
A LessWrong Crypto Autopsy - henryaj
https://www.lesserwrong.com/posts/MajyZJrsf8fAywWgY/a-lesswrong-crypto-autopsy
======
lukev
Oh boy. For supposed rationalists, there's a lot wrong with this sentiment.
Biggest issues:

1\. Confirmation bias. How many things were discussed on rationalist websites
that people were sure were going to be yuge, petered out, and were forgotten?
You can't claim victory for rationalists without factoring in the ratio of
failed predictions.

2\. You can make a strong argument that the fundamentals of bitcoin itself are
irrational (power consumption, transaction throughput, etc). Is accurately
forecasting the irrationality of others itself rational? Maybe. But given how
unreliable people are, feels more like augury than rationality to claim you
saw it coming, post facto. Especially when your actual chain of reasoning
turned out to be incorrect, despite a correct conclusion.

3\. I _did_ mine myself 20 bitcoins in the early days. But then I cashed out
when they were $20 a pop and bought and iPad, and was well pleased with myself
at the time. Obviously not a great idea in hindsight, but the point is that in
order to make a 10000x return requires a strong belief that Bitcoin will
actually go that high. Because to reach 10000x you have to resist the strong
temptation to cash out at 10x, 100x and 1000x. I would argue that cashing out
at 100x IS more rational in most scenarios than holding out for the moon shot
(even if that eventually happened.) It could have just as easily crashed back
down to zero.

~~~
semiel
> Confirmation bias. How many things were discussed on rationalist websites
> that people were sure were going to be yuge, petered out, and were
> forgotten? You can't claim victory for rationalists without factoring in the
> ratio of failed predictions.

If there are indeed more than 10,000 of these, then I agree it's selection
bias to only look at the successful one. Do you think there were? Personally,
I'm having trouble coming up with even a single equivalent case, though I'm
sure there are at least a few.

~~~
AnthonyMouse
> If there are indeed more than 10,000 of these, then I agree it's selection
> bias to only look at the successful one. Do you think there were?
> Personally, I'm having trouble coming up with even a single equivalent case,
> though I'm sure there are at least a few.

Isn't this basically every startup? If it grows up to become Google or
Microsoft, you 10,000X your money. And then 10,000 of them don't.

~~~
Houshalter
The average person never gets the opportunity to be an early investor in
startups. You could buy 10 bitcoins when they were $1. You couldn't buy Google
stock until after they were successful.

------
pillowkusis
Scott argues that Bitcoin is an example of why rationalists need to be more
confident in their results — I’d argue it’s an example of where they should be
much more modest. Hindsight bias is in play here.

The line of reasoning that “this investment has a 1/10000 chance of going
huge, and a 9999/10000 chance of being at best a waste of time, so I should
invest” is not a rational strategy by itself. If you applied this logic to
every moon-shot investment you came across you’d barely break even between the
few winners and thousands of losers. You need to know something more
interesting about the investment than “this could go to the moon”. Otherwise
you’re spending all your time buying and then losing money in penny stocks.

You also have to hold onto Bitcoin much longer than seems rational. It’s rare
to find that someone buys Bitcoin at $1 a coin, and doesn't sell at
$1000/coin. A 1000x return is the definition of moon-shot. Scott claims that
“most people” agreed Bitcoin had a more than 1/10,000 chance of achieving
$10,000 a coin — but this is a totally non-obvious result to me. Maybe it’s
1/1000 chance of a price of $1,000? A 1/100,000,000 chance of $100,000? In
2011, how could you reliably make such a precise prediction? For a community
centered around epistemic modesty, such a finely calibrated probability like
that seems unreasonable.

And for the record — Bitcoin was expected to grow in price proportional to its
value as a currency, tool, technology, etc. Nobody said “I’m going to buy
Bitcoin because it’s going to enter into a giant speculative bubble and I want
to be on the bottom”. Nobody seems to know why Bitcoin has exploded in price,
so I’m hesitant to award points to rationalists. Seems more like a case of
“correct by coincidence”. You made statistical inferences and acted on the
result, and ended up being right, but not for any of the reasons that your
statistical inference is based on.

~~~
devereaux
> If you applied this logic to every moon-shot investment you came across
> you’d barely break even between the few winners and thousands of losers

You would become... a VC

Their method is to just select the moonshots on the basis of some common
characteristics with previous moonshots

------
psyc
I was active on LessWrong in '09-10 (and not-as-active until '14). Bitcoin was
mentioned rarely. Hal Finney and Wei Dai themselves barely talked about it
there, if at all. IIRC they didn't mention it until a few years later. My
awareness of Bitcoin came from various other tech/programmer forums. I mined
0.7 BTC in early 2011 and held it until a few months ago. Not life-changing,
but certainly the biggest ROI on anything I've ever had by a few orders of
magnitude. But my point is I don't remember becoming interested in Bitcoin
because anyone on LW was talking about it. They weren't. Even though I
regularly interacted with Finney and Dai, I didn't even know they had anything
to do with cryptocurrency until last year.

Edit: To be clear, I'm adding context, not arguing with the article.
Yvain/Scott was certainly there.

~~~
tgb
I mean, the article claims the first mention of it was in early 2011 on LW, so
your timeline makes sense. Maybe it was on IRC or something else that you
heard about it at all.

------
07d046
Because this is Less Wrong, I'll say that they're making a logical fallacy. A
prediction was made that Bitcoin would go well, and it did, but the fact that
it went well doesn't mean that the prediction was rationally founded.

~~~
Anderkent
There aren't that many predictions being made on LW though. If you expect this
has only come true by chance, there should be a large amount of similar
predictions that haven't come true in the LW archives. Are there?

~~~
CompelTechnic
As another comedic twist, the LW community is probably the biggest proponent
of publishing long-dated predictions and calibrating their confidence based on
their results and priors. If ANY group of people has a defensible history of
trying to make verifiable/actionable predictions, it is LW.

------
arnioxux
> 3: Arguments-from-extreme-upside sometimes do work

I have seen a bunch of less wrong articles on pascal's wager and variants so I
assume they are familiar with them:

\-
[https://en.wikipedia.org/wiki/Pascal%27s_Wager](https://en.wikipedia.org/wiki/Pascal%27s_Wager)

\-
[http://lesswrong.com/lw/kd/pascals_mugging_tiny_probabilitie...](http://lesswrong.com/lw/kd/pascals_mugging_tiny_probabilities_of_vast/)

\-
[http://lesswrong.com/lw/h8k/pascals_muggle_infinitesimal_pri...](http://lesswrong.com/lw/h8k/pascals_muggle_infinitesimal_priors_and_strong/)

With that fallacy in mind, is bitcoin still a good call? It could've been any
other cryptocurrency winning and they all satisfy the same tiny probability
with astronomical returns. It doesn't make sense to dump all your resources
onto every new coin that pops up. Just like how you wouldn't adopt every
religion to guarantee that you will never burn in any hells.

~~~
Bartweiss
Rationalists are familiar with Pascal's Wager, arguably to a fault. (There's a
_lot_ of discussion regarding how it ties into strong AI. The darker theories
look something like Stross's _A Colder War_.)

It's certainly true that long-odds betting isn't an inherent winner, and
crypto better is long-odds betting. But BTC was the first blockchain currency,
and is credited with being the first decentralized answer to the double-spend
question. People who understood the tech and the importance of that idea at
the beginning might well have made a prediction that this was different than
your average investment bubble, and given that BTC and ETH are clearly the
'safest' cryptocurrencies they'd have a solid point.

It was still a long odds chance. It could have dried up regardless of
technical merit, or crashed when the selfish miner problem was unveiled, or
been supplanted by a more-usable version of the same insight. But it's quite
reasonable to argue that 2011-2013 BTC was a much more justified bet than
early-stage Ripple or Litecoin or other cryptos.

------
CompelTechnic
I find it really funny that even though the author of the original article
from 2015 turned out to be fundamentally right about price movement, a lot of
people here are nitpicking the reasoning to death.

One factor that has contributed to crypto's explosive growth that does not get
mentioned as much as I think it should is how controversial it is. I can't
remember if it was PG or Mark Cuban or some other VC-related person, but I
remember a quote that says (roughly)-

If a new company is based on an idea I like, I want to buy. If it is based on
an idea that makes me bored, I don't. But if it is based on an idea that I
hate and can't stop thinking about how much I hate it, I want to buy.

Looking back, the "memetic contagion" of people debating the merits of bitcoin
has only helped it. The fact that a lot of people hated it (and continue to
hate it) and can't stop talking about it has only added fuel to the fire.

~~~
neaden
Friday is groundhog day. Phil might be right about his weather forecast, but
it won't make me give any more credence to groundhog based weather prediction.

------
tgb
Having recently received a reasonable fraction of a bitcoin, I am interested
in what the optimal ways to cash out on it from a theoretical perspective are.
Say I have some guess as to what chance it will have X value in Y years and
have some quantified percentages of risk/security. How much do I sell now, how
much should I hold on to "in case", etc? I feel like there is some
mathematical advice here that I don't know. I feel like the best strategy
should be something like "sell 50% every year" where 50% will be dependent on
what I expect future performance to be.

Edit: and ironically, it's the inconvenience of selling it that has kept me
from doing so yet! The opposite of the author's problem.

------
toyg
Can mods please use "cryptocurrency" or "cryptocoin" ? How on Earth am I
supposed to know which links are about cryptography now ?

I was looking forward to a sweet post about cryptography failure, with
possible advice relevant to my day-to-day work... but no, yet another Bitcoin
analysis I really don't care about.

Sigh.

------
bhaak
> [...] one bitcoin purchased today (for 90 cents, last time I checked) [...]
> My financial advice is to not buy more than ten [...]

That's a really strange proposition. "It might be worth a lot more than now
but don't spend more than 10 bucks on it"?

I imagine, back then buying bitcoin wasn't easy (it's still not) so going
through all that hassle for 10 bucks is odd.

I would have expected a recommendation of maybe $100 or even $1000 if one was
adventurous.

~~~
Anderkent
I think it's consistent with the rest of the post. The claim is that long-term
bitcoin is either going to be worth a shitton, in which case having 10 is
enough, or 0, in which case having more than 10 is pointless.

Buying more makes sense if you're planning to sell somewhere between, like if
it gets to $10k.

------
baby
Is this about cryptography?

~~~
decorator
No, it's about crypto.

~~~
baby
www.cryptoisnotcryptocurrency.com

~~~
decorator
See the world for my retort.

------
monadmancer
I was logically onboard back then, but the notion of Proof of Work mining
seemed ridiculous and wasteful, so I didn't bother. I didn't even consider its
purchase, which in retrospect would've been a good idea?

I'm happy to hear the field is moving to Proof of Stake. I would've been on
board from the beginning most likely.

------
api
I had a bit of Bitcoin back then-- maybe 10 BTC. Some I mined back when you
could CPU mine. I set up a process to mine in a pool whenever my 2011-2012 era
MacBook was plugged in and had Internet, keeping it alive even when the lid
was closed with another hack.

I spent it on various things between then and the big Bitcoin pumps: coffee
(there was a spot that would take BTC in SoCal), open source contributions,
etc., and cashed a little out just to see Coinbase work.

I never thought it would go anywhere near this high for the rational reason
that Satoshi's Bitcoin is really not a very good currency. It's a significant
innovation in distributed systems and the Bitcoin code base is a good proof of
concept, but I expected it to stay semi-niche or to eventually crash if/when
major technical limits were found.

I saw three killer problems with it:

(1) Proof of work inherently promotes centralization due to industrial
economies of scale. I expected some miner to eventually have 51% and behave
badly, or a government that felt threatened by it to invest in >=51% hash
power (or nationalize a few miners) and wreck it. The latter would be cheaper
both politically and monetarily than a full frontal assault, especially if
done semi-secretly.

(2) It doesn't scale and won't scale. It's far too heavy. Some of the issues
are merely Bitcoin's choice of parameters and some are deeper problems with
the implementation.

(3) Hyper-deflationary behavior is not a desirable characteristic for a
currency. (Hyper-inflationary isn't either, but Bitcoin will never have that
problem.) A currency needs to have at least a somewhat stable price and the
ability to grow in quantitative base if needed to act as a good medium of
exchange. Bitcoin is far more deflationary than gold. Not only does it have a
strict known global limit, but it's subject to breakage (loss of coins) to a
much greater degree than gold.

So I didn't "hodl" because I thought it would probably top out at around
$100/coin. I underestimated the irrationality of the rest of the market.

Moral of the story? Markets are not rational and are therefore pretty tough to
predict using purely rational models that don't delve into emotionally driven
human behavior, herd dynamics, and game theory.

Second moral of the story: I agree with point #3 here that sometimes extreme
upside arguments do work. I should have held because I didn't need to cash out
and there was the remote chance that... this... would happen.

The latter works with startup investing too. I've talked to some angels and
several said they made their biggest exits on companies they'd mentally
written off. In one case when it came time to cash out he forgot where he put
his certificate info or how many shares he had.

~~~
dmichulke
> or a government that felt threatened by it to invest in >=51% hash power (or
> nationalize a few miners) and wreck it

Well, AFAIU they will wreck their fork, fine by me.

> Hyper-deflationary behavior is not a desirable characteristic for a
> currency.

It is a desirable characteristic for a store of value though. And eventually,
every hyper-deflation stops and it might become a currency.

~~~
api
Bitcoin is a poor store of value too. It requires a lot of power simply to
maintain it. It's a dissipative structure. Gold on the other hand can be
buried in the ground and can just sit there for free. There are costs
associated with moving and guarding or hiding it, but they're less than the
cost of maintaining a vast network infrastructure and lot of energy-consuming
hash computers.

To me the whole "store of value" thing is goal post moving. It was originally
intended to be a currency but it's not very good for that, so people have
decided to punt on that goal and redefine its objectives.

I also forgot to add that Bitcoin in its current incarnation is not quantum
hard and will die when practical QC arrives. It could be rev'd to support
post-quantum crypto, but the way it's dealt with scaling issues so far does
not inspire confidence that it will get ahead of the curve.

~~~
dmichulke
> To me the whole "store of value" thing is goal post moving.

I agree and the bet is currently on LN to get that currency aspect back. But
it troubles me and many others.

On the mitigating side, many people think that it it's not a currency, even
with low transaction fees, because it's so volatile. Therefore, those people
have never bought it in the first place and cannot exert downward price
pressure right now either.

------
jstanley
Page not loading for me.

~~~
wozer
Cached:
[https://webcache.googleusercontent.com/search?q=cache:FWjBUR...](https://webcache.googleusercontent.com/search?q=cache:FWjBUR-t1QsJ:https://www.lesserwrong.com/posts/MajyZJrsf8fAywWgY/a-lesswrong-
crypto-autopsy+&cd=1&hl=de&ct=clnk&gl=de)

------
themark
You can always place low risk, high reward bets on the stock market using
options.

------
thaumaturgy
Missing from this post: no matter how smart you think you are, the future is
still unpredictable, because it involves other people and people are mostly
gooey and not perfectly rational game theory state machines.

------
csomar
Wow. This is a very Wrong post. As much as I like crypto and bitcoin (and I'm
an early investor), this post gets it all wrong.

Bitcoin is kinda like a ponzi scheme. It can only benefit a few that bought in
early. If most of LW readers bought in, the price to get them all in will be
much higher thus making their investment less rewarding.

Remember, in crypto we are not building houses but convincing the other guy to
buy in. We are yet to have reliable instant and cheap transactions. We are yet
to have stable non-volatile crypto. So from a usability point of view crypto
is still not usable.

