18 January 2016

A Bit of a Problem

If you like what OPEC means for oil prices, you'd love what the gold standard would do to financial markets.
-- Michael Feroli/2011

Well, Bitcoin is back in the news, and not, it seems, in a pleasant way. (There was a time, perhaps still is, when bitcoin was called the new gold.)

For those who've read history, 19th America was a 100 years' war, of sorts. Those with wealth waged war on those without it. Deflation/depression/panics were the order of the day. The country was in one most of the time. Those who had specie liked that, since they got a "return" on their positions without any investment risk. What could be better? And some wonder why I've concluded that the same motive and incentive™ exists with today's cash holders: corporations, hedgies, and 1% individuals. The Giant Pool of Money is still out there, and growing. Really new innovation in the consumer arena (the only one that matters, supply side ideation notwithstanding) is stalling out. Not least because battery chemistry has run up against the limits of the periodic table. A really Godzilla depression is the holders' best chance of risk-free return. American housing didn't work out so well.

So, here's why bitcoin is worse than gold:
Like many of the programmers who took an early interest, Mr. Hearn admired the rule-bound nature of the system. Only 21 million Bitcoins would ever be created. And the distribution of new Bitcoins was clearly laid out, relying on mathematical algorithms that left no room for human meddling.

Two points to keep in mind:
1) with a strict limit on the number of "specie" in circulation, deflation in prices has to result with any level of expansion of an economy -- this is the 19th century experience
2) bitcoin, by design, is a pyramid scheme

OK, 2) isn't obvious. The fundamental meme of a pyramid scheme is two points:
1) first entrants get (nearly) all profits
2) late entrants bear (nearly) infinite cost

That's bitcoin in a nutshell. The mining of bitcoin is, by (not necessarily intentional) design, more expensive for each succeeding unit, so that the first 100 bitcoin were orders of magnitude cheaper to acquire than the next 100 from today.
According to my calculation, a single Bitcoin transaction uses roughly enough electricity to power 1.57 American households for a day.
The Bitcoin protocol will continue to increase the difficulty of the cryptopuzzles to keep rewards constant, continuing the arms race until the last block is mined.

That's a pyramid scheme.

Now, the current report deals with enabling cheaper mining and network management. Needless to point out: the early entrants who got their bitcoin on the cheap don't want to lower the cost today; that's giving away the farm. And, needless to continue, the point of a specie currency is that it levels the field for all participants. And, of course, the incumbents retaliated against the liberators (bitcoin XT).

When that last bitcoin is mined, not in our lifetimes,
But since the last Bitcoin block is projected to be mined around the year 2140, adopting Bitcoin as a major (or world) currency anytime in the next few decades would just exacerbate anthropogenic climate change by needlessly increasing electricity consumption until it's too late.
life won't be so nice. Given the restriction, so far, on coinage rate and the increasing cost of mining, bitcoin may both drive deflation (should it ever gain specie status, and long before coinage exhaustion since new bitcoin approach infinite cost soon) and end the global warming problem by consuming all electricity. Ain't capitalism grand?

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