This whole article is simplistic and inaccurate. They're making a straight-across comparison between two ETFs, one of which has high management fees and another of which has low management fees. The former happens to be a Bitcoin fund and the latter happens to be a gold fund.
Management fees vary widely across funds. They have everything to do with how money-grubbing the funds in question are and little to do with how expensive the assets actually are to secure. For example, you can pay >2% management fees on a really predatory S&P 500 index fund, the kind that John Hancock would sell you. Or you can pay .02% management fees on a top-level Vanguard fund tracking the same.
The only reason that the management fees on the Bitcoin funds is because they can be high since there's little competition so far, unlike with, say, S&P 500 index funds. It's not intrinsically expensive to store Bitcoin; far from it. It's far cheaper to store than gold, for all the obvious reasons that you don't have physical goods to secure.
"If gold can be stored in Fort Knox-like bunkers for just 0.08% per year, there is little reason it should cost 15 times more for bitcoin to be stored in similarly safe solutions. For now, though, it’s easy money for the custodians"
A better article title then would not have been "Bitcoin is more expensive to keep safe than gold" (which is untrue). It would have been something like "High management fees in Bitcoin funds caused by lack of competition in newly emerging marketplace".
The former is more to the point and accurate enough. I think all of us in tech knew what the article was going to be about before we read it.
The problem is real though. We must reckon with the possibility that all these anarcho-capitalist dreams will go to hell once the necessary minimum overhead of handling crypto turns it into an _even more centralized_ medium of exchange.
No, all of us in tech certainly did not deduce the correct meaning from the inaccurate article title and contents. If that were true my comment explaining the inaccuracy of the title would not be voted to #1.
Second of all, there are many many cryptocurrencies at this point and they are all thriving/competing with one another across various measures. Since fiat is incapable of competing with anything except on relative value, fiat is doomed to fail.
Fiat currency is competing very well in a category I really care about: “things which have existed for more than 15 years and which I can expect to still be around 15 years from now”.
Sure, fiat currencies can hyperinflate with less than 15 years’ notice, but 15 years from now I expect most fiat currencies will be similarly valued and most cryptocurrencies to be as gone and forgotten as a geocities homepage.
You think bitcoin will be gone in 15 years? It's already been around for ~10 years and it's just starting to reach mass awareness. If it survived ~10 years in relative obscurity, please explain how it's going to be be gone in 15 years now that it's well known?
Yes, it has reached mass awareness and now maintaining the network consumes more electricity than Ireland (https://powercompare.co.uk/bitcoin/). If the current rate continues it'll consume all the world's energy by 2020.
I don't know if it will be gone but something's got to give at this rate.
It’s failing to serve its primary use case as a currency. It’s now a speculative investment vehicle with exorbitant transaction fees. I struggle to see how that’s going to last.
Good point. I don't have a strong refutation of it. The main advantage of bitcoin over gold is that you can transfer it anywhere in the world to a potential anonymous recipient, which is why its main success stories so far have been in shady businesses. The current main advantage(s) of gold over bitcoin is it's still a lot easier for the average person worldwide to acquire and sell it, cultural tradition, there's been a few recessions where gold has at least held firm so it's trusted as a store of value.
So if bitcoin's competition is Gold (and not your local currency) it would need to get a lot easier for laymen to acquire and sell (I'm not just talking bay area engs, I mean like the Venezuelan farmers, which is why bitcoin enthusiasts trump up any and all reports of the like). The segwit x2 fork was at least an attempt at that, and coinbase has done good work reducing frictions. The 2nd and 3rd will take years but could happen.
I just feel like at this point all of bitcoins gains in the past year have been driven by wild speculators looking to make a quick buck, which tells me that when the recession hits they will dump their holding and btc will tank. This will make people less confident in btc as a store of value, and will consider it instead to be a wildly risky investment vehicle, which it is. At that point, it will default to its only proven use case thus far: anonymous worldwide financial transactions.
disclaimer: I have a smallish % of my portfolio in both gold and btc.
> The current main advantage(s) of gold over bitcoin is it's still a lot easier for the average person worldwide to acquire and sell it
I don't think this is true at all? All I have to do to acquire Bitcoin is sign up for an account at an exchange, link my bank account, and then hit the buy button. It's exactly as easy to acquire as stocks.
Contrast with physical gold, which I wouldn't know where to acquire.
In the third world, quite a lot of people don’t have a bank account, or at least not a conventional one as we would understand them. A common alternative is M-Pesa, which is phone based, and I don’t mean smartphone: https://en.m.wikipedia.org/wiki/M-Pesa
I'm not suggesting it will last forever, I'm just saying it has already survived far longer than most people realize and therefore it's more resilient than people probably realize.
That said, I think saying that bitcoin will be gone in 15 years is a bit like those people who thought the internet was just a fad. People who "get it" understand its usefulness and as long as there are enough of those people then it will remain.
Being “well known” solves precisely zero of the things which causes software projects to fail.
Being seen as a “low-risk-high-return investment” attracts developers, but only until it stops delivering that promise.
That said, my claim is that most will fail, not that all will fail. You may think that’s weasel words, but I will not accept a currency that even has a 10% chance of failing in 15 years (and if you think that’s harsh, imagine being a bank and taking a 10% risk of default on a relatively short 15 year mortgage), and judging by both http://deadcoins.com (looks like 600 entries, I stopped counting at 200) and the Wikipedia claim that there are over 1172 currencies, that risk is much, much higher than 10%.
I see your list of cryptocoin failures and raise you a list of fiatcoin failures (granted, the latter list, which is much longer, was accumulated over a much larger timescale...)
I’d describe Bitcoin as the AltaVista of cryptocurrencies: an early lead, people will remember it, but not fundamentally all that great and liable to be replaced as soon as someone invents a good (and trusted) alternative.
It might survive… but there’s no way I’d risk money I couldn’t afford to lose the way I would with any G20 economy’s fiat currency.
OK, so it's a comparison between two ETFs and then also some overpriced service from Coinbase that has similar characteristics to a mutual fund. The point still stands that there is as of yet very little competition in this space. Expect costs to come way down still.
The competition is simply buying bitcoin, which isn't possible to do for the S&P 500 without investing a few million and constantly incurring fees to adjust to its shifting composition.
The safe store is the only reason to buy this bitcoin ETF. Contrary to common myths, no investors, institutional or not, are constrained by regulations not to buy bitcoin directly.
It's hard to steal a truck of gold, especially considering the mens with guns which are typically around. It's hard to mess up physical security of a truck (not even to mention a vault), and even if you lose it, the thief still has a big and heavy problem on his hands. Real world police is good at these things. And unlike bitcoin, gold can't just teleport to Russia (using a generic non-cooperative country here)
Stealing bitcoin requires just one tiny mistake in a miriad of places (starting with random number generation, ...), and then you are done with no other recourse.
Coinbase uses redundant hardware wallets in geographically-distributed safe deposit boxes for their cold storage. It's very unlikely that they'll have a major theft from that, and their hot wallet funds are insured.
Personally I think hardware wallet random numbers are safe but anyone technical who's worried about that could generate their own from von Neumann coin flips, and turn that into a 24-word seed for setting up a hardware wallet.
I wouldn't say this is more difficult than securing a large amount of gold. If someone gets into your safe deposit they can just take your gold. With a hardware wallet you get three guesses of a 4 to 8 digit PIN and then it wipes itself. And you can't store gold redundantly to protect from loss.
If I live in a huge city, I might have afew million people to protect your gold against.
Anywhere in the world your securing Bitcoin against a billion or more people, plus bots. A proven attack vector could wipe out thousands of people in afew minutes.
Its a great feature. I have a ledger nano S. It looks like a big USB key, so it would be really easy to lose. Or it could break or malfunction or get stolen or something. I don't want to risk a significant chunk of my assets on the off chance that happens, so I store the recovery keys in a safe place as a backup.
Now, given that I have recovery keys stored in a safe place anyway, the ledger itself is somewhat disposable. Its still a great way to actually access my money, but if something happens to it I can just get a new ledger. So, yes, I want it to wipe itself if the wrong PIN is entered a few times. That feature means if I lose the ledger I can relax knowing my money is still safe even if somebody finds it.
Usually you have a group of "recovery phrases" that once entered into the device, it restores itself so you can still access the funds. There is more information how this works on a Ledger Nano S for example here: https://medium.com/@trionkidnapper/ledger-nano-s-restoring-a...
No, they wipe out that hardware. It's like your smartphone wiping itself with a few wrong password attempts. It can still be recovered, it just means that particular hardware is now useless until it has been recovered. It's great if you lose your smartphone, but if it was just your kid messing around then you can still recover it.
They can only wipe out your funds if they copy they wipe is the only copy. But this is extremely poor practice, and backups are very common practice to protect against precisely this sort of thing.
How bug-free is the "hardware" wallet though? Especially given that we recently saw a weak key issue force Estonia to re-issue all its PKI ID cards ...
To avoid any possibility of weak key issues, flip the coins. Key generation from the random seed uses a standard algorithm that has been public for years, with billions of dollars available for anyone who breaks it. You can check the implementation by entering your seed into other software to make sure it generates the same addresses.
Do many people collect bitcoins with interesting histories for their numismatic value, the same way they collect real coins? Is there a market for specific bitcoins that are worth more than their face value because they're somehow special? If a celebrity buys something from you in bitcoin, can you turn around and auction off that bitcoin to their fans?
"They don’t understand the difference between art and crime." -J. S. G. Boggs
Speaking to ARTnews after Mr. Boggs’s death, Mr. Weschler said, "He was just short of being a con man, but no more than anyone in the art world, or for that matter in the world of finance — which, of course, was his whole point."
People will pay for bespoke "vanity" addresses (this can be done securely or insecurely, the latter being a way of scamming people...), but those are not tied to any specific bitcoins.
Another thing I've seen is mined blocks of bitcoin being sold at a premium - the miner (or pool) will take your address and mine a block to it.
Is this purely for sentimental reasons (“freshly mined bitcoins”) or are there any practical uses for that? I can imagine coins with no history on the blockchain can be useful somehow.
Now that you mention it, I'm blown away that coins with "auspicious" numbers don't sell for a ridiculous premium in China, India and other cultures that believe in that garbage [1]. Might be a good business...
Those are not “coins”, they are addresses, which anyone can generate for free. Coins (strictly speaking, “amounts of bitcoin”) can be sent to and from them, but those coins don’t have an identity. Transactions and addresses have numbers; “bitcoins” don’t.
A pension fund, which is run by a board of directors and manages $400bn, is not going to print a paper wallet to hold $2bn worth of Bitcoin.
They have more important things to worry about, like investing their $400bn and achieving a decent return on their entire holdings.
Second to that (or maybe even more importantly), it's ass covering. Imagine the headlines: "CALPERS INVESTS $2BN IN BITCOIN AND ETHEREUM, AND LOSES ACCESS KEYS". If you're managing a fund, you just don't risk that.
These custodian fees (which will come down eventually) are a cost of doing business to access the asset class. I would assume those entire crypto holdings also to be insured as part of said fee, in the event something does go wrong.
This is why multi-sig exists. Put the funds in a 6-of-10 account, done. You would need a 60% attack (60% of the executives to collude/conspire, or 60% being hacked/kidnapped) to be robbed.
Firstly it's not the executive's money to actually hold onto.
Secondly they have sooooooo many options where their own incompetence/mistakes will not be a factor in their money literally disappearing into nothingness. There's a reason why bank deposit insurance exists.
If you think you can hold onto the money cheaply, by all means start this business and get them as a client. But you'll probably want insurance, you'll likely need some security measures, etc etc. Things start costing money.
Not to mention the coordination costs for them of "yet another holder of assets". What if they want to sell a chunk of it? They need to get 60% of execs in a room every time?
These people hold money for a living. I understand that they might not be aware of the latest and greatest technical stuff... but this is their job and they've likely thought of a lot of details here.
There's also value in a human being the last step in the security mechanism. No matter what happens, a court order/explanation of force majeure/etc means that the money is never really truly lost.
However, I still don't really get the usage difference between SSS and multisig. In a M of N situation, you give N secrets to N people, and M people together can spend the funds.
In my mind, Shamir secret sharing wallets (e.g. Armory) belong to the family of multisig wallets.
It would be nice if you could elaborate on that point.
- SSS can be bad if just your own client gets it wrong, multisig can be bad only if the blockchain itself is implemented incorrectly and somehow everybody who's been poking at its crypto for years with billions of dollars at stake has missed it.
- With SSS, once you reconstruct the key, there's one person holding that single key who will sign a transaction with it. You'd better trust that person. With multisig, each of the m keys can be controlled by a different person and they don't have to share. So (unbroken) SSS is fine for protecting your own key, but an organization that wants to distribute responsibility should use multisig.
So, slightly paraphrasing, IIUC :
- multisig is more adapted for organizations, there is no need of trust between the key holders. And it's more secure, because it uses a more widely audited code than that of wallets.
- SSS seems more adapted for individuals. It has more flexibility and privacy in N and M, since no P2SH script identifier is sent to the blockchain. I guess transaction fees should also be lower.
Wow, that's very informative. Thankyou. I had just written a comment talking about SSS, but I didn't realize that Bitcoin has multisig in the actual protocol. That is definitely a lot better.
> Yes, if you're a $10m hedge fund or a small family office. But not if you need to manage $400bn; then you (really) want a custodian.
Who, if they are competent, will happily print out a bunch of keys on paper and lock them in boxes, and charge you a 75 basis point asset under management fee for that service.
Looks like most don't think this way. They think that they don't have the 'expertise' in-house for maintaining multisig account. So they will just have to hire an 'expert' custodian to reduce risk.
And this is why most funds that hold bitcoin will fail, at some point.
Bitcoin is a paradigm shift. Its more important value proposition is the lack of counterparty risk (which other people refer to as "self financial sovereignity"). If you're hiring a custodian to hold the bitcoins for you, you're doing it wrong.
> They think that they don't have the 'expertise'
If bitcoin is seen as requiring some special knowledge to hold it safely, it's simply a UX problem that will be solved when wallet software/hardware matures.
People like you, in the long term, will learn that the risk associated using an identity-based custodian based services (be it for fiat or for crypto) is never worth it. Why? In the crypto case, because counterparty risk is higher in this space (companies get hacked more often than banks being robbed). In the fiat case, because of the diminishing rate of value of your holdings due to inflation.
I would love to have a way for my bank to hold my crypto for me, with the same amount of insurances and security audits as they have for other assets.
The "be your own bank" idea which crypto offers was one of the reasons it has taken me a while to get into it. That was something that I really didn't want.
I trust my bank living up to the task of keeping it safe and reimbursing me if they don't. I don't care about the individual coins but I do care about the value they represent and I trust that even if a bank loses a number of coins that it will not affect me. Just like if a bank vault was broken into it would not come out of my account.
To be honest, bearer shares weren't exactly the best invention ever. They held considerable risks, and losing the shares meant losing your investment and/or company. Crypto ownership is very similar.
You should pay to five companies in different jurisdictions for a 3 of 5 multi-sig. As far as I know, nobody offers such service right now, but I think it will exist in the future.
I can't see "CALPERS INVESTS $2BN IN CRYPTO AND GETS SCAMMED" being any better, honestly. I'm sure you can insure crypto holdings, but considering the risks, the cost must be exorbitant.
Correct. You can also just shove the gold bars in a safety deposit box too, so from a certain point of view both are free (or $100/year for the safety deposit box, whatever).
But if you have a significant amount of gold or bitcoin (ie, 7+ figures when expressed as USD), a safety deposit box is not going to cut it. You have way too much risk (thieves, fraud, losing the key, securing the key, insurance, liability, etc., etc., etc.) You want someone else to store your gold (or bitcoins).
And people charge 15 times more to store Bitcoin than gold.
That's a very good point, people like to paint the hyper-mobility of transference of crypto-currencies as superior to precious metals. But for most people seeking a "store of value" they are more interested in having that value sit somewhere safe and undisturbed.
And from this point of view the propensity for a crypto-currency to suddenly vanish if every 'i' is not dotted and every 't' not carefully crossed, is rightly seen as a liability for the 'store of value' game.
Also interesting to consider is the kind of security precaution spread that exists between between various value levels in precious metals, vs. crypto-currencies.
For example, consider the difference in security mechanisms employed by someone storing a couple gold coins in a box in their house, vs. Fort Knox.
Whereas your security precautions for storing $10, or $1,000,000 in crypto-currency are not a whole lot different.
Crazy idea - if you're paranoid enough, could you print your BTC on real metal that could last as long as our physical currency does? It loses its liquidity, but it gains permanence.
(Not the original poster) I suppose it's cold storage, but on something which is more permanent than paper. Of course it's a bit pointless since even the cheapest most acidic paper should last for 20 years or so which is long enough for storing bitcoins for the vast majority of funds.
A bit less space, unless you're talking about storing hundreds of thousands or millions of dollars worth of gold. Not to mention for a common thief it's a little hard to turn gold into cash anonymously whereas that's very easy to do with BTC.
In most cases the unwieldiness of a ton of gold compared to X number of crypto-coins serves as a superior security mechanism for a 'store of value.'
A ton of gold exists in a single time and space, meaning security measures are highly localized and conveyance to another location requires a non-trivial energy expenditure.
The more or less "pure information" basis of crypto-currencies mean the security mechanisms surrounding them must be "global," they can be potentially accessed unauthorized by someone anywhere on the planet through means of social engineering, exploiting faulty code, or similar. And once accessed the "pure information" can vanish from the reach of the ostensible owner with just a few electrons cycling through a few circuits.
In fact what percentage of the total supply of bitcoin were acquired in just such a manner?
Not surprising, actually. Gold is very easy to keep locked away because it's a physical object. But that also means it's very difficult to move around. As with all things, there are tradeoffs and one must decide what is best for each. Even if the "15x" figure is true, there might still be a use case for Bitcoin.
You have to put a lot more care into locking away keys. Locking away gold is easy. You just lock it away. Keys have to be properly generated with no other copies that could be compromised and printed on archival quality paper in a fireproof safe. And even then, a key only has to be compromised, not physically removed. Two of three multisig, while clever, means you now need three locations instead of one, and you might not even know that the first key was compromised. But this probably only boils down to the fact that we've got pretty good at storing gold by now. I don't think Bitcoin is any easier to store, though.
You can, and Coinbase and other competent exchanges do. You can also store the keys redundantly and apply cryptographic as well as physical protections.
why this? because a trezor is more expensive than a safe you would keep inside your wall? how about travelling with the gold? how about moving a lot of gold lets say like a truck as the example already mentioned? I usually travel and take my trezor along when needed... and its still in the same safe behind the wall as I would keep a gold bar or something valuable.
Kolmogorov complexity "is the length of the shortest computer program...that produces [an] object as output" [1]. Being financial inclined, I often wonder about its analogy in economics. Usually I measure weight or energy. The least massive, or smallest amount of energy needed, to make one dollar of value.
More interesting is the shortest program that reproducibly produces one dollar of value. By this measure, Bitcoin is one of the "denser" pieces of fungible information humans have invented.
"Heavy" networked bits must defend against everyone, everywhere, all the time. This enables lots of new turf. It also increases security risk.
>deterministically (and reproducibly) produces one U.S. dollar of value.
Can that really be said of anything, with the nature of markets, and supply and demand?
If I invest in solar panels, or oil wells, then the expected value per unit sold of the product I produce will be dependent on a massive number of predictable and unpredictable inter-playing forces in a global complex system.
While I can make forecasts of an average expected unit price by studying historical prices, factors affecting them, probabilities of various events, etc. there is also the case that my very selling of the product has an effect on the price I can expect.
As a supplier at a certain scale I can expect revenues to follow a downward curve, with each unit supplied a certain amount of demand is satisfied and thus lowering the overall market price and my expected revenue.
It's not exactly a one-way curve, at higher supplies and lower prices, new avenues of demand can be opened and prices can follow a curve upward.
I like the idea and thinking you've proposed here, but it seems like the complexity of markets is more complicated than Kolmogorov complexity.
It seems the like what produces value in terms of the most optimal ratio between input and output is always in flux. And when a maxima of optimal value is found all the mechanisms of market forces work against it being deterministic and precisely reproducible.
I think to deduce a measure like you proposed in an economic context you would have to have a product that is absolutely finite in potential supply and all potential uses for the product strictly defined, enumerable, and un-extendable. And therefore lowering JumpCrisscross complexity would simply be a matter of optimizing production costs.
But I'm not sure any such scenario exists, it would require a deterministic understanding of the universe and it's constituent parts that we don't have and it would have to preclude the ingenuity and creativity that seem to be key human qualities that drive the flux and change we see in the world.
Kolmogorov complexity is useful to talk about because Kolmogorov complexity is easy to bound. It is always less than or equal to the length of the string.
Economics is really a study of organisms. Biologists often make the mistake of trying to define adaptiveness, but there probably is no such thing. In a universe of rock and scissors, it's clear which organism is best, but when paper comes along, suddenly they're equal.
Attempts at formalism come with the caveat that equilibrium strategies, (strategies such that, if all organisms use them, no organism can improve) generally require the zero cost generation of random numbers.
What does this mean for our function which assigns economic value to programs? Non-trivial (not zero everywhere) solutions are not guaranteed to exist, and indeed the case for their existence doesn't look hopeful.
Should say: paying a few first-entrant pioneers management fees so you can easily buy and hold exposure to bitcoin via a regulated publicly traded fund like BIT, is more expensive than doing the same with more established gold funds on more established exchanges, and even more expensive by using a retail solution for individuals.
Just keeping bitcoins safe is no more expensive than gold. I've literally thrown some dice to generate a private key, sent coins to it, and all you need to do is make sure nobody else sees the key. Costs nothing. I won't go into details there, there's a million options, and they're not much different from say putting gold in a secure vault.
This article is about ETFs, not bitcoins or gold. If you own an ETF, you don't own gold or bitcoin, you own shared in an ETF, which is not even remotely the same. If you do actually own bitcoins or gold, and you entrust it to someone else, you have nobody to blame but yourself when they lose it. If you value something, hold onto it yourself and be careful with it.
This argument seems to assume you pay someone to keep your Bitcoins safe for you.
Let's be very clear: If you are not able to safekeep your Bitcoins yourself, you should not have any more than you are willing to lose. That's the state of the field at the moment. The whole point is cutting out the middlemen, and if you can't do that, you're not equipped to be in Bitcoin. Learn or stay away.
Try to steal my Trezor HW wallet. It is protected by a proper pin and passphrase and there are multiple accounts on it. So even if you force me to unlock it, I won't show them all. So I am actually more worried about my physical gold than Bitcoin.
You functionally can't buy insurance on meaningful amounts of Bitcoin. You can convince an insurance company to write you a standard cyberinsurance policy, but the limits on them are far less than the amount of Bitcoin people want to store, and when you have a more bespoke conversation with an underwriter they will say "No no no HELL no."
It is not hard to understand why insurers don't want to write these policies. Bitcoin exchanges die catastrophically in over 20% of exchange-years.
Last time I checked, their hot wallet had less than 5% of the bitcoins on their books. A catastrophic data break would leave most of their customers without either their bitcoins or any way to be made whole from the loss.
Right but it's only the hot wallet that has any significant risk. The cold wallets aren't online at all, they're on hardware wallets in geographically distributed safe deposit boxes. Even if someone broke into one and managed to crack the hardware, that'd be just a small portion of their funds.
I would argue that they store the coins in the custody vault as close to the exchange point as possible so the fast transfers are frictionless...and that would cost a premium.
It is expensive because..of the risks premium associated with the storing a highly volatile asset.
If I had given 1 oz of gold for storage on Jan 2, 2017 the price was 1150 USD. If something had gone wrong in Sep, when the peak price was reached the payout would be 1350 USD, a 17% premium on the storage price.
In comparison, I gave 1 BTC for storage on Jan 2, 2017 at 1025 USD. If something were to go wrong today the payout needs to be 8217 USD, a 700% premium.
No, it’s not. You can just print a paper wallet (or even just write your private key on a piece of paper) and stick that in a vault. The author is conflating mining and transmission with storage.
Indeed, for the fools that store their bitcoins in a wallet on services like Coinbase. You only need to save your private key in a save place to have the storage for free.
Management fees vary widely across funds. They have everything to do with how money-grubbing the funds in question are and little to do with how expensive the assets actually are to secure. For example, you can pay >2% management fees on a really predatory S&P 500 index fund, the kind that John Hancock would sell you. Or you can pay .02% management fees on a top-level Vanguard fund tracking the same.
The only reason that the management fees on the Bitcoin funds is because they can be high since there's little competition so far, unlike with, say, S&P 500 index funds. It's not intrinsically expensive to store Bitcoin; far from it. It's far cheaper to store than gold, for all the obvious reasons that you don't have physical goods to secure.