Bitcoin in a hyperbolic bubble

tecate

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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.
I think once they've had it running for a decade, then bitcoin devs might consider it. Ethereons tend to move fast and break things which is great for innovation but not so great for a $600 billion network. For that reason, bitcoin development tends to be so much slower.
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.
I agree. Microsoft has secured its digital identity project on it. Blockstack/Stacks has developed its blockchain to rely on the Bitcoin network for security and the founders of that project actively encourage others to do the same.
i believe that there's room for one proof of work-based blockchain. That said, nobody will ever be accepting of its energy usage if they don't have an appreciation of what that blockchain can offer as a public good in the long run.
 

Dublinbay12

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I think once they've had it running for a decade, then bitcoin devs might consider it. Ethereons tend to move fast and break things which is great for innovation but not so great for a $600 billion network. For that reason, bitcoin development tends to be so much slower.
I agree. Microsoft has secured its digital identity project on it. Blockstack/Stacks has developed its blockchain to rely on the Bitcoin network for security and the founders of that project actively encourage others to do the same.
i believe that there's room for one proof of work-based blockchain. That said, nobody will ever be accepting of its energy usage if they don't have an appreciation of what that blockchain can offer as a public good in the long run.
I looked at Microsofts DID back in the summer when I was looking at digital identity. I didn't realise they were using the Bitcoin network rather than a standalone ledger / blockchain solution. How does it work on the Bitcoin network?
 

tecate

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Bloomberg: "Bitcoin is Unlike Any Other Bubble We've Seen So Far"

Analysts for the world's largest publicly traded hedge fund came to this conclusion:

“Instead of considering each individual spike and fall as a discrete bubble, there may be more merit in the argument that this volatility is simply part of the price discovery in a new asset class, and that these are not bubbles, but part of a not-so-random walk that will eventually dwindle to give Bitcoin more stability, and ultimately, legitimacy,”
 

Duke of Marmalade

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Bloomberg: "Bitcoin is Unlike Any Other Bubble We've Seen So Far"

Analysts for the world's largest publicly traded hedge fund came to this conclusion:

“Instead of considering each individual spike and fall as a discrete bubble, there may be more merit in the argument that this volatility is simply part of the price discovery in a new asset class, and that these are not bubbles, but part of a not-so-random walk that will eventually dwindle to give Bitcoin more stability, and ultimately, legitimacy,”
"Price discovery"?. Sounds fancy. Investopedia describes it as finding the spot price at which willing buyers and sellers will trade, this is in contrast to the concept of "valuaton".
BTC/USD is one of the most discovered price pairings on the planet. At some stages in the last week the price was being discovered at a rate of more than $100bn per day. The most price discovered pairing is EUR/USD which runs at about $800bn per day.
But there is a huge difference in the dynamics of the respective price discovery processes. BTC/USD is almost entirely speculative which makes it hugely unstable. EUR/USD is dominated by their respective utilities e.g. the EUR demand comes from US companies wanting to import from the EZ etc. and these are relatively stable phenomena.
So I assume that what is meant by the Man Group is that ultimately BTC/USD itself will stabilise and that will occur when speculation is a very minor part of the price discovery dynamic. It will be like the EUR/USD i.e. underpinned by the demand for the respective utilities of the two "currencies".
I agree entirely with this as does John Kelleher. The price cannot be sustained indefinitely by specuation. I just can't see BTC ever having any significant utility as a medium of exchange.

PS Interesting table of past bubbles in the Bloomberg link
 
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WolfeTone

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PS Interesting table of past bubbles in the Bloomberg link
Disappointing not to see our own property bubble in there. Maybe it was just our 15mins of infamy?

It will be like the EUR/USD i.e. dominated by the demand for the respective utilities of the two "currencies".
I agree entirely with this as does John Kelleher
So you accept it has value, or could have value? If, say, the respective utility is a hedge against inflating fiat currency?
 

Duke of Marmalade

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So you accept it has value, or could have value? If, say, the respective utility is a hedge against inflating fiat currency?
First of all I have corrected my original post. I think to say that the price discovery of EUR/USD is "dominated" by the utility aspect might be a bit misleading. I don't think trade between the US and the EZ runs at $800bn per day. I have changed the word "dominated" to "underpinned".

And this brings me to your second point. As per John Kelleher all demand for a digital currency should be underpinned by its utility as a medium of exchange (unless it specifically has backing by some asset). Speculative or Store of Value demand are overlays on this underpin. Without the underpin any further demand has no foundations. And I don't think bitcoin will make it as a medium of exchange in any meaningful way.
Anticipating attack from the usual quarters this does not mean that all Store of Value candidates have to be first and foremost a medium of exchange. Gold is actually a poor medium of exchange and Real Estate is quite useless. But in the case of a unbacked digital currency, medium of exchange is its only possible underpinning utility.
 

DazedInPontoon

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And this brings me to your second point. As per John Kelleher all demand for a digital currency should be underpinned by its utility as a medium of exchange (unless it specifically has backing by some asset). Speculative or Store of Value demand are overlays on this underpin.
Why? For example MicroStrategy bought $1b of bitcoin, they've no intention of using it as a medium of exchange. Where does the necessity for the medium of exchange come from? other than that they have the ability to trade it in part or in full for dollars at some point in the future should they want to?
 

Duke of Marmalade

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Why? For example MicroStrategy bought $1b of bitcoin, they've no intention of using it as a medium of exchange. Where does the necessity for the medium of exchange come from? other than that they have the ability to trade it in part or in full for dollars at some point in the future should they want to?
Just to repeat, I am endorsing John Kelleher's view. JK is Investopedia' bitcoin guru. He is a very avid supporter of the coin and he gives a lengthy argument to support its suitability as a medium of exchange. As with most of my bitcoin sources I owe thanks to @tecate.
$100bn BTC/USD per day was trading recently. Let's say that to all intents zilch of that was as a medium of exchange. Price discovery is today totally underpinned by speculation. Microstrategy might call it store of value.
What Man Group were arguing, I think, is that ultimately price discovery will stabilise. They didn't quite say it but I presume that means it will reach a stage when some utility value is underpinning the price discovery rather than pure speculation.
John Kelleher argues that the only utility value it can achieve is as a medium of exchange. Just to stress that point, JK cannot see store of value being sustainable as a standalone utility, that can only be medium of exchange. He goes on to suggest that it might take up 15% of global medium of exchange requirements and I think he puts a target price of $500,000. I agree with his argument but not his forecasts.
 
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WolfeTone

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He goes on to suggest that it might take up 15% of global medium of exchange requirements and I think he puts a target price of $500,000. I agree with his argument but not his forecasts.
Here is how I view such forecasts.
What would have to be occurring in the global economy for bitcoin to hit $500,000? It is hard to imagine that joe soap public pitching a few dollars to even a few tens of thousands of dollars to drive the price up to that level? Maybe I'm wrong?

The only way I can see it hitting that level is if institutional money is ploughing into bitcoin. And at that level, it would suggest a hyper (or high) inflationary period in the fiat world. And in times of high inflation....it would not be beyond reason, imo, for people to start using other mediums of exchange for money.
And if you happen to own bitcoin, well, why not spend some of what cost you so little relative to a price of $500,000?
 

Duke of Marmalade

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Forbes said:
The big guys on the block are still on the sidelines

Now, despite bold calls in the media, none of the world’s ten largest asset managers bought Bitcoin directly or through Grayscale’s trust. Neither Blackrock nor Fidelity, Vanguard, Goldman Sachs GS +0.5% or the rest of the list that manages $32 trillion. Not one.

And most of Wall Street's top hedge fund managers still swear off Bitcoin.

Take Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates. In a recent interview for CNBC, he said: “It’s a shame. It could be a currency. It could work conceptually, but the amount of speculation that is going on and the lack of transactions [hurts it]”

Peter Boockvar, chief investment officer for Bleakley Advisory managing $5 billion, calls the idea that Bitcoin is replacing gold “absolute nonsense.” In a Monday note to clients he said: “Something with a 10+ yr history is not replacing something with a 5,000 year track record.”

While there are opposite—and very, very optimistic—predictions for Bitcoin (such as JP Morgan’s $146,000 target), neither of the asset managers making those calls disclosed any investments in Bitcoin so far.

Which leaves us hanging with more questions than answers.
 

WolfeTone

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I can only read positives in that article @Duke of Marmalade.

The fact that not one of ten largest asset managers, sitting on $32trillion, have bought into bitcoin, yet, is intriguing. Imagine, if per chance, they put a very modest 0.01% of that $32trn ($3.2bn) into bitcoin at some point. What signal would that send to the rest of the global financial market?

I note Dalio's "it's a shame. It could be a currency" reference. There is the twinkle of a flame in such words, imo.

I agree with Boockvar, it is a nonsense that bitcoin is replacing gold on a 10:5,000yr ratio. Or in other words, $500bn:$9trn ratio.
What will the monetary ratio be in when the time ratio is 20:5,010yr ratio?

Here is the thing that is most striking. These guys are in the business of buying and selling, buy low, sell high. They have a fiduciary responsibility to obtain best value for their investors. Signaling to the markets an intention to buy before actually buying would be irresponsible.
The most significant signal from that article is that the top asset managers are even commenting on bitcoin.

I had ceased my purchases of bitcoin, but I must now re-consider.
 

tecate

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As with most of my bitcoin sources I owe thanks to @tecate.
That one you found all on your own, Dukey. As for the rest (Nouriel and whomever else), you're more than welcome. It's just a shame that they don't have anything new to bring to the party.

Price discovery is today totally underpinned by speculation. Microstrategy might call it store of value.
I'm pretty sure Michael Saylor would call it a store of value given he's repeatedly talked about holding it over a mutli-year period.

They didn't quite say it but I presume that means it will reach a stage when some utility value is underpinning the price discovery rather than pure speculation.
I don't think it would be reasonable to make that assumption. It may be that like Saylor and others, they see it as already acting as a store of value.

Forbes via Dukey said:
The big guys on the block are still on the sidelines
Absolutely - it's a beautiful thing. We only have a handful of them in yet. 1% from all of them and we're into exceptionally big numbers for bitcoin. This is the first time in history that Main Street has had an opportunity to front run Wall Street. That said, it seems that window is closing.

Here is the thing that is most striking. These guys are in the business of buying and selling, buy low, sell high. They have a fiduciary responsibility to obtain best value for their investors. Signaling to the markets an intention to buy before actually buying would be irresponsible.
The most significant signal from that article is that the top asset managers are even commenting on bitcoin.
Good point. In Dalio's case, where he once dismissed bitcoin, more recently he tweeted out saying that he may have misunderstood it and was open to taking another look at it. Tying in with your point, his hedge fund simply couldn't take a position in bitcoin right now as it's gigantic relative to a bitcoin market that doesn't have sufficient liquidity/market size to accommodate it.

That gives me great hope for Marmalade Coin, there was me depressed at no institutional take-up..
You're quite right to be optimistic, Dukey. If limited institutional take up has taken BTC to $40k, imagine what full on institutional take up will do..
 
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Duke of Marmalade

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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.
Finished reading Antonopoulos, though I skipped the Bitcoin Core source code stuff. I was right about the numbers. It currently takes around 100, billion, trillion hash attempts to validate a block. It originally took 4 billion.
But I got it a bit wrong on the relationship between Difficulty and Integrity (of the blockchain). There are at least 4 intermingled factors, the Difficulty, the Hash Power of the network (of miners), the Diversity of the miners and the 10 minutes.
Take Diversity first. If there was only 1 miner one could have no confidence in the blockchain no matter how much Proof of Work she supplied. It is reckoned that anything over 30% concentration in one control would be a threat.
The other 3 factors operate like this: the greater the Hash Power then the greater the Difficulty to validate a block in 10 minutes. So in a sense we do need these enormous levels of Difficulty so as to bring the Hash Power under control and we need the 10 minutes to ensure blocks cannot be confirmed too quickly as that would make it easier to generate hard and fraudulent forks.
But I was still right that the "halving" has no direct bearing on the integrity of the blockchain. All else equal it should reduce the Hash Power (less incentive) and hence the Difficulty but these should cancel out.
 

Duke of Marmalade

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And what can we learn, if anything at all, from being 'a bit wrong'?
That we should take care commenting on bitcoin mining.
I was wrong to state that the current levels of Difficulty are way beyond what is necessary to secure the blockchain, they are required precisely because the hash power of the network has increased so exponentially. I am not alone in having misunderstanding of mining.
WolfeTone said:
Also, there was the halving of the block reward in March this year. This is part of the technical side that I trust more than understand.
As much as I do understand it, it is that as the block reward has halved that the nodes/miners require more processing power to validate the blocks and earn the rewards. Or in short, it hardens the network against hacking, fraud, centralised control, etc.
This is just plain wrong at several levels. Halving does not in any way increase the processing power, if anything the reduced incentive should reduce processing power. Increased processing power does not harden the network against hacking etc. But you are in good company in getting this wrong.
tecate said:
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.
It is the exact opposite. Increased hashrate means that it is easier to do the Proof of Work and thus makes it easier to corrupt the blockchain for fraudulent ends. This has to be countered by increasing the amount of "work" that has to be "proved". In fact it has been increased by a multiple of 21 trillion since the original Difficulty. Admittedly it makes it more difficult for me to attack the blockchain with my laptop. But for the players in the game the object is to keep the difficulty the same i.e. 10 minutes to get the right hash. It is a constant race between the increased hash rate which makes it easier to attack the blockchain and increased Difficulty which puts on the brakes.
Dear theo I note that you trust this technical side more than understand it which is an honest admission. Let me recommend Antonopoulos to increase your understanding. Admittedly it is like seeing how sausages are made. Would put you off sausages.
 
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Cricketer

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It is the exact opposite. Increased hashrate means that it is easier to do the Proof of Work and thus makes it easier to corrupt the blockchain for fraudulent ends. This has to be countered by increasing the amount of "work" that has to be "proved". In fact it has been increased by a multiple of 21 trillion since the original Difficulty. Admittedly it makes it more difficult for me to attack the blockchain with my laptop. But for the players in the game the object is to keep the difficulty the same i.e. 10 minutes to get the right hash. It is a constant race between the increased hash rate which makes it easier to attack the blockchain and increased Difficulty which puts on the brakes.
I don't know what a tracker mortgage is.
 

tecate

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It is the exact opposite. Increased hashrate means that it is easier to do the Proof of Work and thus makes it easier to corrupt the blockchain for fraudulent ends.
If the attack vector is a 51% attack, then such an attack becomes much more difficult and costly to execute as the hash rate increases. Higher hash rate = higher mining difficulty. As per the protocol, the difficulty level adjusts dynamically. This is what makes the Bitcoin network so much stronger than other networks. For that reason, much smaller proof of work networks have suffered 51% attacks because they have not gotten up to sufficient scale to provide for sufficient network security. My understanding is that it would cost at least a couple of billion dollars to execute a 51% attack on the Bitcoin network. That's dollar cost before we get into the actual logistics of carrying out such an attack. Beyond all that, the attack would be obvious, the network could be hard forked - leaving the attackers out of pocket....ergo, it wouldn't make economic sense.
 
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Duke of Marmalade

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If the attack vector is a 51% attack, then such an attack becomes much more difficult and costly to execute as the hash rate increases. Higher hash rate = higher mining difficulty. As per the protocol, the difficulty level adjusts dynamically. This is what makes the Bitcoin network so much stronger than other networks. For that reason, much smaller proof of work networks have suffered 51% attacks because they have not gotten up to sufficient scale to provide for sufficient network security. My understanding is that it would cost at least a couple of billion dollars to execute a 51% attack on the Bitcoin network. That's dollar cost before we get into the actual logistics of carrying out such an attack. Beyond all that, the attack would be obvious, the network could be hard forked - leaving the attackers out of pocket....ergo, it wouldn't make economic sense.
Okay, I accept that, though my own analysis is not wrong. A higher hash rate needs the Proof of Work to be made more difficult to maintain the security of the blockchain. But yes, this increased difficulty level makes an attempt to achieve 51% control more difficult. I would accept that bitcoin is probably the most robust of the crypto platforms.
 
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