Wednesday, June 7, 2017

Bitcoin, Culture and Value

What good are bitcoins if you can’t show them off? I can’t wear a bitcoin chain around my neck or a bitcoin watch on my wrist. Nor can I hang a bitcoin on the wall. And because bitcoins are highly divisible and fungible they make for poor collectibles. I can’t possibly complete my bitcoin collection or impress people with the story of a specific bitcoin’s particular place in history or what makes it different from the other bitcoins out there.

These limitations are one reason why bitcoin is a peculiar store of value.

We typically think gold is expensive because people value it as jewelry, that original works of art are valued for their beauty and their place in history or the oeuvre of an artist. People collect old coins because they find them beautiful or fascinating and because they are driven by the human instinct to collect things that are rare and meaningful in some way.

It seems to be the aesthetic, historical, cultural features of these kinds of objects, together with their rarity and the human drive to collect that give them their value. But bitcoin doesn’t seem to have such qualities. Nor are bitcoins backed by governments or central banks who can create a demand for them the way they do with regular money. Bitcoins also don't provide returns in the way stocks do.

So if not through these properties, institutions or returns, how could bitcoins have become so valuable? Is bitcoin just in a big bubble that will inevitably pop?

In this article I first argue - much in agreement with Moldbug's Bubble Theory of Money - that while it is true that bitcoin is in a big speculative bubble, it is a sustainable one.

And secondly, contrary to how we usually think about them, most of the value of the objects I mentioned above - gold, fine wines, works of art etc - is also bubbly. 

Bitcoin is special only in that it is an extreme case of the same bubble mechanism. While much of the price of original works of art, fine wines and gold can be explained by this bubble-blowing mechanism these objects do also have some consumption value. Bitcoin's value on the other hand is nothing but bubble. The same principle holds for other cryptocurrencies such as Ethereum.




Exchange Value
One common answer to the question of what gives bitcoin its value appeals to bitcoin’s qualities as a medium of exchange. Bitcoin allows people to transfer value – value embodied by the bitcoin itself – from one person or non-person to anyone or anything else in a fast, cheap, secure way without the involvement of any third parties. And while these days bitcoin transactions are not as cheap or fast as they once were, there seems to be something to this answer.

On the other hand, it is not as though bitcoin is currently actually used very much as a medium of exchange. And although it is not very clear how to relate the one to the other it seems that this currently very limited use as a medium of exchange hardly justifies its current high value.

Things change when we consider the promise of its future use as a medium of exchange. If the technical problems involved in scaling up bitcoin can be solved so that more, faster and cheaper but still secure bitcoin transfers are made possible bitcoin’s value could become much higher still. This possibility of bigger future value could justify its current high value. 

While there is definitely something to this, it does not actually show that it is bitcoin's medium of exchange function that is the source of its value. The problem is that in order to be used as a medium of exchange at all bitcoin already needs to have value. Something valueless cannot be used as a medium of exchange. It is only through speculation about its future value that bitcoin was able to make that leap from valueless to valuable and come to be used as a medium of exchange in the first place.



Alternatively, if bitcoin itself cannot accommodate a much higher number of transactions, it may be possible to build a fast, cheap and secure payment system (or combinations of such systems) on top of bitcoin and its blockchain. Transactions in that payment system would not involve moving bitcoins around. Instead bitcoin would be used in the settlement system in the background. 

In that case, though, it would not really be bitcoins that are used as a medium of exchange in regular, everyday transactions. Instead, the technology and institutions built on top would form the payment system while bitcoins themselves would not actually be moved around very much.

Yet in this scenario in which they are not highly demanded as a medium of exchange, bitcoin would still be very valuable. Or rather, it would need to be very valuable for its blockchain and hence the payment systems built on top to be secure at all, and for bitcoin to be able to be used in the settlement system below.

Reversed Causation
All our attempts then to explain the value of bitcoin fail. Bitcoin doesn’t have the properties that seem to explain how traditional stores of value such as gold, original works of art, fine wine or collectibles become valuable, and its uses as a medium of exchange or as the settlement layer behind a payment system depend on its having a value in the first place.

The reason we can’t explain the origins of bitcoin’s value, I suggest, is that when we think of the store of value function of objects such as gold, original art, fine wine, collectibles and bitcoin we get the causation backward.

Sure, gold is shiny and durable, works of art are beautiful and meaningful, old coins connect us to our human history and so on. But ultimately, gold is not valuable because we use it in jewelry; we use gold as jewelry because it’s valuable. Gold becomes interesting as jewelry because it allows us to show off to others or, as Drake explains, even to ourselves. 



And the fundamental reason bitcoin is valuable right now is that people think bitcoin will be even more valuable in the future.

Culture Matters
The reason we typically get this causation backward is that in the case of traditional stores of value like gold, works of art and fine wines this causal mechanism is typically embedded in and obscured and complicated by social, cultural, aesthetic, epistemic norms, values and practices that accompany, explain and so seemingly justify an asset’s value. 

For example, it is exceedingly unlikely that a painting made by your 5 year old daughter will ever be valued at $100 million. It lacks the aesthetic and historical properties that will move or inspire people. Art experts won't write catalogs, articles or books about it, museums won't include it in exhibitions, and art historians won't try to situate the work in its (art) historical context. 

And while a good photocopy of a Rembrandt may have many of the same aesthetic qualities as the original it will never sell for more than a couple of hundred dollars on the market because it lacks the historical properties and the rarity of the original, making it a hopeless candidate to satisfy our drive to collect. Similarly, a supermarket wine could taste just as good as a 1947 Cheval Blanc but it lacks the latter's history and rarity, and the lyrical descriptions with which experts try to express its supposed intrinsic qualities.

Speculation Matters More
But although these qualities may have been important for these types of objects to become valuable in the first place, it is through the speculation mechanism that they actually gain the largest part of their value in the market: People value them because within this context of cultural, social, aesthetic norms, values and practices they expect other people to value them in the future. This way, these objects store (and typically grow) value, and people can sell them or show them off to capitalize on that value. It is this speculation mechanism that causes the price of these objects to be much higher than it would be for their consumption value alone.

To illustrate this principle, imagine what the effect on the market price of original works of art would be if it became law that after the death of its next owner the piece had to be destroyed. In that case the current owner and the next owner would still get the direct use value of the piece (save for the comfort of the knowledge they’d be leaving something for their descendants) but it would cease to function as a store of value. This would be a dramatic disruption in the valuation mechanism described above and it would result in a drastic drop in price.

Or imagine you would not be allowed to show pieces of art or jewelry to other people or even let them know you possess them. You could still freely buy works of art and jewelry in anonymized markets and enjoy them in the privacy of your own home but you could no longer show them off. This too would dramatically disrupt the valuation mechanism described above and cause a huge drop in price.

So although the rich cultural contexts in which stores of value such as gold, works of art, fine wine and so on are embedded were important conditions for such types of objects to become valuable, the primary driver of the store of value function of these objects is the speculative one. They are as valuable as they are now because people expect them to be valuable in the future. But this speculative mechanism gets obscured and made more complicated by these elaborate social, cultural, aesthetic, epistemic norms, values and practices that seem to provide an explanation and justification for the object's value.

Rationalizing Value
True, experts wax lyrical about the superior qualities of a 1947 Cheval Blanc, or the superior sound coming from a Stradivarius but what may really be going on here is projection and rationalization

People project the high market value of these objects onto the objects themselves, in the form of alleged superior aesthetic qualities. They do so because we need good stories, good reasons to explain, or rather, to rationalize the huge value of these objects that in reality is due in large part to speculation.

This is also why the results of research and blind tests in which experts fail to pick out the supposedly superior expensive wines from other wines or the sound of a Stradivarius from that of other violins have so little effect on prices paid for these objects in the industry.



In a way such earnest research and clever experiments miss the point. People want and need to believe the stories and descriptions of the supposed superior properties that explain the high value of these goods even though there are good empirical reasons to think those descriptions and explanations are false. A Stradivarius does not sound or even play better than new high quality violins do. But to admit this or even to genuinely treat it as a statement that is in need of empirical verification would implode the whole thing and lay bare the mechanism of speculation that was responsible for the high value all this time.

The profoundly strange aspect here is that the element of pretend inherent in these kinds of shared cultural contexts helps sustain the high value of these objects by obscuring the mechanism - speculation - that is actually responsible for most of that value.

People have to take the stories and descriptions seriously and literally but at the same time they can't act the way they would if they actually did take them seriously and literally: In that case they would have to be open to the possibility of falsification, for example. 

It's a remarkably delicate balance of seriousness and non-seriousness that all involved in these contexts seem to be able to maintain effortlessly. It's only outsiders - such as the earnest researchers - who unsuccessfully try to disrupt it from time to time.

The Beauty of Make-Believe
Although the previous paragraphs may sound critical of what goes on in these kinds of practices and beliefs, there is nothing inherently objectionable or wrong with them. The drive to accept, to go along with and indulge in them, to form and sustain norms and rituals around them is as human and non-objectionable as the drive to collect rare and meaningful items, or the drive that makes rational people cheer when 'their' football club wins or cry when it loses. In all these cases, there are elements of pretend or make-believe, a semi-deliberate choice to not analyze these things until there is nothing left.

In contrast, the same people who can suspend their disbelief when they indulge in these practices will be utterly serious and rational when it comes to the factuality of another aspect: When a presumed 1947 Cheval Blanc wine or a Stradivarius violin turns out to be a forgery it immediately loses all its value. When it comes to that aspect, people do take things entirely literally and seriously. 

Which is entirely sensible when we realize that for the collectibility and the speculative mechanism rarity and originality are crucial features while demonstrably superior aesthetic qualities need not be.



Naked Value
The remarkable thing about bitcoin, in contrast with the objects described above, is that it exists almost entirely without these kinds of contexts of established cultural, social, aesthetic norms, values and practices. 

Bitcoin is the purest embodiment of the speculative, bubble-blowing mechanism responsible for the store of value function. People buy a bitcoin not because books were written about the beauty of a specific bitcoin, or to show off that bitcoin in the club but because they think that this bitcoin – or any bitcoin – will be more valuable in the future.

For this reason bitcoin shows that for an object to become a store of high value it is not just not sufficient for it to have - or be said to have - certain valued properties the way that fine wines, works of art and so on do, it is not even necessary. Bitcoin's value is the result of nothing but speculation. It is nothing but bubble. It doesn't even require the pretense that its value is attributable to some feature inherent in bitcoin itself.

Admittedly though, this is a somewhat exaggerated way of putting it. In bitcoin's history there have been aesthetic, cultural or ideological factors that probably motivated some people to buy them. Some people admired the beauty of bitcoin’s design or were fascinated by how exactly it works so that they wanted to buy bitcoins to try it out or study it for themselves. Or they may have valued bitcoin because they saw it as driving political change they agreed with, or they appreciated the humanity in its promise to allow anyone to directly engage in value transfers with anyone else in the world. In such cases people may have bought bitcoins more to help kick-start these processes than to profit from them themselves.

In order for bitcoin to have taken off in the first place such a wider context of motivations other than speculation may well have been crucial, at least to the extent that in their absence speculation about its future value might well have been insufficiently optimistic.

It is also possible that in the future a richer context of cultural, aesthetic, social and other norms, values and practices will evolve around bitcoin. Maybe somebody will figure out a way to stylishly show off bitcoins to others as you would a gold chain. 

Or maybe despite bitcoin’s general and essential fungibility some (parts of) bitcoins will become more valuable than others, due to some unique feature. Maybe people would pay, for example, five bitcoins for a one-bitcoin transaction from one of the earliest Satoshi blocks. Then again, the divisibility of bitcoin may complicate this as the bitcoins in the Satoshi blocks could be divided up into billions of parts so that they are hardly rare. Also, even if bitcoins from the earliest blocks could somehow become collectibles, this would still not explain the value of all the other bitcoins in circulation.



Sustainable Bubbles
I have argued that the store of value function responsible for the non-use value of objects is a bubble-blowing mechanism. It is a mechanism by which people give objects value by expecting others to continue to value them in the future. And I have argued that this bubbly non-use value constitutes the largest part of the value of assets such as gold, works of art, fine wines, collectibles— but especially of bitcoin.

But don’t bubbles pop? And if bitcoin embodies this mechanism most purely, does this not mean that bitcoin’s value is nothing but bubble, and that it can pop any moment now?

No. Not all bubbles pop. If anything, the continuing high value of the objects we have discussed here – gold, works of art, fine wine, collectibles – are evidence that store of value bubbles can be sustained, that they are not inherently unstable or destined to pop. 

And as for bitcoin, yes, it is mathematically true that its value cannot continue to grow at this pace indefinitely. There is simply not enough value in the world to sustain decades of this pace of growth. But while a slowing down of the growth of bitcoin’s value may mean the end of bitcoin as a high risk-high return speculative asset, it does not mean the end of the value of the asset itself.

This is what makes bitcoin fundamentally different from a Ponzi scheme. While it is impossible for a Ponzi scheme to survive for very long if it stops adding enough new users to pay for the returns and withdrawals of existing users, bitcoin could at least theoretically survive an end to its growth. It could do so by transitioning into a stable, low-growth store of value.

Such price stability would, incidentally, also increase its appeal as a medium of exchange. But even if it never does come to be widely used as a medium of exchange, bitcoin could still continue to exist as the purest form of a store of value the world has ever seen, as something that is valuable for absolutely no other reason than that people expect it to continue to be valuable in the future.

Of course the other side of this is that when people - for any number of reasons - stop expecting bitcoin to have value in the future it will cease to have value today.

The bitcoin bubble does not have to pop, but it could.

29 comments:

  1. one of the best explanations - very simple.

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  2. Now I can explain why Bitcoin has value today even when there is none at present.

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  3. Great post, great writing.

    "...bitcoin could at least theoretically survive an end to its growth. It could do so by transitioning into a stable, low-growth store of value."

    This needs some fleshing out. How would this transition work? As long as bitcoin is dominated by speculators, it will always be volatile. Might it succeed in making this transition because it has become a popular medium of exchange? To attract regular folks who want a medium of exchange, bitcoin needs to be non-volatile. But presumably this non-volatility can only emerge once regular folks who want a medium of exchange have taken the place of speculators. There doesn't seem to be any way to break into this virtuous circle and arrive at the end-point you suggest.

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    1. Yes, it can be tempting to think of that phase as a casual "and then a miracle occurs" kind of thing. But the chicken-egg problem you describe needn't occur.

      Instead of bitcoin transitioning from a high_risk/high_reward speculative asset into a medium of exchange, it seems more likely to me that it would go a little something like this:

      high_risk/high_reward speculative asset
      =>
      lower_risk/lower_reward speculative_asset/store_of _value
      =>
      still_lower_risk/still_lower_reward store of value
      =>
      lowish_risk/lowish_reward store of value
      =>
      stable store of value
      =>
      maybe also medium of exchange


      This avoids the problem you described because while it is indeed unlikely that people start to use an asset with an unstable value as a medium of exchange, it is completely normal for investors to invest in assets with different degrees of risk/reward.

      (and typically fewer people will invest in high_risk/high_reward assets and more people in low_risk/low_reward assets, and so bitcoin could pick up more and more investors as it transitions from high_risk/high_reward to low_risk/low_reward.)

      (so i also think it doesn't even need to come to be used as a medium of exchange for it to be and remain valuable)

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    2. What underlying forces drive the transition from being a high risk speculative asset to being a low risk asset?

      I mean, in the case of a ponzi or something like Proof of Weak Hand 3D, the tokens are going to be permanently volatile. It makes no difference if it has attracted a small group of participants or if is more mature and has attracted a large one... no amount of time will make POWH3D or a ponzi less volatile.

      Or take stocks. Just having more participants in the market for a given stock doesn't lead to stable prices. I mean, when a stock debuts as a penny stock, it will be incredibly volatile. Earnings are non-existent and it only has a hazy business plan that might or might not work. Say that ten years later the stock trades $100 and volatility is a fraction of what it used to be. It isn't the bigger market cap and larger trading volumes that drive this decline in volatility, but the fact that the company's business has grown dramatically and earnings have become much more stable and predictable.

      What is the story for how bitcoin goes from a highly volatile instrument to a boring one?

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    3. As the supply is inflexible, the sole factor in determining the price gyrations are demand. As Bitcoin may increase drastically in market cap, liquidity, &c, the demand might stabilize, thus lower volatility.

      More time-tested and proven cryptographic system, incentive system, &c, will also help increase general trust in the system, of course.

      As for how that might go, given one subscribes to the digital gold / store of value narrative for now, obvious markets where Bitcoin may displace a fraction or a multiple are gold store of value demand, offshore banking demand, foreign exchange reserves demand and perhaps general market expansion of similar value props given how accessible Bitcoin may be compared to other previous non-sovereign monetary store of values / “opt-out monies”. Likely wild hypecycles, h/t vijay, thatll decrease in percentage terms each time.

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    4. Yes, increased trust in the system could help reduce volatility. And yeah, increased accessibility could increase market size, and that in turn could also reduce volatility.

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  4. "What underlying forces drive the transition from being a high risk speculative asset to being a low risk asset?

    I mean, in the case of a ponzi or something like Proof of Weak Hand 3D, the tokens are going to be permanently volatile. It makes no difference if it has attracted a small group of participants or if is more mature and has attracted a large one... no amount of time will make POWH3D or a ponzi less volatile. "

    I’m not sure what you mean here by a Ponzi’s volatility. I mean, a good indication that an investment is a Ponzi scheme is exactly its *lack* of volatility. Constant steady high returns are an essential feature of Ponzis and also a key reason they are not sustainable.

    Maybe instead by ‘volatile’ you mean something like ‘unstable’, maybe in the sense that the Ponzi scheme could implode at any moment, namely any time enough participants decide to exit out of fear that the other participants might beat them to it.

    If this is what you mean by ‘volatile’ then yes, that could happen with bitcoin too.

    But it could also happen with gold, original works of art, collectibles etc.

    If enough people start to think enough other people may exit the gold market and hence drive down the gold price, they themselves will exit now and cause the price to crash now.

    The mechanism responsible for this problem is inherent in any non-use demand for an asset. It’s the bubble mechanism. The monetary demand for any asset is a bubble. Changes in that demand inflate or deflate the bubble. And it is theoretically possible for the monetary demand for an asset to go to zero if people lose confidence other people will sufficiently value the asset in the future.

    The difference between Ponzi schemes on the one hand and assets such as bitcoin, gold and works of art on the other lies in their sustainability. Ponzis are doomed to fail because they require constant growth in the number of participants, in order to be able to pay out profits and to pay back the people who leave the scheme. Sooner or later there are not enough new participants to meet obligations.

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    1. This problem does not occur in the case of bitcoins and gold. It is at least theoretically possible for them to transition from a speculative investment to a stable store of value in which case no new market participants (or increased demand, more generally) are needed to sustain that value.

      That brings us back to your question what this transition would look like, what forces would drive it.

      So I’ve argued that the problem that is unique to Ponzi schemes – that they are not even theoretically sustainable – does not apply to bitcoin. In a Ponzi scheme you *have to* exit before the others do and hence before the whole thing implodes. So the question is only one of timing.

      With bitcoin and gold on the other hand it is at least theoretically possible that the thing is sustainable and that you never have to exit. As long as enough people keep believing enough other people will sufficiently value bitcoin or gold in the future, the thing is sustainable.

      So to the extent that you think the unsustainability feature of a Ponzi scheme (i.e. that it *must* implode) also applies to bitcoin and is something that cannot but prevent bitcoin’s transition from speculative investment to stable store of value, I think you need not worry.

      And to the extent that you regard not that feature but the general bubble feature (i.e. that it *could* implode if people lose faith) of bitcoin as something that would prevent this transition, I think the main counterargument I can make is to simply point to gold, collectibles etc.

      Those assets are prime examples of the viability and sustainability of the bubble mechanism. Enough people apparently believe that gold will be sufficiently valued in the future.

      But this answer alone may not be very satisfactory because bitcoin differs from eg gold in some crucial respects:

      - bitcoin is so new and we can actually point to the period in which it was still worthless
      - there is no non-monetary, industrial demand for bitcoin
      - bitcoin at this point also has no show-off value the way gold does in the form of jewelry

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    2. But as far as I can tell those elements do not make the transition from speculative investment to stable store of value impossible. Let me explain by way of a thought experiment:

      Suppose I discover a new type of metal today. It’s roughly as durable and divisible as gold is. It’s also pretty shiny. And there’s about as much of it as there is gold. Oh, and it’s not really clear there are any industrial uses for it.

      Starting today, how do you imagine the price of that metal will develop in the next few days, weeks, months and years?

      It seems to me that there will be a pretty volatile initial few days, maybe weeks or months, as people try to figure out how much other people will value the metal. And sooner or later some stablization will take place based on a convergence of people’s expectations about other people’s future beliefs.

      Still, lots of factors could disrupt and destabilize the market and at least temporarily cause more volatility. And it’s theoretically possible that everybody starts believing nobody will value the metal in the future, in which case the price will go down to zero. But it seems likely that some stabilizaation will occur, and hence that the asset will come to be used less as a speculative investment and more as a stable store of value.

      The way the price of this new metal develops is likely quite different from bitcoin’s price development. (just like gold’s price development was also very different from bitcoin’s and from this new metal’s), as the assets, their features and their histories and the contexts in which they are discovered, used and valued are all different to some degree. In the case of bitcoin, for example, there is more certainty about supply, but much less confidence about how much people will actually value bitcoin in the future, especially because there is no perfect precedent that one can study.

      So when you ask what the story is for how bitcoin can go from a highly volatile instrument to a stable and predictable one, II can’t give you a good prediction. (If I could, I’d become rich.) Instead, I can only point to some partial comparables (historical and hypothetical) where such stabilization does occur, and note that AFAIK there is nothing that suggests it is impossible for bitcoin’s price to stabilize as well, for market participants to somehow come to a temporary consensus that bitcoins will be valued this or that much in the future, even though nothing but speculation , no non-monetary demand and no perfect precedents, underlies such speculation.

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    3. "Or take stocks. Just having more participants in the market for a given stock doesn't lead to stable prices. I mean, when a stock debuts as a penny stock, it will be incredibly volatile. Earnings are non-existent and it only has a hazy business plan that might or might not work. Say that ten years later the stock trades $100 and volatility is a fraction of what it used to be. It isn't the bigger market cap and larger trading volumes that drive this decline in volatility, but the fact that the company's business has grown dramatically and earnings have become much more stable and predictable."

      I agree that in the case of stocks earning are a stabilizing force, one that is lacking in the case of bitcoin. I’m less sure that increases in the market cap and trading volumes do not empirically tend to lead to greater stabilization even in the absence of the earnings factor. Take for example these 2 factors:

      1. Imagine it’s 2010 and only about 1,000 people own bitcoin. That means there is still enormous room for growth. If instead 5 billion people already own bitcoin and only 1 billion people don’t, there is much less room for growth. It seems much easier to estimate future demand in the latter case than in the former, and hence there will more convergence of expectations among market participants and hence less uncertainty and less volatility.

      2. Greater liquidity typically means lower transaction costs which typically means an improved functioning of the price system and hence less volatility.


      ---

      I suspect there's something lacking in my response, that it still does not address your key concern, but maybe I'm not clear enough about the issue myself to figure out what is missing.

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    4. Maybe we could do a convo or even a podcast on the topic. Likely less time consuming than doing it in writing, but less time to think etc.

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    5. Podcast? Sure, maybe not yet though. I'm a slow thinker, gotta write it all down first. I may have a response or two to your points that I'll leave on this thread, hopefully this weekend.

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    6. "Maybe instead by ‘volatile’ you mean something like ‘unstable’..."

      "The difference between Ponzi schemes on the one hand and assets such as bitcoin, gold and works of art on the other lies in their sustainability. Ponzis are doomed to fail because they require constant growth in the number of participants, in order to be able to pay out profits and to pay back the people who leave the scheme."

      The reason I brought up ponzi games (specifically POWH3D) was in reference to their price volatility, not their unsustainability (I don't see why POWH3D can't stutter on forever). The point I was trying to make is that no matter whether POWH3D has 35 participants, or if it has 350, the day-to-day price volatility of the token is going to be the same under both scenarios. A growing interest in playing ponzi games doesn't alter the nature of the game. So POWH3D can't make some sort of transition from speculative to stable price. Would you agree with that? Here is the price chart, for instance.

      On the question of sustainability, POWH3D will certainly suffer large declines in confidence. A chunk of the participants may stop believing that other people will value POWH3D tokens in the future, and this will cause a drop in price. But you only need a few people to keep believing in it for the tokens to survive the selloff and trudge on.

      So to reiterate, I don't think it is the 'unsustainablity feature' of a ponzi game like POWH3D that applies to bitcoin--POWH3D isn't unsustainable. It is the permanent volatility that applies.

      "Suppose I discover a new type of metal today. It’s roughly as durable and divisible as gold is. It’s also pretty shiny. And there’s about as much of it as there is gold. Oh, and it’s not really clear there are any industrial uses for it.... And it’s theoretically possible that everybody starts believing nobody will value the metal in the future, in which case the price will go down to zero. But it seems likely that some stabilization will occur, and hence that the asset will come to be used less as a speculative investment and more as a stable store of value."

      But in this story why can't I just substitute POWH3D tokens for your "new metal". They fit perfectly, no? In your story you say that it "seems likely that some stabilization will occur". But it doesn't seem likely to me that the price of POWH3D tokens can ever shed their incredible volatility. People’s expectations about other people’s future beliefs will simply never converge. So why is your "new metal" able to achieve this jump?

      I think that you're taking a logical leap when you claim that an object that is purely speculative can make the transition to being stable, without having provided a good fundamental explanation for the underlying forces that guide this shift. I think I provided a decent explanation for why a stock might succeed in doing so. If you want to convince me that bitcoin can do the same, you need to give me a similar explanation of underlying forces. Put differently, why is bitcoin like a stock and not like POWH3D?

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    7. Ah, I had somehow missed your earlier article on POWH3D in which you make an explicit distinction between ponzi schemes and ponzi games. My argument applied to the former and not the latter, and so is pretty much irrelevant. Anyway, that clears up some confusion for me.

      More later.

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    8. Discussion continues here https://twitter.com/KoenSwinkels/status/1035288026824560640

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  5. Oh, and a third reason why a larger market cap could help reduce volatility is that bigger markets become less easy to manipulate.

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  6. In case you haven't read, Saifedean has a decent short piece on bitcoins volatility: http://jsf.iijournals.com/content/24/1/53. PDF: https://www.dropbox.com/s/z5w0b2qdpylantp/Can%20Bitcoin%27s%20Volatility%20Be%20tamed%3F.pdf?dl=0.

    ReplyDelete
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  14. Bitcoinist
    http://bitcoinist.com/
    Bitcoinist is the prime source for information about Bitcoin, digital currency and blockchain technology. Bitcoinist provides up-to-date news and insightful analysis related to business news and technical price analysis to community events.

    ReplyDelete
  15. Bitcoinist
    http://bitcoinist.com/
    Bitcoinist is the prime source for information about Bitcoin, digital currency and blockchain technology. Bitcoinist provides up-to-date news and insightful analysis related to business news and technical price analysis to community events.

    ReplyDelete