Topic: Bit coin is on a down hill slope - page 3. (Read 5518 times)

In fact, it is a fundamental problem with money creation: the distribution of seigniorage, and of course, the flip side: the cost of inflation.

It is unavoidable when an asset becomes money.  An asset becomes money when the bulk, or all, of its price (that is, of its demand) comes from a desire to hold value, and doesn't come mainly from another desire to hold the asset (such as using or consuming it). 
The production, and the increase in value, of a monetary asset profit to certains (= seigniorage) and are hence paid for by others (inflation).  It is unavoidable.

If a normal commodity with normal usage (say, milk) becomes money, then the price of milk will increase significantly, as people will start holding milk for its value, and not to drink it or make food with it.  This will profit enormously to people with cows.  It will cause an over-investment in cows, and it will cause an under-consumption of milk. 

If an almost useless commodity, such as gold, becomes money, then there will be an over-investment in gold-mining, and people who had gold for say, ornament purposes, will become very rich as compared to people who didn't have any.  The more people dig up gold, the more they become rich, and this goes at the expense of those who have worked hard to *earn* gold, and see its value decrease because of the inflation of the gold stock.

Issuing fiat money profits of course to those issuing it (the state, the central bank, those giving assets to the central bank against fiat money...).  By increasing the fiat money stock, this seigniorage is paid for by all those who held fiat money they obtained by working for it, because of the inflation they suffer.

With crypto currencies, you have the same issues.  The idea was that during the inflationary phase, there is more or less a running-parallel with the adoption.  As such, the miners, who get the seigniorage, but, contrary to the fiat issuers who get the seigniorage for nothing, are put in competition, and as such, just "grow the network", are paid for by the inflation, but on the other hand, more adoption would also mean an offset of the inflation.

If the rate of adoption increase were equal to the inflation, then we would have a perfect system.  Clearly this isn't exactly the case currently.  Satoshi had to pick an inflation curve, and tried probably to fit it to his imagined adoption curve.  The more this is wrong, the more one will suffer from too much inflation, or the more one will get a too early price increase.

All in all, the way to handle the inflation and seigniorage issue with bitcoin is in principle not so bad.  The only difficulty is of course that the real adoption will not follow precisely the pre-programmed inflation curve (over 140 years or so), which implies strong price fluctuations.

I'm not suggesting that the Bitcoin's algorithm is racist, merely that it is horribly wasteful (roughly 14% of all BTC in existence was mined over the past year, i.e. 14% of Bitcoin's market cap was spent on network maintenance/security).  And these costs do not translate into jobs, but mind boggling amounts of burnt energy.
Bitcoin utopia:




Yes, there is, already exists--the current fiat system.
Imposing limitations like "It has to be trustless, decentralized, and it's name must start with the letter 'B'" is a bit Goldbergian.  

From what I can see, Proof of Stake system doesn't really solve the problem that Bitcoin is solving. It puts a group of people at the center of its security model. In that sense the network is "owned" by the wealthiest of its stakeholders, which turns it into a form of private money, and we already have plenty of that.

Bitcoin, on the other hand, has a neutral algorithm as an ultimate judge for people's performance. That's how it ensures that any attack on it is not permanent and can be overturned with the same 51% mechanism. All Proof of Stake systems in that sense are already 51% attacked by default, and their position is static over time.


Correct. Mining-less systems regardless of their initial distribution of money have an asymptote that leads towards centralization essentially turning any such system into a private enterprise.

Correct me if I am wrong, but Proof of Stake mining puts all of the emphasis on the Bitcoins you hold rather than the hashing power, right? So even if I have 100 TH/s it won't mean anything at all if I don't ALSO own a significant amount of Bitcoin. Is that right?


If so it's a HORRIBLE idea because it creates unnecessary cost barriers to getting into Bitcoin mining. Right now you can buy mining hardware and start earning Bitcoin even in areas where it's nearly impossible to purchase Bitcoin thus allowing it to become established in new areas, but if you have to actually own Bitcoin first that scenario becomes impossible. It also significantly slows reinvestment possibilities. Right now, for example, I can immediately reinvest my earnings into new mining hardware which helps to expand the network. If I also had to maintain significant stores of Bitcoin it would slow the expansion of the network. People already established would have no trouble, but people just getting into it would find it impossible to compete.

Although I can see a benefit in preventing a single monopoly, technically, if only the wealthiest of people have the rights to minted coins it will in a round about way encourage the formation of monopolist groups. It would very likely mean that cloud mining solutions would be the ONLY way to mine since these companies would likely hold coin of their own which would very likely lead to large numbers of people giving way too much power over the network away to a central authority. (although, to be fair, with electricity costs it's likely to move in that direction anyway)

This also raises the question of what such a change would mean for current miners. I don't think many people would be happy if their ROI expectations were completely destroyed by a protocol change. If the people whose hardware supports the network back out due to a lack of ability to recoup investments due to a lack of assets that would lead to major disruptions in the integrity of the network. Even if the proposed changes leads to a fair balance between small and large miners with proportional holdings of small and large Bitcoin this would still present a problem for those who don't have any holdings when such a change goes into effect. Overnight their investments would become completely meaningless and, like I said, those without the ability to obtain more would be barred from participating. Even in scenarios where you can mine without assets if preference is given to those with assets it would still significantly alter the way rewards are calculated and from there it becomes less about being rewarded for maintaining the hardware that processes transactions and more to do with being rewarded for being wealthy.

I can really only think of one long term benefit to such a scenario: Increasing the number of people with holdings decreases the sell pressure while increasing scarcity which would drive the price up. In theory that increase in price could help to offset some of the problems I mentioned, but I am still against any protocol change that introduces barriers to the average person getting involved. I myself obtained my first Bitcoin from mining hardware I purchased with fiat because at the time I couldn't purchase Bitcoin anywhere locally and neither Western Union or MoneyGram would allow me to send money to other countries (MoneyGram banned me for life for trying, believe it or not) and I would never have been able to have anything to do with Bitcoin if those barriers existed and I wouldn't be a strong supporter of Bitcoin today.

FYI there is a better way, it's called Proof of Stake mining, it's working for a variety of altcoins, they have all avoided the inevitable downfall of PoW systems (expensive + low security).

If Bitcoin stays relevant in the future there will always be a competition for "conquering" its algorithm. I can't say whether it will cost 10% of its market cap or not. But I can say for sure that those engaging in this voluntary competition will be getting something out of it - be it profit in the form of transaction fees or some other agendas. The algorithm really doesn't care about people's nationality, political or religious views, their skin or eye color. It simply says "here I am out in the open, make me run faster and you win!".

We have already gone through one halving and the network survived without suffering any security loss. For users the inflation is predictable and declining over time, miners get what they are after as their engagement is voluntary.  So there is really no cost or "tax" associated with running the network because you get what you pay for.

If there is a better way to organize a neutral global money system, we should have it penned here and get a nobel prize in economics.

Call it "service fee" or "inflation," call it whatever you want, but ~10% of Bitcoin's market cap will be spent every year to maintain current level of security.  For now inflation is footing the bill, but once block reward halves, either security will suffer, or tx fees go way up.  

This happened last year guys! Stock up now, while you can, we are in extremely oversold territory!!!

I will put it another way.
The network is guarded by the amount of competition, which in turn is judged by the algorithm.
Yes, coins that have little relevance or importance are easy to attack, but that's not the point.
Everything can be attacked. What I'm sayng is that humans are more prone to that than an open algo.


There is no tax, just a distribution of coins. If 10% of new coins being emitted per year, then rougly the same amount of money will be spent mining them. The same goes for 5%, 2% of the market cap and so on. Money in, money out - no tax!

No, the network is guarded by how expensive it is to attack it.

Algorithm alone does nothing, there's a ton of altcoin got attacked to death, and they uses the exact same algorithm as Bitcoin.

The past 5 years has shown, the natural equilibrium is reached with an annual PoW mining expense of 10% fiat value of Bitcoin market cap.

Therefore, investors/stakeholders of Bitcoin will pay a 10% tax in fiat value on their Bitcoin holdings, perpetually.

Now of course there are other factors affecting the price, such as new money coming in, or existing money leaving the eco-system. It's up to the investor/stakeholder to decide whether inflow of new money will offset the 10% mining tax.

When distribution ends the network is still guarded by an algorithm, this is the only way to keep money away from politics.


Correct.

^
I think he means "distributed to miners."  More than 10% a year, but still...
When all the coins are distributed, inflation won't pay for mining any longer--tx fees will.  How well that works out without being outrageously pricey per tx remains to be seen.

It has nothing to do with inflation rate, the 10% expense is on the USD value of the market cap. If the PoW mining expense had anything to do with coin distribution, then what happens when coins are all distributed? Bitcoin network suddenly has no hash rates?

Here's another perspective on why prices are going down: The price of oil. 45% of the Russian economy is based on oil exports and much of the oil extracted in the US depend on higher prices. While consumers in some countries significantly benefit from the lower prices at the pump, if entire nations are going through economic collapse that's going to have an impact.

If we think of Bitcoin as a global currency that means it's going to be impacted by the economic collapse of nations. If we think of Bitcoin as a commodity - a luxury expense - that still means it's going to be impacted.

Still, economic recessions are often temporary. Price wars on crude oil end eventually. If this is a major factor influencing the price going down (and it seems likely, since the graphs for the past year line up) that means that the price of bitcoin will without a doubt climb back up.


http://www.vox.com/2014/12/16/7401705/oil-prices-falling

Crude Oil Price over the last 3 months:


Compare that to the price of Bitcoin over the last few months and the value of Bitcoin is actually doing BETTER than crude oil, but it's still falling at the same relative curve.

Now, just to double check, I compared this to the price of Gold which has been on the SAME downward trend throughout 2014 with more similar price spikes, although a bit more exaggerated. Now no one can say that the price of Bitcoin dropping proves it to be unreliable without making the same statement about Gold and Crude Oil.



This isn't a coincidence. Bitcoin is obviously influenced by outside economic factors. Does anyone else have any other takes on this perspective though?

To expand on this, let's take a look at the prices for each over the past year.

Bitcoin:



Crude Oil:



Gold:



Looking at it together over the past year we see that the graphs are different, but follow similar trends. There is an upward spike early in the year - with Gold happening a bit after Bitcoin in similar scales and Crude Oil only having a gradual dip up. Followed by a general downward trend with Gold falling similar to Bitcoin and ALSO having a second spike in the middle of the year with crude oil being on a more general downward slope that's a bit sharper.

Isn't it interesting how Gold spikes twice to similar highs proportional to previous value and then falls at a very similar average slope? And isn't it interesting how crude oil is falling much sharper? Although it's spike appears delayed, I would argue that it's the other way around. The second smaller spike hit Bitcoin and Gold shortly after the small spike hit crude oil so there is a time lag of sorts likely related to the overall health of the global economy.

This time lag tells me that the price of Bitcoin is going to go up a bit very soon since the price of Gold has already started it's upswing, but I wouldn't expect it to climb much higher without the bubble effect since global economies are still reeling from the impact of low gas prices. At the very least one could easily expect to make quite a bit of money over the next month assuming that the historical trends follow through.

Why would you call emission rate a tax?

When the block reward was 50 coins the inflation was higher than 10% per year, it gets lower and lower with every new halving. Bitcoin was designed to distribute coins over the course of several decades on a permission-less basis. All coins (before they are mined) are guarded by an algorithm, as opposed to any form of private money (including fiat) guarded by a group of people.

It might be cheaper to maintain an electronic money system, where people are at the center of its security model, but you will get all the downsides of that as well.

2009-2013 has all been good years, precisely because all the new money coming in, plus Bitcoin marketcap was tiny back then, so the 10% of something tiny, is still tiny, new money easily overwhelmed the 10% PoW mining tax.

At the end of 2013, Bitcoin marketcap went up big time. Now 10% is not so tiny, it's a pretty large amount of money. Therefore 2014 new money was not able to balance out the 10% PoW mining tax, and we are seeing Bitcoin going down in value.

You have a good point there. I know that in the case of USD the Federal Reserve actually creates trillions of virtual dollars without any backing temporarily to control the value of USD. Federal law requires printed money to have backing, but it when it creates it as a virtual deposit this is considered something of a reserve power. That's certainly a mechanism of control that Bitcoin would never have.

That being said, the exchanges are worth hundreds of millions of dollars (at least) and they stand to lose money with price drops. How difficult would it be for a holder of Bitcoin to influence price fluctuations to prevent a loss of profit? Not that I am accusing anyone of doing this, but in theory these could be central points of wealth that would stand to gain from acting as partial mechanisms of control.

Aside from a mechanism of control argument I would argue that it is still more of a currency than a commodity. Stock prices are a good analogy, but you can't use stock to buy goods and services and I already use bitcoin for that. A currency is simply a unit of exchange and just because it's easier to influence paper marked with the insignia of a given nation doesn't make shiny stones or seashells any less valuable as a currency. I found it completely impossible to send USD to some countries, but Bitcoin has proven to be the easiest way to purchase goods overseas.

As far as stability goes, fiat currency isn't always stable. Before bitcoin even existed I made thousands of dollars by investing in Canadian money and then waiting for the price to change as dramatically as I expected. There are also economic recessions.

I strongly believe that Bitcoin already has the characteristics of a currency and that it has the potential to become the world reserve currency, but I would argue that there are some barriers in making it fully useful so I can at least agree that it's an immature currency at this point. For example, if you buy a cup of coffee, would you want to wait 10 minutes for the transaction to be approved? I think that there should be a kind of "express lane" for highly urgent transactions which would be set at a higher cost. If most transactions cost .0001 BTC maybe a base price of .0004 BTC would be enough to start in the express lane, with people who are willing to pay more put higher in the queue. A mechanism like that would make it as fast as credit cards which would help it to compete, but this raises the problem of what would happen if the price of Bitcoin went up to, say, $40k. Would the transaction fees be the same? Who would willingly pay that? I think the solution there would be another denomination. For example, 100 pennies equal a dollar. If there was a kind of altcoin that wasn't created by mining, but was instead created with the destruction of a Bitcoin (and, inversely, a set number of this altcoin destroyed creates a Bitcoin) we could have a coin designed primarily for much smaller transactions. It would in practice be no different than using words like "bits" or "mBTC" or "Satoshis", but if it works with smaller data sizes because the transactions are limited to that denomination it would likely help handle such transactions fasters and at a lower price. In that case trading bitcoins could still cost .0001 BTC, but trading in bits might cost .01 bits (unless the protocol is updated to allow a unit smaller than a satoshi). As strongly as I believe in Bitcoin, I believe that these issues with transaction speed and denomination sizes are barriers to widespread adoption.


I'm also in it for the long haul, but I invest not in futures but rather in mining. Regardless of if the prices go up or down I will reinvest most of my earnings each money in more mining no matter how low or high the price got. That just feels like the most stable way to invest in bitcoin.

The rules that govern currency investments still apply though. Prices go up and down on an hourly basis just like any currency based on exchange rates just like currency.
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This isn't actually true. The rules regarding commodities most certainly apply. When it comes to FIAT then it is a lot more stable, a lot less volatile and reflects the country of origin. Also the country of origin has a variety of mechanisms to influence its value compared to other FIAT i.e. Lending rate, Printing money etc

I would suggest it probably reflects a consumable commodity, as opposed to a commodity which is a store of value such as Gold.

The bottom line is simple.. It is freely traded and market conditions apply so if you believe in the concept and it is here to stay then it is exceptionally likely that BTC will increase in value.. The roller coaster ride is down to speculative investors and BTC is probably the best place to speculate due to the large moves, both up and down, whcih can occur in a short timeframe.

Me, i am in for the long haul however I wil do some tradsing if the opportunity arises. i currently have over 120 BTC committed to a sell order around $430 and hope to buy back in around 400-410 however only time will tell if I cancel that or not.

That brings up a very simple point: Bitcoin is worth whatever someone is willing to pay for it and will never be worth more or less. If you hold Bitcoin and can sell it at $270 you won't sell it for any less unless you are trying to unload it fast. Conversely, if you believe that the price is going to swing back up high there is a point where you will invest heavily and that's the point that it will swing back up. Everyone has a different personal bottom line that they start investing heavier in.


The rules that govern currency investments still apply though. Prices go up and down on an hourly basis just like any currency based on exchange rates just like currency.