
The Cryptocurrency Singularity - ramontayag
https://medium.com/@ramontayag/the-cryptocurrency-singularity-7e37ae4aa4
======
sagitariusrex
Whenever I read articles like this I'm reminded of this quote by Richard
Buckminster Fuller

"You never change things by fighting the existing reality. To change
something, build a new model that makes the existing model obsolete."

IMHO this is what Bitcoin is all about. Not a get-rich-quick scheme or
whatever insults some people throw at it, but a sound, arguably better
alternative to fiat currencies.

Aside: If you haven't yet gotten into the fancy dancy, drama sprinkled ICO,
Scamcoin, and Altcoin world I cannot recommend it enough. It's hilarious, like
the cambrian explosion of cryptomoney.

~~~
root_axis
Bitcoin is not "better" than fiat currencies, it's worse in every way except
for the fact that it is not operated by a central authority. In terms of
convenience, security, and ease of use it is clearly worse. The world does
need a "back channel" currency, and bitcoin is a perfect fit for this, but it
will never move beyond that because there's simply no reason for the masses to
use it.

~~~
ericb
> it's worse in every way except for the fact that it is not operated by a
> central authority.

-It is lighter--I can carry it in my head

-It travels faster

-It is not inflated by 2% a year

-It cannot be forged

-It can cross borders

~~~
AstralStorm
It is inflated but currently its value gain masks that.

You cannot carry those big numbers in your head comfortably. Heck, it is
tricky to carry a wallet ID. Even trickier to get a physical transaction done
with BTC.

~~~
ericb
See my link about brainwallets above.

------
zupa-hu
I'm confused. Gresham's law sais "bad money drives out good". Inflation is
bad, so from that follows that the money that inflates more will be more used.
Okay, I buy that.

Then this:

> When the singularity is reached, I think people will be more likely to
> choose to spend their inflationary fiat currency instead of their
> deflationary cryptocurrency.

I'm lost here. People already prefer to spend USD over Bitcoin. So I
understand the change would be if Bitcoin inflates faster, because then people
will prefer to spend Bitcoin. But the article sais the opposite.

Or doesn't "stable against USD" mean that Bitcoin will inflate/deflat at
around the same rate as USD?

Interesting article, I'd love to understand it! Anyone?

~~~
gbaygon
I thought the same thing, the core idea of this article is in direct
opposition of its conclusion.

Bitcoin is going up in value, and according to the market predictions it will
go way higher, so it's deflationary.

Bitcoin holders will prefer to spend cash money to bitcoins anytime in
speculation of future gains.

I see bitcoin more of a speculative investment at the moment, than a type of
currency. Only the ones that are riding the bitcoin trains seems to think this
is the future of money. Outside that bubble nobody really uses it.

~~~
Rmilb
I think its unfair to dismiss the currency aspect of bitcoin. The use case for
the developed world is 95% speculation 5% buying contraband online however,
for people in Venezuela[1], girls learning to code in Afghanistan[2], or women
in Saudi Arabi who can't legally open a bank account, Bitcoin is solving
problems that under banked people have now. Of course the ecosystem needs to
mature so grandma can use it safely, but that will come with time.

[1] [https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-
in...](https://www.cnbc.com/2017/08/24/bitcoin-mining-is-popular-in-venezuela-
because-of-hyperinflation.html) [2] [https://www.coindesk.com/how-bitcoin-
helps-afghan-girls-achi...](https://www.coindesk.com/how-bitcoin-helps-afghan-
girls-achieve-financial-freedom/)

~~~
millettjon
I think it has high utility anywhere outside of the US and EU. There are
billions of people that don't have access to stable currencies or reasonable
banking.

~~~
notahacker
Sure, but access to reasonable banking is also highly correlated to access to
ability to actually buy things with BTC or convert BTC to spendable money.

------
BenoitEssiambre
This is full of misunderstandings about monetary policy.

Currencies that are not designed to lose value over time can not be stable.
Intrinsically worthless tokens engineered to have better than market risk
adjusted, liquidity adjusted, real returns compared to real productive
investment will always be unstable and fluctuate increasingly wildly as they
get more popular. This is a result of physical limits of production. As people
hoard worthless tokens, their price increases which causes more people to
hoard them instead of investing in real businesses with real production
capacity.

This eventually causes production capacity to drop. That's right, when enough
people do it, token hoarding displaces investment in businesses and factories
and lowers global production capacity. This means token hoarding causes a
future drop in things available to buy with these tokens.

Eventually there will be people who want to buy real things with their stock
of tokens. The tokens will be chasing fewer goods which means prices for stuff
will rise (tokens will lose value). This might happen suddenly when people
with large stockpiles of tokens notice that value is dropping and that there
are tons of other tokens waiting on the sideline to make it drop even further.
Hoarders might rush to get rid of their stockpile all at the same time before
they're worthless which will cause their fall to worthlessness. This drop will
bring the tokens closer to their natural intrinsic value of zero. The cycle
can then start again, such is aggregate economics.

The 1920s and 1930s suffered from this type of production drop but with gold
tied currencies instead of cryptocoins. It happened to a lesser extent in 2007
when western world central banks failed to keep inflation rates high enough.

It's important for the world's sake to not let deflationary currencies become
too popular. When savings or financial promises are insufficiently tied to
future production or to accumulation of real goods, there will be
disappointment when many people try to exchange them for real stuff. That is
true for crypto currencies as well as government currencies (that is why the
system is designed to make banks invest people's money in real businesses and
minimize the proportion of money that is stockpiled idly).

It's true that crypto currencies are currently not widely held enough to
significantly affect the aggregate economy but speculation already keeps them
volatile and the knowledge that as they get more popular, there will be more
macroeconomic pressures towards volatility keeps the speculation wild and
cryptocoins unstable.

~~~
ramontayag
If I understand this right, I don't think I necessarily disagree with you. My
question is: if people can choose one or the other to spend, what do you think
they'll choose? A currency that inflates quickly, or one that inflates less
quickly?

~~~
BenoitEssiambre
I think market forces will make it so that the one that inflates less quickly
will be more volatile and the higher risk premium of holding it will make it
often less attractive than the one that inflates more quickly but often it
also will be the opposite.

Like most investments there will be a trade-off of risks vs returns but both
currencies will in the long run, be poor investments compared to income
generating assets tied to real production.

~~~
ramontayag
This is certainly interesting. Could the same principle be applied to gold
which has been fairly stable?

I don't think gold is the right medium for the singularity because it is not
easy to obtain and subdivide. It needs to be in the the vicinity of choosing
the inflated coin on one hand, and the more valuable coin on the right.

Perhaps it's this trait that will keep Bitcoin volatile? Because it's easy to
go in and out of it, volatility will remain high?

~~~
BenoitEssiambre
Yes it's similar to gold. Gold has some intrinsic value which anchors its
price and reduces volatility and as you mentioned it is not as easy to trade
which reduces speculation. But even gold is still a fairly volatile
investment.

~~~
ramontayag
Yes, it may feel volatile, but how volatile is it compared to other
currencies? For example, my country's currency fell 10% in the last three
months.

Intrinsic value discussion aside (which is its own discussion worth having), I
would certainly like to keep more of my money in gold vs my local currency if
gold were easy to get and keep. Peter Schiff says goldmoney.com does this, but
I'm not interested in owning a certificate.

You bring up a good point though. The closer I imagine ourselves being at the
event horizon, the fuzzier the details become. For example, I don't know what
"stable enough" is exactly. I guess the question is now, will it ever get
close enough to go past the event horizon?

~~~
BenoitEssiambre
The crucial thing is that as you get near this "event horizon" you get close
to a point where cryptocurrencies would be macroeconomically destabilizing in
the same way gold tied currencies were destabilizing in 1929.

I don't think crypto-currencies will ever get that popular though. It would
require governments to be on board and foolishly march towards the 1929 thing
again. But you never know, as they say, history rhymes.

~~~
ramontayag
BenoitEssiambre, what are your thoughts on [http://woobull.com/bitcoin-
volatility-will-match-major-fiat-...](http://woobull.com/bitcoin-volatility-
will-match-major-fiat-currencies-by-2019/)?

------
clarkmoody
Rothbard's _History of Money and Banking in the United States: The Colonial
Era to World War II_ [1] wades through hundreds of years of Gresham's Law in
action. Special attention is devoted to par laws and legal tender laws in
exacerbating the tendency of banks to print more notes than there is metal in
the vault.

[1] [https://mises.org/library/history-money-and-banking-
united-s...](https://mises.org/library/history-money-and-banking-united-
states-colonial-era-world-war-ii) (free audio book, epub, and pdf available)

~~~
c3534l
Aw, you had me until mises.org. I prefer to get my economics from reputable
sources.

~~~
clarkmoody
Seriously? I was of the opinion that Hacker News readers had enough
intellectual fortitude to evaluate content on its merits.

------
ineptech
I don't understand how someone can talk about making everyday purchases with
BTC without addressing the transaction fees and confirmation times. Doesn't it
currently cost several dollars to spend a dollar? Is there some reason to
think that in the far future confirmation times and transaction fees will
trend towards zero?

~~~
antocv
Bitcoin is not the only cryptocurrency, and not all cryptocurrencies are based
on a blockchain data-structure.

There are other currencies which are not-inflationary, trustless and
decentralized, and many more currencies with various levels of those
properties, some are more centralized and require trust in a few in various
ways, and some are decentralized trust-less but still inflationary.

There is even cryptocurrencies which do not use Proof-of-Work, or Proof-of-
Stake, or Proof-of-Anything - but still can reach consensus in open
distributed network.

~~~
ineptech
Sure, but this is an article specifically about BTC; none of its conclusions
hold for cryptocurrencies generally. I guess it just seems really deceptive to
talk about fiat's "hidden cost" of inflation while ignoring BTC's not-at-all-
hidden cost.

Similarly, I'm unclear on why confirmation times aren't considered a serious
problem. It seems like BTC enthusiasts like to discuss a hypothetical future
in which the BTC infrastructure is so mature that you can buy coffee without
worrying about fees and confirmation times, but I don't see how we get there
from here. Either the payment takes hours to confirm (leaving the coffee shop
vulnerable to double-spending) or it goes through an off-chain processor (who
would demand to know my identity). Either way you're losing one of the main
selling points of using a cryptocurrency in the first place.

------
maxander
The argument makes some intuitive sense (more people buying X over Y makes the
value of X go up, which makes holding X more desirable, so more people buy X
instead of Y...), but if this effect actually happened I don't see why it
would happen with a cryptocurrency and not, say, gold. Nothing about the
argument seems specific to cryptocurrencies- it's used here simply as a
commodity whose value has historically been going up for awhile, and which
people feel pretty bullish about.

There are other reasons, also, why Bitcoin or it's ilk would be particularly
_bad_ commodities to show this effect- notably, that the Bitcoin system can
handle only a finite volume of transactions efficiently, and while it's
capacity can be increased, the community managing it is (so far) still too
disorganized to do so quickly (and without dramatic measures like forks and
such.) Gold trading, as far as I know, already has none of these limitations,
so cryptocurrencies have catching up to do, on that front.

~~~
ramontayag
Yes, you're right to bring up confirmation times and community. I didn't
include that on purpose in order to focus on the good vs bad money part. My
hunch is the scaling issues will (eventually) get addressed when we hit the
barriers. Might not even be Bitcoin.

------
jms18
> Will governments around the world begin to make their currency deflationary
> in order to make it attractive?

rofl

If you want people to use currency more, you make it inflate faster. This guy
does not understand macroeconomics.

~~~
kylnew
thank you. I'm glad I'm not the only one who feels this article doesn't
properly understand the intricacies of inflation/deflation in an economy

~~~
ramontayag
Yes, I certainly can't say I'm an economics expert. Mind sharing with me what
part of the article you think is misguided?

~~~
kylnew
Yes. I posted my thoughts in another comment >
[https://news.ycombinator.com/item?id=15184382](https://news.ycombinator.com/item?id=15184382)

Honestly, I'm kind of scared/surprised more people aren't talking about this.

~~~
ramontayag
Thanks for the link. I'm not sure where in the article I said inflation is
worse than deflation. I don't feel I know enough about economics to express an
opinion about this.

What I'm trying to say is that if people have a choice, they'll keep their
wealth in a currency that destroys their wealth the least slowly. This, I
suspect, will have a runaway effect. We probably wouldn't be able to stop it
if we tried, which sounds a lot like the AI singularity.

~~~
kylnew
My concern is that you ignore the effects of deflation in your argument
altogether, which you simply cannot do.

You are also effectively demoting the US dollar to the current inferior
currency of the two to support your little adage, which I find a bit strange.

I believe your intention was just to write a little thought experiment, which
is cool. I'm just a little baffled the way some people follow along for the
ride without question.

Perhaps obvious, but I hold no cryptocurrency. I'm not saying I never would,
but the sheer amount of dreamy speculation like this is exactly what keeps me
away from the market.

~~~
ramontayag
By "effects of deflation", are you referring to the claimed ill-effects of
deflation, that will grind the economy to a halt? If so, mind helping me
understand why I can't disregard that?

I appreciate your replies - not sure if I mentioned it earlier to you, but I
posted it here in HN because there is no shortage of smart people willing to
express their thoughts.

~~~
kylnew
It's a concern I have about deflationary currencies in general. It's not very
common in the world right now so you could argue I'm speculating too, really.

You are talking about the singularity being the point that we switch to crypto
currency. I suppose my argument is that the singularity may not come because
of deflation counteracting and convincing people to continue holding.

All in all I'm glad it's been such a diplomatic discussion. I would engage
people the same way if I were you and appreciate that you seek new
information.

~~~
ramontayag
I understand - I'm not aware of an asset class like bitcoin and the other
cryptocurrencies, so I have to go with opinion and extrapolation for a lot of
the thinking. :)

It sounds like what you said is that the singularity may not happen because
cryptocurrency deflation will make cryptocurrencies more attractive to hold
compared to inflationary fiat. I'm fairly certain I understood it wrong.

Won't people move more of the money into deflationary currencies if they are
accessible and exchange friction between the inflationary one and deflationary
one is acceptable?

I appreciate the appreciation!

------
leot
Per the other comments here, the applicability of Gresham's law as the author
describes is questionable.

However, the author's broader point appears to be that the economic impact of
a deflationary currency is largely unknown, and as expressed is worth
considering. IANAE, but it seems at least conceptually possible that there
could be an economy in which every actor's rational decision was to always buy
some token because it appreciated so reliably. Consider, e.g., Shubik's
"Dollar Auction" paradox, in which a sequence of rational decisions can lead
to an ultimately irrational final outcome. Coupled with Bitcoin's expenditure
of energy as proof of work, Bitcoin could prove to behave like a kind of
superintelligence akin to one of Bostrom's paperclip maximizers, except it's
one that consumes more and more energy resources as it attempts to maximize
the value of Bitcoin.

~~~
ramontayag
I did send the article to my old economics professor so he can tell me where I
misunderstand things, but I haven't gotten a reply yet. ️

------
PierreRochard
Excellent writeup! I came to the same conclusion a few years ago with Thiers'
Law: good money drives out bad,
[http://nakamotoinstitute.org/mempool/speculative-
attack/](http://nakamotoinstitute.org/mempool/speculative-attack/)

~~~
ramontayag
Thank you! I knew I was just lacking in Google-fu when searching for other
articles that expressed this idea I had been forming in my mind.

------
banku_brougham
'People spend lesser valued currency and hoard higher valued currency'

+

'people are hoarding bitcoin'

(does not imply)

'bitcoin is a higher valued currency'

------
kylnew
I think there's a critical discussion about inflation vs deflation missing
from this article.

Inflation is bad, but so is deflation because it encourages saving your money
which, in turn, hurts liquidity in the marketplace (i.e. the amount of cash
freely flowing around). Liquidity is essential to keep the economy moving.

Isn't what we want really a currency with just a _little_ bit of inflation
that keeps people spending their dollars today rather than saving them for
tomorrow?

~~~
millettjon
If you live under the influence of a failing government, the liquidity of
bitcoin may well be higher that the local failin currency as you can move
value to/from the outside world.

~~~
kylnew
This is certainly true. All foreign currencies are not alike in their
viability, but this does not address the long term concern of the
cryptocurrency itself and its inflationary/deflationary direction.

------
jchanimal
Completely agree. Thanks for bringing Gresham's Law into it. Now I'm terrified
I need to diversify.

~~~
ramontayag
Apologies! I wasn't planning to terrify people ;) kidding aside, I think it'll
a while before we get there, so there is a lot of time.

------
eosophos
Once Bitcoin gets linked up with Litecoin, lightning network, and atomic
swaps, seems like it will become more viable as a payment channel. It still
beats me, however, as to why anyone would by anything with it if it might be
worth twice as much in 6 months. Of course, it could also be worth half as
much.

~~~
montecarl
When I buy things with Bitcoin, I typically convert more fiat currency to BTC
to keep my BTC balance constant.

~~~
encryptThrow32
So why not just use fiat? Coinbase used to offer this service, where you would
'auto-topup' your balance, but removed this because it was silly as it
generated multiple tx's just to do what paying in fiat would achieve in the
first place.

As time goes on, the notion that coffee or meals are suitable to be paid in
bitcoin seems more absurd. You would no more pay for a meal with a gold bar
than you would with a Krugerrand. It will be seen as decadent for all those
pizzas, controlled substances and ransoms to have been paid in BTC -- a kings
ransom for pizza?

Bitcoin will likely never be a general purpose payment network. Lightning MAY
if it obtains support from legacy services like VISA and MASTERCARD. I suspect
V/MC will be the lightning nodes with the most payment channel volume.

------
arthurjj
I was hoping this article was going to be a serious look at if an AI could run
on a currency like Ethereum.

A few months back I wrote a tongue in cheek version about if the DAO hack was
to prevent the singularity [1]. But I'd be curious if it were actually
possible.

1\. [http://arthur-
johnston.com/essay/2016/06/26/Rokos_DAO.html](http://arthur-
johnston.com/essay/2016/06/26/Rokos_DAO.html)

~~~
dsr_
If an AI can run on a universal Turing machine, then it can run on a Turing-
equivalent platform like ether.

That doesn't make it a good or economical idea.

~~~
ubernostrum
On the contrary, it's a great solution for AI risk: run the AI on a
blockchain, and hackers will find plenty of ways to disable it if it starts to
get out of hand.

------
javajosh
A carbon tax on miners could slow down this singularity.

------
fpgaminer
Software is eating the world.

Those who think a digital currency of some kind _won't_ displace cash are
going to be made fools.

About the article ... there are a lot of questions here.

I guess the main thrust of the article is that Bitcoin's volatility is
declining, and thus it is becoming more attractive for use as a tool for
buying lunch (where lunch is a stand-in for common day-to-day transactions).
That hinges on the idea that Bitcoin wasn't attractive for that purpose
before, because its value was too volatile.

1) The graph the article uses to demonstrate that Bitcoin is becoming less
volatile seems to indicate, to me, that Bitcoin is just as volatile as it ever
was. If I'm reading the graph correctly, the average of volatility is the
same, but the std deviation of volatility has been decreasing. In other words,
Bitcoin is just as volatile, but it's more consistently volatile. That's ... a
weird metric to measure. Either I'm reading the graph incorrectly, or OP is.

2) The OP says "I wanted to keep them because Bitcoin has, since its
inception, on average increased in value at about 150% per year". So why bring
up volatility? Volatility isn't relevant to whether Bitcoin goes up in value
over time or not. It's clear that, as long as Bitcoin continues to be useful,
it will continue to deflate long term. So it's clear that Bitcoin will always
have this "issue".

3) But that presumes that deflation is an issue to begin with. Is it? I'm
naive on the subject. For the majority of human history we used deflationary
currencies; precious metals. The world didn't stop turning then. But then the
question is, are inflationary currencies better? Is our modern use of them an
evolution, then?

On the one hand, we can think of it as horrible that the majority of people
are storing their value in a currency that is decreasing in value over time.
Their work, their labor, earns them wealth that decreases over time. That's
disturbing.

But maybe it _should_ be that way? Having people store their wealth in
inflationary stores of value implies that work is only valuable in the
immediate time frame. And that kind of makes sense. A burger I flip today is
valuable today, but not so much years from now, let alone decades from now.
Paying me a deflationary currency today for that burger flip is weird, then,
because you've traded something that increases in value over time for
something that decreases in value over time.

So you could argue that in today's economy employers trade cash, something
that decreases in value over time, for work that also decreases in value over
time. And ... doesn't that make sense?

And yet, if given the opportunity and knowledge, wouldn't everyone want to
store their value in deflationary vehicles? And if that's the case, wouldn't
everyone, as the article implies, only _have_ deflationary vehicles to trade
with ... so we'd just re-evolve to using deflationary currencies again.

Does the average person even _know_ that their currency is inflationary? I
doubt it. Maybe the choice of deflationary/inflationary doesn't even matter.

I dunno, it's just a complicated question. I don't think it's clear cut that a
deflationary currency is better or worse.

My point is, the deflationary property of Bitcoin doesn't necessarily preclude
its use as a daily driver. Volatility sure might, but deflation I'm not so
sure.

It's probably irrelevant to the average person. The average person will see
value in replacing HSBC, who would normally freeze their bank account randomly
and destroy their business.

4) It's important to mention that, at this point, we have reason to believe
that Bitcoin and clones based on its model can never be used to buy lunch (and
other such small transactions). The cost of decentralization is too high, and
we have no way to decrease those costs by the orders of magnitude needed to
handle the transactional loads of things like buying lunch. We are working to
decrease them, and have recently succeeded in a modest improvement on the
Bitcoin network, but orders of magnitude is ... out of reach without some
massive innovation.

It's more likely that on-top-of networks like Lightning Network and its
evolutions built on top of Bitcoin will be the thing people interact with on a
daily basis.

The average person will get their paycheck in Bitcoin, but do their daily
transactions using IOU networks like Lightning that settle behind the scenes
on a less frequent basis. This allows the average person to use Bitcoin as
their store of value, giving them by default the advantages that traditionally
only a small fraction of the population have had, but still allowing cheap
daily transactions for buying lunch.

That doesn't change the meaning of the article. But it's important to mention
how Bitcoin is evolving to fulfill the future the article proposes.

So ... maybe that's the future. Or maybe a side chain will evolve with
inflationary properties and we just use that to buy lunch and get paid. Maybe
every country will have their own cryptocurrency, pseudo-centrally controlled,
with atomic swaps for global trade.

But one thing I know for sure. Software is eating the world. You either choose
to ride that wave, or you get eaten by it.

