Cryptocurrency Link Compendium

• While the supply of bitcoins might be finite, the aggregate supply of digital currency as a whole, including Ethereum, Litecoin, and all the other variants, is potentially infinite. We have already seen the emergence not just of Ethereum, but a seemingly limitless number of new Bitcoin immitation currencies alongside a proliferation of so-called 'initial coin offerings'. It is therefore a clear fallacy that one is buying into a finite supply of the world's next global currency to be. And why should we not have expected supply to mushroom in this way? Ethereum was created by a 21yo college dropout in his basemen at zero cost. If you can code a currency in your basement that subsequently ends up trading at an aggregate value of $40bn, then why on earth would you not do so? But this sort of alchemy can't last. One of the best measures of something's value is its replacement cost, and if a 21 year old can create a digital currency in his basement, it can't be all that hard. It is therefore reasonable to expect thousands and thousands of new coin offerings to emerge until the supply overwhelms demand and the prices of all of them crash. [LT3000]
• Satoshi Nakamoto's paper and Bitcoin launch happened in 2008... over 10 years ago. The iPhone was launched in 2007. If blockchain really is a platform that will change everything, it's a real sleeper success story. Typically you see killer apps on a new platform a lot quicker. Web 1.0 launched Amazon and Netflix within the first couple of years. Where are all the blockchain apps? The only industries that have really been impacted are ransomware, money laundering, and facilities for exchanging and speculating on tokens. There are unloved monopoly ledger companies like OpenTable and Ticketmaster. Where has any centralized application actually been disrupted? If distributed ledger technology can't disrupt OpenTable, what use is it? My best guess is that blockchain and Bitcoin adoption will remain a curiosity and a niche phenomenon linked to black markets, illicit activities, weak states with unreliable payments and money. [link]
• What is now apparent is that bitcoin was never a monetary phenomenon. No, bitcoin is a new sort of financial betting game. It is a digital, global, highly-secure, and fairer version of the old-fashioned chain letter. The premise behind bitcoin-the-game is that the current wave of buyers must guess when (or if) a subsequent wave of buyers will emerge, this second next wave's participation being contingent on when (or if) they believe a third wave of buyers to emerge. If they guess right, the early birds win at the expense of the late ones. And they can win a lot of money, as Coinbase points out in its post. [link]
• [P]roof-of-work axiomatically requires high transaction costs to ensure payment finality ... Counterfeiters can attack bitcoin via a "double-spending" strategy, ie spending in one block and later undoing this by releasing a forged blockchain in which the transactions are erased. This paper starts by introducing the concept of "economic payment finality" in the blockchain. That is, a payment can be considered final only once it is unprofitable for any potential adversary to undo it with a double-spending attack. ... If the incentives of potential attackers are analysed, it is clear that the cost of economic payment finality is extreme. For example, to achieve economic payment finality within six blocks (one hour), back of the envelope calculations suggest that mining income must mount to 8.3% of the transaction volume – a multiple of transaction fees in today's mainstream payment services. [DSHR]
• Let's compare Nakamoto's goals to the state of cryptocurrencies in practice: *No trusted third parties. In practice you have to trust both exchanges and mining pools. *Irreversible transactions. In practice immutability is a double-edged sword, but in any case the 51% attacks on smaller cryptocurrencies illustrate the reversibility of transactions. *Micro-transactions. In practice the average fee to get your transaction confirmed is more than $1 - as I write it is $4. *Parties transact directly without intermediaries. This is possible, but in practice for large transactions you need exchanges, and for small transactions you would need the Lightning Network (if it worked). *Buyers need not reveal personal information. In practice, except to an exchange. And note that de-pseudonymizing cryptocurrency addresses turns out to be fairly easy in practice. *Irreversibility protects sellers from fraud. In practice, fraud is rampant. *Escrow protects buyers from fraud. In practice, escrow mechanisms have not turned out to "easily be implemented". So Bitcoin hasn't been a great success measured by Nakamoto's goals for it. [DSHR]
• Ethereum sucks. Either the devs are too incompetent to make the code work or they are being bribed to forestall upgrades; either way is bad news for Ethereum. This bodes poorly for future upgrades such as Caspar and Sharding. Ethereum will continue to fall relative to Bitcoin and other coins as people lose faith in the project. A trade that is 'short' Ethereum and long a combination Bitcoin, Tron, Stellar, Monero, Ripple should be successful. [Grey Enlightenment]
• If you add together the current market value of the Brazilian real, the Iranian rial, and the Russian ruble – all starting with "r" and all questionable currencies – you arrive at something well over $2 trillion. As custody problems for holding cryptocurrencies are solved – and big and powerful financial intermediaries are working on it – why can't the market value of bitcoin rival any one of those or even all three together? If that happens, I'll never find a stock with a rate of return close to what bitcoin would provide. So if you make it a 1-2% position, the worst that can happen is you lose every penny. The best that can happen is you get an astronomical rate of return. The risk/reward is better than anything else I can find. [Horizon Kinetics]
• The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin's must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system's vulnerability to a "majority attack", namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, "flow", payments to miners for running the blockchain must be large relative to the one-off, "stock", benefits of attacking it. This is very expensive! [link]
• Even the most die-hard crypto enthusiasts prefer in practice to rely on trust rather than their own crypto-medieval systems. 93% of bitcoins are mined by managed consortiums, yet none of the consortiums use smart contracts to manage payouts. Instead, they promise things like a "long history of stable and accurate payouts." Sounds like a trustworthy middleman! [link]
• A lot of folks are in situations where they either don't pay for electricity or pay a flat rate. Why aren't they all mining Bitcoin? How about office workers? Nobody complains if they plug in a space heater, a Lava lamp, an aquarium, or a personal phone charger. Maybe the landlord is paying the electric bill in any case. Why wouldn't there be a Bitcoin miner that "flies under the radar" by consuming less than 500 watts? Supposedly it takes about 13,000 kW/h to mine one coin (source), so that's about three years at 500 watts per hour. Three years is a long time to wait (we could get lucky and earn a Bitcoin after 1 day, right?), but on the other hand a $10,000 bonus once every three years would be welcome! [Phil G]
• I have a half-baked, three-quarters-joking theory of cryptocurrency, which is that it is a magical incarnation of a sort of male internet grievance. People -- mostly men -- sit around on Reddit complaining that they are underappreciated geniuses and that it is unfair that they have not been rewarded with vast wealth. They feel dispossessed and betrayed: They expected the modern world to reward computer literacy, but then they grew up to realize that the modern world, much like the old world, rewards mostly people skills and creativity and emotional intelligence. And then Bitcoin came along, and paranoid computer-literate people who spent a lot of time on the internet were the early adopters, and it became the world's first economic system that allocates wealth basically for hanging around on Reddit. What Bonatsos describes is not an accident; cryptocurrency seems almost custom-designed as a way for the men to get all the wealth, again. I know you are going to email me to complain about this theory, but what I want to propose here is: What if you didn't? [Bloomberg]
• I simply couldn't find much evidence that distributed ledgers are useful for any real-world applications (other than speculative asset bubbles). Once you understand that blockchains are bad at solving real-world problems, then you will understand why Bitcoin will fail. The blockchain imposes limitations that makes Bitcoin a bad version of something that has been tried in the past: e-gold (description here and Wired profile here). A company's stance on blockchain can also serve as a test of a company's management. In my view, companies pushing blockchain technology (e.g. IBM, Microsoft, Intel, Oracle) are disconnected from customers' actual needs and have mediocre management. Companies that don't talk about blockchain (e.g. Facebook, Amazon, Google, Apple) are more likely to produce sensible technology that will work in the real world. [Glenn Chan]
• "We're getting requests for service that are just astounding," said Steve Wright, general manager of the Chelan County Public Utility District, which includes Wenatchee. "We do not intend to carry the risk of bitcoin prices on our system." [WSJ]
• The financial guys that really love bitcoin are some of the guys that either blew up or closed funds due to poor performance. The two most prominent fund manager bitcoin boosters are like that. It almost feels like they are so happy to have found their Hail Mary pass. And the most prominent guys that have good performance and didn't blow up tend to be the guys that don't like bitcoin and think it's stupid, a bubble or whatever. [Brooklyn]
• I'm not one to embrace conspiracy theories with alacrity but I do believe the government is purposely orchestrating an environment where cryptocurrencies can thrive—albeit for a truncated period of time—but with a baneful ulterior motive in store for the middle class. I believe governments are currently in the process of vetting the cryptocurrency space and using bitcoin as its primary test case. Their goal is to allow the public to gain trust and familiarity with electronic currencies before crushing private cryptocurrencies altogether, then replacing them with one government-sanctioned "bitcoin"—call it Fed-coin. [link]
• Every single entity on coinmarketcap.com, with the exception of Bitcoin, and, arguably, the Bitcoin-metacoins, is inherently flawed. By this, I mean, each has a negative economic value and should be abandoned. [link]
• I don't write about crypto-currency often because its proponents are fanatical. (You’d be fanatical too if you combined rabid self interest that might make you a multi-millionaire with a social engineering project you thought was utopian.) But more and more, I am inclined to agree with a judgement my friend made years ago: While Bitcoin does something important (creates a peer-to-peer payment network) it does it in a terrible way. [link]
• High computational power requirements translate into high transaction fees. And that’s a problem for a lot of the applications that have been proposed for the blockchain. Using bitcoin as a currency is the biggest obvious problem. Most banks for example process millions of transactions daily, and most of these transactions are almost free because running a nice secure sever that handles a million transaction a day isn’t a lot more expensive than one that handles just a few transactions. [Alpha Vulture]
• Yesterday someone asked my cleaning lady to invest in Bitcoin. Now if someone had asked her to accept payment in Bitcoin, or send payment in Bitcoin, then this would be compelling evidence that one should invest in Bitcoin. But when cleaning ladies are asked to invest in Bitcoin, not a good investment. [Jim]