Bitcoin is funny money

[lifeanon269]

One way is to issue and/or retire currency as needed in order to maintain a target inflation rate. This is how fiat currencies operate, and also how the USD-pegged cryptos work. Another way is to have the currency be backed by some other asset with a known, relatively stable value. This is how national currencies worked on the gold standard, and the USD-pegged cryptos work on a similar premise (backed by fiat currency rather than a tangible asset). These systems are far from perfect, but they do result in currency with a much more stable value than BTC has ever experienced. Don't throw up your hands and say it can't be done, without first looking at history to see how this problem has been addressed in the past. Every existing currency was new once.

Perhaps I wasn't clear enough, but you misunderstood the proposition I was setting. The entire point of bitcoin is to remain decentralized. So there is no way to bootstrap a decentralized currency in such way without speculation being involved. All of the possibilities you've proposed all involved a central party that either must adjust the supply based on whatever metric some central party so chooses, or back the currency with some other unrelated asset held in a centralized account that can't be audited by the general public. Like you yourself said, it would be no different than how fiat currency are today or have been in the past and is one of the very problems that bitcoin set out to solve. Bitcoin solved the byzantine generals problem in computing and that can't be understated as a historic feat.

This is complete nonsense. I purchase different currencies to facilitate transactions I want to perform (if the person I want to do business with wants payment in that currency), not because I expect the currency itself to go up in value. Shouldn't the usefulness of blockchain technology be sufficient to spur adoption without needing to promise people great riches just from owning a few of your new tokens? A currency that people expect to keep increasing in value is one that nobody will want to use in commerce except as a last resort. Why spend your currency now when it will be worth twice as much next year? What is BTC's answer to this problem? At what point will the value stabilize enough that people have less incentive to hold at all costs and more incentive to exchange their BTC for the goods and services they require? At what price would you say "you know what, I think BTC is overvalued right now"? How do you determine that price?

No it is not complete non-sense. Speculation was very much a talked about idea for bitcoin by Satoshi Nakamoto and others as a feature to spurn adoption in the early days. They talked about how even for people who didn't think much of the currency, it still might be worth picking up a few in the event that it does end up taking off. It is called an asymmetric bet. When your upside is such much more massive than your downside, it can be beneficial to pick some up even if you don't think it will become of anything. If the USD in all its digital forms is perfectly sufficient in the developed world for purchasing goods and transacting in our daily lives, there really isn't too much of a need to use something else to buy our daily coffees. Like I said in my other posts, buying retail goods with some form of digital currency was never a technological hurdle for humanity:

https://forum.mrmoneymustache.com/investor-alley/bitcoin-are-we-still-out/msg2757464/#msg2757464

In fact, the "first mover advantage" of our world's fiat currencies can have an extreme network effect that would prevent other currencies from being used as a medium of exchange simply due to the network effect that is such an important feature for a medium of exchange. If everyone is using the USD (digital or otherwise) as their currency, then it can be very difficult to get other people to use something else...unless there is some type of incentive to do so. And since it was never a technological hurdle for humanity to use a digital currency like the USD to pay for retail goods, that incentive must come in the form of something else...like a monetary benefit for being an early adopter.

Finally, in regards to the deflationary properties, a few things I want to point out.

1) Bitcoin will not always go up in such a remarkable fashion as you've seen historically. It is doing this because the market is so minuscule in comparison to the larger economy. The liquidity in the world's bitcoin exchanges is very small and only takes a few million dollars to move the price of bitcoin thousands. As I've said before, there is no supply elasticity for bitcoin to react to increased demand. The amount of people in the world that own bitcoin is still very small (a few percent at most). So it is still very early in regards to what would be considered bitcoin adoption. Since the greater economy is so much larger than the bitcoin market, there can be massive inflows or outflows of money into or out of bitcoin at once which can move the price drastically. This won't always be the case. If bitcoin were to become adopted, even if as just a replacement for gold's use as a safe haven asset, then the amount of money that could flow into or out of bitcoin at any given time would be tamed greatly. As has already been seen historical for bitcoin, its volatility has gone down over time and will continue to go down as the market grows.

2) It just simply isn't true that a deflationary currency would result in people not spending any money at all. People still need goods, food, and shelter to survive. Consumerism, as sad as it may be, is just part of inherent human nature. The problem with our economy and monetary policies of today however is that they exacerbate the problem of consumerism even more. Why save or wait to purchase goods tomorrow if my money isn't going to have the same purchasing power tomorrow as it does today. People are incentivized to buy things today rather than save money. Our entire economy is built around consumption. A brand new iPhone, even though it will be cheaper to buy if you waited 2 years, is still bought in crowded lines the day it comes out at a much more expensive price. While that is not an example of currency deflation, it is an example of human nature in that same price scenario. It reminds me of a MrMoneyMustache article that was written back in 2012 that I often think about. I feel bitcoin aligns with this greatly.

https://www.mrmoneymustache.com/2012/04/09/what-if-everyone-became-frugal/

Bitcoin won't always be going up in drastic price swings like it is today. At some point instead it will only grow as our economy does. At which point it becomes a much greater store of value. While it won't get rid of human nature's desire for consumption, at the very least our monetary policy and economy won't also exacerbate the problem by incentivizing these bad habits that humans inherently have. This very much is inline with Mr. Money Mustache's thoughts and teachings about frugality and I'm surprise so many of this forum don't understand this.

[forgerator]

Hey I'm just trying to help you guys.  Cash out now and count your blessings

how about let's put a pin in this and revisit on Dec 2021. Shall we?

Sure if you want to embarrass yourself

yes I'm so very embarrassed already watching my btc stack priced at $33k . I'm sure I'll be even more embarrassed EOY....

[seattlecyclone]

One way is to issue and/or retire currency as needed in order to maintain a target inflation rate. This is how fiat currencies operate, and also how the USD-pegged cryptos work. Another way is to have the currency be backed by some other asset with a known, relatively stable value. This is how national currencies worked on the gold standard, and the USD-pegged cryptos work on a similar premise (backed by fiat currency rather than a tangible asset). These systems are far from perfect, but they do result in currency with a much more stable value than BTC has ever experienced. Don't throw up your hands and say it can't be done, without first looking at history to see how this problem has been addressed in the past. Every existing currency was new once.

Perhaps I wasn't clear enough, but you misunderstood the proposition I was setting. The entire point of bitcoin is to remain decentralized. So there is no way to bootstrap a decentralized currency in such way without speculation being involved. All of the possibilities you've proposed all involved a central party that either must adjust the supply based on whatever metric some central party so chooses, or back the currency with some other unrelated asset held in a centralized account that can't be audited by the general public. Like you yourself said, it would be no different than how fiat currency are today or have been in the past and is one of the very problems that bitcoin set out to solve. Bitcoin solved the byzantine generals problem in computing and that can't be understated as a historic feat.

A central bank is not required to have a variable money supply. The BTC protocol already has varying supply! It manufactures new coins out of thin air according to a fixed schedule. They could have just as easily designed it to introduce new coins at a variable rate based on the current exchange rate between BTC and a weighted average of national fiat currencies.

In fact, the "first mover advantage" of our world's fiat currencies can have an extreme network effect that would prevent other currencies from being used as a medium of exchange simply due to the network effect that is such an important feature for a medium of exchange. If everyone is using the USD (digital or otherwise) as their currency, then it can be very difficult to get other people to use something else...unless there is some type of incentive to do so. And since it was never a technological hurdle for humanity to use a digital currency like the USD to pay for retail goods, that incentive must come in the form of something else...like a monetary benefit for being an early adopter.

Yes, network effects definitely exist with fiat currencies. These are generally a good thing. The less we have to convert our currencies, the more convenient our lives are. There needs to be some compelling reason to switch people off of the existing currencies. If the benefits of decentralization and technological advancement that BTC provides aren't enough motivation on their own to get people to use it, why even bother making a new currency? Surely it should have some reason to exist beyond making the early adopters rich?

As has already been seen historical for bitcoin, its volatility has gone down over time and will continue to go down as the market grows.

lol. The value has changed by 10% today. This is not unusual for BTC, and is also completely unacceptable for a unit of currency that you're going to write down in a contract you're using to agree on a price you'll pay for something in the future.

It just simply isn't true that a deflationary currency would result in people not spending any money at all.

No, but if you have part of your wealth in a stable-ish inflationary currency and part of your wealth in a highly deflationary currency, you're going to spend the inflationary currency first. That's what I meant by saying that Bitcoins will only be spent as a last resort.

The problem with our economy and monetary policies of today however is that they exacerbate the problem of consumerism even more. Why save or wait to purchase goods tomorrow if my money isn't going to have the same purchasing power tomorrow as it does today. People are incentivized to buy things today rather than save money.

Yes, you've hit on the problem with hyperinflation. People treat their currency like a hot potato and spend it as soon as possible. This is not really a problem with a currency that has low rates of inflation. Yes, you will see the purchasing power of your currency decline a bit if you hold it for years and years, but that's not sufficient motivation to spend all your money right away. It is sufficient motivation to invest in productive assets instead of hoarding cash under your mattress, which is generally a good thing!

Bitcoin won't always be going up in drastic price swings like it is today. At some point instead it will only grow as our economy does.

At what point will the value stabilize enough that people have less incentive to hold at all costs and more incentive to exchange their BTC for the goods and services they require? At what price would you say "you know what, I think BTC is overvalued right now"? How do you determine that price?

Care to make a prediction here? At what exchange rate will we ultimately determine is the fair, stable USD value for a BTC? How do you arrive at this number?

[lifeanon269]

A central bank is not required to have a variable money supply. The BTC protocol already has varying supply! It manufactures new coins out of thin air according to a fixed schedule. They could have just as easily designed it to introduce new coins at a variable rate based on the current exchange rate between BTC and a weighted average of national fiat currencies.

You just said that a central bank is not necessary, but then followed up with your countering solution to bitcoin's current solution today to be pegged to central banking. I feel like you're missing the entire point of bitcoin (decentralization). Any reliance on a central authority by requiring a peg to those central authorities defeats the entire purpose of bitcoin. Nevermind the fact that your solution doesn't make any sense from a technological feasibility standpoint.

Yes, network effects definitely exist with fiat currencies. These are generally a good thing. The less we have to convert our currencies, the more convenient our lives are. There needs to be some compelling reason to switch people off of the existing currencies. If the benefits of decentralization and technological advancement that BTC provides aren't enough motivation on their own to get people to use it, why even bother making a new currency? Surely it should have some reason to exist beyond making the early adopters rich?

There are many benefits to using bitcoin, many of which have already been discussed. While some of these benefits are available today, many of these benefits don't come to fruition until bitcoin is widely adopted however. It is the chicken and the egg situation.

lol. The value has changed by 10% today. This is not unusual for BTC, and is also completely unacceptable for a unit of currency that you're going to write down in a contract you're using to agree on a price you'll pay for something in the future.

I've already linked to articles here that address this, perhaps you missed it or didn't read it. Cherry picking volatile days for bitcoin in the middle of a bull market isn't going to back your argument. You'd have to look at long term volatility over time and it is true that volatility has decreased over time. This was addressed in Fidelity's article on bitcoin criticisms here:

https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms

No, but if you have part of your wealth in a stable-ish inflationary currency and part of your wealth in a highly deflationary currency, you're going to spend the inflationary currency first. That's what I meant by saying that Bitcoins will only be spent as a last resort.

This is part of the role of money that is misunderstood by a lot of people (talking people in general here). I hear all the time from people who say that someone who spent 10,000 BTC (worth $20) to buy a pizza must regret their decision. But money is really just a store of one's productive work value. If I must work 30 minutes to earn $20, then that $20 represents a half hour of my production at the time I earn it. It is my decision at any given point what I want to do with my money. If my prerogative is to work 30 minutes to buy a pizza, then it doesn't really matter what currency I use as a medium of exchange to purchase that pizza. That pizza still requires me to work for 30 minutes to acquire it. What each individual must decide for themselves is how much of their productive work they wish to use for consumption today versus consumption tomorrow. The only regret one might have in purchasing goods is their time preference in acquiring those goods. Does one choose to purchase the good today or does one wish to wait to purchase the good tomorrow. As frugal workers on this forum, many of us choose to have low time preferences for all the things we purchase; favoring savings over short term purchases.

The only hurdle then in deciding which currency to use in a medium of exchange then is the friction involved in using a given currency. For bitcoin, since a person isn't yet likely earning bitcoin as wages, then they must use the dollars they did earn as wages to acquire some bitcoin which is likely going to cost them fees in exchange rates. Is it worth it to the person to decide to move their wages into bitcoin to use as a medium of exchange at the cost of 1-5% in exchange fees simply to use it as a medium of exchange? For most people the answer is no. But this decision isn't an inherent problem to bitcoin itself and will likely go away if someone simply decides to take wages in the form of bitcoin. In time I suspect there will be more and more people who might choose to do so for varying reasons. At that time then the friction of using bitcoin as a medium of exchange diminishes greatly and it becomes more a decision about their time preference in how much of their wages is for short term spending versus long term savings (one's savings rate).

Long story short, while good money does chase out bad in the greater economy, from an individual's perspective it is more simply about the friction involved with using any given currency than anything else. The time preference an individual has is unique to the individual. Bitcoin does I feel promote a low time preference which overall I think is a good thing for the world. A large number of people introduced to bitcoin have become savers today that never would have been saving money had they not been introduced to bitcoin. Nothing wrong with that given the atrocious savings rates of most Americans out there.

Care to make a prediction here? At what exchange rate will we ultimately determine is the fair, stable USD value for a BTC? How do you arrive at this number?

No, I don't care to make predictions. The market is unpredictable and its that market that predicts what a fair value is. The economy is so completely complicated and the world at large is so complicated. I don't think anyone could've predicted that in 2020 there would've been a pandemic, though experts did predict that at some point there would be one. So it is much easier to make macro predictions for possible future outcomes, but predicting things with a precise timeline and value at that particular time is futile and not something I care to engage in. I'm fascinated by technology and economics and bitcoin scratches both of those itches for me. It will certainly be interesting to see what it goes in the future. Nothing is certain.

Cheers

[seattlecyclone]

A central bank is not required to have a variable money supply. The BTC protocol already has varying supply! It manufactures new coins out of thin air according to a fixed schedule. They could have just as easily designed it to introduce new coins at a variable rate based on the current exchange rate between BTC and a weighted average of national fiat currencies.

You just said that a central bank is not necessary, but then followed up with your countering solution to bitcoin's current solution today to be pegged to central banking. I feel like you're missing the entire point of bitcoin (decentralization). Any reliance on a central authority by requiring a peg to those central authorities defeats the entire purpose of bitcoin. Nevermind the fact that your solution doesn't make any sense from a technological feasibility standpoint.

I just threw out a USD peg as an example of a choice they could have made instead of having a money supply that is fixed or even decreasing as people forget their keys. Instead of USD they could peg it to gold or Honolulu real estate or corn futures or any number of other things, in a decentralized manner, according to a protocol agreed upon in advance. You are asserting without evidence that this would be technically infeasible. I disagree. The network operates on consensus. Someone tries to sign a block claiming to have mined the wrong number of new bitcoins, and it will be rejected because it breaks the protocol. Right now the correct number of new bitcoins per block operates on a simple fixed algorithm, so you'd need to add in a mechanism to use the current exchange rates instead of that fixed number. The tricky bit would be to come to a consensus on what that rate is, but I'd think it should be possible to have the nodes monitor a number of different exchange rates that are trusted by consensus on the network. New data sources could be added by a consensus of miners agreeing they're valid, or removed in the same way if one becomes untrustworthy.

There are many benefits to using bitcoin, many of which have already been discussed. While some of these benefits are available today, many of these benefits don't come to fruition until bitcoin is widely adopted however. It is the chicken and the egg situation.

Again, if these benefits are so compelling, shouldn't people have enough motivation to switch without the speculative profit angle?

History is littered with dead technologies that were marginally better than the competition on some technical metrics but never gained enough adoption to overcome the incumbent players. Eventually someone comes along and invents something that is so obviously better than the old thing that people finally switch. BTC has been around for a decade now, and I still lack a reason to pay anyone with it. I own some BTC that I mined in the early days, but it just sits there unused. I never come across a scenario in my lifestyle where it seems like the best way to pay anyone for anything I want or need. What am I doing wrong?

Maybe some cryptocurrency takes the world by storm and we all start using it, but it seems like BTC has maybe had more than long enough to prove itself and it just isn't the one.

I've already linked to articles here that address this, perhaps you missed it or didn't read it. Cherry picking volatile days for bitcoin in the middle of a bull market isn't going to back your argument. You'd have to look at long term volatility over time and it is true that volatility has decreased over time. This was addressed in Fidelity's article on bitcoin criticisms here:

https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms

I read the article. I saw the volatility graph. I'll grant that the volatility shown in that graph is lower recently than it was in the very early days, but since about 2014 I don't see any meaningful downward trend. Volatility was pretty flat in 2014-16, crept higher in 2017-18, then went back down to about where it was in 2014-15. An ongoing trend is not evident in the data presented.

Care to make a prediction here? At what exchange rate will we ultimately determine is the fair, stable USD value for a BTC? How do you arrive at this number?

No, I don't care to make predictions. The market is unpredictable and its that market that predicts what a fair value is.

To the moon, right? When we can't even begin to use logic to put a fair price on an asset, isn't that a problem? Some Dutch tulip traders might have some lessons for you.

[lifeanon269]

I just threw out a USD peg as an example of a choice they could have made instead of having a money supply that is fixed or even decreasing as people forget their keys. Instead of USD they could peg it to gold or Honolulu real estate or corn futures or any number of other things, in a decentralized manner, according to a protocol agreed upon in advance. You are asserting without evidence that this would be technically infeasible. I disagree. The network operates on consensus. Someone tries to sign a block claiming to have mined the wrong number of new bitcoins, and it will be rejected because it breaks the protocol. Right now the correct number of new bitcoins per block operates on a simple fixed algorithm, so you'd need to add in a mechanism to use the current exchange rates instead of that fixed number. The tricky bit would be to come to a consensus on what that rate is, but I'd think it should be possible to have the nodes monitor a number of different exchange rates that are trusted by consensus on the network. New data sources could be added by a consensus of miners agreeing they're valid, or removed in the same way if one becomes untrustworthy.

That's my entire point that you're not understanding. Pegging to anything else in the real world is going to create a reliance on something that is centralized. Where are prices determined for a given trading pair? On exchanges which are centralized entities? What if an exchange goes out of business? Who decides what exchanges are utilized and what exchanges aren't? You don't think that trying to get global consensus on such a thing using corporate entities that are established based on individual national legal frameworks would be a problem? Not to mention the most important part that you're missing...when bootstrapping a brand new currency that doesn't exist yet (which is what this entire discussion was about) ...there are no exchanges in existence to pull trading pair prices from! If you're insisting that using centralized authorities (even in aggregate) is a viable solution for determining a monetary policy of a decentralized currency, then you're missing the point of bitcoin entirely.

Again, if these benefits are so compelling, shouldn't people have enough motivation to switch without the speculative profit angle?

History is littered with dead technologies that were marginally better than the competition on some technical metrics but never gained enough adoption to overcome the incumbent players. Eventually someone comes along and invents something that is so obviously better than the old thing that people finally switch. BTC has been around for a decade now, and I still lack a reason to pay anyone with it. I own some BTC that I mined in the early days, but it just sits there unused. I never come across a scenario in my lifestyle where it seems like the best way to pay anyone for anything I want or need. What am I doing wrong?

Maybe some cryptocurrency takes the world by storm and we all start using it, but it seems like BTC has maybe had more than long enough to prove itself and it just isn't the one.

The internet took several decades before it became widely adopted. The same things you're saying today about bitcoin, you'd could have just as easily been saying about the internet in its earliest forms. "There is no reason for me to use it, there is no useful information on it, no one else is using it, etc, etc."

It is not that you're doing anything wrong though. It's just that you're writing off technology that really is pretty technically ground-breaking simply on the merits that it lacks widespread adoption a decade into its life. Like I said, there is a lot of friction at the moment to using bitcoin as a medium of exchange currency. Most merchants don't accept bitcoin as a form of payment. There are still scaling issues that need to be worked out. The lightning network is still in its infancy. For most people, acquiring bitcoin requires purchasing it from an exchange/broker which inquires fees. This creates large amounts of friction where you'd likely want to recoup those fees in capital gains before deciding to spend it. There are some benefits however. Some places provide a discount when making purchases with bitcoin (Bitrefill, Fold, Purse.io, etc). There are security benefits to using bitcoin. There is no need to give credit card details over the internet when making purchases with bitcoin. This makes purchasing things with bitcoin much more secure, since you're "pushing" funds to the merchant instead of the merchant "pulling" funds from your account. The will reduce the overall systemic costs of fraud in the economy (which are upwards of 5-10%).

However, like I said, many of these benefits won't be fully realized unless bitcoin is widely accepted. This entire discussion stemmed from the concept that speculation was an inherent benefit to help drive adoption and, so far, that seems to be the case. I'd be willing to bet that after several bull-run cycles, there will be more and more people that own bitcoin and are getting paid in bitcoin. This has historically held true so far and I have little reason to suggest that wouldn't be the case with a continued increase in demand. If you're getting paid in bitcoin and all the merchants you interact with accept bitcoin as a form of payment, then there is little friction there to using bitcoin as a means of payment.

I read the article. I saw the volatility graph. I'll grant that the volatility shown in that graph is lower recently than it was in the very early days, but since about 2014 I don't see any meaningful downward trend. Volatility was pretty flat in 2014-16, crept higher in 2017-18, then went back down to about where it was in 2014-15. An ongoing trend is not evident in the data presented.

https://bitcoinist.com/looking-at-bitcoin-volatility-over-the-years/

I'm not arguing that bitcoin isn't volatile relative to fiat currencies, especially during cyclic periods like we're in today shortly after a 4-year halving. These first 3 halving events were very large ones. It was only until this most recent one (from 12.5 to 6.25/block) that we ended up going below the Feds' target for USD inflation rate. So we were still seeing large dramatic changes in the inflation rate that causes large supply shocks on the market. The next halving takes us to 3.125/block and after that we'll continue see less and less meaningful halving events. At that point there won't be as much of a supply shock to the market and these events will come with much less fanfare than they do today to the point where they're barely even noticed by the market. Likely in 10 years the market will have greatly stabilized at the volatility will have decreased greatly because there won't be these supply shocks that are taking place every 4 years like we're currently seeing.

To the moon, right? When we can't even begin to use logic to put a fair price on an asset, isn't that a problem? Some Dutch tulip traders might have some lessons for you.

So are you arguing that the market is not efficient and that somehow you know better that all the market participants and that the market is somehow completely wrong about what the price of bitcoin currently is? I'm not saying there won't be irrational exuberance taking place at any given time or there won't be corrections (sometimes large ones). But, taking an objective historical look at bitcoin's price, you can hardly argue that bitcoin is ALWAYS in a bubble and that throughout its entire history all bitcoin market participants have ALWAYS been wrong. I mean it with all due respect, but anyone who compares bitcoin to tulips and the bubble that took place with tulip bulbs in the 1600's immediately loses credibility. If you really think there is a comparison between the single tulip bubble in the mid-1600s and the continuous bull-bear cycles that bitcoin has seen that have correlated with its supply halvings, then rather than suggesting that dead tulip traders have a lesson for people, why not present said lesson yourself to everyone here?

Perhaps rather than looking at the bitcoin high prices of each year (which is measuring those exuberant highs), maybe you should be looking at the yearly low prices for bitcoin. Since that is measuring a more concrete bottom support price for bitcoin, you'll find a much tamer and gradual bitcoin price increase annually. But hindsight is 20/20 and it is easy to call the bottom with hindsight analysis at the end of the day. If that's where you want to look to find more "rational" fair prices for bitcoin, so be it. But I don't think you're going to have much of an argument claiming that 11 years in and entering a new bull cycle after demolishing the previous all time high that the market is not efficient enough to determine what the price of it is and that it's always been wrong even after 3 "bubbles". Write a bitcoin obituary if you wish, but you'll have to add it to the pile:

https://99bitcoins.com/bitcoin-obituaries/

[onecoolcat]

Hey I'm just trying to help you guys.  Cash out now and count your blessings

how about let's put a pin in this and revisit on Dec 2021. Shall we?

Sure if you want to embarrass yourself

yes I'm so very embarrassed already watching my btc stack priced at $33k . I'm sure I'll be even more embarrassed EOY....

Keep talking and you will really be embarrassed when Bitcoin crashes down to a low of $50,000 in 2022.

BTC up 26% since this thread was made 1 week ago. 

[seattlecyclone]

I just threw out a USD peg as an example of a choice they could have made instead of having a money supply that is fixed or even decreasing as people forget their keys. Instead of USD they could peg it to gold or Honolulu real estate or corn futures or any number of other things, in a decentralized manner, according to a protocol agreed upon in advance. You are asserting without evidence that this would be technically infeasible. I disagree. The network operates on consensus. Someone tries to sign a block claiming to have mined the wrong number of new bitcoins, and it will be rejected because it breaks the protocol. Right now the correct number of new bitcoins per block operates on a simple fixed algorithm, so you'd need to add in a mechanism to use the current exchange rates instead of that fixed number. The tricky bit would be to come to a consensus on what that rate is, but I'd think it should be possible to have the nodes monitor a number of different exchange rates that are trusted by consensus on the network. New data sources could be added by a consensus of miners agreeing they're valid, or removed in the same way if one becomes untrustworthy.

That's my entire point that you're not understanding. Pegging to anything else in the real world is going to create a reliance on something that is centralized. Where are prices determined for a given trading pair? On exchanges which are centralized entities? What if an exchange goes out of business? Who decides what exchanges are utilized and what exchanges aren't? You don't think that trying to get global consensus on such a thing using corporate entities that are established based on individual national legal frameworks would be a problem? Not to mention the most important part that you're missing...when bootstrapping a brand new currency that doesn't exist yet (which is what this entire discussion was about) ...there are no exchanges in existence to pull trading pair prices from! If you're insisting that using centralized authorities (even in aggregate) is a viable solution for determining a monetary policy of a decentralized currency, then you're missing the point of bitcoin entirely.

I disagree with you that the use of data from multiple active exchanges would somehow break the decentralization of the protocol. Every node on the network would still have a say in accepting or rejecting new blocks proposed to be added to the chain. Changes in the set of good data sources for determining the currency creation rate would need to be publicized widely, and would not take effect until adopted by the majority of miners, just as any changes to the protocol already have to do. I don't intend to dive too far into the weeds on this. There are surely plenty of edge cases to consider, and the people who stand to profit from greater stability should work those out and make it happen. To your point that this system doesn't work for a brand new currency without an established market, of course it doesn't! Use whatever system you like to get the first currency units into existence. Once a robust marketplace forms you can feed that data back into your system to adjust the money supply as needed to reduce the volatility. You don't need to be stuck with a deflationary spiral forever just because you had one once.

The internet took several decades before it became widely adopted. The same things you're saying today about bitcoin, you'd could have just as easily been saying about the internet in its earliest forms. "There is no reason for me to use it, there is no useful information on it, no one else is using it, etc, etc."

The evolution of the internet is actually a great analogy here. There are lots of internet technologies that came and went before we landed on the World Wide Web that eventually saw wide adoption. Just as one example, the Gopher protocol came out a few years before the Web as a way to share linked information over TCP/IP networks. A lot of what you can do with it is similar to what you could do with early websites, but it had some limitations that prevented it from winning wide adoption in the end. Betting on BTC isn't just betting that digital currencies will become widely used someday. I actually think that's reasonably likely myself! You're also betting that the BTC implementation of the digital currency concept will prove to be less like Gopher (promising technology with a few ultimately fatal flaws) and more like the Web (flexible enough to adapt to everyone's needs). On that point I have a very healthy amount of skepticism.

https://bitcoinist.com/looking-at-bitcoin-volatility-over-the-years/

This is basically the same graph from your other article! Am I supposed to look at that red line and see a clear downward trend?

I'm not arguing that bitcoin isn't volatile relative to fiat currencies, especially during cyclic periods like we're in today shortly after a 4-year halving. These first 3 halving events were very large ones. It was only until this most recent one (from 12.5 to 6.25/block) that we ended up going below the Feds' target for USD inflation rate. So we were still seeing large dramatic changes in the inflation rate that causes large supply shocks on the market. The next halving takes us to 3.125/block and after that we'll continue see less and less meaningful halving events. At that point there won't be as much of a supply shock to the market and these events will come with much less fanfare than they do today to the point where they're barely even noticed by the market. Likely in 10 years the market will have greatly stabilized at the volatility will have decreased greatly because there won't be these supply shocks that are taking place every 4 years like we're currently seeing.

"Supply shocks?" Nearly 90% of the BTC that will ever exist (according to current protocol) already exists. For every 20,000 BTC that existed yesterday, not even 20,001 BTC exists today. Changes in supply cannot explain any significant portion of recent volatility.

So are you arguing that the market is not efficient and that somehow you know better that all the market participants and that the market is somehow completely wrong about what the price of bitcoin currently is?

On the contrary! I have no earthly idea how to reason about what a bitcoin should be worth. That's why I'm not buying them. I was hoping you could enlighten me with the thought process you use to decide about this. If it doubled in value next month would you be buying or selling? Why? What about if it halved in value?

[celerystalks]

I think the reason bitcoin proponents get so emotional over cryptos is because the know deep down that failure of ever more people to change their minds about it and give in represents an existential threat to the viability of the project.

People who own stocks are not bothered by those who choose not to own any. Sure we may try to help educate from time to time. But I don’t need an ever expanding pool of buyers to make my investment grow. The growth of this investment happens naturally due to business growth (although changing investor sentiment does cause some short term volatility).

Bonds are a contract for a fixed income over a number of years between the issuer and the investor. Although most bonds trade on the open market, an ever expanding pool, again, is not required to make the investment productive.

Gold. That is a tricky one. I own some. I understand why others don’t. That being said humanity has had (and still has) a long-term fascination for the stuff.  People seem to instantly understand its value without any coaxing.  And further, those who own some gold usually would prefer a long term stable, steady rise in price, since this naturally represents the stable value of gold versus the inflation inherent in modern fiat currencies. A massive shift in sentiment towards gold resulting in huge short term increase its price is not a good thing.

Cash.  Sure there is an argument that the value of fiats are just our imagination. Or another argument is, in most cases, they are just another form of digital currency — so why allow the government to have a monopoly on it. To answer this, governments have monopolies on fiats because government has a monopoly on the use of force. I would say that fiats have value because the government finds them acceptable to settle debts.   So if I fail to pay taxes or owe someone else money the government or private party gets a judgement against me for the debt.  Let’s say I just ignore this, perhaps even on the premise that fiat currency is imaginary and so judgments issued in it are meaningless to people who do not believe in fiat currencies.  In this case, the government is authorized to use its force to take enough property (houses, cars, boats, jewelry, stocks, bonds,etc) to settle that debt. But, the government also provides the option of using its own fiat currency to satisfy these debts and thereby protecting property from seizure and limiting the use of government force. So in that sense it has value. And for individuals who have no debts, fiat currency still has value since there are enough others who do have such debts to provide deep liquid markets for government backed fiat currency.


But cryptos. The price rests solely on sentiment. And growth is obtained only through winning converts and growing positive sentiment.  Cryptos do not represent a share in a productive business. Cryptos promise no yield. Cryptos have not been a stable store of value for thousands years. And, cryptos do not represent a limit on a government’s use of force to seize property. Cryptos advance solely on the euphoria that new converts feel when they “get it” in terms of the technology and/or that purchasers feel when the stated value of their wallet increases.  Who doesn’t remember the rush we all got when we finally understood something deeply technical in school or work that many others struggled to understand? Who doesn’t love seeing the reporter value of their accounts go up at the end of a trading day? These things are pleasing. But, they do not form the basis of a new form of money. Because beyond these feelings, there is nothing of value really there.

Moreover, to the extent cryptos do represent any advantage over fiat money, these advantages are touted as making them better. But the better a money is, the more likely it is to be driven out of circulation by worse forms of money. This is known as Gresham’s law. Simply stated, bad money drives out the good. It has been this way always. Debased coins were spent before higher content coins. Fiat currency has driven out commodity money currency. Worn physical currency usually is spent before shiny/crisp new currency.  Electronic traceable but secure transactions have taken over instead of more anonymous physical cash transaction. Credit card processed transactions (which are worse for merchants due to processing fees and chargebacks) have taken over for most modern electronic transactions.  So if cryptos are in fact “better”, this would represent an uphill battle against Gresham’s law. If people really want to create a digital currency to take over, it has to be a worse form of money than credit card processed transactions, so people choose to spend it first.

[lifeanon269]

I disagree with you that the use of data from multiple active exchanges would somehow break the decentralization of the protocol. Every node on the network would still have a say in accepting or rejecting new blocks proposed to be added to the chain. Changes in the set of good data sources for determining the currency creation rate would need to be publicized widely, and would not take effect until adopted by the majority of miners, just as any changes to the protocol already have to do. I don't intend to dive too far into the weeds on this. There are surely plenty of edge cases to consider, and the people who stand to profit from greater stability should work those out and make it happen. To your point that this system doesn't work for a brand new currency without an established market, of course it doesn't! Use whatever system you like to get the first currency units into existence. Once a robust marketplace forms you can feed that data back into your system to adjust the money supply as needed to reduce the volatility. You don't need to be stuck with a deflationary spiral forever just because you had one once.

It is amazing that after (what I'm assuming is) just a few hours of thought, you've solved the byzantine generals problem in computing that has been a problem since the dawn of computing. Just going by some of your suggestions tells me you don't understand the entire reason why bitcoin exists.

The evolution of the internet is actually a great analogy here. There are lots of internet technologies that came and went before we landed on the World Wide Web that eventually saw wide adoption. Just as one example, the Gopher protocol came out a few years before the Web as a way to share linked information over TCP/IP networks. A lot of what you can do with it is similar to what you could do with early websites, but it had some limitations that prevented it from winning wide adoption in the end. Betting on BTC isn't just betting that digital currencies will become widely used someday. I actually think that's reasonably likely myself! You're also betting that the BTC implementation of the digital currency concept will prove to be less like Gopher (promising technology with a few ultimately fatal flaws) and more like the Web (flexible enough to adapt to everyone's needs). On that point I have a very healthy amount of skepticism.

You do understand that bitcoin was not the first digital cryptocurrency, right? There were plenty of ones that came before it, but they were all susceptible to attack and had faults of their own. Bitcoin drew inspiration from several of them and some were even referenced in the original bitcoin whitepaper. Digi-cash, b-money, BitGold, HashCash, etc.

You're not understanding a critical aspect of security (my field is Information Security). I see people make the claim that "Bitcoin could be the next MySpace to Facebook", but this misses a critical point with regards to security. We don't use cutting edge technology when trying to secure things. The encryption protocols (SHA,RSA, AES, etc) in use today are protocols that have been around for decades and vetted by the greater public before the world is confident in their robustness in securing the world's most confidential data. The entire point of bitcoin is guaranteeing security through its protocols and decentralization. The longer bitcoin is in existence without fault, the more confident people get in having their money secured by the network. Consequently, the longer it is in existence and operational, the higher of a price is justified for that security that it provides. You're not going to have a brand new crypto-currency that doesn't have the same history as bitcoin that suddenly out of the blue the world will feel confident moving billions of dollars into it. That's just not going to happen and I'm absolutely confident in that. Barring a complete failure in the security of the bitcoin network (something I'm also confident won't happen), you're not going to see a sudden switch to a "newer and better" cryptocurrency. If there were a sudden complete failure in the security of the bitcoin network, people certainly won't be quick to put money into another new one.

"Supply shocks?" Nearly 90% of the BTC that will ever exist (according to current protocol) already exists. For every 20,000 BTC that existed yesterday, not even 20,001 BTC exists today. Changes in supply cannot explain any significant portion of recent volatility.

I don't think you're understand how price is determine in markets. It isn't how much bitcoin that has been put into circulation that determines the price. The liquidity of that bitcoin is what does. It doesn't matter if all bitcoin have been mined or only 10% has been mined, it is the liquidity that determines how much the price swings. If I buy bitcoin and send it to cold storage not ever to be touched for 10 years, that bitcoin is taken out of circulation and doesn't contribute at all to market liquidity. How much bitcoin is actually liquid on exchanges is what really matters. If 99% of bitcoin is stored away in cold storage and only 1% is available for sale on exchanges, then it isn't going to take much money to chew through that liquid bitcoin for sale for the price to swing way up. Throughout 2020, the available bitcoin available on exchanges around the world has dropped by 20% and continues to drop. Glassnode, a chain analysis company, performed an analysis that showed that about 78% of bitcoin in circulation is considered "illiquid".

For example, on one of the most liquid exchanges in America (Gemini), there is only about 400 liquid bitcoin in sell orders from here until a price of $36,000. That means that an additional influx of only about $14 million will be enough to move the price of bitcoin thousands of dollars higher.

Also, miners (who produce new supply of bitcoin) generally sell this bitcoin to market since they're a business and must pay bills for infrastructure and electricity. So, given demand being equal, a halving in this new supply of bitcoin means that there will be much less new bitcoin being brought to market which means there is a supply shock to the market. This causes the price to go up (with equal demand), and thus with the price rising it brings in new demand and can bring massive price swings to the upside because of this large disparity between demand and supply.

So yes, this is a supply shock and I don't think you really grasp how scarce bitcoin is. It isn't about how much bitcoin has been mined that matters, like you claimed. People simply look at the price being tens of thousands of dollars without fully realizing how scarce and illiquid bitcoin really is. Again, there is no supply elasticity here.

On the contrary! I have no earthly idea how to reason about what a bitcoin should be worth. That's why I'm not buying them. I was hoping you could enlighten me with the thought process you use to decide about this. If it doubled in value next month would you be buying or selling? Why? What about if it halved in value?

It seems to me though that you're applying selective critique to bitcoin about what the price should be. By just about every measure imaginable, the stock market should not be at the prices it should be at today. Do you suggest to people that they should stop contributing to their 401k's or stop investing in the stock market until there there is a crash that brings things back in line with metrics that are more inline with history? No, I don't think you would, nor would I. We continue to invest in the stock market through massive overvaluations and massive crashes (fire sale!). We do so because we have a fundamental belief that over the long term (a decade or more), the value of the market will be greater in the future.

My point is that we don't apply any sort of fundamental price analysis to the stock market as to what a price should be. In fact, we actively discourage such a thing. TA active traders simply haven't been shown to be good at their jobs over the long term. Warren Buffet issued a bet to active traders to see if they could be the market against a passive investment strategy. The end result after 10 years was simply that active traders couldn't beat the market. Trying to reconcile what "fair price" should be against what the market is telling at any given point in time is a futile effort. It doesn't matter if the market is stocks, gold, bitcoin, or anything else. Active trading is a futile effort.

The truth of the matter is that I purchase bitcoin no differently than how I purchase or invest in anything else. I just passively invest each month on a regular basis regards of whether or not it goes way up or way down with full confidence that demand for bitcoin will be higher in 10 years than it is today. And it doesn't seem like I'm alone in that risk analysis. As I've said before, MassMutual an insurance company that has been in business for almost 200 years and whose sole business industry is about risk management, can look at bitcoin at decide that they should put $100 million of their reserves in bitcoin. If you feel that you've done more legal, regulatory, technical, and market risk analysis than this company and feel confident in being opposingly bearish on the matter, more power to you.

I'm not trying to convince anyone to buy bitcoin here. The only reason why I even initially entered this thread and the other one in this forum was because I saw so many blatantly incorrect statements being made about bitcoin that it was clear that many of the most harshest critics that I was reading here didn't seem to have much knowledge on the matter. Misinformation isn't going to help anyone whether you want to save money with bitcoin or not.

[seattlecyclone]

I disagree with you that the use of data from multiple active exchanges would somehow break the decentralization of the protocol. Every node on the network would still have a say in accepting or rejecting new blocks proposed to be added to the chain. Changes in the set of good data sources for determining the currency creation rate would need to be publicized widely, and would not take effect until adopted by the majority of miners, just as any changes to the protocol already have to do. I don't intend to dive too far into the weeds on this. There are surely plenty of edge cases to consider, and the people who stand to profit from greater stability should work those out and make it happen. To your point that this system doesn't work for a brand new currency without an established market, of course it doesn't! Use whatever system you like to get the first currency units into existence. Once a robust marketplace forms you can feed that data back into your system to adjust the money supply as needed to reduce the volatility. You don't need to be stuck with a deflationary spiral forever just because you had one once.

It is amazing that after (what I'm assuming is) just a few hours of thought, you've solved the byzantine generals problem in computing that has been a problem since the dawn of computing. Just going by some of your suggestions tells me you don't understand the entire reason why bitcoin exists.

The Bitcoin protocol has already solved this problem. They have an existing procedure for gaining consensus about proposed changes to the protocol. I'm suggesting that if they care about price volatility, adopting a different method of increasing the money supply in response to real-world exchange rates could do that. Protocol changes would be needed for this, and they would likely need to occur more frequently than what has happened in the past in order to keep the list of exchange rate providers fresh, but the procedure for adopting such changes already exists. Just use that.

You do understand that bitcoin was not the first digital cryptocurrency, right? There were plenty of ones that came before it, but they were all susceptible to attack and had faults of their own. Bitcoin drew inspiration from several of them and some were even referenced in the original bitcoin whitepaper. Digi-cash, b-money, BitGold, HashCash, etc.

Sure, and Gopher wasn't the first attempt at providing information over computer networks either. It was an iteration on what came before, and it took another few iterations before the technology became broadly useful to the general public. Maybe in an alternate history the people behind Gopher would have recognized the shortcomings of their system compared to HTTP/HTML and improved Gopher to eventually win in the marketplace. They did not. Bitcoin has a number of flaws. People are working hard on inventing better technology, usually on alternative blockchains. Will the people behind Bitcoin be able to tell the worthwhile advancements apart from the useless ones, and adopt the good ones into their own protocol before the new coin overtakes them in popularity? Maybe! It could just as easily (perhaps even more easily) go otherwise. The new thing would obviously need to prove itself to be secure before it gets adopted widely, but that doesn't seem like an insurmountable barrier to me.

I don't think you're understand how price is determine in markets...

I understand perfectly well how prices are determined in exchanges. Per Coinmarketcap, the overall trading volume across multiple exchanges was nearly 2.4 million BTC in the past 24 hours. Obviously some coins were traded multiple times and most were not traded at all, but the miners selling their 900 new BTC each day to pay their electric bills make up a tiny fraction of the overall trading volume. Halve it again and that's a difference of 450 out of 2.4 million.

It seems to me though that you're applying selective critique to bitcoin about what the price should be. By just about every measure imaginable, the stock market should not be at the prices it should be at today. Do you suggest to people that they should stop contributing to their 401k's or stop investing in the stock market until there there is a crash that brings things back in line with metrics that are more inline with history? No, I don't think you would, nor would I. We continue to invest in the stock market through massive overvaluations and massive crashes (fire sale!). We do so because we have a fundamental belief that over the long term (a decade or more), the value of the market will be greater in the future.

I'm not being selective at all. Stocks have actual metrics you can look at. You can look at the earnings of a company, look at some expert projections of where those earnings are headed in the future, and make a decision for yourself about whether the current price is a fair multiple of the earnings you're buying. Yes those metrics aren't as favorable at the moment as they have been in past years, but the prices are still low enough that it's a reasonable bet to say that they will be higher in a decade or two. I was hoping you would have some numbers you could point out to say why my BTC would need to be worth $X in order to facilitate a transaction volume of Y in Z years (and what evidence we have to suggest about the odds of the transaction volume actually being that large at that time), but so far all you've given is an appeal to trust in the wisdom of the crowds on this one.

[Channel-Z]

Fidelity sent me a survey last month on Bitcoin (I have no idea how to buy it or use it). PayPal, which I had not logged onto in years, is advertising quite prominently the ability to purchase four different cryptocurrencies. Institutions are clearly trying to get more people on board.

[Pomegranate12]

End times prophecy 

[lifeanon269]

The Bitcoin protocol has already solved this problem.

That was my entire point. What you're not understanding is that along with the blockchain, proof-of-work, and digital signatures, it's monetary policy is a part of the solution to the byzantine generals problem. The solutions you're suggesting would be a step back in that regard and would result in a high likelihood of a byzantine fault. Pointless arguing more on this...

I understand perfectly well how prices are determined in exchanges. Per Coinmarketcap, the overall trading volume across multiple exchanges was nearly 2.4 million BTC in the past 24 hours. Obviously some coins were traded multiple times and most were not traded at all, but the miners selling their 900 new BTC each day to pay their electric bills make up a tiny fraction of the overall trading volume. Halve it again and that's a difference of 450 out of 2.4 million.

If you understood then you wouldn't have said what you previously said in regards to circulating supply.

For every 20,000 BTC that existed yesterday, not even 20,001 BTC exists today. Changes in supply cannot explain any significant portion of recent volatility.

And now your follow up argument is confusing trading volume with liquidity. Trading volume has little to do with liquidity. You can have massive amounts of trading volume taking place with low amounts of liquidity and likewise you can have massive amounts of liquidity in the market with minimal trading volume. Take a look at Liquidity-Book for further evidence:

https://coin360.com/liquidity-book

On a large number of exchanges you can't even place an order for an order of 250 bitcoin. There just isn't enough liquidity for that. Claiming that 900 new BTC is a fraction of the liquidity on exchanges is patently a false claim. That 900 additional BTC mined each day is added every single day. Some of it will be brought to market and add to the liquidity on these exchanges while a large percentage of it will be taken off the market and put in cold storage. A change of 1800 additional bitcoin to market liquidity every single day down to 900 is a massive change. Add in the metrics that show that more and more bitcoin is becoming illiquid on a daily basis and yes, there is a supply shortage of bitcoin taking place at the same time that demand for it is increasing. This is such a basic market phenomenon that if you don't understand this, then I'm not going to take the time to explain it further.

I'm not being selective at all. Stocks have actual metrics you can look at. You can look at the earnings of a company, look at some expert projections of where those earnings are headed in the future, and make a decision for yourself about whether the current price is a fair multiple of the earnings you're buying. Yes those metrics aren't as favorable at the moment as they have been in past years, but the prices are still low enough that it's a reasonable bet to say that they will be higher in a decade or two. I was hoping you would have some numbers you could point out to say why my BTC would need to be worth $X in order to facilitate a transaction volume of Y in Z years (and what evidence we have to suggest about the odds of the transaction volume actually being that large at that time), but so far all you've given is an appeal to trust in the wisdom of the crowds on this one.

Except you are. You want me to name precise metrics, but by all measure any metric you use for the stock market would be telling you to sell. Price to earnings ratios, while historically used to measure whether a stock is overvalued. At current P/E ratios, the entire stock market is at historically high ratios. https://www.multpl.com/s-p-500-pe-ratio Much of the reason for this is the massive inflows of new money into the markets by the Fed. So past measurements aren't holding up to today's new economic environments.

You claim that you can look at "expert projections on where those earnings are headed in the future"....Ya, there is a name for that. It's called speculation. There are also "expert projections" about what experts see as new institutional investments flowing into bitcoin. More and more companies are looking to put bitcoin on their balance sheets. We know this is true due to the growing institutional adoption and massive swing in sentiment among these institutions. Furthermore, there are other metrics that align and validate this hypothesis of institutional adoption. Google searches for bitcoin hasn't budged. The 2017 rally was largely driven by retail investors and that was clearly visible in the large spike in Google searches. Google searches today for bitcoin haven't budged up at all. Also, active on-chain addresses is still very low at the moment compared with previous bull cycles. More active on-chain addresses is indicative of retail adoption. So this also validates the idea that institutional and high net-worth individuals are picking up bitcoin for cold storage. Volatility is also on par with volatility in past bull cycles (2013 and 2017), but this volatility is almost exclusively on the upside. We haven't had very much downside volatility which also lends to the idea that institutions are picking up bitcoin with little thoughts about cashing out in the short-term as opposed to day-traders looking to capitalize on volatility to cash out during short-term spikes.

There are plenty of future projections for bitcoin that use varying degrees of speculation and comparisons to other assets and commodities. At the end of the day, just like with expert predictions about stocks, it's all speculation. Personally I do think bitcoin will continue to compete with gold as JP Morgan is predicting. Millennials simply prefer bitcoin over gold and since they're the ones with future money being moved in the future economy, I feel comfortable making the claim that will likely be true. But, again it's speculation and I'm not going to get in price predictions. At the end of the day, we'll see who's right here.

[Sunder]

What the fuck do "gamers" have to do with Bitcoin?

"Gamer": A manboy who hasn't gotten over the fact that they have to face reality, not a synthetic, digital world in which they are Lords, Kings, Knights, and other such things, because the difficulty is adapted to their incompetence.

You're part of a Luddite mindset. 20 years ago, adult gamers might have been unfavourably described as you have described them, and there may have been some truth to that.

These days, with the complexity and social nature of games requiring genuine leadership, teamwork, strategic thinking, and perseverance, companies, government agencies and even military are developing games as recruitment tools.

As the article stated, nearly a third of the world games. I've been in the C-suite for a few years, responsible for multiple teams through middle managers. And you might be surprised not only how many senior and middle managers game, but how many prioritise gaming: actively schedule it into their calendar.

[effigy98]

You have to ask why did banks like JPMorgan changed their mind from hating bitcoin to loving it now? There is something VERY different about crypto this time around.

Tin foil hat time...

- Government crypto currency is going to hurt banks. Better to back bitcoin then the digital fed coin.
- Somehow, governments needs to transfer money to the younger generations to get them motivated to put down the video games and go be productive, have kids, etc and keep this system going. However, if they piss off the old people who vote, that will make them lose their jobs, so they are going to keep up free money to people making under 75k or whatever. You could inflate the things that the younger folks like (tech stocks, crypto) and deflate the assets of the older people (bond yields, zombie companies, old school companies) and do a less confrontational wealth transfer that way, which will probably result in younger people spending again on stuff other than video games and being involved in society due to a wealth effect.
- International companies are pissed off paying a bank to hold their money, wouldn't you be??? They want to go somewhere like gold or bitcoin or buybacks that does not have this "cost". Most seem to be doing buybacks but others want the money available if needed so that leaves gold or bitcoin if they don't want cash. The ONLY thing imo that is holding the united states back from negative interest is not having a fedcoin because they are scared that we are going to remove the 3% of REAL dollars in the banks so the house of cards falls over due to that 3% of cash being the backing of the fractional reserve for the other 97% of virtual borrowed money that really doesn't exist anymore then bitcoins do.

[ChpBstrd]

You have to ask why did banks like JPMorgan changed their mind from hating bitcoin to loving it now? There is something VERY different about crypto this time around.

Tin foil hat time...

- Government crypto currency is going to hurt banks. Better to back bitcoin then the digital fed coin.
- Somehow, governments needs to transfer money to the younger generations to get them motivated to put down the video games and go be productive, have kids, etc and keep this system going. However, if they piss off the old people who vote, that will make them lose their jobs, so they are going to keep up free money to people making under 75k or whatever. You could inflate the things that the younger folks like (tech stocks, crypto) and deflate the assets of the older people (bond yields, zombie companies, old school companies) and do a less confrontational wealth transfer that way, which will probably result in younger people spending again on stuff other than video games and being involved in society due to a wealth effect.
- International companies are pissed off paying a bank to hold their money, wouldn't you be??? They want to go somewhere like gold or bitcoin or buybacks that does not have this "cost". Most seem to be doing buybacks but others want the money available if needed so that leaves gold or bitcoin if they don't want cash. The ONLY thing imo that is holding the united states back from negative interest is not having a fedcoin because they are scared that we are going to remove the 3% of REAL dollars in the banks so the house of cards falls over due to that 3% of cash being the backing of the fractional reserve for the other 97% of virtual borrowed money that really doesn't exist anymore then bitcoins do.

Interesting ideas.

#1 is a fascinating possibility. A world of fedcoin instead of cryptocurrency might cut banks out of a lot of transactions. What do we need VISA and their 2-3% surcharges for it we can just have a government debit card? So maybe the banks do have an interest. But more likely, they see this as another opportunity to perform a middleman function and charge for it.

#2 seems implausible, because you'd have to find someone in government who cares about wealth being transferred to the younger generations. This is not a political issue in the U.S; nobody cares about the young because the young don't vote. There might be a natural market crowding out effect as the old who hold most money inflate certain assets, leaving the young to speculate on crypto.

#3 I have yet to see crypto appearing on mainstream corporate balance sheets. It's too risky to hold or to borrow in crypto, as this asset class has a history of murdering both the longs and the shorts. CFOs want stability, not a wildcard. Negative rates might push corporations to look for ways to reduce interest paid on their cash deposits, but I suspect they'd just hold less cash and rely more on banks to provide guaranteed revolving lines of credit. Yet that puts the onus on banks to pay negative rates and hold enough cash to supply those revolvers. Both will lose money in the end. There could also be more pressure for mergers, low-returning projects, and other wastes of capital. But I don't see any CFO's saying "I bought $10M of bitcoin so we could save $50,000 in interest per year on our cash"; the shareholders would ask WTF are you gambling our company?

[seattlecyclone]

On a large number of exchanges you can't even place an order for an order of 250 bitcoin. There just isn't enough liquidity for that.

So you're saying that even though the trading volume is 2.5 million BTC per day, you can't buy 250 of them? It's just the same 249 BTC trading back and forth 10,000 times a day? Seems like a good business for the exchanges and their fees. For the rest of us...not so much. For comparison, the daily trading volume of VTI is about 3.5 million shares per day and the market has no problem whatsoever filling an order for several hundred shares.

[lifeanon269]

So you're saying that even though the trading volume is 2.5 million BTC per day, you can't buy 250 of them? It's just the same 249 BTC trading back and forth 10,000 times a day? Seems like a good business for the exchanges and their fees. For the rest of us...not so much. For comparison, the daily trading volume of VTI is about 3.5 million shares per day and the market has no problem whatsoever filling an order for several hundred shares.

No...just no. It is apparent at this point that you've just completely dismissed bitcoin based on your fundamental misunderstanding of things and you have no care at all about actually learning new things before commenting. My posts aren't here to convince you really, but as I said more to help those who do wish to learn something new that are reading this thread to hopefully spur some curiosity and help them on their path to learning what you clearly care not to.

If you honestly do wish to learn, then I suggest just pulling up exchange market data and watching what takes place on the market and how ask/bid orders are filled and learn what market depth is and how liquidity helps determine price discovery. Market depth is important to understand where the market stands at any given time. It is basically where two opposing forces meet, sellers and buyers. Here is a good dashboard where you can view exchange market data without the need of creating an account anywhere:

https://tradeblock.com/markets/gmni/xbt-usd/5m/

On to your post...First off, why are you comparing the market of a scarce asset to a mutual fund? They have extremely different market dynamics. No, it isn't just the same 250 btc being traded that accounts for all the trade volume. The liquidity that makes up the market depth is just what consists on the order book that has varying types of ask/bid orders. Limit orders create liquidity while market orders take liquidity out of the order book. Generally there are lower fees for orders that generate liquidity since liquidity is a good thing and exchanges want to entice people to generate liquidity with their bitcoin holdings.

https://www.gemini.com/fees/marketplace#section-order-types

The thing to understand about liquidity is that it is not static. It is constantly ebbing and flowing as the market changes. For example, there might be about 1000 btc on the order book up to a price of say $40,000, but if those orders start getting filled closer to a market price of $40k, then many people might start taking down their limit orders and moving them to a higher price. Conversely, there might be people who have their bitcoin in a wallet and they don't plan on selling bitcoin until it reaches $40k (maybe that was their intended cash out price when they originally bought bitcoin). So as bitcoin reaches a price of $40k, that person might now bring their bitcoin to market to sell it which will create liquidity that wasn't there before.

Also, as the unit price of bitcoin goes up, naturally the liquidity also generally goes up since there is simply more value per unit of bitcoin. Someone selling one unit of bitcoin @ $30k obviously adds $30k of liquidity to the market where as selling 1 btc at $100k will add $100k of liquidity to the market. So liquidity is constantly changing and as the market grows, there is more liquidity which means the market depth is much larger. When there is more market depth, there is more value in the market which means that volatility goes down because it takes more money to move the price of bitcoin. This is why it is widely understood that as the market for bitcoin grows and as the price of bitcoin gets higher, volatility will also go down (as discussed in the Fidelity article I linked to earlier).

So why is it that trade volume not just the same 250 btc (or however much liquidity we're talking about) being traded around? Because the liquidity that makes up the order book are just the market maker orders. There are lots of orders that take liquidity from the market and these have to come from somewhere. Generally they come from people's bitcoin wallets that are on the exchanges themselves. You can get a general idea of how much bitcoin is on these exchanges at Viewbase.com. You can also get an idea of the trending data for this which is showing that more and more bitcoin is moving off exchanges and into cold storage somewhere (further exacerbating the supply shortage I talked about):

https://www.viewbase.com/coin/bitcoin

For example, there is about 806k bitcoin stored on Coinbase (which is about $25 billion). A lot of this is the bitcoin that gets traded on a daily basis. The market liquidity on the order book is just what soaks up market orders and where price discovery largely happens. Even though there might not be many limit orders on an exchange at the moment for a bitcoin price of $100k, you can be sure that some of that 806k bitcoin stored in bitcoin wallets on Coinbase will come to market should the bitcoin price rise to $100k. That's just how the market functions and the nature of human trading behavior.

My point about liquidity wasn't that if you wanted to purchase 250 or 300 bitcoin on an exchange that you can't. The market will generally gladly sell you that much bitcoin. The point I was making about liquidity is that if you were to place an order that large, because bitcoin is a scarce asset, doing so will likely make the price of bitcoin move greatly. We see this all the time in the market where bitcoin will be resting at a certain price and then all of a sudden the price spikes $1k dollars. This is usually because a very large order was filled soaking up large amounts of limit orders and also causing new bitcoin to come to market as the price rises. And like I mentioned, as the unit price of bitcoin rises, liquidity does too. That 900 bitcoin mined each day also is valued more now which means that as it comes to market, it is now adding greater liquidity to the market than it was previously. Eventually the market stabilizes again until greater demand comes in or leaves. Suggesting that the bitcoin halving events don't cause a supply shock to the market is a fundamental misunderstanding of these market dynamics. History has continuously shown that these events are not and cannot be priced in before hand since it is an active change to the market equilibrium and the price discovery that is taking place every single day.

Also, the problem if you're looking to fill a very large order is that generally you want to maintain as low of a cost basis on your purchase as possible. So buying $1 billion in bitcoin right off the market is going to cause the price to sky rocket which won't be good for your purchases. So it is usually best to average your purchasing out over several days (this is what MicroStrategy did) or find an OTC trader you can purchase from at an agreed upon price so that you don't shake the markets with your bulk purchase.

It is clear you can purchase more than just 250 bitcoin as many companies have done so. You can see here a list of some of the companies that have publicly announced adding bitcoin to their balance sheets.

https://bitcointreasuries.org/index.html

For example, MicroStrategy has over 70k bitcoin in their reserves worth over $2 billion. They made their first round of purchasing over the course of five days so that they didn't shake up the markets which would allow them to get the best cost basis for their acquisition. Otherwise, had they purchased all their bitcoin up front, they would've chewed through the order book liquidity and the price would've sky rocketed.

https://cointelegraph.com/news/coinbase-executed-microstrategy-s-425m-bitcoin-purchase-in-september-2020

You don't get these same market dynamics with an asset that isn't scarce in some way and many of the market dynamics for bitcoin are completely unique to bitcoin because of the very fact that there is no supply elasticity to additional market demand. The only way to add additional supply liquidity to the market to meet additional demand is to increase the price. And when there is a large halving event like what has taken place with the first 3 so far, it really does create a shock to the market. It is akin to having half of the world's oil producers just shut down overnight and stop producing oil. Given the same amount of demand, the price is obviously going to go up. There is no way around that market reality. The flip side of a commodity that is producible though is that as the price rises, there are new economically viable production possibilities that could arise that might not have been economical with lower prices. Oil reserves that weren't economically feasible to drill previously at lower prices might suddenly be at new higher prices. The same goes for gold. You don't have that reactivity in the market with bitcoin. The supply is what it is and there is no changing it.

I sincerely hope this helps anyone who is genuinely curious about the bitcoin market. I write these posts not to convince anyone about bitcoin or to buy it, but more to counter the endless misinformation and false info that is posted here that might prevent someone that is genuinely curious about learning from going down the right path.

[celerystalks]

@lifeanon269 is there anything that would cause you to change your views on cryptos?

[lifeanon269]

@lifeanon269 is there anything that would cause you to change your views on cryptos?

Cryptos? 99%+ of cryptos are junk at best and scams at worst. I talked about blockchain technology in this post of mine here:

https://forum.mrmoneymustache.com/investor-alley/bitcoin-are-we-still-out/msg2757464/#msg2757464

Most of the cryptocurrencies out there have no real use case or they're simply using blockchain tech when there really is no need to. Many of them are horribly centralized (in which case, why use a blockchain?). Many of them pre-mine their tokens for a few insiders to have prior to the tokens being released to market. Often there are shady dealings taking place with pay-for-play activity where payments are given to exchanges as favor for getting tokens listed (which drives retail speculation). Then that allows insiders to dump their pre-mined tokens on the general public. I've seen this way too often. If you read the SEC lawsuit against Ripple, there is a whole slew of allegations with shady dealings being made all with the intention of misleading investors.

Often times there are tokens that are created where there is almost zero need for a token to be used at all. The projects latched on to the "blockchain" buzz word hype just to make money. If you're diversifying a crypto-currency portfolio out of bitcoin and into other tokens, I feel you're actually increasing your risk while at the same time reducing your returns (almost all alt-coins trail bitcoin in gains historically).

This is why I only believe bitcoin actually has a use case today. The idea that you can say "blockchain, but not bitcoin" is a misunderstanding of the benefits that a blockchain provides. You can't separate the two. It is like saying "well the world wide web is great, but not the internet." I feel if there ever were some great benefit to a new token or crypto-currency that is out there, it will instead just be adopted by bitcoin as a side-chain because why have that use case be backed the the security of a much more inferior network when it could be backed by the bitcoin network's security instead? We're already starting to see this happen. This (among other reasons I've mentioned before) is why I don't see bitcoin being the "MySpace to Facebook".

Aside from the technical aspects, I feel bitcoin fills a crucial role in the economy at an especially critical time in history. The monetary policies of central banks around the world are not sustainable and there is no sign of them correcting. We're approaching negative interest rate territory and regardless of your thoughts on the matter, it can at least be agreed upon that it is uncharted territory for monetary policy. There simply aren't many additional tools left at the Fed's disposal for correcting or assisting with future market instabilities. The problem is that the Fed has now supporting such an expansive economy that should there be future corrections without the proper tools in place to assist, the crash could be much worse than it otherwise would've been.

The government uses a bogus CPI metric to determine what inflation is, but there is no single inflation number for every person (different people use and desire different goods and assets). So it is skewed lower than what reality is to claim that inflation doesn't exist (~2%) so that the metric can continue to support their monetary policy objectives. But, in reality, inflation is out of control for a lot of people. For the most part, inflation hits scarce assets the hardest because you have an increasing supply of money chasing a finite supply of goods or commodities). Another problem with inflation is the cantillon effect where because money from the fed is infused into the banking sector, the wealthy generally has first access to this new influx of money and can use it first before this supply is fully circulated in the economy. This means they have access to additional buying power before inflation takes full effect. This exacerbates wealth inequality.

I'm not an economic doomsayer by any means. I fully believe the economy will continue to grow just fine and I will always continue to invest in the economy through the highs and the lows. But that doesn't mean I don't recognize the faults in our economy and the glaring issues that many are ignoring with the trends around the world with regards to expansive monetary policy. In this regard, I think bitcoin has tremendous value in the world and has arrived at preciously the right time. I feel it will provide a great check against governments who might wish to push the boundaries with certain policy decisions. There is an ever growing cohort of corporations and business as well that are sitting on massive stock piles of cash that are also recognizing this fact with little recourse on what to do to prevent their stock piles from melting away at 10% annually (bonds are trash, can't invest in stocks/securities, cash is trash, etc). I feel it is just a matter of time before more and more companies start putting a little of their cash reserves into bitcoin to help them manage risk.

So, personally, I feel bitcoin is the only cryptocurrency that has a use case and legitimate secure network in place in today's world. The longer time goes on, the more people and businesses will trust putting their money into bitcoin (even just a small percentage) as a check against concerning monetary policy. Remember, bitcoin is global and there are many other nations in the world that don't have the same economic strength and positioning in the world that the USA has. It won't take the US dollar failing for bitcoin to fill a great need for many people in the world. Personally, I don't think governments should have a monopoly on money and even if bitcoin solely exists as a check against fiat currencies without fully replacing them (I don't see fiat currencies going away because of bitcoin), then bitcoin will have its worthwhile place in the world. Whether people eventually get to be paid in bitcoin and purchase their morning lattes with bitcoin is a secondary effect to all of this. Like I've always said, paying for retail goods with some form of digital currency tech was never a technological hurdle for humanity. Bitcoin doesn't need to fill that role to be successful, but if it does at some point, then all the merrier.

Cheers

[seattlecyclone]

Dude...I already told you I knew how trading markets worked. You don't need to write a novel explaining an order book to me, or how people might change their orders based on price changes, or how extremely low liquidity can cause high volatility.

I made the comparison to VTI because they're both scarce assets, with similar market cap, that trade on exchanges that work on basically the same principle. In both cases there's a large majority of shares sitting on the sidelines owned by buy-and-hold investors, with some active trading going on with a much smaller fraction of the shares.

The difference is that with BTC it's apparently impossible to buy a few million USD worth without eating up a significant fraction of the liquidity in the market and causing great changes in the price; stock ETFs with a similar market cap absolutely do not have that problem.

The more I learn from you about the current state of the BTC marketplace the less confidence I have that it's anywhere close to being the commonly-used currency it will need to become to justify the price.

[lifeanon269]

Dude...I already told you I knew how trading markets worked.

Apologies, but forgive me if your previous two posts had objectively false claims in them then and made no sense that led me to believe otherwise. Anyway, like I said, if you found no value in my posts, ignore them. Others may find value.

So you're saying that even though the trading volume is 2.5 million BTC per day, you can't buy 250 of them? It's just the same 249 BTC trading back and forth 10,000 times a day? Seems like a good business for the exchanges and their fees. For the rest of us...not so much. For comparison, the daily trading volume of VTI is about 3.5 million shares per day and the market has no problem whatsoever filling an order for several hundred shares.

I understand perfectly well how prices are determined in exchanges. Per Coinmarketcap, the overall trading volume across multiple exchanges was nearly 2.4 million BTC in the past 24 hours. Obviously some coins were traded multiple times and most were not traded at all, but the miners selling their 900 new BTC each day to pay their electric bills make up a tiny fraction of the overall trading volume. Halve it again and that's a difference of 450 out of 2.4 million. For every 20,000 BTC that existed yesterday, not even 20,001 BTC exists today. Changes in supply cannot explain any significant portion of recent volatility.

---

I made the comparison to VTI because they're both scarce assets, with similar market cap, that trade on exchanges that work on basically the same principle. In both cases there's a large majority of shares sitting on the sidelines owned by buy-and-hold investors, with some active trading going on with a much smaller fraction of the shares.

VTI is not a scarce asset. Vanguard can easily create additional shares to meet new demand. In fact, one of the functions of an ETF is the creation and redemption process to allow the fund to be traded like a stock and at the same time meet demand to keep the ETF share price inline with the fund's underlying value. Comparing this ETF process with an actual scarce asset like bitcoin is silly. Market capitalization comparisons have nothing to do with this, so I'm not sure why you continue to make that comparison.

The difference is that with BTC it's apparently impossible to buy a few million USD worth without eating up a significant fraction of the liquidity in the market and causing great changes in the price; stock ETFs with a similar market cap absolutely do not have that problem.

Well duh, welcome to what scarcity looks like! Again, comparing bitcoin to stocks is a silly exercise.

The more I learn from you about the current state of the BTC marketplace the less confidence I have that it's anywhere close to being the commonly-used currency it will need to become to justify the price.

Bitcoin doesn't need to be used as a medium of exchange currency to have value. See my convo with celerystalks.

Again, I'm not here to convince you, just dispel objectively false or misleading claims and it seems like you're full of them. I don't care to debate this anymore with you.

But I will leave with a slide deck from SkyBridge Capital that has a decent overview of bitcoin today for those who wish to learn more.

https://files.constantcontact.com/4e269f68301/49e4cc09-f9ef-48a2-a5e5-944ed5c7da95.pdf

[Telecaster]

Except you are. You want me to name precise metrics, but by all measure any metric you use for the stock market would be telling you to sell. Price to earnings ratios, while historically used to measure whether a stock is overvalued. At current P/E ratios, the entire stock market is at historically high ratios. https://www.multpl.com/s-p-500-pe-ratio Much of the reason for this is the massive inflows of new money into the markets by the Fed. So past measurements aren't holding up to today's new economic environments.

You claim that you can look at "expert projections on where those earnings are headed in the future"....Ya, there is a name for that. It's called speculation. There are also "expert projections" about what experts see as new institutional investments flowing into bitcoin. More and more companies are looking to put bitcoin on their balance sheets. We know this is true due to the growing institutional adoption and massive swing in sentiment among these institutions. Furthermore, there are other metrics that align and validate this hypothesis of institutional adoption. Google searches for bitcoin hasn't budged. The 2017 rally was largely driven by retail investors and that was clearly visible in the large spike in Google searches. Google searches today for bitcoin haven't budged up at all. Also, active on-chain addresses is still very low at the moment compared with previous bull cycles. More active on-chain addresses is indicative of retail adoption. So this also validates the idea that institutional and high net-worth individuals are picking up bitcoin for cold storage. Volatility is also on par with volatility in past bull cycles (2013 and 2017), but this volatility is almost exclusively on the upside. We haven't had very much downside volatility which also lends to the idea that institutions are picking up bitcoin with little thoughts about cashing out in the short-term as opposed to day-traders looking to capitalize on volatility to cash out during short-term spikes.

There are plenty of future projections for bitcoin that use varying degrees of speculation and comparisons to other assets and commodities. At the end of the day, just like with expert predictions about stocks, it's all speculation. Personally I do think bitcoin will continue to compete with gold as JP Morgan is predicting. Millennials simply prefer bitcoin over gold and since they're the ones with future money being moved in the future economy, I feel comfortable making the claim that will likely be true. But, again it's speculation and I'm not going to get in price predictions. At the end of the day, we'll see who's right here.

The part in bold really isn't true though.  The higher the initial price for any productive asset--stocks, bonds, rental real estate, etc.--the lower the future return.  Stock prices (and bond prices and most real estate too, for that matter) are high.   But that doesn't necessarily mean "sell." It means expect lower returns in the future.

As an aside, not all metrics say S&P500 is overvalued right now.  Many people have heard of Robert Schiller's CAPE ratio.     Schiller has also developed a lesser known metric called Excess CAPE Yield which takes into account interest rates and inflation.   The ECY shows that appear to be reasonably valued right now.  Recent article here.  Warren Buffett has made similar comments.  Basically, the lower the interest rate the easier it is for companies to compound earnings, so high multiples would be justified. 

Buying a share of stock gives you a claim to a portion of the future earnings.  Future earnings can't be known for sure of course, but they can be estimated and there lots of tools to do so.  In the short term, stock prices are driven by supply and demand, but in the long term it always comes back to earnings.  In the short term I have no idea what stock prices will do, but I'm confident in ten years prices will be higher than they are today.  This is not rank speculation.  There are sound reasons to believe this.  Primarily that the ROE of the S&P500 has remained remarkably close to 12% for decades trending up and down in a fairly narrow band. 

The price of an unproductive asset like say gold or fine art, however is set strictly by supply and demand.  I have no idea what the price of gold or that Matisse will be ten years from now, and neither does anyone else.  It is logical to assume gold will have some value because people have always like gold, but there is literally no way to predict the price.

Which brings us to Bitcoin.  Bitcoin's price is set by supply and demand, just like gold.  As long as people want to own Bitcoin, it will have value.  Just like gold.  But that presents a nearby insurmountable problem for use as currency.    As long as we have had recorded monetary transactions, the economy has operated on credit.  Buy now, pay later.  Or maybe pay now, and get delivery later.  Do some work for me, I'll pay you in two weeks.  Buy a house now, I'll pay you over 30 years.  But that can't work with Bitcoin because the price doesn't stay the same and there is no real way to predict the price or know how much or which way the price will move.   Up above you predicted that as (if) Bitcoin increases in market cap the volatility will decrease.  There is a certain logic to that, but the market cap say the S&P 500 is what? 100 times larger than Bitcoin and it is still too volatile to use for short term savings. 

If you want to trade it, or just like the idea of owning it, knock yourself out!   But there is no reason to believe it will have widespread use as currency.   

[seattlecyclone]

VTI is not a scarce asset.

Sure it is. Look up scarcity in an economics textbook. The supply of VTI shares is not infinite. That is why they have value. The fact that a thing can be created by consuming other scarce resources (shares of publicly traded companies) does not make that thing non-scarce.

Again, comparing bitcoin to stocks is a silly exercise.

On that, we are in violent agreement. Stocks have actual reason to have value now. Bitcoin is based on hope and prayer that it will someday find enough utility to justify the valuation. There is no comparison.

[lifeanon269]

The part in bold really isn't true though.  The higher the initial price for any productive asset--stocks, bonds, rental real estate, etc.--the lower the future return.  Stock prices (and bond prices and most real estate too, for that matter) are high.   But that doesn't necessarily mean "sell." It means expect lower returns in the future.

Fair enough. I probably shouldn't have used the word "sell". That would imply opportunity costs of better risk-adjusted options elsewhere and I don't think that's really the case with stocks, even in today's environment. Like I said, you're not going to see me selling.

As an aside, not all metrics say S&P500 is overvalued right now.  Many people have heard of Robert Schiller's CAPE ratio.     Schiller has also developed a lesser known metric called Excess CAPE Yield which takes into account interest rates and inflation.   The ECY shows that appear to be reasonably valued right now.  Recent article here.  Warren Buffett has made similar comments.  Basically, the lower the interest rate the easier it is for companies to compound earnings, so high multiples would be justified.

The problem with any measure that is modeled on inflation adjustments is that we really are in uncharted territory with regards to monetary policy. This is a really good article by Lyn Alden:

https://www.lynalden.com/money-printing/

Which brings us to Bitcoin.  Bitcoin's price is set by supply and demand, just like gold.  As long as people want to own Bitcoin, it will have value.  Just like gold.  But that presents a nearby insurmountable problem for use as currency.    As long as we have had recorded monetary transactions, the economy has operated on credit.  Buy now, pay later.  Or maybe pay now, and get delivery later.  Do some work for me, I'll pay you in two weeks.  Buy a house now, I'll pay you over 30 years.  But that can't work with Bitcoin because the price doesn't stay the same and there is no real way to predict the price or know how much or which way the price will move.   Up above you predicted that as (if) Bitcoin increases in market cap the volatility will decrease.  There is a certain logic to that, but the market cap say the S&P 500 is what? 100 times larger than Bitcoin and it is still too volatile to use for short term savings. 

If you want to trade it, or just like the idea of owning it, knock yourself out!   But there is no reason to believe it will have widespread use as currency.

Like I said, bitcoin doesn't need to be used as a widespread currency to have value and I don't foresee it being used as a widespread currency any time soon (<10 years). However unlike gold or the stock market, the lack of supply reaction with bitcoin will actually be its strength for stability in the future as opposed to the contributor to volatility like it is today.

The reason for the volatility today is obviously because it is such a small market. I don't think that's controversial at all. But, I do believe there is a possibility for greater stability with bitcoin at a larger market cap (even if its smaller than the S&P 500). While I don't think it is valid to compare the stock market with bitcoin (businesses are always in wild flux, thus volatility is inherent to the market regardless of its size). A business that exceeds its quarterly earnings receives a massive influx of investors on the news. Conversely, an earnings miss causes investors to flee. There is always an ever changing flow of news and outcomes that take place with business. This isn't the case with bitcoin. It's supply is static. So as its market cap increases and volatility decreases, there won't be regular news cycles every quarter that causes vary degrees of cash flow positive or negative. Bitcoin is what it is and everyone knows what to expect from its monetary policy.

The problem is that there is the dichotomy between fiat currencies and bitcoin. Fiat currencies will always be debased and inflated (that was one of the chief reasons bitcoin was created). Because of this dichotomy, that means there will always be an infinite supply of fiat currency to flow into bitcoin. So, like you said, even if bitcoin were to reach a large market cap size, there will always be an disparate and increasing amount of fiat currency cash flow that could enter the bitcoin market. Essentially by virtue of inflating fiat currencies, you will always continue to be increasing the size of the bitcoin market. However, at larger market cap sizes, due to the stability of bitcoin's supply rate in the future, the rate of deflation of bitcoin's value will likely be highly correlated with the rate of inflation of fiat currencies. The rate of deflation for bitcoin would likely be slightly higher than the rate of inflation of fiat currencies (accounting for the rate of lost bitcoin annually) So I don't think the comparison to stock market volatility is an apt comparison here. So you say it is insurmountable for bitcoin to achieve stability and thus could never be used for credit or lending, but I disagree with that.

That being said, I think there are several use cases of currency and bitcoin can fill some of those roles without being required to fill all of those roles. I think it is important to separate currency uses cases. A currency doesn't need to be used as credit to be useful as a medium of exchange for many people around the world. As I talked about earlier, often times the choice to use a given currency in a transaction comes down to friction. There could be many people in the world where the friction to use bitcoin might be less than using any other legal tender, digital or otherwise. This can take place and likely will take place (it already is in small niche cases around the world), without the requirement of bitcoin being used as credit and lending. There is also the use case of cross-border payments and friction in this environment is inherent to fiat currencies that are generally confined to national borders. Whether it is simply remittances or actual commerce.

Ultimately, bitcoin's value for the foreseeable future will always be denominated in fiat terms. But I don't think that is in any way a hindrance for bitcoin.

[lifeanon269]

Sure it is. Look up scarcity in an economics textbook. The supply of VTI shares is not infinite. That is why they have value. The fact that a thing can be created by consuming other scarce resources (shares of publicly traded companies) does not make that thing non-scarce.

But you were comparing the market cap of VTI as a means of explaining why additional demand for VTI doesn't cause an increase in the share price like it does for bitcoin. That was where the original discussion arose from. The problem with your argument is that VTI (the ETF) is not scarce in regards to demand. The entire point of the ETF is to trade according to the value of its underlying, not to trade at a premium for simply being an ETF. Especially for VTI, Vanguard does its best to ensure its share price is inline with its NAV. This means that if there is an influx of demand for the VTI (causing an increase in the ETF's market cap), then Vanguard (or whoever the authorized participant is) steps in to issue additional shares to keep the share price of the ETF inline with the underlying value. Because the share price is based on the value of the underlying NAV and that underlying is the total stock market and thus the comparison you were making about why increased demand doesn't cause a large increase in share price is an apples to oranges comparison here even with similar market cap sizes. What you should be doing is comparing the share price of the ETF with the market cap of the entire underlying, since that is where the ETF share price comes from. This explains why VTI as an ETF for the total stock market can fulfill orders and meet demand without a large increase in its share price even if the ETF were to have a similar market cap to bitcoin.

See below:

I made the comparison to VTI because they're both scarce assets, with similar market cap, that trade on exchanges that work on basically the same principle. In both cases there's a large majority of shares sitting on the sidelines owned by buy-and-hold investors, with some active trading going on with a much smaller fraction of the shares.

The difference is that with BTC it's apparently impossible to buy a few million USD worth without eating up a significant fraction of the liquidity in the market and causing great changes in the price; stock ETFs with a similar market cap absolutely do not have that problem.

So you're saying that even though the trading volume is 2.5 million BTC per day, you can't buy 250 of them? It's just the same 249 BTC trading back and forth 10,000 times a day? Seems like a good business for the exchanges and their fees. For the rest of us...not so much. For comparison, the daily trading volume of VTI is about 3.5 million shares per day and the market has no problem whatsoever filling an order for several hundred shares.

[Lady Stash]

Bitcoin is funny money and will disappear
It's not a wise long term investment 
Cash out now

A year ago I agreed with you.  Now I'm betting Bitcoin (or something like it) will become an international currency. 

In the US, we already have a stable currency that's accepted around the world.  In developing countries, there's a non-zero risk of significant currency devaluation and a non-zero cost to switch currency.  Bitcoin can address both problems.  If I live in Venezuela or another country where my currency is actively losing value and I can't trade it for a stable currency because the government is limiting supply then something like bitcoin becomes extremely valuable. 

Obviously it's not accepted widely yet, but once bitcoin reaches critical mass and stabilizes it has properties that can't be matched by a local currency.  It can't be devalued by a government and isn't subject to local hyper-inflation.  It's free to spend anywhere in the world - no money change costs. 

The biggest risk to adoption I can see is that governments outlaw bitcoin to keep control of their currencies and enforce anti-money laundering policies and financial sanctions.

[onecoolcat]

Can I go to the grocery store and hand the cashier some bitcoins to pay for my food ?
How about at the gas station
You use money to buy goods and services. 
Bitcoin is funny money and will disappear
It's not a wise long term investment 
Cash out now

Bitcoin is up 41% since this post.  Its going to disappear.  Just wait guys.

[chevy1956]

Bitcoin is funny money and will disappear
It's not a wise long term investment 
Cash out now

A year ago I agreed with you.  Now I'm betting Bitcoin (or something like it) will become an international currency. 

In the US, we already have a stable currency that's accepted around the world.  In developing countries, there's a non-zero risk of significant currency devaluation and a non-zero cost to switch currency.  Bitcoin can address both problems.  If I live in Venezuela or another country where my currency is actively losing value and I can't trade it for a stable currency because the government is limiting supply then something like bitcoin becomes extremely valuable. 

Obviously it's not accepted widely yet, but once bitcoin reaches critical mass and stabilizes it has properties that can't be matched by a local currency.  It can't be devalued by a government and isn't subject to local hyper-inflation.  It's free to spend anywhere in the world - no money change costs. 

The biggest risk to adoption I can see is that governments outlaw bitcoin to keep control of their currencies and enforce anti-money laundering policies and financial sanctions.

I'm not sure it Bitcoin will come good but it could and I think it'd be great. It is miles away from getting to that level yet. The problem is it might not happen in our lifetimes and bitcoin may be replaced by something better. I view an international digital currency that is easily transferred, safe and secure as being a big step forward in relation to money or better put a means of exchange.

[chevy1956]

Can I go to the grocery store and hand the cashier some bitcoins to pay for my food ?
How about at the gas station
You use money to buy goods and services. 
Bitcoin is funny money and will disappear
It's not a wise long term investment 
Cash out now

Bitcoin is up 41% since this post.  Its going to disappear.  Just wait guys.

I find this argument pretty stupid. The price going up and up is solely about an asset bubble and how people react to asset bubbles. We've seen this throughout history. We know it's irrational but it's really irrational when we are talking about a medium of exchange.

I like the idea of cryptos and I still feel they could be a gamechanging technology.

[Pomegranate12]

Bitcoin will not be allowed to succeed
Satoshis ???  Come on why not just buy a bag of magic beans

[Pomegranate12]

Can I go to the grocery store and hand the cashier some bitcoins to pay for my food ?
How about at the gas station
You use money to buy goods and services. 
Bitcoin is funny money and will disappear
It's not a wise long term investment 
Cash out now

Bitcoin is up 41% since this post.  Its going to disappear.  Just wait guys.

28 percent

[Pomegranate12]

I'm gonna bring this thread back up when it crashes to oblivion

[onecoolcat]

I'm gonna bring this thread back up when it crashes to oblivion

Yeah, when it crashes down to $35,000 in 9 months, go ahead.  It is not dropping below $15,000 again. 

[onecoolcat]

Can I go to the grocery store and hand the cashier some bitcoins to pay for my food ?
How about at the gas station
You use money to buy goods and services. 
Bitcoin is funny money and will disappear
It's not a wise long term investment 
Cash out now

Bitcoin is up 41% since this post.  Its going to disappear.  Just wait guys.

I find this argument pretty stupid. The price going up and up is solely about an asset bubble and how people react to asset bubbles. We've seen this throughout history. We know it's irrational but it's really irrational when we are talking about a medium of exchange.

I like the idea of cryptos and I still feel they could be a gamechanging technology.

The point is that he told everyone to "cash out now".  Had anyone listened to him they would have missed out on 41% (now 42%) gains.  Bitcoin is speculative and it will continue to be so for the near future.  However, that doesn't mean you shouldn't hold any in your portfolio.  I personally hold very little in my portfolio (less than 5% of my income has gone into it over the years).  I think its quite short-sighted not to invest a small amount, say 1% of your income, into Bitcoin.  It has its ups and downs (it may drop 70% from its high) but if you look at the use case of Bitcoin and see the changes in the markets you cannot legitimately say it will "disappear".  In fact, it has a clear track record of regaining loss ground and then some after its drastic drops.

[chevy1956]

The point is that he told everyone to "cash out now".  Had anyone listened to him they would have missed out on 41% (now 42%) gains.  Bitcoin is speculative and it will continue to be so for the near future.  However, that doesn't mean you shouldn't hold any in your portfolio.  I personally hold very little in my portfolio (less than 5% of my income has gone into it over the years).  I think its quite short-sighted not to invest a small amount, say 1% of your income, into Bitcoin.  It has its ups and downs (it may drop 70% from its high) but if you look at the use case of Bitcoin and see the changes in the markets you cannot legitimately say it will "disappear".  In fact, it has a clear track record of regaining loss ground and then some after its drastic drops.

I agree that holding some bitcoin isn't a bad idea as part of a diversified portfolio. I said earlier if you hold gold and/or silver or even any currency I think bitcoin may be the best option for that part of your portfolio. I'd much rather invest in bitcoin than gold.

[CuboCube]

Bitcoin does have an awful lot of shady people propagating it; bitcoin is not what it supposed to be. And once you have it, you immediately want to onboard others. It's the most cunning inadvertent pyramid scheme ever, if you will. Let's see how this Tether thing works out on the 15th of january. (https://www.coindesk.com/nyag-tether-bitfinex-loan-documents-coming-weeks, https://en.wikipedia.org/wiki/Tether_(cryptocurrency))
The Billion-Dollar Bitcoin Scam - Ordinary Things: https://youtu.be/YCuGpfMSmck
Bitcoin - Unmasking Satoshi Nakamoto - Barely Sociable: https://youtu.be/XfcvX0P1b5g

[MustacheAndaHalf]

There's also no counter-weight to the optimism.  If someone thinks Tesla is overpriced, they can short the stock or buy PUT options.  If someone who doesn't own Bitcoin thinks it is about to fall ... you can't short it in your brokerage account.  There's no options to buy.  So the only people who can express their views are buyers.

Even if Bitcoin isn't funny money... if you see a lot of press about Bitcoin, and many threads on forums... it's probably because the price has run up a lot (which it has).  So when everyone is trying to get you interested (in this case in Bitcoin), that's probably not the best time or price to buy.

[onecoolcat]

There's also no counter-weight to the optimism.  If someone thinks Tesla is overpriced, they can short the stock or buy PUT options.  If someone who doesn't own Bitcoin thinks it is about to fall ... you can't short it in your brokerage account.  There's no options to buy.  So the only people who can express their views are buyers.

Even if Bitcoin isn't funny money... if you see a lot of press about Bitcoin, and many threads on forums... it's probably because the price has run up a lot (which it has).  So when everyone is trying to get you interested (in this case in Bitcoin), that's probably not the best time or price to buy.

That is not true.  People have been shorting Bitcoin since 2017.

[celerystalks]

There's also no counter-weight to the optimism.  If someone thinks Tesla is overpriced, they can short the stock or buy PUT options.  If someone who doesn't own Bitcoin thinks it is about to fall ... you can't short it in your brokerage account.  There's no options to buy.  So the only people who can express their views are buyers.

Even if Bitcoin isn't funny money... if you see a lot of press about Bitcoin, and many threads on forums... it's probably because the price has run up a lot (which it has). So when everyone is trying to get you interested (in this case in Bitcoin), that's probably not the best time or price to buy.

Bitcoin is down 1.45% since you made this comment. Obviously represents a buying opportunity from recent highs.

[lifeanon269]

There's also no counter-weight to the optimism.  If someone thinks Tesla is overpriced, they can short the stock or buy PUT options.  If someone who doesn't own Bitcoin thinks it is about to fall ... you can't short it in your brokerage account.  There's no options to buy.  So the only people who can express their views are buyers.

Even if Bitcoin isn't funny money... if you see a lot of press about Bitcoin, and many threads on forums... it's probably because the price has run up a lot (which it has).  So when everyone is trying to get you interested (in this case in Bitcoin), that's probably not the best time or price to buy.

Ya, that's not true. You can short bitcoin on several exchange/broker websites (BitMex probably being the largest). I track many of the larger transactions that take place and there were several very large liquidated shorts that just took place after bitcoin just breached $35k ($6.4M, $2.4M, and $1.3M). In fact, short squeezes in bitcoin are often what cause many of the larger upside swings. Long story short though is that not many choose to short bitcoin because it is absolutely stupid to do so with something that is so lopsided toward buy demand and who's upside is so tremendously high.

Also, for what its worth, in regards to "many threads on forums", let's not forget that this one was started by a bear. Seems like bears are just as likely to come out of the wood work when prices go high as bulls are.

[Telecaster]

The biggest risk to adoption I can see is that governments outlaw bitcoin to keep control of their currencies and enforce anti-money laundering policies and financial sanctions.

Governments keep control of their currencies by simply requiring that taxes be paid in the local currency.  Taxes themselves are an obstacle to widespread Bitcoin adoption because if the price goes up before you buy something you owe capital gains tax. You can bet if Bitcoin use becomes significant at all, governments will make sure to collect capital gains and applicable sales taxes.  And all those taxes need to be paid in local currency.   On the flip side, if the price goes down before your purchase you can carry the loss forward but that becomes an accounting hassle. 

Perhaps a bigger obstacle is the United States and many other countries require wages be paid in legal tender.  The reason for this is in the Jim Crow south, poor blacks (and poor whites, it should be said) were paid in script which could only be redeemed at the company store.  This kept people in poverty because their money was worthless to anyone except their employer, tying them to their jobs.   Because this is worker protection/civil rights issue, I can't imagine a circumstance where this law would be repealed.  If you can only use Bitcoin to buy stuff but not pay wages I don't see a road to widespread use.

And of course there is the volatility problem.   Bitcoin's price is set by supply and demand.  I don't see how the laws of supply and demand will stop applying in the future, regardless of market cap.   Because of the volatility, you can't  to buy or sell on credit (or technically you could, but it would be risky).   Which is how most stuff is bought and sold, at at least one point in the transaction. 

Maybe I'm wrong, but those are some strong headwinds.

[ChpBstrd]

The biggest risk to adoption I can see is that governments outlaw bitcoin to keep control of their currencies and enforce anti-money laundering policies and financial sanctions.

Governments keep control of their currencies by simply requiring that taxes be paid in the local currency.  Taxes themselves are an obstacle to widespread Bitcoin adoption because if the price goes up before you buy something you owe capital gains tax. You can bet if Bitcoin use becomes significant at all, governments will make sure to collect capital gains and applicable sales taxes.  And all those taxes need to be paid in local currency.   On the flip side, if the price goes down before your purchase you can carry the loss forward but that becomes an accounting hassle. 

Perhaps a bigger obstacle is the United States and many other countries require wages be paid in legal tender.  The reason for this is in the Jim Crow south, poor blacks (and poor whites, it should be said) were paid in script which could only be redeemed at the company store.  This kept people in poverty because their money was worthless to anyone except their employer, tying them to their jobs.   Because this is worker protection/civil rights issue, I can't imagine a circumstance where this law would be repealed.  If you can only use Bitcoin to buy stuff but not pay wages I don't see a road to widespread use.

And of course there is the volatility problem.   Bitcoin's price is set by supply and demand.  I don't see how the laws of supply and demand will stop applying in the future, regardless of market cap.   Because of the volatility, you can't  to buy or sell on credit (or technically you could, but it would be risky).   Which is how most stuff is bought and sold, at at least one point in the transaction. 

Maybe I'm wrong, but those are some strong headwinds.

The issue of volatility is a barrier to adoption. Crypto is having a hard time transitioning from speculative investment to store of value and trading token. The more cryptos skyrocket and crash, the less likely a business is to accept them (because the cryptocurrency could crash the moment he receives it) or use them for procurement (because the cryptocurrency could skyrocket the moment he pays it). This uncertainty is intolerable when one's margins are single-digit and one is in debt.

That said, there are now cryptos whose function is to hedge the price of cryptos vs. dollars via contracts.

The following course might be a good investment of time for both enthusiasts and skeptics:

https://www.coursera.org/learn/blockchain-business-models

[MustacheAndaHalf]

There's also no counter-weight to the optimism.  If someone thinks Tesla is overpriced, they can short the stock or buy PUT options.  If someone who doesn't own Bitcoin thinks it is about to fall ... you can't short it in your brokerage account.  There's no options to buy.  So the only people who can express their views are buyers.

Ya, that's not true. You can short bitcoin on several exchange/broker websites (BitMex probably being the largest). I track many of the larger transactions that take place and there were several very large liquidated shorts that just took place after bitcoin just breached $35k ($6.4M, $2.4M, and $1.3M). In fact, short squeezes in bitcoin are often what cause many of the larger upside swings. Long story short though is that not many choose to short bitcoin because it is absolutely stupid to do so with something that is so lopsided toward buy demand and who's upside is so tremendously high.

I said "you can't short it in your brokerage account", and BitMex is not a brokerage.  If someone buys PUT options on TSLA, that goes to the CBOE... there's a well established system of what happens to enforce the contracts.

BitMex is registered in an island off the coast of Africa.  To quote Wikipedia:
"BitMEX was founded in 2014 by Arthur Hayes, Ben Delo, and Samuel Reed, with financing from family and friends."
...
"On October 1, 2020, Hayes, Reed, Delo, and Gregory Dwyer were indicted on charges of violating the U.S. Bank Secrecy Act and conspiracy to violate that law, arising from allegations that the four failed to implement anti-money laundering measures"
https://en.wikipedia.org/wiki/BitMEX

[lifeanon269]

I said "you can't short it in your brokerage account", and BitMex is not a brokerage.  If someone buys PUT options on TSLA, that goes to the CBOE... there's a well established system of what happens to enforce the contracts.

BitMex is registered in an island off the coast of Africa.  To quote Wikipedia:
"BitMEX was founded in 2014 by Arthur Hayes, Ben Delo, and Samuel Reed, with financing from family and friends."
...
"On October 1, 2020, Hayes, Reed, Delo, and Gregory Dwyer were indicted on charges of violating the U.S. Bank Secrecy Act and conspiracy to violate that law, arising from allegations that the four failed to implement anti-money laundering measures"
https://en.wikipedia.org/wiki/BitMEX

No, you can't short bitcoin in your typical brokerage account.

Your original point was simply that you were implying that there is no downwards pressure on bitcoin to counteract all the demand, when there is. There are several places you can short bitcoin.

https://99bitcoins.com/short-sell-bitcoin/
https://www.investopedia.com/news/short-bitcoin/

Not sure why you're going on about BitMex. That's not my argument. I've never used them and they've never had any of my business. I've just seen, time after time, shorts get liquidated on these exchanges from alerts that I get. The primary reason why there aren't many shorts is because you have to be batshit crazy to short bitcoin. Even if you're the biggest bear and think bitcoin will go to $0 someday, shorting bitcoin would be an absolutely reckless move with your money.

[Northman]

I don't think it's a good advice adding BTC to your portfolio or any crypto for that matter for folks reading on this forum on their way to achieve FIRE. It's a very risky asset that can easily drop 80% or more without any reason. Use your common sense and think about it. There is only a small amount of people making a (huge) profit. It's the ones that gotten in before you did AND are lucky enough getting out at the right time. The later you get into this game, the more likely you will lose. It's driven by pure speculation on its price. People screaming it will go to 500k or more (mostly by those already holding BTC). But the truth is that nobody holds that cristal ball and knows what will happen. It's just as likely it will drop to 200. Be warned!

[celerystalks]

Is it obvious to anyone else that with the wild swings and very shallow market, that bitcoin is basically a pump and dump scam?

It seems to me that these run-ups have a certain rehearsed quality to them. Things are quite, miners and other hard core crypto enthusiasts accumulate positions. Then there is a burst of online chatter: Articles in online tech journals, an army of crypto enthusiasts reactivate on forums to discuss all the merits of cryptos and bitcoin in particular.  There is a scramble of n00bs or people who missed the last one to buy in driving up the price. Then the activity dies down and the price crashes. Rinse and repeat in about 18 months or so..

[Pomegranate12]

Bro Bro can I borrow 20 satoshis ???   My Tesla model 27 is in the shop with a busted flux capacitor

[MustacheAndaHalf]

Your original point was simply that you were implying that there is no downwards pressure on bitcoin to counteract all the demand, when there is. There are several places you can short bitcoin.

You're right that I exaggerated in my original post, saying there was "no place" to short bitcoin.  But I didn't expect mainstream investment choices to be put on a par with websites like the one you gave as an example.

Not sure why you're going on about BitMex. That's not my argument. I've never used them and they've never had any of my business.

Because you brought it up, and cited it as the biggest example:

You can short bitcoin on several exchange/broker websites (BitMex probably being the largest)

The amount of money invested in Bitcoin is dwarfed by the mainstream investment houses and markets.  There's trusted brokerages in the U.S. like Vanguard, Fidelity and Schwab - all of which must abide by strict U.S. laws.  There's a big gap between that and websites who remain in poorly regulated locations.