have the feeling that a lot of people are going to get burned by this.

Oh yes, one other question.

If it's going to be the way to go, why haven't billionairs bought them all up at the current price ? That way they would own the economy.
 

markrkingston1

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Bank notes, while inherently worthless, do at least have the backing of a country's taxpayers. Bitcoin doesn't have that.
No, in fact they do not. Or, if you really think they do, can you describe exactly what you think "backing of a country's taxpayers" is and what it actually means to a note holder in practice?

The taxpayer seems to me to offer the holder of a national currency note nothing whatsoever. I'll say that again: The "backing of a country's taxpayers" is wholly worthless.

Afterall, governments will not redeem currency notes for anything at all except another identical currency note. You don't get something different from the government/taxpayer. This is worthless if the currency has devalued.

Worse still, if national currencies are ever backed by anything at all nowadays then it is debt, in that many (most?) national currencies are in fact issued by lending banks in response to book debt. And, yet even worse than this, central governments can and do further meddle in this process by generating new money out of nothing at all, with no backing whatsoever: This is Quantitative Easing.

In comparison, Bitcoin is at the very least no worse than this. Bitcoin is generated (that is to say "backed") not by debt and nor by the arbitrary say-so of a government (as with QE) but by real world energy expenditure managed by algorithmic certainty. This provides much greater assurance that Bitcoins have not been over-issued (and thus under-valued). This is why Bitcoin has been so successful: It offers certainty against over-supply.

Gold, silver and platinum all have a real value apart from their use as currency (there is demand for those metals in industrial processes and for use in jewellery).
Indeed, but it is also worth noting two things:
(a) In actual fact these are not currencies in reality. Almost all nation state currencies have been detached from precious metal equivalence for a long time. Precious metals are in fact not even useful as a currency (at least not in general).
(b) Even precious metals are almost certainly over-valued compared to their industrial usage pricing. In other words, people value them more highly because they choose to do so -- just like Bitcoin and nation state currencies, in fact.

So - Bitcoin and paper money are only worth what people believe them to be (they may as well be hot air)
Quite so. Did I not say this in my second message in this thread! In #76 I wrote: "Or at least, if [Bitcoin] is a scam, then all nation state currencies are as much or even more of a scam on the very same basis."

The corollary of this is that if people do value nation state currencies then, like it or not, they must also value Bitcoin on the same basis.

In other words, if one joins in with the shared delusion (whether wittingly or unwittingly) that nation state currencies have value, and most people do in fact share this delusion (even though most people don't consider it consciously or critically), then Bitcoin has value on the same basis.

whereas precious metals are 'real money'.
Well, not any more in practice.

As I observed above, it is almost possible to use precious metals as currency; it's just not very practical most of the time. There aren't even enough of them to account for all currency nowadays. Furthermore, as I also observed, precious metals suffer from the very same problem as national currencies and Bitcoin: That is that they are valued more highly than their underlying industrial usage justifies.

Having said all this, I stand by my assessment that Bitcoin is still hugely undervalued compared to its eventual 'natural' value in the marketplace, based upon the continuance of the (witting or unwitting) shared delusion that nation state currencies (and thus Bitcoin too) are an acceptable form of value storage and exchange.


** edit **
Fixed typos.
 
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markrkingston1

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But if Bit coin can only be created by very expensive computer searches, what happens if the Fed wanted to pump , say, $100 Billion into the economy (or a Bitcoin equivalent ) ? It can't just print Bitcoins in the same way it prints Dollar bills.
I said before that this was a "non-sensical question error" and, in retrospect, I apologise for appearing to be patronising but... well, it was, and still is, non-sensical. ;)

Let me make a couple of observations which might better explain why:
(a) Bitcoin is distributed. No one controls it[1]. Generation of Bitcoins is limited by its algorithm. It is important to understand that this is both a goal and a strength.
(b) QE with Bitcoin is therefore not only impossible but irrelevant (and "non-sensical").
(c) You seem to be implicitly assuming that there must be some kind of central authority. The world does not have to work that way. Bitcoin doesn't work that way.
(d) Indeed, many people take the view that statist meddlings like QE are a bug to be fixed and that distributed currencies like Bitcoin are the feature (or one of the features) that fixes the bug.

In short, in an economy that makes heavy use of cryptocurrencies there would be no notion of either central control of the currency or of QE[2].

You mention above that the price of shares in not related to the value of a company.
It was Mikefule who wrote that, not me. He wrote "the price of shares in big companies goes up and down with little or no link to the true value of the company" and he was correct. You can see this day to day where the value of shares in big companies goes up and down daily with little or no direct link to the underlying, fundamental value of the company itself. There is some link between share price and a company's value, of course, in that successful companies tend in general to have higher market capitalisation than poorly performing companies, but the market can get it wrong too.

I was under the impression that the share price was related to some multiple of the company value at the time of the IPO.
(a) The share price at IPO is whatever the company's shareholders think they can get away with!
(b) Indeed, as you say, a common basis for valuing a company at IPO is to base it on a multiple of turnover whilst factoring in of assets or balance sheet value. But assets are not necessarily a fixed thing. Intangible assets, such as "goodwill" (that is is to say how customers, the "market", and even suppliers in some cases feel about the company) is hugely open to interpretation.
(c) Important: Whatever basis is used to value a company at IPO, it is valid only at the moment of IPO. As of that moment onwards, a company's share price varies according to what people are willing to buy and sell at. Thus the company's value will go up and down with no relation to what the price was at the moment of IPO.
(d) And the price that people are willing to buy or sell shares at is, as Mikefule said, not necessarily directly related to the underlying value of the company (as best this can be calculated at any one time!).

Anyway, I am now thoroughly confused.
Life in the 21st Century tends to do that, I think. :)

I think it can help to free oneself of implicitly held assumptions, such as that there must always be some kind of central authority. Bitcoin is, right now, a highly successful functional anarchy, for example.

I still have the feeling that a lot of people are going to get burned by this.
Oh, I'm sure. But that's life. One might even say that "new" == "a lot of people are going to get burned".

Progress (and I think this is definitely positive progress) is like that. People get burned. So be it (perhaps sadly).

If it's going to be the way to go, why haven't billionairs bought them all up at the current price ? That way they would own the economy.
(a) Billionaires own the economy anyway. We all work for them, whether we know it or not[3].

(b) If someone has made billions using more conventional means then they are often very cautious indeed (small-c conservative) about new ideas. They don't really need them to get rich or even to get richer, afterall. They already know how to get richer.

(c) All that said, what makes you think billionaires aren't involved? Rather than buying Bitcoins, a good business for billionaires would have been (and still is to a great extent) in funding Bitcoin mining on as large a scale as possible. This is increasingly expensive and energy-intensive to run and yet, if Bitcoin is to survive, it will have an assured future. Being the person (or one of the persons) that people have to pay to validate Bitcoin transactions would surely be an excellent business model for billionaires.


Footnotes:-
1: There are "core developers" for Bitcoin but they only have de facto control, not de jure. In other words, if you dislike the way they do things then you (and people who think like you) can fork Bitcoin and do it your own way. This has happened numerous times for the protocol itself and at least twice for live Bitcoin. If no one likes your fork it will die. If enough people like it then it will prosper.

2: As an aside, bear in mind that QE was only needed because conventional banks had been operating on a fundamentally dishonest and/or incompetent business basis (despite so-called state 'regulation'!). If distributed and decentralised cryptocurrencies were more ubiquitous, there might well be far less opportunity for governments to bail out badly run private businesses such as banks.

3: As another aside, both billionaires and very big businesses have what is in effect a de facto symbiotic relationship with governments.
 
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INT21

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...
3: As another aside, both billionaires and very big businesses have what is in effect a de facto symbiotic relationship with governments.,,

At least that bit is easily understandable.

Thanks for the explanations. It will be interesting to see what happens as this thing rolls on.

INT21.
 

INT21

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markrkingston1,

... Generation of Bitcoins is limited by its algorithm..

Does this mean that the total number of bitcoins that can be generated is known ?

INT21.
 

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markrkingston1,

... Generation of Bitcoins is limited by its algorithm..

Does this mean that the total number of bitcoins that can be generated is known ?

INT21.
Yes. The max number that can exist is known. It's only a question of how fast they get generated.
 

markrkingston1

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markrkingston1,

... Generation of Bitcoins is limited by its algorithm..

Does this mean that the total number of bitcoins that can be generated is known ?

INT21.
Yes, this amount is set as part of the algorithm. It is 21,000,000 Bitcoins.

Have a look at #88 where I addressed this in some detail, including comparing total possible Bitcoin liquidity (i.e. 2,100 trillion satoshis) to total M0 money supply of US Dollars.
 

INT21

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Seems to vary a bit.
bcoin.jpg
 

Mikefule

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Yes, values of internationally traded commodities can fluctuate. A couple of charts attached for comparison. The phenomenon is not peculiar to Bitcoin.

One of the problems with modern capitalism is that people don't just invest in what something is worth, but in what they think it will be worth tomorrow, or next week. The price then becomes linked to a shared subjective perception of probabilities, and perceptions are both fallible and fickle. Short term gambles rather than long term investments have become the norm.

On the few occasions when I have bought shares, I have done so with the intention of keeping them for many years. However, that makes me rather old fashioned.
 

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AlchoPwn

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Yes, we are about due for the 10 year downturn after 208. The business cycle and all that. One crash every decade. One major crash every 40 years.
 

uair01

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Dropgangs: The future of dark markets. Nice speculation about future (?) criminal systems.
Now, goods are hidden in publicly accessible places like parks and the location is given to the customer on purchase. The customer then goes to the location and picks up the goods. This means that delivery becomes asynchronous for the merchant, he can hide a lot of product in different locations for future, not yet known, purchases. For the client the time to delivery is significantly shorter than waiting for a letter or parcel shipped by traditional means - he has the product in his hands in a matter of hours instead of days.

https://opaque.link/post/dropgang/
 

INT21

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I have done so with the intention of keeping them for many years. However, that makes me rather old fashioned.

Isn't there a chance that inflation will wipe out your long-term gains.
 
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uair01

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Tweet linking to an FT article. Bitcoin is a pyramid scheme :)
https://ftalphaville.ft.com/2019/01/23/1548238967000/BIS-trolls-bitcoin/

The conclusions are, first, that Bitcoin counterfeiting via “double-spending” attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of “mining” income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality.

https://www.bis.org/publ/work765.pdf
 

ChristLionQC

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Dropgangs: The future of dark markets. Nice speculation about future (?) criminal systems.
Now, goods are hidden in publicly accessible places like parks and the location is given to the customer on purchase. The customer then goes to the location and picks up the goods. This means that delivery becomes asynchronous for the merchant, he can hide a lot of product in different locations for future, not yet known, purchases. For the client the time to delivery is significantly shorter than waiting for a letter or parcel shipped by traditional means - he has the product in his hands in a matter of hours instead of days.

https://opaque.link/post/dropgang/
The police told us about this, and the Winthrop method, a couple of years ago when they arrested a local ne'er-do-well in the orchard trying to pick up some drugs left "under the tree" ...
 

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A cryptocurrency called QuadrigaCX owes 190 million dollars worth, but can't access it as their founder had the only password and he died in november.

Cryptocurrency gone with the wind
 
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Kchoo

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The barter system needs no bit coins or cash or checks... lol...
People only followed imaginary paper and electric values out of conveinence only. If currency becomes inconvenient, or even unusable by any part of society, the barter exchanges will take over again. People find what works and they will do what works.
 

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...the barter exchanges will take over again. People find what works and they will do what works. ..

A total impossibility.

So, you need a car to get to work. How do you value it. What are you going to barter for it ?

You can't use perishable goods as they won't store.

This is a serious question.
 

Kchoo

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...the barter exchanges will take over again. People find what works and they will do what works. ..

A total impossibility.

So, you need a car to get to work. How do you value it. What are you going to barter for it ?

You can't use perishable goods as they won't store.

This is a serious question.
I suppose this is where 'To big to fail' comes in.

No doubt our way of life would go backwards a bit until a new system is created... If a car builder knows money is no good, then what would they do?
 

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..If a car builder knows money is no good, then what would they do? ..

As all forms of exchange require some kind of payment, nothing in today's society would exist.

Barter only works within a small community. You soon find out that a fiat currency is required.

I suppose one could use shellfish and do exchanges through a prawn broker.
 

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Even the Greens won't go that far.
 

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With no cars, how are they going to get to places to destroy farmers GM crops ?

Even anarchists sometimes need transport.
 

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..If a car builder knows money is no good, then what would they do? ..

As all forms of exchange require some kind of payment, nothing in today's society would exist.

Barter only works within a small community. You soon find out that a fiat currency is required.

I suppose one could use shellfish and do exchanges through a prawn broker.
Perhaps more barter exchange will occur in smaller groups, especially if the monetary system is percieved to be disadvantageous for things where barter is perfectly acceptable.
 

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Possibly, but a lot of the barter material would be seasonal. If you lived in a small community with a lot of produce, veggies, chickens etc, it would work to some extent. But it would be hard to organise. And when winter comes, then what ?

'Fred, I need to use your tractor for a day. how about use of my wife for five nights ?'.

''Aw, come on Sid, I've seen your wife. Three nights and your daughter for three ?'.

'Fred, you strike a hard bargain; but I do need to plough that field. 'Gladys, here a minute'.

INT21.
 

Mythopoeika

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With no cars, how are they going to get to places to destroy farmers GM crops ?

Even anarchists sometimes need transport.
Horse and cart.
 
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