Bitcoin in a hyperbolic bubble

[WolfeTone]

In my book 1 in 3,000 is insignificant

On the face of it I would agree. A couple of points however.

Firstly, the halving is related to an finite amount of bitcoin to be mined. Unlike the housing analogy where supply is cut, over the long term an increase in demand will increase the housing supply levels once more.
Secondly, the halving is not necessarily by itself the critical factor. It is a signal to the market (albeit this signal is known in advance and may already be priced in) of increasing scarcity - and this maybe where my understanding of the technical side of bitcoin may need improving.
With increasing scarcity, the processing power to secure the bitcoin in mining needs to be increased. As the processing power is increased, the difficulty adjustment is also increased. As the difficulty adjustment is increased this makes the network more secure.
In theory, the greater the security of the network, the more attractive it is to store money (if you are inclined to consider it is digital gold). As more money comes into bitcoin, the price starts to rise and in turn, a speculative run commences. And with most (nearly all) speculative runs it tends to overrun itself on the high side, inducing a price correction - itself being oversold.

As it happens, the concept of bitcoin as digital gold is continually gaining momentum.

 

[tecate]

Let's agree to disagree. In my book 1 in 3,000 is insignificant but I accept that is a subjective call.

What's nonsense is your calculation. As per on chain analytics resource, Glassnode - 78% of BTC supply is illiquid.

Here's another stat for you.

Number of active bitcoin addresses

Notice that the mean average goes up and to the right - over the course of ten years....inclusive of the four years you've spent dressing it down. Clearly, your friend Nouriel hasn't been taking heed of that network effect. Here he is in April 2013 telling the world that bitcoin was an atrocity at $58.

 

[Duke of Marmalade]

With increasing scarcity, the processing power to secure the bitcoin in mining needs to be increased. As the processing power is increased, the difficulty adjustment is also increased. As the difficulty adjustment is increased this makes the network more secure.

Let me explain how the security of the blockchain works. Each block comes with a Proof of Work. The "work" referred to here is tweaking the block (through the nonce) until its SHA256 hash has the required number of leading 0's. This was originally set at 32. So the number of tweaks and re-runs of SHA256 was of the order of 2^32 or 4 billion. This was deemed quite good enough to ensure that it would be impossible to alter a block once it had become about 3 deep in the chain as everything ahead of it would also have had to be re-run and it would be impossible to catch up with the original blockchain which would have grown longer in the meantime. The longest version of the blockchain is the one that is deemed the correct one.
This level of difficulty in the Proof of Work was called Difficulty of size 1.
But the Difficulty served another vital purpose, it would be automatically adjusted by the protocol to maintain the timing of the release of blocks to approximately 1 per 10 minutes. This was an entirely different use of the Difficulty from its primary use in underpinning the Proof of Work. The speed at which blocks could be added was determined by the processing power of the miners. To cut a long story short the Difficulty level today is 21 trillion times the level 1 needed to secure the blockchain. Think of that. Today that trial and error SHA256 routine has to be run 21 trillion multiplied by 4 billion times to find the nonce that legitimately adds a block to the chain. That's approximately $50,000 in electricity per block.
Now for your erroneous take on the halving. The halving reduced the incentive for miners to apply processing power, rather like a 50% fall in the price. Though the difference is that the halving would be anticipated and therefore to an extent already built in. Nonetheless the Difficulty fell from 16 trillion to 13 trillion after the halving. The recent surge in price has pushed the Difficulty to the dizzy heights of 21 trillion.
Main takeaway my dear theo is that at these silly Difficulty levels the security of the blockchain is not in any way at play, it is all about meeting the 10 minutes per block requirement.

 

[Duke of Marmalade]

What's nonsense is your calculation. As per on chain analytics resource, Glassnode - 78% of BTC supply is illiquid.

Same source 3m is Highly Liquid. The 930 new bitcoins should be seen in the context of either the 3m volume per day or the Glassnode assessment of 3m Highly Liquid.
As always you never, ever give any ground. Can't you see that you are out on a limb on this one. @WolfeTone concedes the point. You never will. You don't happen to be related to an American guy with a strange comb over hairstyle, do you?

 

[tecate]

As always you never, ever give any ground.
@WolfeTone concedes the point. You never will. You don't happen to be related to an American guy with a strange comb over hairstyle, do you?

That's a bit rich coming from you. I have discussed at length and repeatedly bitcoins shortcomings. I accept that it could still fail. Meanwhile you have never recognised any of the positive characteristics of bitcoin.

You're also wrong in your take on bitcoin network security. As the hashrate goes up, so too does the level of security making it the strongest network of its kind on the planet.

 

[Duke of Marmalade]

You're also wrong in your take on bitcoin network security. As the hashrate goes up, so too does the level of security making it the strongest network of its kind on the planet.

That's what I mean by stubborness. Do you concede that increasing the Difficulty is about controlling the timing of bitcoin release rather than adjusting the security level? Careful, I am refreshing my understanding by re-reading Mastering Bitcoin by Antonopoulos, and that's how he describes the situation.
@WolfeTone admits to being light on the technicals of bitcoin. I myself, not much further along that path, was explaining how I thought his view that "halving" increases security is erroneous. It would have been more helpful if you, whom I presume to be expert in all things bitcoin, would comment as to which of us has that right.

 

[tecate]

I don't claim and have never claimed to be an expert on bitcoin first and foremost..far from it. An increased hashrate equals heightened network security.
You're going back over old arguments (covered over the course of 4 years) trying to find a way to meet your narrative...which doesn't put you in a strong position to talk about stubbornness!

 

[Duke of Marmalade]

I don't claim and have never claimed to be an expert on bitcoin first and foremost..far from it. An increased hashrate equals heightened network security.
You're going back over old arguments (covered over the course of 4 years) trying to find a way to meet your narrative...which doesn't put you in a strong position to talk about stubbornness!

That you didn't do the helpful thing and comment as to whether @WolfeTone or myself have it right on the interplay between "halving" and security should be a big pointer to @WolfeTone in that regard.

 

[tecate]

Don't be childish. I stated that an increased hashrate equals increased security.

 

[DazedInPontoon]

Do you concede that increasing the Difficulty is about controlling the timing of bitcoin release rather than adjusting the security level?

I agree with everything you said in your previous detailed post about mining, except this. I see where you're coming from, but both are related. If the difficulty did not increase the rate at which blocks are mined would keep increasing, all of the bitcoin block rewards would already have been mined which would have perhaps not left enough incentive for miners to secure the network.

The schedule of the block rewards is deliberate to give bitcoin time to grow. Both in terms of the diminishing block reward having higher fiat value, and the transaction fees increasing, so that miners still have sufficient incentives going forward. If there is any concern here, it's that the schedule will not give enough time.

 

[Duke of Marmalade]

I agree with everything you said in your previous detailed post about mining, except this. I see where you're coming from, but both are related. If the difficulty did not increase the rate at which blocks are mined would keep increasing, all of the bitcoin block rewards would already have been mined which would have perhaps not left enough incentive for miners to secure the network.

The schedule of the block rewards is deliberate to give bitcoin time to grow. Both in terms of the diminishing block reward having higher fiat value, and the transaction fees increasing, so that miners still have sufficient incentives going forward. If there is any concern here, it's that the schedule will not give enough time.

Glad to know I haven't got this all completely wrong. The numbers are mind blowing, I am re-reading Antonopoulos and haven't got that far yet but I don't remember numbers that big.
I accept your clarification which for the benefit of @WolfeTone I will restate in a different way. Mining is all about security. Remuneration of miners is therefore a key ingredient. Ultimately that remuneration will solely be in the form of transaction fees but until that level of maturity is reached the reward has to be enhanced by granting new bitcoins. The 1 in 10 minutes thing then is about giving the system time to reach the maturity where new bitcoin rewards are not necessary.
Correct me if I have misinterpreted you.

 

[DazedInPontoon]

I think we're mostly on the same page, but I see mining as achieving multiple things at the same time, and I don't know if they can be considered separately. It relates to security in terms of the difficulty to re-mine blocks and overtake the main chain, it relates to incentives for miners to mine (which encompasses the block schedule) but the block schedule also relates to the *fair* distribution of new bitcoins. Mining relates to all of these things at the same time, and bitcoin doesn't really work without all of them.

Similarly you can probably ascribe many purposes to the halvings. Firstly, and most obviously it is the method by which the total eventual supply of bitcoin is limited to 21 million, secondly it means the supply distribution is front loaded which gave people an incentive to get involved in bitcoin early before it was at critical mass instead of waiting to see if it 'takes off'. This incentive to get people involved early was essential for it to reach critical mass, which I now consider it has.

Even more interesting is that the sharp drops by 50% every 4 years are now notable events that some would say cause a significant shock in terms of new supply and therefore price. It could have been done as a more gradual decrease, but it wasn't, I don't know whether this was intentional or not - but I would love to know. I don't know exactly how the halvings affect the price, but it has always gone up a lot in the months following one, it may just be a self fulfilling prophecy if enough bitcoiners expect it and decide not to sell in the period after one.

And on "The numbers are mind blowing" you need to account for the improvements in hardware too. the hashes per second that hardware can achieve has been growing over time as the hardware improves.

 

[WolfeTone]

Fair play @Duke of Marmalade , you have provided an interesting summary of some of the technological workings of bitcoin that certainly give pause for thought. As previously stated, I'm in the novice arena when it comes to the technological side. I suspect that perhaps this area has been trashed out elsewhere in other bitcoin threads, if so, it would be interesting to re-read through previous thread (which one?) once more rather than repeat ad nauseum.

In the meantime, trying to break down your summary in purest lay-person's language, I will set out my stall.

My understanding of your post is that the levels of difficulty in the chain are unwarranted as by the 3rd block, the mathematical equations were complex enough to ensure it was impossible to alter the block at this point as to do so would require a period of time and processing power that would be useless by virture that, over that same period of time another block (the 4th block) would have been added to the chain? And as this is now the longest version, then it was the valid chain. And any attempt to corrupt the chain would have to recommence on that chain? By which time, another longer chain would have developed and this is the valid chain? Or something like that?

And, in turn, as we are at block 630,000 or so, meaning it is impossible today, by any reasonable understanding to alter and corrupt the blockchain, so adding additional blocks is actually a waste of time and, significantly, energy?

Certainly, the electricity consumption has always been a red-flag in my patch of the woods.

However, it is the conceptual side that I consider I have a reasonable grasp with bitcoin.
It all goes back to the beginning of the concept of money in the first instance. This, however, I know has been trashed out on other threads so I wont start those wheels turning again, but the claim is bitcoin is 'digital gold'

Instead I shall, which should please you, revert to reknowned political and economic historian Niall Ferguson (not of Nobel calibre, but if I understand correct, he schmoozes in those circles).
His 6 part documentary series "The Ascent of Money" is worth a watch if you havent seen it already. Episode one is provides good insight into how money is nothing more than a human concept derived from trust. Over the ages as we know, all sorts of things were used as money in one manner or another, seashells, paper, clay tablets, God, metal.
The critical point is that gold became the globally accepted measure of money, because it was the hardest form of money.

If you are not inclined to watch the whole series, or even a full episode, I would recommend episode one from 8mins 30sec to 11mins 40sec's.

Ascent of Money episode 1

In Fergusons words "money is not metal, it is trust inscribed. It doesn't matter what it is inscribed in, paper, clay, a screen, provided the recipient believes in it"

So money is not metal, but if the price of gold rises high enough, there are miners willing to invest inordinate amounts of time, energy and resources to extract it out of the ground - it having become increasingly difficult to do by virtue of all the mining that has already gone before. And the only way to ensure that one piece of gold is new gold, and not a piece being double-spent, is to establish a vast network of vaults, registrations, custody orders etc on a global scale.

So all in all, there are technological elements of bitcoin that I am not comfortable with, however on a conceptual side it is a brilliant idea.

But what of the technological elements need resolving/improving?

So who do I listen to when trying to grasp a sense of progress in this area, economists? Nope, I listen to the technologists and innovators and entrepreneurs. And if you spend sometime listening to their side (not including price projections), then from my perspective, bitcoin is only at its infant stage of its life cycle. It hasn't even learned to walk yet.
It may not survive into adulthood, but it is growing fast and very robust. And, as it is being claimed, it is the hardest form of money, inscribed in digital form. That has value.

 

[Duke of Marmalade]

@WolfeTone food for thought there. Meanwhile Key Post "Why bitcoin has value" is well worth a read especially the OP by @fpalb.

 

[Duke of Marmalade]

My understanding of your post is that the levels of difficulty in the chain are unwarranted as by the 3rd block, the mathematical equations were complex enough to ensure it was impossible to alter the block at this point as to do so would require a period of time and processing power that would be useless by virture that, over that same period of time another block (the 4th block) would have been added to the chain? And as this is now the longest version, then it was the valid chain. And any attempt to corrupt the chain would have to recommence on that chain? By which time, another longer chain would have developed and this is the valid chain? Or something like that?

Something like that. Current difficulty levels are way, way in excess of what is necessary to make the blockchain incorruptible but as @DazedInPontoon explains they play their part in maintaining the integrity of the mining infrastructure which indirectly underpins the integrity of the blockchain.

Certainly, the electricity consumption has always been a red-flag in my patch of the woods.

Never bothered me too much but then I am the sort who will be the last person to own an electric car.

Instead I shall, which should please you, revert to reknowned political and economic historian Niall Ferguson (not of Nobel calibre, but if I understand correct, he schmoozes in those circles).
His 6 part documentary series "The Ascent of Money" is worth a watch if you havent seen it already. Episode one is provides good insight into how money is nothing more than a human concept derived from trust. Over the ages as we know, all sorts of things were used as money in one manner or another, seashells, paper, clay tablets, God, metal.
The critical point is that gold became the globally accepted measure of money, because it was the hardest form of money.

If you are not inclined to watch the whole series, or even a full episode, I would recommend episode one from 8mins 30sec to 11mins 40sec's.

Ascent of Money episode 1

In Fergusons words "money is not metal, it is trust inscribed. It doesn't matter what it is inscribed in, paper, clay, a screen, provided the recipient believes in it"

So money is not metal, but if the price of gold rises high enough, there are miners willing to invest inordinate amounts of time, energy and resources to extract it out of the ground - it having become increasingly difficult to do by virtue of all the mining that has already gone before. And the only way to ensure that one piece of gold is new gold, and not a piece being double-spent, is to establish a vast network of vaults, registrations, custody orders etc on a global scale.

I'll give a discussion on the whole money thing a miss, but I will watch that clip. Don't really get your point on the double spend of Au. Au has a specific gravity of 19.32 and is completely verifiable, albeit it is not possible to ascertain whether it was newly mined, an heirloom or simply stolen.

So who do I listen to when trying to grasp a sense of progress in this area, economists? Nope, I listen to the technologists and innovators and entrepreneurs. And if you spend sometime listening to their side (not including price projections), then from my perspective, bitcoin is only at its infant stage of its life cycle. It hasn't even learned to walk yet.
It may not survive into adulthood, but it is growing fast and very robust. And, as it is being claimed, it is the hardest form of money, inscribed in digital form. That has value.

Let's agree to disagree.

 

[Firefly]

Well I'll be...

 

[WolfeTone]

Current difficulty levels are way, way in excess of what is necessary to make the blockchain incorruptible

And, perhaps, difficulty levels in mining for gold are way in excess of what is necessary? Yet, overtime, industrialists have invested time and resources into developing better technologies to extract more gold where otherwise it would have remained out of reach.

Never bothered me too much but then I am the sort who will be the last person to own an electric car.

And, like the electric car, is it possible that technologies and innovations will emerge, overtime, that will make bitcoin mining more energy efficient?

 

[DazedInPontoon]

And, like the electric car, is it possible that technologies and innovations will emerge, overtime, that will make bitcoin mining more energy efficient?

Regarding that, another crypto Ethereum is currently also using proof of work mining, but is planning to try switching to proof of stake, which as I understand it would replace proof of work mining entirely by users staking a balance of their coins. The general idea is that if miners have influence in proportion to their balance of ethereum they are thus incentivised to behave well enough to maintain security of the chain. One way or another I'm looking forward to seeing if they actually do change to proof of stake and if so how it works out for them. If it works well enough it could be an option for bitcoin.

But generally I'm on the side of using bitcoin for more things and gaining more value from the security of the chain rather than worrying too much about the proof of work mining. Bitcoin can be a global public good in the form of trustable immutable ledger, we should aim to use that for as many possible things as we can as the marginal cost of doing so is low to zero.

 

[WolfeTone]

But generally I'm on the side of using bitcoin for more things and gaining more value from the security of the chain rather than worrying too much about the proof of work mining. Bitcoin can be a global public good in the form of trustable immutable ledger, we should aim to use that for as many possible things as we can as the marginal cost of doing so is low to zero.

Indeed, and again, my technical-less brain is not the brain needed to progress and explain this, instead my brain-power (what's left of it ) recognises the potential inherent here.

It is this rabbit-hole, that the no-coiners need to get a grasp of. Too much of their time, Roubini et al, is focused on the bitcoin price.
@Duke of Marmalade you need to step aside from the price volatility for a period and look behind the bitcoin curtain!

 

[Duke of Marmalade]

And, perhaps, difficulty levels in mining for gold are way in excess of what is necessary? Yet, overtime, industrialists have invested time and resources into developing better technologies to extract more gold where otherwise it would have remained out of reach.

I was just making the point that at these enormous difficulty levels we are way, way, beyond the difficulty level having any implications at the margin for the integrity of the blockchain.

you need to step aside from the price volatility for a period and look behind the bitcoin curtain!

I am not a complete Luddite. As a technology blockchain does not make me swoon but I can see it could have uses.
Let me remind you of my skepticism on bitcoin. It derives from the observation of a bitcoin evangelist, John Kelleher. He states that ultimately the only utility that bitcoin (not blockchain) can achieve is as a medium of exchange. I think everybody accepts that it has not achieved that so far at least not to the extent of justifying a market cap of $600bn. I agree with Professor Roubini that bitcoin is a not a currency (medium of exchange) and never will be.