When I found out about Bitcoin, I wanted to try some cryptocurrency to see what it was in practice, how it would work. Dogecoin was perfect for this learning purpose. I mined a little, bought about USD5 of it. Gave some tips on Reddit.
I liked the explicit purpose of the community to not be a speculative instrument. You should always use it as currency and most users were against holding it as wealth. I guess they lost that battle to the speculative greedy forces.
Once I learned enough, I stopped playing with it and forgot about some coins left in my wallet. That ~USD5 is worth ~USD430 today. But I forgot about the coins and the password. :) So, no profit from my early playing time.
> I liked the explicit purpose of the community to not be a speculative instrument. You should always use it as currency and most users were against holding it as wealth. I guess they lost that battle to the speculative greedy forces.
Every coin lost that battle. Bitcoin was also intended as currency. At the moment, the amount of speculation far outstrips any legitimate use as currency.
The world has gone nuts. And what's worse, my co-workers talk all day about what Redcoin and Ripple and Verge are doing and whether they bought or sold at the wrong moment.
> Every coin lost that battle. Bitcoin was also intended as currency. At the moment, the amount of speculation far outstrips any legitimate use as currency.
We're seeing the reason economists consider deflation to be a bad thing.
It has nothing to do with deflation (bitcoin isn't even deflationary yet, it is still inflationary currently), it has everything to do with scaling the blockchain as a technology.
Bitcoin was the first to hit the point of big adoption, and it will need to solve the problem. Ethereum is starting to feel the problem now as well.
The capped lifetime supply of Bitcoin is already be priced into the market. This is a problem with every cryptocurrency except DOGE: there's no incentive to actually spend the stuff.
I hope DOGE stays cheap, and I hope it starts getting more adoption among "nerd" subcultures beyond just tipping. Imagine paying for your vinyl figurines or mechanical keyboard parts with Dogecoin! Imagine Bountysource and Patreon and Flattr accepting DOGE! It would be my distributed nerd heaven.
I've never not bought something because putting my money in some investment account will give me a few percent return... I'm not buying a house because the "market is good", i'm buying a house because I need a damn house. I'm not buying food or gas because otherwise my money will be worth less soon, i'm buying it because I need it. Yes, i understand that things will be vastly different if the whole world adopted deflationary currencies, but I disagree that it would be the end of civilization as many people seem to imply when talking about how "dangerous" a deflationary currency is.
There exist markets that you can put your money in and make more than inflation reliably. According to your reasoning, wouldn't the existence of those markets mean there is no incentive for me to spend my money at all right now? I'm not trying to start an argument here, I just never heard a satisfactory reason here besides "trust me i'm an economist". Does it have to do with the extra "work" required to invest in these kinds of things that prevents them from being a problem?
I'd argue that there's a lot more to it than just "deflation" vs "inflation", and that bitcoin as it currently stands isn't going to cause a massive collapse of the economy where nobody spends any money at all ever.
That people spend less when they have deflationary expectation is not only a fancy theory, but a fancy theory combined with empirical fact. Read about Japan's lost decade. (Of course it's not going to be a problem with crypto anytime soon, because nobody measures their wealth in crypto, because nothing is denominated in crypto.)
The other problem with deflation is that it increases the real value of debt, making it harder for companies/borrowers to repay their debt.
Thus, it also tends to increase inequality (rewarding savers, punishing borrowers).
There isn't "no incentive" to spend your money. But there is a non-trivial incentive to not-spend it.
Consumption is surprisingly flexible in these cases. How often do you "need" a house, right now? Just look at all the data out there on how home-buying patterns are changing.
Now compound the issue: you can choose your medium of exchange. Currency A is inflationary (you want to spend it as fast as possible, because it's decreasing in value) and Currency B is deflationary (you want to hold it, because it's increasing in value). You currently hold both A and B. Which do you use for your day-to-day spending?
On an unrelated note, it's a shame that "trust me, I'm an economist" holds no weight nowadays. Nobody except a crank would dismiss a biologist talking about biology because they didn't see a "satisfactory reason" for something. Economists really screwed up their reputation over the last 50 years.
>Consumption is surprisingly flexible in these cases. How often do you "need" a house, right now? Just look at all the data out there on how home-buying patterns are changing.
I'd argue that a reduction in our consumption might not be a bad thing. Yes, on a shorter scale it can cause some harm, however we are on a planet with limited resources, and incentivizing saving over consumption might have massive benefits if done correctly.
>You currently hold both A and B. Which do you use for your day-to-day spending?
If you ignore the benefits that a decentralized cryptocurrency provides, currency A would be the choice. However if you include those benefits (no "gatekeeper" telling you who or what you can spend your money with or on, no ability to "charge back" any money, no trust needed to transact, and an audit-able "paper trail" which cannot be altered), then there are a significant number of transactions where I'd rather use B.
Paying for "subscription" services without fear of being continually charged after I stop wanting the service, receiving donations for work without fear that chargebacks will cause me to owe more than I received, buying goods and services that a company or government may not approve of, sending money quickly and cheaply across political boundaries (ignoring that bitcoin is failing here right now in many ways), and more are all very huge benefits that (at least for me) overshadow the fact that my bitcoin might be more valuable tomorrow than they are today.
>On an unrelated note, it's a shame that "trust me, I'm an economist" holds no weight nowadays.
Its extremely difficult to experiment on "the economy" by its nature, and because of that it is difficult to get hard evidence of the effects that specific things have on an economy. At best they can make educated guesses, but with something that complex I think it's naive to think that anyone fully understands the cause and effect relationships at play.
All social sciences share this problem, and it's why they all get similar amounts of distrust and cargo culting.
If you ignore the benefits that a decentralized cryptocurrency provides, currency A would be the choice. However if you include those benefits (no "gatekeeper" telling you who or what you can spend your money with or on, no ability to "charge back" any money, no trust needed to transact, and an audit-able "paper trail" which cannot be altered), then there are a significant number of transactions where I'd rather use B.
I feel the same way, but by and large we are in the minority on this point. Moreover there's no reason why you can't have all those features with an inflationary currency.
educated guesses
There's more to economics (and social science in general) than "educated guesses". But it's social science's fault that you feel this way, not yours.
> no "gatekeeper" telling you who or what you can spend your money with or on
That only means you'll use option B for the purchases where option A isn't available, not all purchases.
> no ability to "charge back" any money
For the purchaser, that isn't a benefit.
> no trust needed to transact
Either the purchaser needs to send the money first, and trust that the seller will deliver the goods, the seller needs to deliver the goods trusting that payment will be (has been) sent, or both need to trust an intermediary. "Decentralized electronic money" doesn't change this, the only solution is to do all transactions in person.
> There exist markets that you can put your money in and make more than inflation reliably
No, there don't. Even holding U.S. Treasuries is riskier than holding cash.
> bitcoin as it currently stands isn't going to cause a massive collapse of the economy
Nobody is saying that. What it has done is cause a collapse of the Bitcoin economy, i.e. the markets for real goods and services denominated in Bitcoin. If you think Bitcoin will go up 50% next week, you aren't going to use it to buy a cup of coffee. You'll use U.S. dollars, which will be worth a little less (albeit, probably, imperceptibly so) by then [1].
>What it has done is cause a collapse of the Bitcoin economy, i.e. the markets for real goods and services denominated in Bitcoin.
Bitcoin has been extremely volatile it's entire existence, and yet many merchants adopted it as a payment method.
I'll say it again, it's not "deflation" that's causing the collapse of bitcoin (although I'd argue it's not collapsing right now, but just struggling), it's the fact that a blockchain cannot scale at this time.
Steam used bitcoin for years successfully, and only recently had to stop because of transaction fees. Microsoft used bitcoin for years happily, and only recently had to stop because of transaction fees. All of these companies that are no longer using bitcoin, cite transaction fees as the reason, not the "eventually deflationary" nature of it (which was always the case, even when they started using it).
The blockchain as an idea cannot handle this kind of scale, and until that problem is solved, all decentralized cryptocurrencies will fail to get past this hard wall, whether deflationary or inflationary. Luckily there are many bright people working on this problem, both in bitcoin and in other altcoins, and I have hope that it will soon be solved, but until then cryptocurrencies will struggle to reach mass adoption.
> it's not "deflation" that's causing the collapse of bitcoin (although I'd argue it's not collapsing right now, but just struggling), it's the fact that a blockchain cannot scale at this time
I agree. I'm only refuting the argument that Bitcoin is not deflationary.
But by that definition bitcoin is inflationary depending on where you draw the lines. There was a period of about 3 years where bitcoin's value was dropping every day, and just this weekend it dropped 10-20%.
How can "deflation" be a useful definition if it can apply or not depending on the ever changing value of an asset? or even what you compare the value against.
> How can "deflation" be a useful definition if it can apply or not depending on the ever changing value of an asset?
I responded to this question elsewhere [1]. TL; DR Economies can change modes. The American economy was hyper inflationary in the 1970s, then deflationary in the early 1980s and the flipped back to a long-run trend growth of inflation until the dot-com bust.
The gold standard for measuring price level changes is to measure actual prices. The inscrutability of the Bitcoin economy forces the use of proxy metrics, e.g. the exchange rate between U.S. dollars and Bitcoins. This is appropriate given the entire legitimate Bitcoin economy is a subset of the U.S. dollar economy, with prices in Bitcoin often being pegged to an implied U.S. dollar price.
Fair enough. I still disagree that bitcoin being eventually limited in supply is a bad thing, but it appears that I have misunderstood the meaning of inflation and deflation, and I struggle to understand why the definition as you described it is useful.
>This is appropriate given the entire legitimate Bitcoin economy is a subset of the U.S. dollar economy, with prices in Bitcoin often being pegged to an implied U.S. dollar price.
I think this is a consequence of our language and location, as bitcoin is a global asset and therefore gets pegged against many other currencies across the planet.
Still, I understand your point, and I appreciate the discussion!
I'd say that risk-free real rates have actually been positive almost always, so what GP says is right. Holding US Treasuries is risk less for all practical purposes (your cash can be stolen).
> risk-free real rates have actually been positive almost always
No, they haven't [1]. The U.S. Treasury issues inflation-indexed bonds [2]. Their rates have gone negative, from time to time.
In the financial crisis there were non-bank institutions who couldn't find a buyer for their Treasuries fast enough to avoid default on short-term debt. The paranoid fucks who held cash out-survived those who accepted the liquidity risk of holding Treasuries over cash for anyone who (a) doesn't have access to the Federal Reserve discount window [3] and (b) hasn't ensured all their time-sensitive payment terms allow for settlement with Treasuries.
> Their rates have gone negative, from time to time.
Nobody disputes that occasionally, real rates have turned negative (Great depression, 1970's, or after the GFC 2011-2013 in the USA, with some countries in Europe even having negative nominal rates). However, predominantly real rates are positive [1, 2, 3 or even your 1], and some of the earlier episodes were arguably caused by the gold standard.
> non-bank institutions who couldn't find a buyer for their Treasuries fast enough to avoid default on short-term debt.
That's a liquidity problem, as you say yourself, unrelated to rates, no?
EDIT: ah, you're refuting the notion that treasuries are safer than cash. Again, though, you could call that a liquidity problem - if you have loads of cash deposited with a local bank, you might not be able to withdraw it all at once, either.
The price of goods (using USD as a proxy for goods, which is fine so long as you account for inflation of USD) in bitcoin is generally speaking decreasing. This means bitcoin is deflationary (despite new bitcoin still being mined).
It depends on your scale, take this weekend for example and it's absolutely not deflationary according to your definition, and there is no guarantee that it will continue in either direction.
Currently Bitcoin is neither inflationary nor deflationary.
It's a near zero swap (mostly other than fees). Nothing is created nor destroyed, which is why the primary argument for Bitcoin having much value today is as a value store.
You want to sell $1 million in bitcoin. Someone else is willing to pay you $1 million USD for those bitcoins. $1 million neither left nor was added to the economy. You now have the $1m USD to spend or invest as you see fit. You swapped positions, that's it. No deflation occurred at all.
I can buy more of whatever good I want for 1 bitcoin today than I could a couple of months ago, and I could buy more then than at the beginning of last year. That means bitcoin is deflating.
> The current amount of bitcoin in existance is increasing at a rate of 12.5 every 10 minutes
An increasing monetary base and deflation are not mutually exclusive. They tend to go hand in hand, but not always. Bitcoin's monetary base is increasing, i.e. there are more units today than there were yesterday. It is also deflating, i.e. one Bitcoin today is worth more than one Bitcoin yesterday. (More precisely, one unit of real goods or services are worth fewer Bitcoins today than they were yesterday.)
>It is also deflating, i.e. one Bitcoin today is worth more than one Bitcoin yesterday.
But that's explicitly false, especially today (what with bitcoin being down 14% over the last 24 hours). And there was a period of bitcoin's history of about 3 years where the value of one bitcoin was dropping day after day. Does that mean bitcoin was inflationary during that time?
I just can't see that as being a useful definition.
> Does that mean bitcoin was inflationary during that time?
Just because something is volatile doesn't mean we can make no useful statements about its trend. If you're re-evaluating your purchasing and investing activity on a day-to-day basis then yes, the day-to-day price level change is relevant. (There are corporate treasurers who worry about 30-day price level changes.)
> I just can't see that as being a useful definition.
I agree. For an asset as volatile as Bitcoin, the terms "inflationary" and "deflationary" are largely meaningless. It won't be used as a currency because it's volatile, not because it's deflating.
Still, between "inflationary" and "deflationary" Bitcoin has (a) spent more days deflating than inflating and (b) deflated over its long run to date. It is more correct to say Bitcoin is deflationary than anything else.
> It won't be used as a currency because it's volatile, not because it's deflating.
Again, I disagree. It's volatility wasn't a major problem in the past, and I believe it will begin to mellow out as time goes on. Bitcoin just went through an unprecedented amount of growth over 2017, as the market matures and more liquidity is introduced the price will (hopefully) stabilize.
>Still, between "inflationary" and "deflationary" Bitcoin has (a) spent more days deflating than inflating and (b) deflated over its long run to date. It is more correct to say Bitcoin is deflationary than anything else.
But isn't that true of any asset? Go back far enough and they all start at 0 and are worth something today.
> But isn't that true of any asset? Go back far enough and they all start at 0 and are worth something today.
Asset, perhaps (there is rightful quibbling as to whether e.g. a bond was ever worth zero; it didn't exist and then came into existence with a positive value, but that's nitpicking). Currency, no. The first U.S. dollars minted were far more valuable than one U.S. dollar today.
The actual action of bitcoin against anything in the economy leads to zero net inflation.
There is no wealth / money / assets being created or destroyed by Bitcoin going up or the coin count increasing.
There's no scenario where Bitcoin can reach into the economy without transiting through something, in which case there is a swap and no new value is created.
Want to take a loan against your bitcoins? The entity doing the loaning gets your coins if you default. Nothing new has been created, you swap positions.
Want to sell your bitcoins? The buyer swaps positions with you, no new wealth has entered the economy. The buyer holds your former position, and you hold the eg USD or Euro currency.
Want to direcly trade a house for bitcoins? (leaving off any taxes, fees, etc for this purposes) You swap positions with the seller. They get your bitcoins, you get the house. Nothing new has been added or removed from the economy.
New wealth is created almost exclusively via productivity increases, not by two people trading objects $1 for $1 back and forth.
>There is no wealth / money / assets being created or destroyed by Bitcoin going up or the coin count increasing.
That's false. There is electricity being spent, and the security of all transactions before the current block being further secured by each new block.
you might not think it's a valuable thing, but many others do, and you can't just discount it as not existing because you don't see the value.
Just like how you might not see the value in videogames, or shitty daytime TV, but that doesn't mean it's worthless, just that it's not something you value. Bitcoin is a service that allows trustless transactions, and that service costs in the form of electricity usage.
> you might not think it's a valuable thing, but many others do, and you can't just discount it as not existing because you don't see the value.
I never said any such thing at all. I never said Bitcoin wasn't worth anything, in fact everything I said implies that people were obviously willing to swap / trade etc. with it (the implication is that it's worth something).
I said Bitcoin does not involve the creation of any new value (as in, any net new value). It doesn't.
When you seek to utilize Bitcoin, all instances involve value swapping, not net new value creation. If you mined 1,000 Bitcoins, for you to enter them into the economy you must swap them against something else, for example $USD currency (or a car or a house, whatever). Nothing new is generated in that process, you're swapping positions. I get the 1,000 coins, you get the $USD which I was just holding.
That's why Bitcoin is clearly a value store.
Electricity cost, which you mention, over time ends up being a small fractional cost, little different than the existing transaction fees. As each coin is not mined over and over again, per unit of activity the electricity cost of each coin averaged plunges over time (eventually becoming insignificant given numerous years). Not to mention, most bitcoins were not mined at a meaningful electricity cost, which dramatically dilutes the whole as well.
>Electricity cost, which you mention, over time ends up being a small fractional cost, little different than the existing transaction fees. As each coin is not mined over and over again, per unit of activity the electricity cost of each coin plunges over time (eventually becoming insignificant given N years).
That's not true. Because in order to spend the transaction, it must be mined again. The amount of electricity cost of each coin doesn't plunge, it increases with each transaction, and stays the same if the "coin" doesn't move. At a point in the future no new bitcoin will be created, and at that time the only incentive to mine will be transaction fees which will pay for the electricity cost of the continued mining for validating transactions. It's not an insignificant cost, it's the only significant cost.
>When you seek to utilize Bitcoin, all instances involving value swapping.
By that definition all physical mining doesn't create any value, since people are just "swapping" their currency for whatever you dug out of the ground. And please don't say that it's different because it's "physical".
You seem to be hung up on the "swapping" aspect, which I never said was the "value add" of bitcoin, it's not, you are correct that simply trading bitcoin doesn't add anything of value. But transacting bitcoin does, it provides the value of enabling trustless transactions quickly and without any "gatekeeper".
Edit: I think I just realized the problem. Your definitions only make sense if you mine the coin once, then trade it off the blockchain forever (as in physically or virtually sending the bitcoin keys to someone else in return for some kind of good or service). That's not how most people use bitcoin, and doing it that way removes all of the benefits and "value add" that I talk about, and indeed is just a store of value at that point. So you are correct, but if you transact bitcoin in the blockchain, suddenly it becomes something more than a store of value, it provides value. It provides security, trustless transactions, immutable history, and more.
To utilize bitcoins, you do not need to go through the now extremely electricity intensive process of mining them each and every time. For example, the electricity transaction cost to send my friend a coin for payment for something, is trivial. Their cost to hold that coin is also relatively trivial, they did not have to expend vast electricity cost to mine it just so they can receive it; they don't have to buy tens of thousands of dollars worth of hardware to hold or acquire that coin, etc.
> By that definition all physical mining doesn't create any value, since people are just "swapping" their currency for whatever you dug out of the ground
Mining leads to dramatically higher utility value extraction of the thing being mined in most cases (which is typically the point of the mining), other than eg raw gold or silver store (both of which also have some industrial use value that can significantly amplify their foundational value).
You generally don't pull coal or oil or lithium from the ground to utilize it as a value swapping device. You mine them to put them into an industrial process that dramatically increases their value. Bitcoins are almost exclusively mined as a value store / value swapping device, as is the case with gold.
Mining is one of the great examples of net new wealth creation, mostly thanks to unlocking of energy over centuries of scientific advancement. You could hardly have picked a worse example.
For example unlocking oil, which is considered a form of mining for economic purposes, takes a non-acting asset in the ground, which can then be unleashed due to its immense energy concentration. Our technological progress can further improve the utilization. Plastics as a global, highly useful industry for example, was impossible a thousand years ago; scientific progress unlocked that new net value.
Bitcoin doesn't actually store electricity, whereas oil continues to retain its energy potential whether we think it's valuable as an energy source or not (eg if we all switch to solar). That's a literal property of oil. If the world replaces Bitcoin with the next great coin and its value goes to zero (whether in 7 years or 27 years), there's no electricity actually stored by the value-dead coins. It's the very real difference between oil having tangible chemical properties and Bitcoin being digital.
Coal as another example along with oil, takes a non-acting thing from the ground, which can then unleash vast energy that previously was not being utilized. Scientific processes can further unlock and enhance that value, make it dramatically greater, as was the case in its original entry into the economy.
Further, industrial processes can then amplify the things mined from the ground. In 1750, we had no means to utilize oil meaningfully, and then progress on chemistry allowed us to unlock that potential.
Farming and timber are two other good examples of new net value creation systems derived from dramatically amplifying an existing thing.
Blockchain and the services built on top of it, are where most of the net new value will be created ultimately. As in the case of the industrial applications of things mined from the earth, or farm land, etc. Bitcoin will very likely remain a value swapping entity. Blockchain, assumingly leading to all sorts of new services in the coming years, will likely enhance economic productivity, which is where net new wealth comes from. Most new wealth created is derived from time/labor saved and similar (thus oil applied thanks to science has been an extraordinary net new wealth generator). Bitcoin is not a very meaningful device toward that, its transaction costs have made it heavily impractical as a potential superior transaction system or currency (in which case it could have acted as a productivity booster, eg by saving people time or fees). Other crypto coins that possess superior properties to bitcoin for those purposes may fill that role.
>To utilize bitcoins, you do not need to go through the now extremely electricity intensive process of mining them each and every time.
Yes, you do not, but someone does. Unless you are trading them off the blockchain (in which case you are correct, and they add no value), every transaction must be included in a mined block, which takes a significant amount of electricity to mine and add to the blockchain. And that must happen each and every time a transaction occurs on the blockchain.
>For example, the electricity transaction cost to send my friend a coin for payment for something, is trivial.
It is not, it costs a fraction of all of the electricity used to mine the block your transaction was included in, proportional to it's size compared to the rest of the block, minus the mining reward. In other words (ignoring block reward for simplicity right now), if your transaction was 200 bytes, and 5000 of your transactions can fit in a block, and it costs roughly $20,000 in electricity to mine a block (average in september 2017), then your transaction cost roughly $4 in electricity. At the rates I used to calculate the $20,000 per block, that's 480 watt-hours on the mining alone! Ignoring the cost of transmission, relaying, validation, storage, and other smaller more trivial costs.
That is the whole basis behind bitcoin, and the entire reason for it's existence. I urge you to do a little reading on bitcoin and how it works before trying to speak about it. The whole "proof of work" is why bitcoin is valuable, it's the entire thing that bitcoin brought to the world, without it bitcoin is nothing more than a walmart gift card.
>Bitcoins are almost exclusively mined as a value store / value swapping device, as is the case with gold.
You seem to be willfully ignoring the entire point of bitcoin, which is that it isn't mined as a value store, but as a service which secures transactions and allows them to be trustless. Just like how mining lithium isn't to use lithium as a coin, mining bitcoin isn't about using bitcoin as a simple coin, but about securing those transactions and making them trustless. As long as you continue to completely ignore this, I don't think there is any more point in discussing this. You are willfully ignoring the net value that bitcoin creates while saying that it creates no value.
> That is the whole basis behind bitcoin, and the entire reason for it's existence. I urge you to do a little reading on bitcoin and how it works before trying to speak about it.
I'm fully aware of how Bitcoin works. Using argument from intimidation is not a valid argumentation line.
My position was factually correct. It does not cost even remotely as much for me to buy 1 bitcoin (eg from coinbase) or accept 1 bitcoin as payment (eg as a merchant), as it does to originally mine it today. As such, the electricity cost of each bitcoin on unit of utilization, plunges over time vs the origination. That electricity cost is not going to perpetually climb such that each bitcoin represents an eventual eg trillion dollars of electricity cost, your premise is false and absurd. After each bitcoin is mined today, its electricity cost per amount of N time existing declines, it does not increase. The first action, the mining, is extremely expensive; each action thereafter, is less expensive compared to that. Further economic use of a given coin mined today involves lower cost than the initial cost of mining it. If that weren't the case, Bitcoin would collapse instantly, it would become entirely unusable over a short amount of time (and it would never be worth mining).
I notice you ignored that you entirely blew the argument premise about the physical mining world. Bitcoin could hardly be any more different from oil or coal or numerous of other things we mine from the ground, precisely because natural gas, oil, coal are not primarily used as value stores or value swapping devices, as Bitcoin is.
> You seem to be willfully ignoring the entire point of bitcoin, which is that it isn't mined as a value store, but as a service which secures transactions and allows them to be trustless.
For someone that keeps proclaiming that I'm ignorant, you're making a very wrong claim. The supposed "point" of Bitcoin is not strictly defined and has shifted in the last several years based on circumstances. There's no single central authority of Bitcoin that can define its point. If transaction fees are very low, it will be utilized differently than if its transaction fees are very high, thus its utilization shifts. There is no singular rigid "point."
Oh they have gone nuts indeed. I see this pattern among my friends who are mostly financially uneducated. They have never traded stocks and have little understanding of how markets work.
They actually think they can read the “news” on reddit and buy/sell accordingly, outsmarting other players.
That's terrifying. At least my co-workers are aware of the risks (because I won't stop reminding them). It's important to realise that this really is somewhat like a Ponzi scheme. There's nothing real backing up that value, just the belief that in the future, more people will want these coins. The difference with a real Ponzi scheme is that that belief could turn out to be true. But nobody knows.
Here's an interesting thing, though: many exchanges don't accept money, only other cryptocurrencies (binance.com, for example). So you in order to trade there, you first need to buy bitcoin or some other mainstream coin at an exchange that does accept money, and then transfer it to the other exchange to really trade there. But bitcoin is slow and expensive to use, so a lot of people advice using litecoin or ether instead. So that means that litecoin and ether are already winning the "who gets to be the currency that's going to be actually used" race. Ease of use does matter.
Also I just checked my password manager and saw I had a bunch of Dogecoin sites. Tried them all. 5 out of 6 are completely dead, an one is just a price aggregation site.
Also Dogecoin blew my GPU at the time, luckily I got a free replacement from MSI.
Similar experience, though I'm too lazy to check the value, I think I had something like 17k dogecoin mined. My password had to have been like 60 characters and I forgot it, deleted my wallet because I figured it wasn't worth much anyways and I had gotten bored with the community by then.
I really did like the community around it though (aside from a few ne'er-do-wells) and how when people would ask for the going rate of 1 Dogecoin you'd always get the response of 1 Dogecoin. In any case I think it worked well as an educational tool.
I actually tried some homemade bruteforce attack using all my regular passwords, but at half-way I decided it was not worthy. I don't think Dogecoin has any chance (or will, as a community) to get another 10x valuation; so probably I will keep tracking the value of my ~27000 dogecoins as a reminder of how speculative bubbles work.
Similar story here, except I discovered that the Doge I had sitting around on an old HDD was worth around $3000 in August, so I recovered it and exchanged it for Ethereum.
If I'd held on to the Doge it would've been worth twice as much now. Oh well, it's free money so I can't really complain and I still think Ethereum has more potential longer term. Not that I'm an investor by any stretch of the imagination.
Serious question... how does ${Price of 1 coin} * ${Total supply of coins} = ${Market cap}? Not all coins are going to sell for the peak price ... it seems like a moot metric at best.
Becaude you can't observe directly how much every person really values the assert, only the market-clearing price. No serious economist/trader thinks that 5% of the supply can be bought or sold for 5% of the market cap.
This is exactly the same whether the assets are commodities, cryptocurrency or equity yet we still talk about market cap as a useful proxy.
The theoretical basis for that metric, with stocks, is the whole being worth at least as much as the sum of its parts. That is, a buyer of every last share of Apple stock lands up owning a company throwing off $60+ billion a year [1]. A buyer of every last Bitcoin ends up with nothing.
I can't think of a non-currency asset that shares this property. For currencies, measuring the size of the monetary base can be meaningful. But it's not as meaningful as market capitalization is to individual equity securities.
Epistemologically, we cannot choose good summary metrics for Bitcoin until we know what it's useful for.
But I think it is also clear that the theoretical buyer of every last share of Apple stock does not end up with a company "worth" $900 billion (it's current market cap). That metric and measurement of value just vanishes if there is no market any more. How you measure its "worth" from now on is completely arbitrary and debatable.
Say he owns them all and then starts an auction for one share every day. Could you still take the price of that one share per day to determine a total value of the company?
That is not in opposition of your argument. (Crypto)currencies are vastly different to stock in an established and profitable company. But also f.e. Uber stock is very different from Apple stock.
> Say he owns them all and then starts an auction for one share every day. Could you still take the price of that one share per day to determine a total value of the company?
Minority discount models [1] are notoriously useless or hairy, owing to the complexity of the body of law governing what a controlling shareholder can and cannot do to minority shareholders (and how likely they are to get away with it). The inverse of those models is the control premium [2], the amount an acquirer is typically wiling to pay over the public stock price to buy every last share.
We could quibble about whether the $900 billion company is worth $1 trillion or $800 billion after being taken over (with or without stubs [3]). What we will probably agree on is it is worth more than zero. That's all that is germane to my original argument.
A crucial difference, and your hypothetical captures it very nicely.
With Apple, the price reflects future income potential. Thus, if holders of Apple shares sell 10% of the outstanding stock, that should not affect the price much, in theory, except to the extent that it reveals new information about the firm. Sure, the price will drop, but if it drops much, investors will come in and pick up the cheap shares.
With BTC, the value comes solely from the value people assign to it (unlike Apple!), and when people sell it, that is ipso facto evidence that it's less valuable (unlike Apple). Thus, if holders of BTC sell 10% of the outstanding coins, there's really not much to support the price (except maybe painting the tape and freshly printed tethers), and it could conceivably collapse completely.
> I can't think of a non-currency asset that shares this property.
Good point. I was thinking of gold, but surely if someone purchases all the world's gold, it'll be worth quite a lot, because it does have intrinsic uses. With BTC, people could trivially switch to any fork.
The classical wisdom is ${price of stock} is at least somewhat correlated with ${price of company assets} + some speculative modifier for future performance. The cryptocoins only have the latter.
We can also see there is a real sense in which market cap matters. There are many cases where companies acquire other companies that are publicly traded in one shot. When that happens, the offer is generally somewhere in the ballpark of the market cap. If someone wanted to acquire "all BitCoin", there isn't an equivalent way to use the "market cap" of BitCoin to mean anything.
(If you want to observe that value is thus still relative and that the people making the offer are themselves influenced by the market cap, go nuts. However, if you intend "valuations are relative anyhow" as a selective attack on the realness of stock market caps but then "accidentally" forget to apply the same logic to cryptocurrency market caps, I'll pass.)
I don't think there is much wisdom in factoring in the price of company assets in its stock price. That's just obvious.
That's like selling your car vs selling your car with 10.000 dollars in the trunk. Obviously it affects what I'm willing to pay.
But the important question is still the worth of the car - which is very complicated to determine objectively and with f.e. classic cars nearly pure speculation.
That's because cryptocoins are currency and stocks are parts of any kind of enterprise that does something to add value to the material world around us. People seem to have a hard time understanding the difference between "The US Dollar" and "The Kraft Heinz Company".
I've thought the same and chalked it up to 1) lack of a better way to easily gauge the ballpark value and 2) better headlines. I believe that's the way public company market caps are calculated as well, though with less of a chance of going to absolute zero.
It represents the value right now. It can of course vary due to supply and demand.
If everyone decides to sell, price will go down, but we can also make the opposite argument. If I were to buy all coins in the world, I would probably have to pay much more due to the increased demand.
They will all sell for that price if supply and demand are equal. Sellers will ask for at least as much as the value of the last trade, buyers will offer no more than the value of the last trade. When there is an imbalance then either buyer or seller must compromise by offering more or asking less, repsectively. These figures are based on trades that have happened in the last few seconds so it's more realistic than in some other markets.
Yeah, but then maybe there should be some metric to measure volatility as well. Even some stocks are going to be more volatile than others. And it's not like stocks have never been outrageously overvalued before...
So, if I weren't sure that cryptocurrency was in a bubble before, I think it's safe to say that when DogeCoin pops a $2B market cap something big is happening. And that big thing is probably not good.
Dogecoin isn't really a parody, not in the way that e.g. Useless Ether Token is a parody. It's a relatively lighthearted, fun cryptocurrency, but it's at least as legitimate as e.g. Litecoin, and the only way to see it as less legitimate than Bitcoin is if you see something magical about the fact that Bitcoin was first.
True, if anything it was probably the second most lively crypto community effort I've seen to date. Bitcoin was a community for everyone, and the biggest. Litecoin was just about price. Ether and Ripple were just about price and a few devs talking about tech. Doge was about community, it was really unique in that way and a lot of fun. Relatively few really cared about its price in any serious way and everyone just wanted this thing to blow up for the fun of it.
Anyway... more importantly, there's absolutely no way anyone is able to cash out anywhere close to $2b in dogecoin haha.
I think what people don't fully get is that these small coins had 0.1% the market cap of bitcoin over the past few months, and it had just <$100k volume per day worldwide for most of last year. (about half of a single walmart's daily sales). That means it's pretty easy to manipulate. You just set-up a simultaneous buy and sell order with two accounts on an exchange, buying doge for bitcoin at 10x the price. Of course, you're selling to yourself, so you don't lose anything in this process. But you are momentarily creating a price momentum that others may pick up on. Throw some posts in trading forums for all the new people who don't understand anything and just talk about price movements to get-rich-quick, and you've got people jumping on the bandwagon. It's a typical pump & dump and it's the only reason we suddenly talk about ICOs and other coins, because when bitcoin moves up quickly like it has, it's an easy time to exploit all the other coins that have tiny volume / price, but lots of potential eyeballs if you make the price move.
> I feel some are using our rise to illustrate the absurdity of cryptocurrency pricing (http://uk.businessinsider.com/dogecoin-cryptocurrency-has-ma... for example). To me, in an environment where a cryptoasset with $30 USD equivalent transaction fees has a market cap of over a quarter of trillion dollars, I don't think we're the absurd one. Yes we take ourselves less seriously, but that doesn't mean we're not serious behind the scenes. We're a 4 year old currency with transaction fees barely over a cent and significantly higher throughput than most other cryptocurrencies.
Stocks - at least, blue-chip stocks - are usually thickly traded. The full set of shares outstanding does get bought and sold, at prices that usually remain roughly reflective of the market price (e.g. Dell being taken private, for a recent example). There are stocks that trade much more thinly, and this kind of absurdity can happen there, e.g. Bigfoot Project: https://www.bloomberg.com/view/articles/2016-08-18/bigfoot-r... .
So there's no clear bright line between "legitimate market cap" and "silly market cap". But there is a quantitative difference, and it's worth thinking about how deep the order book is when you see these "market cap" calculations being thrown arond.
Stocks represent ownership of an actual company that produces things and sells them, creating value. The price of the stock reflects an estimate of the future profits, the true value. If you buy all AAPL shares, Apple's future profits are yours. If some people (for whatever reason) sell AAPL while the estimate of future profits is not affected, price will drops somewhat and then value investors will swoop in to pick up the cheap shares. Others might disagree with the assessment, but future profits would vindicate the value investors. In other words, true value is realised and revealed over time. Thus, you have feedback loops that should keep the share price somewhat anchored to true value.
However, with Dogecoin, there is no intrinsic value, but solely what people assign to it. If people sell Dogecoin, that is ipso facto evidence that it's worth less, which can set of vicious cycles, run-away feedback loops, both up (bubbles) or down (crash). There is no true value. It's different from stocks.
In theory no, but in practice stocks on major markets will have a deeper book and also a "market maker" that would act as a counterparty for large trades.
Cryptocurrency supporters like to say HN hates bitcoin etc. but for some reason "price point" stories keep getting voted up. I still don't get the fascination with price point stories. Do we need to post Google or Apple price points next time they break a marketcap?
That said yesterday's story about Dogecoin breaking $1B:
Not exactly rich, but I mined a couple of million of them back in 2013-2014. Still have a million left (the rest were stolen by Paul Vernon in the Cryptsy heist). Probably cost me around a thousand pounds in electricity and hardware costs, before I decided it was no longer worth it as all the altcoins plummeted in value. I held onto them for years because it didn't seem worth selling them for nothing. Obviously, I'm now happy I did.
I seen on an exchange people were using doge to move funds as other coins/tokens were more expensive or disabled, it's not a sign of a bubble but of it actually being used
I liked the explicit purpose of the community to not be a speculative instrument. You should always use it as currency and most users were against holding it as wealth. I guess they lost that battle to the speculative greedy forces.
Once I learned enough, I stopped playing with it and forgot about some coins left in my wallet. That ~USD5 is worth ~USD430 today. But I forgot about the coins and the password. :) So, no profit from my early playing time.