Key Post Bitcoin is a clearly identifiable economic bubble

[Duke of Marmalade]

So in 10 years time, are you saying that bitcoin mining will be utilising much less energy than it is today whilst bitcoin continues to scale as a network?

After 3 more halvings (11 years?) the mining rewards per se will fall from c. $300k per block to less than $40k at current prices. That will transform the economics and lead to a great phasing down of current mining capability. But of itself this does not threaten the sustainability of bitcoin.

Until such time as the network matures, the higher the hashrate, the more secure the network is. If a nation state were to attempt to carry out a 51% attack, it's much harder for them to do so - the higher the hashrate.

Agreed. The increased hash rate is in effect to prevent an attack by the mining network itself but yes it makes it much more inaccessible to external agents.

You mention that the algo difficulty is many times greater than 'originally planned'. Can you cite that text as I'd be interested in reading through it?

I’m referring to the fact that the initial protocol envisaged a difficulty of 1, possibly increasing somewhat with adoption, would suffice but that a difficulty of 21 trillion would have been beyond any possible conception.

 

[tecate]

After 3 more halvings (11 years?) the mining rewards per se will fall from c. $300k per block to less than $40k at current prices. That will transform the economics and lead to a great phasing down of current mining capability. But of itself this does not threaten the sustainability of bitcoin.

So 3 more halvings should bring us up to mid 2032. You're quite right re. mining reward reducing. That's guaranteed - at least in terms of bitcoin - the only other variable is its price at that point. All of that indicates that energy requirement is likely to decrease while the energy use of things like gaming, netflix, youtube, etc. remains the same.

I’m referring to the fact that the initial protocol envisaged a difficulty of 1, possibly increasing somewhat with adoption, would suffice but that a difficulty of 21 trillion would have been beyond any possible conception.

Do you have a link to where this is outlined in the whitepaper or in satoshis musings on bitcointalk, etc? You may well be right - it's just that if you are, i'm surprised that I've not come across that info before.

 

[DazedInPontoon]

I’m referring to the fact that the initial protocol envisaged a difficulty of 1, possibly increasing somewhat with adoption, would suffice but that a difficulty of 21 trillion would have been beyond any possible conception.

Saying it would "possibly increase somewhat with adoption" is understating it. It *must* increase with adoption in order to maintain the 10 minute block time.

It also *must* have been anticipated that it would increase by a huge amount. When bitcoin launched, even though the launch was announced (and the software was available) in advance of mining starting there was basically no interest in it. It's likely Satoshi was the only person mining on day 1.

The starting difficulty had to be so low that Satoshi's own computer (or maybe they had multiple) could mine blocks every 10 minutes. This means it was also very insecure. We can imagine that someone with twice as many computers as Satoshi could have easily come along and attacked it by mining a longer alternative chain. Of course no one did, because at the time bitcoin was nothing more than a curiosity, it had no market, no price and basically no interest from anyone.

The difficulty was never intended to be this low as bitcoin grew. We know this because the algorithm increases the difficulty as required (with no upper bound afaik).

adoption increases -> price increases -> miner incentive increases -> hash rate increases -> security increases.

You can even make that a loop if you consider that security increases are a factor in adoption increasing.

 

[Duke of Marmalade]

@tecate @DazedInPontoon
Look, I am not saying there is any explicit reference by Satoshi to a target level of difficulty. Of course increased adoption and improved technology could have been anticipated and that's why the flexibility in the difficulty level was built in. But what was not anticipated is that the value of bitcoin would increase from 50,000 btc per pizza (or whatever that infamous transaction was, I forget) to $50,000. That is the main driver of the increase in difficulty. The platform can survive a huge reduction in that difficulty level with negligible reduction in security, that's all I am saying. I'm also saying today's massive energy usage is a limited term phenomenon (and that is even without it fulfilling its BOHA destiny).

 

[DazedInPontoon]

But what was not anticipated is that the value of bitcoin would increase from 50,000 btc per pizza (or whatever that infamous transaction was, I forget) to $50,000.

Some people anticipated it, though indeed not many. I mean, if you thought adoption was going to grow to the extent it has you could arrive at the prices we are at.

I mostly agree with everything else you're saying, though I would not be surprised if bitcoin price continues to increase enough to offset the difficulty drops either.

 

[tecate]

But what was not anticipated is that the value of bitcoin would increase from 50,000 btc per pizza (or whatever that infamous transaction was, I forget) to $50,000. That is the main driver of the increase in difficulty.

Well, we don't have a USD price prediction from him/her/them, but there was a reference made to 'crazy high prices' as per this quote from 2010 ->

"When someone tries to buy all the world's supply of a scarce asset, the more they buy the higher the price goes. At some point, it gets too expensive for them to buy any more. It's great for the people who owned it beforehand because they get to sell it to the corner at crazy high prices. As the price keeps going up and up, some people keep holding out for yet higher prices and refuse to sell."

In tandem with a belief in year on year adoption / growth of transaction volume, it seems that Satoshi was also banking on ongoing price appreciation (to the point at which the network has matured) also.

 

[DazedInPontoon]

To follow on from tecate's post I consider that Satoshi had to understand the possibility of the road bitcoin has followed (including the price), regardless of how likely they thought it was. The game theory aspects built into the design make that clear to me - the limited supply, the distribution schedule, the mining difficulty algorithm, the block rewards and fees and the incentives that result from that combination that create self-motivation of everyone that is involved.

 

[Duke of Marmalade]

I have to admit that I was impressed by the predictions back in 2011 in @DazedInPontoon's link but then again I guess there have been predictions of lotto draws. I see one of the predictions was on the basis of 50m btc so not very well informed.

 

[Duke of Marmalade]

(Sidenote: I have never liked the lotto analogy as the future price of bitcoin is not a random event, it is a product of supply and demand. Some random events may affect that on any particular day, but not the average long-term price. I would never play the lotto without expecting a loss - as a venture it has negative expected value.)

Actually just at the moment the Lotto has a 130% expected value because of the €19m carry forward jackpot.
All of the Nobels and Wall Street predicted 0 for btc and still do.
Even the cultists accept a non negligible possibility that the Nobels will eventually be proven right.
Some randomer predicted $10k back in 2011. Mighty impressive. I wouldn't trust her to give me tomorrow's weather forecast.

 

[tecate]

All of the Nobels and Wall Street predicted 0 for btc and still do.

On your Nobel Laureate Keynesian economists, this Upton Sinclair quote seems appropriate:

"It is difficult to get a man to understand something when his salary depends on his not understanding it."

On your Wall Street hold-outs, most of them have had to backtrack to varying degrees. I'm sure there are some but I can't think off hand who prominently in the Wall Street set right now is saying bitcoin will go to zero. Who do you have in mind?
One good thing that came out of bad regulation ( New York's not fit for purpose BitLicense ) is that it led to crypto developing outside of New York and further away from the clutches of Wall Street.

Even the cultists accept a non negligible possibility that the Nobels will eventually be proven right.

And I would still say that bitcoin could still fail. However, what I've found fascinating is that there still remain some parties to this ongoing discussion here who are not prepared to accept that there's a non negligible possibility that bitcoin continues to develop.

 

[Duke of Marmalade]

And I would still say that bitcoin could still fail. However, what I've found fascinating is that there still remain some parties to this ongoing discussion here who are not prepared to accept that there's a non negligible possibility that bitcoin continues to develop.

Fair point. It is here for a while for sure, much longer than I thought in 2018 when I successfully shorted it but you are right I just can’t see this surviving long term. It has no intrinsic value. A 1 trillion dollar illusion. Totally mind boggling.

 

[tecate]

A 1 trillion dollar illusion. Totally mind boggling.

Here's a 100 trillion dollar delusion ...

 

[time to plan]

On your Nobel Laureate Keynesian economists, this Upton Sinclair quote seems appropriate:

"It is difficult to get a man to understand something when his salary depends on his not understanding it."

This Winston Churchill quote seems appropriate.

It is a good thing for an uneducated man to read books of quotations.

Although I may have somewhat exposed myself there.

 

[tecate]

And the difference between the two quotes is that the former underscores a point I was making relative to the discussion at hand. The latter is a suggestion that I'm uneducated - unrelated to the discussion at hand.

Admittedly, I'm most certainly no rocket scientist but notwithstanding that, if any views I've expressed here or any conclusions I've drawn on the subject are wayward, Id imagine it would be more useful for all if you can tackle the subject itself in demonstrating that.

 

[RetirementPlan]

There are some interesting discussions online this week about the impacts of bitcoin mining on the turmoil in Kazakhstan

https://twitter.com/artimusfoul/status/1479068075483873284

 

[Protocol]

The Bitcoin challenge: How to tame a digital predator

Bitcoin’s market capitalisation reached new peaks in November 2021. This column suggests it is hard to find arguments supporting the cryptocurrency’s current valuation. Even if the financial stability risks of a Bitcoin collapse could be contained, the burst of the bubble would imply painful...

voxeu.org

Abstract:

"Bitcoin’s market capitalisation reached new peaks in November 2021. This column suggests it is hard to find arguments supporting the cryptocurrency’s current valuation. Even if the financial stability risks of a Bitcoin collapse could be contained, the burst of the bubble would imply painful losses for many retail investors and society at large. The authors conclude that public authorities should refrain from taking measures supporting additional investment flows into Bitcoin and should treat it as rigorously as the conventional financial industry to combat illicit payments, money laundering, and terrorist financing."

 

[Brendan Burgess]

When Bitcoin collapses, why will it pose financial stability issues?

I presume that the major banks do not have exposure to Bitcoin?

There will be painful losses for those late onto the pyramid, but why should there be for society at large? I don't like seeing people losing money, but they have had multiple warnings and have ignored them.

OK, we will probably have some rioting by penniless former millionaires as they had in Albania. And doubtless the the losers will blame the government for conspiring to defraud them. But I doubt if even our government would compensate Bitcoin owners for their losses.

Brendan

 

[RetirementPlan]

When Bitcoin collapses, why will it pose financial stability issues?

I presume that the major banks do not have exposure to Bitcoin?

There will be painful losses for those late onto the pyramid, but why should there be for society at large? I don't like seeing people losing money, but they have had multiple warnings and have ignored them.

OK, we will probably have some rioting by penniless former millionaires as they had in Albania. And doubtless the the losers will blame the government for conspiring to defraud them. But I doubt if even our government would compensate Bitcoin owners for their losses.

Brendan

I don't have much sympathy, but I wonder if there is a risk of a further negative impact on the younger generation, who are already being priced out of property ownership. I'm guessing that crypto ownership is heavily skewed towards the 20s-40s, as suggested by this US analysis;

 

[DazedInPontoon]

I love that demographic chart, the future is bright. Enjoy the January sales kids.

 

[DublinHead54]

I presume that the major banks do not have exposure to Bitcoin?

If major banks had exposure to Crypto it would not pose a stability issue if said crypto collapsed. Banks are now much better capitalised vs the previous financial crisis, thus they would have to hold capital adequate to the underlying risk of cryptocurrency, just like they do for every other asset they have exposure to.

It is incorrect to compare the banking landscape to that of 07/08....or banking regulation would have failed for the last 10 years.

I don't have much sympathy, but I wonder if there is a risk of a further negative impact on the younger generation, who are already being priced out of property ownership. I'm guessing that crypto ownership is heavily skewed towards the 20s-40s, as suggested by this US analysis;
View attachment 6023

I think what is at play here is that the 18-45 cohort are digital natives, especially the 18-25 year old bracket.