Cryptocurrency -- Is anyone on-board?

[mtdoc]

I applaud the idea behind cryptocurrencies:  That is, a way to free us from the grip of the central banker/big bank cabal that has been redistributing wealth to the 1% for decades now. 

However, Bitcoin is currently in the throws of a speculative bubble and is not yet serving the purpose for which is was originally intended.

The original goal, as I understand it, was to limit the total able to be mined (? 21 million) and by the nature of the algorhithm the mining become progressively more difficult. In this way it is meant to mimic precious metals.

However, human greed is an unstoppable force - so now with forks and a flood of ICOs, I'm not sure that original intent has any chance of surviving.

As a long term repository of wealth it has some advantages compared to traditional fiat currencies, but it cannot match an immutable metal with thousands of years of history in that role.  It is also important that it depends entirely on an intact electrical grid and functioning internet.

As a speculative investment  which is what it has become - it is in a bubble that now surpasses all prior ones, making tulip and .com bubbles look tame.

Dave's advice above to accumulate Bitcoin may pan out.  But it is a pure speculation play at this point - you're picking red or black on a roulette wheel.

[NivagSwerdna]

My 2p worth...

The liquidity is in BTC so that would be the only sensible place to invest at present.  (Etherium is almost an order of magnitude less liquidity)

However BTC has absolutely ZERO intrinsic value, it not convertible/fungible to anything useful, so it's value is only in the prevailing supply of buyers and sellers.

As I understand it the way exchanges work is you can only sell your BTC for real world currency iff there is a buyer at that exchange who wants to do the opposite so liquidity at that exchange is crucial.  i.e. the day people decide to sell, the buy side liquidity dries up and the price collapses.

So... whilst the lemmings are heading into BTC you can ride the wave but make sure you sell before they reach the cliff.

... and bubbles do exist.... tulips, carbon credits, .com shares, etc....  and people did lose >90% when those bubbles collapsed.

[sleemanj]

who pays for the cryptocurrency infrastructure, servers, support and power and so on

In terms of bitcoin, AIUI I think I'm putting this in reasonable terms, the users, who pay to the miners, who effectively process the transactions.

Every time you transfer some bitcoin from you to somebody else, you nominate a fee you are willing to pay for that transaction^{^1}, this fee is something like an auction bid, the miners pick off the highest bids first and process those transactions, the fee you nominated goes to the miners for their work.

This is currently a big problem with Bitcoin, because the fee for processing a transaction is ridiculous. 

According to https://bitcoinfees.info/ you are looking at about $4.00 USD - that's regardless of the value you transfer, so if you pay $3.50 USD worth of bitcoin for a cup of coffee, you have to add on about $4.00 if you want that payment to go through within about an hour.

Clearly this is an untenable situation, and there are ideas for solving it, but... the solutions all at least erode some raison-d'etre of bitcoin I think it would be fair to say.

With all the new coins being created what puts a limit on the number of different coins that can be created?

Natural selection, survival of the fittest.

^{^1} Wallets will typically suggest fees based on how fast you want the transaction to happen, exchanges will typically enforce a (high) fee because they want transactions to happen right away.

[thm_w]

This is currently a big problem with Bitcoin, because the fee for processing a transaction is ridiculous. 

According to https://bitcoinfees.info/ you are looking at about $4.00 USD - that's regardless of the value you transfer, so if you pay $3.50 USD worth of bitcoin for a cup of coffee, you have to add on about $4.00 if you want that payment to go through within about an hour.

Clearly this is an untenable situation, and there are ideas for solving it, but... the solutions all at least erode some raison-d'etre of bitcoin I think it would be fair to say.

With all the new coins being created what puts a limit on the number of different coins that can be created?

Natural selection, survival of the fittest.

Crypto clearly has value, but this is the point I don't understand. Bitcoin is essentially dead as a "daily use" coin, the fees are high, the transaction times are slow, and mining for the average user is not worth it. I suppose there is still value in large or overseas transactions (in place of a wire transfer for example).

But when there are ton of other alts that are: cheaper, faster, etc. it makes me wonder how long BTC will hold its lead. Being the first to utilize a new piece of technology is no guarantee of success.

[suicidaleggroll]

What is behind Bitcoin?  Behind most world currencies there is something of value.  Gold in some cases, 'full faith and credit' in others.  But there is something supporting the currency.  Bitcoin has nothing except a volatile exchange rate.

There is nothing behind the vast majority of world currencies.  The physical note has a guarantee that it is worth the amount of currency that's printed on it (a dollar bill is worth a dollar), but there is nothing holding the value of that dollar relative to the rest of the worlds' currencies, other than availability and people's faith in its future value.  If the government decides to print a bunch more money, its value plummets relative to other world currencies.  If a government's stability becomes questionable, the value of its currency plummets.  Cryptocurrencies are basically the same...their exchange rate is based on availability and people's willingness to buy/sell, which in turn is based on their faith in its future value.  Availability is also strictly controlled using different methods for different currencies.

[thm_w]

So the operational costs of the infrastructure is not paid in the currency of that infrastructure. Interesting.

It is, for mining you are paid in BTC.

Wouldn't that then mean the transaction fee would be a security risk insofar as anonymity goes. Unless you paid cash of course. Can you do that?

Bitcoin is not anonymous, every transaction sent can be tracked. This is a common misconception.
There are steps you can take to attempt to remain anonymous, purchasing bitcoin in cash from a person/location you trust is one of those.
https://bitcoin.org/en/protect-your-privacy

I still think cryptocurrency is the preferred currency of seedy underworld activity like drugs, child porn and tax evasion all of which will eventually lead to government intervention. As we saw with China a month or two back. Cryptocurrency is very exposed to such intervention.

Along with everything I don't understand about it, what prevents that from happening? Apart from inertia due to lack of public outcry.

You could say the same about cash.
The government could destroy the value of cash if they wanted to (similar thing happened in India, where certain bills had to be traded in and are now worthless). Its just a lot harder with BTC, as its decentralized. You'd have to firewall the country, find and shutdown servers, etc.

[sleemanj]

So the operational costs of the infrastructure is not paid in the currency of that infrastructure. Interesting.

Sorry if you misunderstood me, I quoted the fees in a USD equivalent just for clarity, you set the fees in bitcoin, about 0.0004 bitcoins at the present average fees (change wildly).

[EEVblog]

I'd love to hear from those who have had a more experience than I do with Crypto, what lessons have you learnt so far?

1) Buy and HOLD.
2) Don't panic and sell on the dips, just use it as an opportunity to buy more.
3) Serious money can be made day/week/month trading the fluctuations. Buy on dips, sell on high, don't panic if it keeps dipping, but more.
4) If doing 3) then you stand to gain more percentage swings with the altcoins.

Sounds like a poor man's (in metaphor only) stock market where you don't actually invest into anything. Just ride the mystical Bitcoin wave.

Correct.
And technically it's more like speculation than actual investment.

[Red Squirrel]

I wish I had gotten into it myself but that's risk for you, if you arn't willing to take risks you won't win.

[hamster_nz]

Maybe this painting needs to be updated to include crypto-coins:



Wagon of Fools by Hendrik Gerritsz Pot, 1637. Followed by Haarlem weavers who have abandoned their looms, blown by the wind and flying a flag emblazoned with tulips, Flora, goddess of flowers, her arms laden with tulips, rides to their destruction in the sea along with tipplers, money changers and the two-faced goddess Fortuna.

[thm_w]

Maybe this painting needs to be updated to include crypto-coins:

https://upload.wikimedia.org/wikipedia/commons/c/c6/Flora%27s_Malle-wagen_van_Hendrik_Pot_1640.jpg

Wagon of Fools by Hendrik Gerritsz Pot, 1637. Followed by Haarlem weavers who have abandoned their looms, blown by the wind and flying a flag emblazoned with tulips, Flora, goddess of flowers, her arms laden with tulips, rides to their destruction in the sea along with tipplers, money changers and the two-faced goddess Fortuna.

Almost there:


Although the "starting price" of bitcoin is slightly more arbitrary.

[NiHaoMike]

It is nominated in USD because, as stated above, USD is the current, most common trade currency in the world. In the past, it used to be the British pound, in the future, who knows? There are efforts made by some countries to establish a different reserve currency.

If CPU/GPU/ASICS catch up, the hashes can and do, grow more complex. Also, define no effort, there is no such thing as a free launch, and compare it with the cost of 'printing' a dollar (hint: There is no paper involved).

There are a few cryptocurrencies where the (main) proof of work does other useful work, such as Curecoin/Foldingcoin finding cures for cancer. Just imagine if there was actual motivation to make ASICs that cure cancer. (Albeit, from my understanding, the work involved is such that an ASIC would not have that much advantage over GPUs.)

[hamster_nz]

There are a few cryptocurrencies where the (main) proof of work does other useful work, such as Curecoin/Foldingcoin finding cures for cancer. Just imagine if there was actual motivation to make ASICs that cure cancer. (Albeit, from my understanding, the work involved is such that an ASIC would not have that much advantage over GPUs.)

... for some very loose definitions of "useful work". If curing cancer was just a CPU time issue it would have addressed a long time ago, or we just need to wait a few years for the price of computation to halve a few times over.

The problem with digital "proof of work" is that the work keeps on getting easier as tech advances. What is hard work today is easy work tomorrow. Bitcoin attempted to solve this by making them progressively harder to mine.

IIRC it bitcoin keeps on increasing the number of zeros a hash must have, making it exponentially harder to mine them. I think it is every four years that this happens. Moore's law is often recast as the cost of computing halving every 18 months.

There is most likely some simple calculus that proves a crash will come - a bit like exponential economic growth, it can't last for ever.

Or maybe people will spend more time at intangible jobs making intangible wealth to pay for intangible goods that have near-zero cost of production, to make them feel productive and fuel ecconomic growth?. Like the people who test and tag all the office equipment to satisfy health and safety requirements, and then spend a portion of the money on cell phone apps or Netflix subscriptions.

Side Qn: Does "Jim's Test and Tagging" actually save more lives than it wastes? If so, why don't we have to have the electrical gear in our homes tested regularly?

[brucehoult]

At this stage the value of a bitcoin is largely dependent on the existence of someone willing to pay more. Why did it drop so much yesterday in just 3 hours? Why will the others match the growth that bitcoin has? I don't have any idea.

I do.

Bitcoin is a form of cash.

If it is to, one day, take over the role currently occupied by cash i.e. getting your salary in it and then running off to the supermarket etc and spending it, then there has to be a comparable value of it.

That is because, although the bits of paper are not worth anything much intrinsically, you need to have enough of it that people can receive it, keep it in their pockets for a little while, and then spend it.

On average, the amount of time that people hold traditional cash before spending it is about one week.

Of course some people only hold it for a day. Others stuff it under their mattress for years. But you can calculate the amount of things that are bought using cash in a day and the amount of cash that is in circulation, and it turns out that the the latter is about seven times bigger than the former.

Maybe bitcoin will follow about the same ratio. Maybe. Hard to say.

There is currently about $1.5 trillion (10^12) of USD cash. I don't know how much of others such as Euro etc. Lets say $5 trillion in total.

By design, there can only ever be 21 million bitcoins. Right now there are about 16.7 million of them (80% of what there can *ever* be), worth $160 billion.

That's about 10% of the value of US$ cash in circulation. That's actually pretty staggering. A year ago it was more like 1%.

Given that there is a hard limit on the number of bitcoins that can ever be produced, the only way the total value of bitcoin can expand to accommodate growing usage is by the value of each bitcoin increasing.

IF usage increases, which it may or may not.

[brucehoult]

IIRC it bitcoin keeps on increasing the number of zeros a hash must have, making it exponentially harder to mine them. I think it is every four years that this happens.

No.

The number of bitcoins awarded to the miner who finds the hash for the last ten minutes or so of transactions is halved every four years.

But the hash difficulty (the number of zeroes the hash must have) is adjusted every week. If all the active miners collectively are finding hashes and thus completing blocks in less than ten minutes on average then the hash difficulty is increased. If it is taking on average longer than ten minutes to find hashes and complete blocks then the difficulty is *decreased*.

Decreases don't happen a lot so far. But if a significant number of miners decide that it's not worth it -- that they're spending more on hardware and electricity than they are earning in bitcoin rewards -- and drop out, then the difficulty level will be decreased.

[CNe7532294]

I think there are important figures beside security and popular trust that needs to be addressed with bitcoin. How stable is your power grid or more precisely your energy market? Personally, from what I see here as of now, I would tie bitcoin decisions to 2 things. One is gov't action like we saw in China but that might recover given that the currency is popular with people all over the world. Another is an energy crisis. Currently we aren't at one. In fact a few years back (2015) we were "drowning in oil". We were at one when we were fighting 2 senseless wars. What happens if that dries up? Could we move to sun, wind, and water like we've been doing? Yes. Would it be enough though? What if there was a ban (limited or full) on anything carbon? or radioactive? Could we support 7.5+ billion people running pumps and filters for water and heating as well as electrical lighting? What if the internet had limited use? These are questions I'd like to see considered since bitcoin relies on internet and computers. One thing is for sure. This totally explains why we didn't come up with this like today in the 90s or 2000s. Imagine running things on linear PSUs or incandescents. Also everything was much slower back then as well.

[brucehoult]

One thing is for sure. This totally explains why we didn't come up with this like today in the 90s or 2000s. Imagine running things on linear PSUs or incandescents. Also everything was much slower back then as well.

Nothing to do with computer speed. If computers were slower then the bitcoin network would automatically lower the hash difficulty level. Bitcoin would have worked fine with Apple ]['s, if the internet existed.

The big reason bitcoin could not happen until at least 1995 or 2000 (and git too) is that earlier hash functions such as MD4 (1990) and MD5 (1992) were too rubbish to be trusted to not ever produce collisions, and not be reversable.

Don't even talk about the hash functions we had in 1980...

[NiHaoMike]

Decreases don't happen a lot so far. But if a significant number of miners decide that it's not worth it -- that they're spending more on hardware and electricity than they are earning in bitcoin rewards -- and drop out, then the difficulty level will be decreased.

That also explains the "ratchet effect" with energy efficient altcoins. Where the ongoing cost to continue mining is low, there would be little reason for existing miners to drop offline. The ones who get screwed are the ones who invested in a mining setup too late, but they'll keep their miners running since they would at least want to cut their losses.

That said, I have experienced one of those energy efficient altcoins dropping in difficulty to something like 2/3 what it was just the day before. The culprit was that one of the big mining pools screwed up, effectively taking roughly 1/3 the miners offline.

[Cerebus]

Bitcoin is a form of cash.

If it is to, one day, take over the role currently occupied by cash
[snippity, snip, snip]
Of course some people only hold it for a day. Others stuff it under their mattress for years. But you can calculate the amount of things that are bought using cash in a day and the amount of cash that is in circulation, and it turns out that the the latter is about seven times bigger than the former.

The problem here is that you can't just talk about 'cash',  but actually have to talk about money supply. Annnnd there's ya problem: because if we're to talk about money supply then we have to get into monetarist economics; and if economics is the "dismal science" then monetarist economics is the despondent sub-branch of the dismal science, as so much monetarist thinking was driven by doctrinaire politics and not by sound economic analysis and research. Thanks to that we don't really have the tools to do any useful analysis.

[ebastler]

...
Given that there is a hard limit on the number of bitcoins that can ever be produced, the only way the total value of bitcoin can expand to accommodate growing usage is by the value of each bitcoin increasing.
...

Thanks for an interesting analysis, Bruce. But I think it is worth repeating that Bitcoin's current rise in valuation has nothing to do with the community planning responsibly ahead, to ensure that the total Bitcoin value in circulation matches the required transaction volume. What we see at the moment is pure speculation. The increase in Bitcoin usage is nowhere near the increase in its "value".

Actually, it seems that the Bitcoin infrastructure fundamentally stands in the way of wider usage. The number of transactions per second, and the cost per transaction, are simply ridiculous. With the massive computation effort and cost for validating new blockchain entries, and the slow speed of propagating updates to the blockchain, I understand that this is a fundamental limitation of the Bitcoin design. Future crypto-currencies may be able to do better -- by being less wasteful on computation power and electrical energy, and enabling faster and cheaper transactions. Improvement by several orders of magnitude is needed on all these fronts.

[CNe7532294]

One thing is for sure. This totally explains why we didn't come up with this like today in the 90s or 2000s. Imagine running things on linear PSUs or incandescents. Also everything was much slower back then as well.

Nothing to do with computer speed. If computers were slower then the bitcoin network would automatically lower the hash difficulty level. Bitcoin would have worked fine with Apple ]['s, if the internet existed.

The big reason bitcoin could not happen until at least 1995 or 2000 (and git too) is that earlier hash functions such as MD4 (1990) and MD5 (1992) were too rubbish to be trusted to not ever produce collisions, and not be reversable.

Don't even talk about the hash functions we had in 1980...

Good to know. Unfortunately I'm not a software expert so I wouldn't know. I'm more into the hardware aspect. I do think that both energy and gov't crisis is a weak point of this form of currency. Just like people scoff at others for not even considering bitcoin I kinda roll my eyes when we go full in on bitcoin. Believe it or not paper and gold are more valuable than bitcoin in certain situations. Here are a few I know of personally. Hurricane Harvey (I'm in Houston, Texas), Hurricane Irma (family in Florida), and Hurricane Maria (most of my father's side was affected). This might have some use to gather prep supplies but afterwards..... well look at Puerto Rico. An extreme case yes but a valid one. Then there is the Phillipines with Typhoons (my mother's side) and the supposed "big one" for the West Coast. Those are sudden and you can't possibly prepare for those (an earthquake). These situations are where something physical like paper are king. Economic collaspe I wouldn't know. Depends on how the people have a take in that scenario? along with the other possibilities mentioned above. You could keep your wealth or lose what you put in. Gold is a safe bet in that situation but not for spending of course. I'm not gonna chuck around paper weights. The best overall for this time is diversifying your currency. Heck I still have Euros, Pounds, Franc, and Yen along with my US dollars, precious metals, and Bitcoin. As Dave mentioned, buy up and not sell when it goes low. But note that you have to use your brain. Sometimes logic doesn't pan out and a something gets oversold because "people like it". You get screwed out of potential earnings. But if Murphy comes along, boy will you be glad.

[EEVblog]

Dave's advice above to accumulate Bitcoin may pan out.  But it is a pure speculation play at this point - you're picking red or black on a roulette wheel.

I was not speculating. The OP asked what lessons people have learned, that that is one lesson that has been learned.
Whether or not that lesson continues to hold true, and/or for how long, I don't know.
What I do know if that if you want to be into crypto, then you have two options:
1) Buy and hold for the long term.
or
2) Day trade the volatility

You can do both of course, and Option 1 can have several sub options:
a) Have a price at which you would cash out and take profits.
b) Sell out only when you need the money.
c) Buy into the crypto dream that is going to be the "new currency" and hold it forever to buy and sell stuff you need in your daily life.

[Cerebus]

Dave's advice above to accumulate Bitcoin may pan out.  But it is a pure speculation play at this point - you're picking red or black on a roulette wheel.

I was not speculating.

I think he meant speculating as in financial gambling, not as in 'I wonder if...'.

[ebastler]

... if you want to be into crypto, then you have two options:
1) Buy and hold for the long term.
or
2) Day trade the volatility

It seems that the significant transaction costs, and hard-to-predict delays in getting a transaction processed, make option (2) less attractive in the case of Bitcoin?

I am not sure whether these impediments on transactions are actually a good thing, because they serve as a "low pass filter" in a nervous market. On the other hand, a delay makes a feedback loop harder to stabilize -- which might apply also to the feedback loop of Bitcoin price vs. demand?

[sleemanj]

Trading bitcoin on an exchange won't necessarily (or tyoically) involve on-chain transactions, so transaction fees (bitcoin ones) don't factor there typically unti, you want to transfer coin in/out of your own bitcoin wallet.  Of course the exhange will typically charge a margin on trades.