The Cryptocurrency Thread 2

[explanade]

And today President Putin took time time from preparing to invade the Ukraine to tell his government to sort out the risks and benefits of Bitcoin and come to consensus. https://bitcoinmagazine.com/markets/putin-russia-has-advantages-in-bitcoin-mining

No way Russia bans BTC.

It would kill their ransomeware industry.

 

[MichaelB]

And today President Putin took time time from preparing to invade the Ukraine to tell his government to sort out the risks and benefits of Bitcoin and come to consensus. https://bitcoinmagazine.com/markets/putin-russia-has-advantages-in-bitcoin-mining

Please share with us what is in this link and how it contributes to our discussion.

 

[MichaelB]

If two parties decided that transacting outside of the regulated financial system is a good idea, I wonder if it's constitutional to disallow it. I don't know much about regulations governing public corporations, so if the two parties were in that category, they might be forced to use the traditional process. The courts would probably step in if the advantages of dealing in crypto provided an advantage.

In addition to the fine responses by Mr._Graybeard and Gumby, one additional point.

The regulatory system does not disallow financial transactions, it requires they be reported. This allows tracking to ensure the funds are legitimate and taxes, if owed, are paid.

 

[Markola]

Please share with us what is in this link and how it contributes to our discussion.

This thread was set up by Gumby, but if you are in charge here, kindly inform us. I summarized the link well enough, which I thought was additive to a discussion that was occurring yesterday.

 

[MichaelB]

This thread was set up by Gumby, but if you are in charge here, kindly inform us. I summarized the link well enough, which I thought was additive to a discussion that was occurring yesterday.

As my wife will attest, I’m not in charge of anything. My post was as a thread participant. I’m still not clear what that link contributes to this discussion.

 

[Gumby]

There are plenty of examples of scrip used in the US over the years, but their distribution was fairly limited. For instance you'd probably need to be in Dixie to redeem a $10 note from the Citizens Bank of New Orleans. Coal mine scrip was only good at the Company Store. States and cities issued scrip during the Great Depression that were redeemable within their jurisdictions. The limits of their viability mostly depended on what coupons the seller was willing to accept.

Congress can and has used its powers to drive private currency out of circulation. In 1866 they levied a 10% tax on any bank acceptances of private notes and state bank notes for that very purpose. The law was upheld by the U.S. Supreme Court in Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).

 

[Markola]

No way Russia bans BTC.



It would kill their ransomeware industry.

Right? LOL. Unlike all of the other blockchain projects that I have seen, no entity controls Bitcoin. It is simply unleashed upon the world, so each jurisdiction has to reckon with it as it sees fit. In Russia’s case, they have a lot of excess electricity and also cold weather, which make ideal conditions for Bitcoin mining rigs to run, which means oligarchs have another way to get rich. On the other hand, Russia’s central bank is taking a hard line against Bitcoin’s circulation among the citizens. Putin is saying to his crony cleptocrats, “Figure out amongst yourselves how this thing makes me richer and keeps me dictator, or off with your heads.” I find it entertaining. YMMV.

 

[yakers]

The regulatory system does not disallow financial transactions, it requires they be reported. This allows tracking to ensure the funds are legitimate and taxes, if owed, are paid.

This is really the point, all financial transactions even barter/trades 'should' be reported. We can expect IRS/tate govts to be diligent in pursuing tax issues.

 

[Markola]

Right, the $1 to $33,000 only applies to the few that got in early. That makes Apple, Amazon, Microsoft, Tesla and countless others "inflation hedges". They aren't, and it doesn't make bitcoin an inflation hedge either (though other attributes might).



I don't know much about bitcoin, but when I see anything being propped up by questionable logic by the proponents, it raises yellow/red flags for me. That's not a criticism, just an observation that proponents and critics alike should be careful that their statements pass the common sense test.



-ERD50

ERD, I think we have to distinguish the fact that Bitcoin is a limited-supply “property” (per the IRS since 2014.). The securities you reference (including most alt coins) are subject to dilution with new issues, so I agree those are not inflation hedges. There will only ever be 21 million Bitcoin and, effectively, 25% less than that, since so many have already been lost forever by their unfortunate owners. Natural selection is not kind to individual organisms.

A certain few other alt coins have limited supply and are similarly based on Proof of Work consensus systems but none of these pink sheet penny stock equivalents has come remotely close to Bitcoin’s sheer dominance, and probably cannot at this point. The SEC is likely to classify the rest of the mushrooming crypto market as “securities”, possibly this year, shutting a lot of nonsense down cold in the U.S. So Bitcoin is distinct from the rest of the digital asset universe.

About 19 million Bitcoin have been mined and it will take another 120 years for the remaining 2 million. So supply will grow for a while but at super-slow rates, much more slowly than inflation. Gold has been the classic inflation hedge but gold mining ramps up to meet demand when the price rises. In this way, Bitcoin is a kind of digital gold, but the hard cap makes it also a kind of limited- supply digital real estate, say land on the Island of Manhattan, with tremendous economic activity happening above on the surface. Bitcoin defies exact analogy but this is an outline of why many believe it will prove to be an inflation hedge after it matures as an accepted asset class, the global market adopts all that it cares to in coming years and this early extreme price volatility is ironed out. Time will tell for this risky investment vehicle.

All that passes the common sense test for me but may not for others yet, or ever.

 

[jim584672]

Other alts have hard limits as well.

Litecoin (84 million)
Ripple (100 billion)
Dash (18.9 million)
IOTA (2.8 billion)
Zcash (21 million)
EOS (1 billion)
AntShares-NEO (100 million)
BitShares (100 million)
Stem (250 million)
Veritaseum (100 million)

Dogecoin has no hard limit, just an annual limit of 5 billion per year.
Ethereum 18 million per year.

You keep saying Bitcoin is special from the alts, but it isn't.

 

[Markola]

I can’t even find most of those on the heat map.

 

[jim584672]

I see quite a few in the heatmap.

 

[ERD50]

ERD, I think we have to distinguish the fact that Bitcoin is a limited-supply “property” (per the IRS since 2014.). The securities you reference (including most alt coins) are subject to dilution with new issues, so I agree those are not inflation hedges. ...

All that passes the common sense test for me but may not for others yet, or ever.

OK, but then that should have been your argument (whether it has real merit, I don't know ), that Bitcoin has limited supply, not that it went from $1 to $33,000 (similar to some other non-inflation hedge investments).

I'm trying to help you - if you want to convince people, use solid arguments. Poor ones weaken your point.

-ERD50

 

[Markola]

Compared to those penny stock equivalents, Bitcoin is anti-fragile:

None of those networks have the sheer electricity flowing into them from miners and nodes to a scale that creates a shield around it.

Only some of those are based on Proof of Work consensus. If you think Proof of Stake is the same, you really haven’t studied the topic.

 

[jim584672]

Litecoin is just as anti-fragile as Bitcoin, based on PoW, been around 11 years, and has a limit on issuance. Nothing stops anyone from setting up an alt coin with these parameters. There is no such thing as "limited" in this space. Besides the foundation of a useless work to give something value is on its face absurd.

 

[Gumby]

I am trying to understand the argument that because it costs a lot in electricity and computing power to make a bitcoin (which I understand to be nothing more or less than an algorithm), then a bitcoin necessarily must have value. To employ a very rough analogy, I could spend several weeks and $50,000 to make my cat a furry pounce toy to play with. But at the end of the day, it's still just a cat toy, worth a few bucks at most, no matter how long and hard I labored to make it or how much I spent on materials.

 

[NW-Bound]

I am trying to understand the argument that because it costs a lot in electricity and computing power to make a bitcoin (which I understand to be nothing more or less than an algorithm), then a bitcoin necessarily must have value. To employ a very rough analogy, I could spend several weeks and $50,000 to make my cat a furry pounce toy to play with. But at the end of the day, it's still just a cat toy, worth a few bucks at most, no matter how long and hard I labored to make it or how much I spent on materials.

People believe that if it is indisputably hard to create something, then 1) it would be rare, and 2) rarity guarantees desirability and value.

I agree with 1), but not 2).

 

[RobbieB]

Everyone is welcome to create as many cyber coins as they can!

 

[joesxm3]

People believe that if it is indisputably hard to create something, then 1) it would be rare, and 2) rarity guarantees desirability and value.

I agree with 1), but not 2).

I collect and restore antique Mauser rifles and I can attest to the fact that being rare does not mean valuable. If there are only four of a very esoteric and scarce model, it does not matter much if only two people understand or care about the markings that make it rare.

Demand combined with scarcity is what drives up price.

 

[Markola]

I am trying to understand the argument that because it costs a lot in electricity and computing power to make a bitcoin (which I understand to be nothing more or less than an algorithm), then a bitcoin necessarily must have value. To employ a very rough analogy, I could spend several weeks and $50,000 to make my cat a furry pounce toy to play with. But at the end of the day, it's still just a cat toy, worth a few bucks at most, no matter how long and hard I labored to make it or how much I spent on materials.

It’s a strength-through-diversity system, with electricity use the proxy measure of diversity of its user base of miners and nodes and, therefore, strength to fend off attack.

“The more energy that Bitcoin’s network uses, the more secure that its latest transactions are against most types of attacks. Many of the tiny non-Bitcoin blockchains have been victims of 51% attacks, where a single entity temporarily or permanently gains control of over 51% of the processing power on the network, and uses that majority of processing power to re-organize blocks and perform double-spend transactions (which is essentially theft).

This chart, for example, shows Bitcoin’s network processing power compared to the processing power of some of its hard fork copycats:

Hashrate

Chart Source: BitInfoCharts.com

Both of those other blockchains only have 1% or less of the Bitcoin network’s total processing power, and have been hit by malicious block re-orgs. In fact, if just 1% of bitcoin miners decide to do a 51% attack on either of those two hard forks, they can. The same is not true for the other direction, since it is the Bitcoin network that has a far larger network of miners and energy usage than them, by two orders of magnitude.”

https://www.lynalden.com/proof-of-stake/

In case the chart above didn’t print, here’s a pic of it:

 

[Gumby]

Okay. I can accept that Bitcoin has a substantial advantage over its competitor cryptocurrencies in that it is much harder to steal one. And I can see that may make it relatively more valuable than its current competitor crypto currencies. But if I may torture my analogy a little further - my cat is very protective of her furry pounce toy. She guards it carefully and is also very ferocious. No one will ever steal it on her watch, unlike that lazy feline across the street who constantly gets his toys stolen. But it's still just a cat toy. So while it may have greater relative value than the neighbor cat's toy, it still does not have much absolute value.

 

[Markola]

Of course, it has value to her because she thinks it does. Apparently, the lazy feline across the street values it, too, which is why yours protects it. That makes the toy a tradable commodity, especially if 100 million and counting kitties around the globe want a fraction of it.

What else is like that? A famous painting stuck in a vault in Switzerland? A rare bottle of wine that no one can drink? Gold in Fort Knox?

 

[captain3d]

Crypto good Crypto bad

 

[RobbieB]

The issue of hacking is real. The issue of mining (doing the blockchain work for profit) is real. More transactions that need to be block chained creates more bitcoins. When the limit is reached, what is the reward for mining (huge energy and hardware cost) when there is no reward?

No more bitcoins, but still a need to keep track of all the transactions? Who keeps the record for no reward?

I know, nameless faceless computers with zero recourse. Go fish.

 

[Markola]

The issue of hacking is real. The issue of mining (doing the blockchain work for profit) is real. More transactions that need to be block chained creates more bitcoins. When the limit is reached, what is the reward for mining (huge energy and hardware cost) when there is no reward?

No more bitcoins, but still a need to keep track of all the transactions? Who keeps the record for no reward?

I know, nameless faceless computers with zero recourse. Go fish.

There’s a lot to unpack in your statement but I’ll try:

1) As mining, which largely relies on free or cheap stranded, green energy resources, gradually becomes less profitable, the ecosystem’s revenue model shifts to network transaction fees; and the former miners enjoy owning and selling some of the valuable Bitcoin they mined and held.

2) Those transactions mostly won’t occur in the Bitcoin blockchain itself but will occur on side chains in the Lightning Network, a decentralized, open source system where all kinds of financial services are being developed using smart contracts technology, including insurance products to compensate for any incorrect transactions. Once all participants are satisfied, the finalized transactions will be settled on the base layer Bitcoin blockchain ledger.

All of these complicated matters are covered very clearly by an electrical engineer/financial researcher in this long form article, if you are interested, called “Bitcoin’s Energy Usage Isn’t A Problem. Here’s Why.”
https://www.lynalden.com/bitcoin-energy/