Have cryptoassets created $0.5 trillion in social value?

Vitalik Buterin poses that question, do read his whole storm. Here are the last three tweets:

How many Venezuelans have actually been protected by us from hyperinflation?

How much actual usage of micropayment channels is there actually in reality?

The answer to all of these questions is definitely not zero, and in some cases it’s quite significant. But not enough to say it’s $0.5T levels of significant. Not enough.

Let me set aside the question of enabling grey or black market activities, and let us put aside the bubbly component of these assets, which may or may not be real.  I’d like to focus on the underlying fundamentals.

Furthermore, crypto-assets have not consumed half a trillion in social costs, though I’d like to see the electricity bill.  So mine is the concrete question: insofar as crypto-assets have served as hedges and stores of value, is that social value or just a private return at some offsetting rent-seeking-based social cost?

Stores of value

Let’s say I build a warehouse and store some furniture in it, because I am moving and I don’t want to throw out the sofa but need to keep it somewhere for a month.  The gains from storing that furniture can be captured by standard cost-benefit methods, and few would doubt that is a legitimate private and also social efficiency.  I am carrying “sitting capacity” into the future.

With crypto-assets, I am carrying wealth more generally into the future.  The person who most wants that payoff structure for the wealth carry will end up owning the crypto-asset.

Do I hold and carry forward that wealth at the expense of other people?  Is creating a crypto-asset, in welfare terms, a bit like being a counterfeiter and thus rent-transferring and wasteful?  Or is it more like storing a sofa while moving house?

Or is the crypto-asset more like an insurance contract, and thus again wealth-enhancing?  I see it as performing a mix of the store of value and insurance functions.

If the crypto-asset is rent-seeking (the electricity cost aside), exactly whose purchasing power is diminished?  Presumably the Bitcoin and Ether millionaires spend more of their money and drive prices up for others.  But it seems that is a pecuniary externality, not a real social cost of the kind that would justify a judgment of socially wasteful rent-seeking.

Maybe it makes more sense to view the crypto-assets as a new kind of insurance contract: “if some of my other assets go bust, Ether will keep me afloat.”

But who am I buying insurance from?

Dare I sneak the electricity back into the argument, and claim I am buying a form of implicit insurance from the electricity company?  In this view of the world, electricity companies, without knowing it, and in conjunction with some basic crypto facts publicized first by Satoshi, started offering new assets for sale/construction.  Some people wanted to buy those assets, and the process of doing so created these new carry-able “things,” namely crypto-assets.  In essence, a bunch of people agreed to make cryptographic skill something to be rewarded and that created some new Arrow-Hahn-Debreu securities, the value being contingent on both electricity abilities and crypto abilities.

As the purchases of electricity proceeded, and the new ADS securities fell into the market, both consumer and producer surplus went up.  In this view, the electricity costs are no more rent-seeking costs than are the bricks in the building of the insurance company.

Think of crypto-assets as assets whose value depends upon the reliability of “a particular kind of cryptography plus surrounding technologies including electricity.”  That value really does seem to vary with the market portfolio in strange, non-traditional ways, validating its use as a hedge.

Now, let’s say that quantum computing made many crypto problems much easier to crack?  Crypto-assets probably would decline in value or at least they would become riskier (given that forks and governance changes might result, exact predictions are a little tricky).

In other words, crypto-assets are bets on the future progress of crypto technologies, with a corresponding beta of the sort found in traditional finance theory.

Why have crypto-assets risen in value so sharply?  Well, at first few people realized they wanted assets with that risk profile, or even that such assets existed (they were too busy thinking of Bitcoin as an alternate form of currency).  As more people saw the potential here, the price rose rapidly.  Of course there may be bubbly components of the price too.

In the longer run, insurance-useful crypto-assets should yield sub-par returns, precisely because of their insurance and storage values.

Getting back to Buterin’s point

So what then are the major social gains from current crypto-assets?  Buterin misses a big but non-glamorous gain: by serving as efficient stores of value and by providing a new kind of insurance, they help people spend more money.  And indeed that is what so much of finance is about, namely enabling higher levels of consumption.  Is that going to account for half a trillion worth of social value?  Likely not.  Is it higher than electricity bill?  We don’t know, but so far the presumption — the bubbly part of the price aside — ought to be yes.  After all, the value of storing your sofa is higher than the electricity bill of the warehouse, otherwise the storage would not happen.

Possibly significant factors I have not considered: Benefits specific to the Ethereum platform, whether hedging itself is always socially valuable, the welfare economics of the bubbly part of an asset price.

Comments

Great post.

If the idea here is to hedge against the cost of electricity then there are much easier ways to do that.

If the idea is to invest in or hedge the value of a particular type of cryptography, maybe this in one way to do that. Are there others?

If the idea is to invest in or hedge (the value of a particular type of cryptography * the cost of electricity required to execute it) this may be a good way to do that compound investment or hedge.

If the idea is to hedge against end of times this is clearly not a good way to do that.

If the idea is to invest in a rare commodity that has value only because of its scarcity there are clearly much more romantic and hence better ways to do that (wine, cars, art, etc.).

A proper accounting of a cryptocurrency's market cap should exclude assets whose private key is known to have been lost.

"they help people spend more money"

Case in point. 85 million dollars to charity.

https://www.reddit.com/r/Bitcoin/comments/7jj0oa/im_donating_5057_btc_to_charitable_causes/

It’s not a store of value. When you store your sofa for a month, you know that after paying the storage fee you will get one sofa at the end of the month. With crypto you don’t know if you’ ll get 3 sofas or 0.1 sofas. Worse you might find your sofa was stolen, or you lost the key to the storage unit.

If you put a dollar in the bank, or your wallet, you know that a day or month later you can take out a dollar.

Same with bitcoin. Put a bitcoin in your wallet, and a day or month or year later you can take out a dollar.

If you are concerned the value in Big Macs might change, it is not any different for a dollar or bitcoin or peso or yen changing in the quantity of Big Macs.

The one thing constant about the dollar or yen or peso is you know that you can pay a dollar, yen, peso in taxes with a dollar, yen, peso respectively.

Bitcoin's absolute value is that it has paying taxes to the issuer and backer of bitcoin.

The value in Big Macs of Bitcoins is a lot more variable than that of dollars.

And of course, really the value in Big Macs of Bitcoins is zero - no McDonalds accepts Bitcoins.

No one doubts the priced in-risk just as no one argues the non-correlative properties.

This was very good.

1) My view might be shaped by helping a buddy clear out his storage unit. He had a few things that could fetch a price, but mostly he had been spending $300/mo for inexpensive and replaceable things. Sometimes storage has a strong emotional component. Sometimes storage continues too long.

2) In the mid term crypto assets might indeed be seen as valuable to a broader portfolio, and for some time may not correlate with conventional assets.

3) If everything does not crash dramatically, I might build a mining rig as a 2018 hobby. But if I do that, why not $GLD?

re #3 Mining rigs are specialized these days, any idea how much one costs? I haven't kept up with this. And electricity. How much does that cost to produce one bitcoin these days?

What I did was a YouTube search, and found a guy using a power supply, motherboard, cpu, and two video cards, os on thumb drive, all hung in an angle aluminum frame. For a small machine like that maybe $800? And all could be recycled as an improvement on my desktop machine.

Just look for a YouTube made in the last few months. There should be plenty.

https://youtu.be/3YMxGGXme8g

For yield at a hash rate and electricity price

https://whattomine.com

Not all mining rigs are specialized. There are two basic categories of miners: (1) ASIC (Application Specific Integrated Circuit) minders and (2) GPU miners.

ASIC mining mostly takes place in the context of the Bitcoin family of coins. This type of mining is dominated by the Chinese, who have a stranglehold on the designing and manufacturing of ASIC miners and the operation of ASIC miners to readily accessible cheap electricity.

Practically all of the newer coins are mined using GPU miners. These projects were designed specifically to be resistant to ASIC mining (and therefore avoid the issue of concentration of power in a select few mining syndicates) by requiring large amounts of very fast memory to achieve high hash rates, which is precisely what video cards contain. This type of mining can be conducted using cheap motherboards laying on a shelf with 13 video cards, perhaps more, attached to each motherboard using USB risers and splitters.

The economics of GPU mining do not look promising, especially if Ethereum successfully switches to Proof of Stake, at which point there will be a gigantic glut of hash power and hardware.

4) the kids are giving each other crypto for Christmas, but that in your bubble calculator

I'd go with them having created more costs than benefits, even ignoring electricity costs. They've created a whole new way of monetizing computer viruses - ransomware. They've greased the wheels of the criminal payment world (buying and selling drugs, stolen property, and especially cybercrime) much more than any other uses. Overall, pretty sure that the net social value of cryptocurrencies is negative.

That's also the argument against printing and distributing the $100 bill and the $500 Euro note, made by GM Ragoff et al. It's also the argument made against encryption (fosters the underworld). don't buy it.

The important difference being that cryptocurrencies can and may very well crash, high denomination notes and encryption as a concept can't 'crash' in any meaningful manner

I don’t think making ransomeware profitable is the argument against the $100 bill.

Solid take. And if it crashes hard, more negatives to come.

On the other hand, if we expand the net to include blockchains themselves and the potential there, suddenly the positive side gets stronger.

... the positives...

if you are believer in things like. policy can lift the world out of poverty... then you may also believe that blockchain/digital currency and smart contracts are a killer tool set in developing / managing / measuring and iterating our policy to accomplish goals like this.

governments can no longer stop us from changing the world.
and governments are no longer the (only) answer.

we all have the tools to effect change.

and note this isn't an anti-government post at all... it is just about imagining and effecting change.

I don't totally understand this, but wont a blockchain by definition always get longer and thus always take more and more computing power to add to?

Let us just change one word, and see how this example works - 'With tulip-bulbss, I am carrying wealth more generally into the future.' Yep, sure sounds reasonable.

' I see it as performing a mix of the store of value and insurance functions.' - Just like South Sea stock, undoubtedly.

'Now, let’s say that quantum computing made many crypto problems much easier to crack? Crypto-assets probably would decline in value or at least they would become riskier (given that forks and governance changes might result, exact predictions are a little tricky).' This makes little sense - either something like bitcoin is a store of value and medium of exchange, or it isn't - whether all bitcoins possible have been mined or not should be irrelevant. Unless, of course, bitcoin as a store of value is actually worthless.

'they help people spend more money' - how Keynesian, even if Isaac Newton would probably disagree.

Tulips and south sea stock represented a future cash-flow. When the cash flow did not match the valuation, investors updated their belief to the new price. Bitcoin does not represent a future cash-flow. While it may or may not be a bubble, this comparison is contrived.

How does a tulip bulb (!) represent a future cash flow? At most it represents a future tulip flower.

I think one problem with this view is that the bitcoin storage cost is likely a function of the capitalization of bitcoin.

Bitcoin security is a function of the amount of miners. The amount of miners is a function of mining revenue streams. If there are not enough miners, stealing bitcoins becomes possible. So the bitcoin network needs to generate enough mining revenues to keep enough miners interested. This amount has to be a function of the capitalization as if it ever diverges stealing bitcoin would become a valid strategy. So bitcoin must have a negative yield, either because you need to pay for the miners energy or because your bitcoins are going to be stolen. This is currently hidden by the wave of investment in the sector (and the funding from the bitcoin seniorage), but that's got to stop at some point. I don't think gold for example has similar features. Securing gold is not a function of of the dollar value.

If miners are a competitive industry, miners revenue has to roughly equal miners costs, so it's a real cost. Compared with other fiat currency cost of storage it seems incredibly wasteful. Storing government bonds is basically costless. You might get negative yields, but those are transfers, not consumption. Gold was valuable because it doesn't rust. It doesn't require maintenance. Bitcoins require a lot of maintenece... I think that's a weakness...

This is good about bitcoin costs but I want to quibble with the last paragraph about the costs of current stores of value. Fiat is a lot more efficient but you have to trust the government to (a) not inflate the value away and (b) not confiscate it. Gold gets around the inflation problem, but a side effect of using it as a store of value is the price is inflated increasing mining activity. The money spent mining gold is equivalent to bitcoin rewards for miners - the price you pay for a workable store of value

Bitcoins require a lot of maintenece… I think that’s a weakness…

they actually require almost zero maintaince. ever heard about "cold storage"

or this guy: https://gizmodo.com/man-who-threw-away-a-fortune-in-bitcoin-now-looking-to-1820994313

The amount of miners is a function of mining revenue streams. If there are not enough miners, stealing bitcoins becomes possible.

yes, by also expending energy and computational resources to revert transactions on the blockchain. if no one wants to expend resources by mining bitcoin (adding transactions to the blockchain) then no one want to expend resources to "steal" bitcoin (aka reverting transactions on the blockchain). the incentives to mine are at least as great as the incentives to "steal": that is the *whole point* of the bitcoin blockchain.

if no one wants to expend resources by mining bitcoin (adding transactions to the blockchain) then no one [will] want to expend resources to “steal” bitcoin (aka reverting transactions on the blockchain).

Doesn’t this assume that the number of bitcoins you get from mining = number of bitcoins you can get from stealing? From my limited understanding, the number of bitcoins you can steal can be a lot more than the number of bitcoins you get from mining.

Gold does not rust - but the whole gold as value store system is still very costly - about $1 billion yearly is spent on mining gold (and perhaps even more on securing it in underground vaults). That $1 billion is a cost because the mined gold is not needed for using gold as value store. If we concentrate on gold as value store - which is probably economically dwarfing other usage of gold - then mining gold does not really produce anything, it is just something that we cannot stop - and is thus a pure cost.

https://medium.com/@zby/proof-of-work-8d8265def194

Of course now the bitcoin system has even higher costs.

A few points:

The current mechanism that secures the majority of cryptocurrencies are PoW (proof of work), where what guarantees the security is that it's hard to conjure up a massive amount of electricity and hashing power and gain the majority of the hashpower. There are cryptocurrencies that *doesn't* rely on that at all though, and Ethereum (second biggest crypto, which Vitalik Buterin is the lead dev for) is making a big push for moving to PoS (proof of stake) where instead of hashing power is invested it's instead ethereum holders that stake their money and lose it if they try to game the system.
When this passes, and it's probably already baked into the $60 million market cap of ethereum, your electricity argument fails.

Securing the blockchain against Quantum computers is currently being worked on, and it's "just" a matter of changing the cryptography used. It'll probably be much less of a hassle than to fix e.g. https (due to development and standardization actually being quite centralized), and there's *much* more money at stake if https broke (all banks would have to shut down their websites, and much much more).
I think that if a currency was known to be practically breakable by quantum (or other big flaws) the price would crash to close to zero immediately, as an attacker probably could transfer money out of other people's wallets. Not just a matter of some increased risk.

While most celebrity economists obsess over the tax bill, Cowen obsesses over cryptocurrencies. I suppose the tax bill bores Cowen. The subject of cryptocurrencies requires one to go back to first principles just to gain a basic understanding (as opposed to a tax bill that is mostly about politicians conferring favors on their patrons). Besides, cryptocurrencies are the libertarian's dream: if cryptocurrencies replace currency issued by governments as both a medium of exchange and a store of value, what becomes the role of government? I suspect that the recent decline in the value of the dollar and rise in the value of Bitcoin is no mere coincidence. I would point out that the distinction between the libertarian and the anarchist is simply one of degree. Anarchists have been trying to undermine America since its creation. The constitution was the founders' response to the chaos preferred by the anarchists - including the chaos resulting from hundreds of different currencies issued by private banks and some states. The difference today is that the anarchists self-identify as libertarians. Disruption on steroids!

+1

I like it when someone says:

Put aside the question of electricity costs.

Put aside the issue of illegal or grey or black market activities.

And,

See the sunshine.

And then says: "I'd like to focus on the underlying fundamentals."

Really?

How much carbon are we putting in the atmosphere to mine bitcoins?

Currency regulation and banking controls are used today as methods to control or raise the cost of terrorism financing, are used for sanctions in the international community.

So, if bitcoin becomes the currency, what are the alternatives to blocking terrorism or imposing financial sanctions.

Are those alternatives cheaper, more deadly, less effective.

Why aren't you factoring in the costs of alternatives you would have to employ to impose sanctions or control terrorism, or drug sales, etc.

I'm sure that criminalizing end to end encryption, intercepting, and analyzing all domestic communications would also be a cheap and effective way to prevent all kinds of criminal activity. It's interesting how the Snowden leaks about secret programs managed to stir up significant backlash against limited mass surveillance of communications, but very few people seem to realize or care that we already live under a full blown financial surveillance state.

In recent years, strong consumer encryption has disrupted the state's ability to intercept communications content. The FBI constantly complains about the problem of "going dark". This has dragged the matter of communications surveillance into the light of the public sphere and it doesn't seem like the public is keen on giving up its access to strong encryption in the name of "safety". If cryptocurrencies can do the same for financial surveillance, I won't be shedding any tears.

It's not like the world was some Hobbesian nightmare back when mass surveillance wasn't feasible. Let's not forget that money laundering is a relatively new "crime". Do powerful controls over finance really make the world a more peaceful place or do they just encourage powerful states to act with impunity, safe in the knowledge that they can defang any enemies they choose to make by impoverishing them?

You didn't answer the question about how you enforce sanctions more cheaply.

Go visit North Korea for a libertarian vacation.

But, don't lift a poster.

Thomas, I was a bit harsh, but I do think you need to consider how states use currency controls as an alternative to more coercive mechanisms.

By the way, if you act quickly, you can listen to a podcast on the legal aspects of cryptocurrencies and bitcoin on Westlegaledcenter in 15 minutes.

Finally, aside from cryptocurrencies, on the other other topics is using blockchain technology for enforcement of contracts.

I agree that robbing your enemies of resources by deputizing the gatekeepers of the financial system to discriminate against them is perceived as a softer, more civilized form of coercion than blockading their country with your military or conducting armed raids on their homes and businesses to confiscate or burn their assets.

But maybe we don't want states to have ways to make their coercive actions more palatable. If the only ways states could coerce were by using bloody antiphotogenic methods, perhaps they'd do it less often. I admit I could be wrong here. It's possible there is some natural law that holds coercion constant and that if "civilized" coercion becomes impossible, we'll see more bloody coercion and society will tolerate it.

"The subject of cryptocurrencies requires one to go back to first principles just to gain a basic understanding "

First principles. Yes! Yet you don't go to first principles.

Value is always rooted in "work". Labor.

Dirt, trash, air have no value because they exist in abundance. Water has no value in the middle of the ocean.

Pure or potable water has value based on the work required to supply it on demand.

Gold has value because the marginal cost in labor is pretty stable across time. Silver has changed in value relative to gold because the marginal labor costs relative to gold have changed. Both can and are produced globally by many employing labor, and demand is based on the labor going into production of many utilitarian goods, eg jewelry, electronics, which are produced by labor globally as a significant factor in the economy.

But government is a major part of the economy everywhere, both consuming labor product and employing labor. In the US, taxes must be paid in dollars, legal tender, and the government spends those dollars paying workers directly or indirectly. The point of Social Security benefits is ensuring disabled, dependent, and aged person can pay workers for food, housing, energy, etc.

In Venezuela the government simple prints money using very little labor and then pays workers more than it collects in taxes as a share of work in the economy. Thus the currency buys less and less labor.

Bitcoin is defined on an increasing labor cost model, marginal cost rising to infinity. At some point its value will depend on the trust those accepting payment for an hour of labor have that they can pay for an hour of equivalent labor.

Without tying bitcoin to labor value, one bitcoin is worth one bitcoin.

A dollar has well defined labor value. A billion people work to earn a dollar in competition for demand from workers paid in dollars for quantities of their work.

That said, many free lunch economists want to cut the tied between money and labor, including the dollar, to create wealth without work.

They imagine robots replacing workers. Well, a robot that makes everything, including robots, eliminates economies entirely. Once everyone has a robot, they will not need to trade labor with other people. Thus there will be no need for money.

I feel like I'm missing the "compared to what." There are stores of value already - so even with all these benefits and costs, what do we have to net out?

Also, how does the potential development of future, better alternatives play out? I think that's part of the compared to what, right? Does investing in one cryptocurrency now affect how we might transition (or not) to something better in the future? If we transition easily to something new, have we accepted a lot of short term cost without getting the longer-term benefits? If we don't, is there some sort of option value that we need to factor in?

Compared to the cost of begin legitimate under the PBOC. PBOC got more rules than they can enforce, so bitcoin seps in allowing the trader to bypass a whole set of rules that are not really enforced.

Interesting points, but I think the reason for the $0.5 T market cap is simpler.

If a true oracle told you that cryptocurrencies will have solved their scaling and volatility problems in 20 years and be widely used as global currencies, how would you value them today? Probably much more than $.5 T, right?

But there are no oracles or certainty so we’re looking at an expected value determined by the market. The number of journalists, economists, professional commentators, etc who still demonstrate a lack of basic knowledge about cryptocurrencies is still shockingly high. I still see articles, posts and tweets indicating they don’t realize a bitcoin is divisible or that the creators of the major cryptocurrencies don’t have backdoors to “hack” them. It’s probably even worse among the rest of the populace.

This ignorance was clearly the reason why the value of cryptocurrencies was so low 5 years ago and its persistence indicates that cryptocurrencies may still be undervalued. Admittedly at this time, the price may be driven more by greed than by education or signs of adoption.

"Driven by greed"?. All markets are driven by greed. Rather, all markets should be, but, at the basic level, markets are driven by information, or lack thereof. The question is: what is the information component of current activity, and what component is driven by emotion. Tulips or a deep informed market. You choose.

Agreed, I worded that poorly. I suspect most of the rapid rise in price was caused by information about the rapid rise in price and not by people learning more about cryptocurrency or seeing signs of its adoption. Still, now that so many hold a thing they don't understand, maybe some will educate themselves and decide it's more likely to maintain long term value than a tulip.

"the rapid rise in price was caused by information about the rapid rise in price and not by people learning more about [it]"

Best statement yet about why this is a bubble.

Best case scenario for bitcoin value is that the underlying value catches up, but the current price has no relation to its actual uses.

The number of journalists, economists, professional commentators, etc who still demonstrate a lack of basic knowledge about cryptocurrencies is still shockingly high. I still see articles, posts and tweets indicating they don’t realize a bitcoin is divisible or that the creators of the major cryptocurrencies don’t have backdoors to “hack” them.

+ a million

that TC appeared to think that Butelin was some smuck doesnt help.

Bitcoin market size is about the size of missing collateral in China. Bitcoin is an FX transfer tool. Bitcoin is not cash.

Cannot have micro payments until we have pure cash because pure cash is needed for autotrading. If the average person cannot auto trade, then the cartel will extract a 1.5% ATM fee on earnings, because the cartel gets the early peak at the central bank tradebook. The early peek gives them the arbitrage moment. All a result of law. we the average person agreed to, by the way. I other words, someone told us that only government bankers can count, and we pay them a counting fee.

Hopefully soon we'll have Proof of Stake coins that don't need to burn the electricity to gain the same level of security as bitcoin: https://medium.com/@zby/proof-of-stake-can-be-cheaper-than-proof-of-work-da14223a965 If it works (this is still speculative - but many people believe that it should work) - then people will probably switch to PoS from the wasteful Proof of Work coins. This will show that cryptocurrencies are not that good store of value for now - as there is much risk that a particular coin will be replaced by something better in the future, but in the long run this should stabilize. Anyway electricity is quite accidental in all of this.

Dark pools are proof of stake. They re ringed fence where all parties are pre-cleared and trusted (they been staked already) . Done with fiat currencies, don't even need to crypto if the ringed fence boundaries are seute.

Dark pools happen all the time, called Fintech.

Is that a metaphor? I don't quite understand how dark pools validate transactions. Proof of Stake requires buying the currency first - before you can vote on the validation actions. I agree that it is kind of less open than Proof of Work - where you can (theoretically) join at any time without any up-front investment - but it is still quite different from a system where a central authority decides what is valid action and what is not. In practice PoW is even closer to PoS - because miners need to invest in expensive equipment.

Just finished the Continuing Legal Education class on Blockchain technology;

A few points:

1. Government can be placed in the node of the transaction to oversee compliance with the law, ie, verifying, for example, that person X, who is otherwise blocked from engaging in transactions due to sanctions, is blocked. Very efficient.

2. Corporate governance may change: I may have real time voting rights to vote on executive compensation. Or a firm's environmental policies. Whoopee. My share will not be held through proxies, but by me directly. I might get board minutes as they are released as the holder of the certificate.

For an interesting podcast on crypto currency, this recent conversation with the founder of Coinbase takes you from the basics through to the more surreal future scenarios.

https://itunes.apple.com/ca/podcast/the-after-on-podcast/id1265002699?mt=2&i=1000397189926

That half a trillion of value is equal to the amount spent transacting traditional money every year.

That was interesting. Not sure about this "Uber on a blockchain" stuff though. Modern web apps are conceptually one database but partitioned and distributed for performance. Can a global blockchain, distributed in a different way, give fast update for "rides near you?"

Re Bitcoins energy usage. I always assumed that Bitcoin used a lot of energy by design, not as some unintended consequence that needs to be rectified. Bitcoin basically turns one scarce resource, electricity, into an even scarcer resource, 'the truth' or perhaps 'objective trust'. The Economist even ran an article calling Bitcoin the 'Trust Machine'.

Proof of Work - expending lots of electricity with no shortcuts, was AFAIK the first known way of doing this and the only one so far that seems to work.

Add a logic circuit to our ATM chip.

The logic circuit says, I give another card some digits and erase the digits from my card. This logic card is counterfeit proof, like the watermark on bank note. This is ure cash, cost about 20 bucks per person for the card, about the price of a fine wallet made of Corinthian leather.

What you get, in your hand, is a bunch of digital bank notes, in your hand, and your tap cards, with your counterparties hand, and the watermark goes from one 'wallet' to another 'wallet', exactly and precisely like a $20 bill, being erased in the source. Pure, sweaty, unadulterated cash.

Clever but pointless. Bitcoin is primarily a speculative asset. It's a wealth transfer from current buyers to earlier buyers, which lasts as long as demand grows. It's not really a tool to escape local high inflation, in our era the dollar has that role. It seems to be a means to avoid local capital controls but that hardly explains holding much. The idea that it's helping to spur consumption is obviously wrong - the fact rhat the price is rising proves people are pouring money in faster than they're taking it out. You can talk your way round it in as many circles as you like, it's still very little more than a wealth transfer.

It is a wealth transfer from accounts inside the PBOC banking network to accounts outside the PBOC banking network.

Instead of BitCoin, which relies on energy consumption to establish value,

I propose

ChimpChange.

You place a chipmunk in a cage and watch in on Youtube run in place

For each revolution of the cage, you get issued one ChimpChange which you can exchange via an encrypted technology.

Value is based on the cost of feeding the chipmunk and cleaning the cage.

Slightly generalize to dog food, in particular standardize on the 20 pound bag, I think that is typical.

Your major currency denomination is the Bag of Dog food, your motto is, in dog we trust. Your currency bank buys and sells dog food futures and guarantees that one of its aper Dog Food Bills will buy one median bag of dog food in most cities.

I think this works if enough people love the median sized dog.

I agree.

And, this humane use of chipmunks increase world income levels as less developed countries will be better able to monitor and feed the chipmunks. There is one problem, however. There is always the risk of chipmunk virus, which would lead to high levels of inflation of ChimpChange in response to low quantities of chipmunks. Elon Musk is currently doing research on the virus and plans soon to announce a discovery of the anti-virus which will be made in the weightless environment on Mars.

You can get in on this opportunity right now before the Winklevoss twins hear about it.

So, all those reporters were not wrong to call you.

"Of course there may be bubbly components of the price too." Ha!

This is the problem I have with TC sometimes. Always has to think outside the box when the most obvious and relevant point is sitting right there in the box scratching itself. It is good to think outside the box but I think you need to think inside the box first, because that's the where the wisdom of the crowds resides, sitting there scratching it's butt. So the main thing about bitcoin was the blockchain that meant no middle men (government) between transactions and everyone had a record of those transactions. It was meant of be used for transactions. It was not intended as a store of value. But then, there were unintended consequences to the blockchain. 1. it turned out to make transactions really cumbersome and time consuming, which is the opposite of what you want in a transactional medium, and 2. mining bitcoins requires more and more electricity. At some point soon the cost of electricity is going to be enormous and that is probably going to have other unintended consequences. And then, as a side issue, at a certain point bitcoin got hot. It became a (temporary) store of value because people saw that the price was rising and though, I could make some quick money. And I'm not sure that something that keeps rising 10% a day can really be defined a store of value. It suggest enormous instability which is exactly the opposite in what you want in a store of value.

So who knows what will happen, but right now, the bubbly aspects have enveloped any other features and until the bubble is resolved, nothing else will really matter.

Wow, if MR readers understand this little about Bitcoin and cryptoeconomics, its even less of a bubble than I thought. I get better discussions of the value of crypto tokens on Twitter. Anyway...

Tyler, the externality I think you are missing is to fiat. Cryptocurrencies are an alternative store of value and (once microtransactions launch, which is being worked on for many of the different currencies) means of transfer. They have various pros and cons relative to fiat, and people who see them as better are choosing to hold value in crypto over fiat. Many are choosing to hold crypto over income-producing assets like equities, bonds, etc. So some of the value of crypto results in less demand and (slightly) lower prices for those things.

Also, you should not make the mistake of calling the spot price times money supply of a token an estimate of value. Unlike shares in a corporation, there is no direct tie between the total enterprise value and the "market cap".

Let’s use language to clarify and not obfuscate.

A store is a place where you put something in and keeps it safe so you can later retrieve it.

It the thing placed in the store does not magically increase behind the locked door.

Money has a unique role in society. It functions on the basic principle that you get to take out of society what you put in.

When you work you add value, and the money you are paid is nothing more than a record of that value. When you spend it, you get back real goods and services equal (in your estimation) to the goods or services you provided when you earned it. In paying the money to the vendor, you in turn pass on the record of the value they gave contributed

Each person in turn contributes, is given a record of the value they contributed and then takes that same value back out, when they spend.

For this to work, the record (money) should hold its purchasing power over time.

If inflation exists, it means that the holder of money is disadvantaged cos the holder of assets. It means that the holder of money can put out LESS than they put in. This breaches the basic principle and is unfair to the holder of the money.

But that does not make deflation good.

In this case, the holder of money is advantaged against the holder of assets. It means too that they get to take out MORE than they put in. Again breaching the basic principle.

Ideally, money should be costless to produce. The token representing it should have no value, be impossible to counterfeit, lose, destroy or steal. Transactions should be instantaneous and also without cost. The record of value (recorded by the token) should retain its real purchasing power over time.

Crypto offers the opportunity to create a token that has virtually all of these attributes.

The current crop are far from the ideal. The exponential deflation of Bitcoin is worse than most inflation in history.

As Bitcoins only claim to fame is as a means to transact, the cost for each transaction can be gauged by summing the total current price by all the coins on issue and dividing by the total number of transactions ever made. On 3 December this figure came to $666. It has gone up since then.

No one would pay this for a transaction using a stable coin.

The only reason to pay this is the belief that others will pay more in the future.

Once there are no more buyers, the sellers will want to quit their stock. But without buyers, the price will fall. As the price falls, holders will want to get out. But without buyers, there is no floor.

Bitcoin is the worst possible incarnation of what will become an indispensable tool: a stable crypto that is costless to produce with minimal transaction costs.

Sorry for the typos in the previous post:

Let’s use language to clarify and not obfuscate.

A store is a place where you put something in to keep it safe, so you can later retrieve it.

The thing placed in the store does not magically increase behind the locked door.

Money has a unique role in society.

It functions on the basic principle that you get to take out of society what you put in.

When you work you add value, and the money you are paid is nothing more than a record of that value.

When you spend it, you get back real goods and services equal (in your estimation) to the goods or services you provided when you earned it. In paying the money to the vendor, you in turn pass on the record of the value they have contributed

Each person in turn contributes, is given a record of the value they contributed, and then takes that same value back out, when they spend.

For this to work, the record (money) should hold its purchasing power over time.

If inflation exists, it means that the holder of money is disadvantaged vs. the holder of assets. It means that the holder of money can take out LESS than they put in. This breaches the basic principle and is unfair to the holder of the money.

But that does not make deflation good.

In the case of deflation, the holder of money is advantaged against the holder of assets. It means too that they get to take out MORE than they put in. Again breaching the basic principle.

Ideally, money should be costless to produce. The token representing it should have no value, be impossible to counterfeit, lose, destroy or steal. Transactions should be instantaneous and also without cost. The record of value (recorded by the token) should also retain its real purchasing power over time.

Crypto offers the opportunity to create a token that has all of these attributes, with very low cost.

The current crop are far from the ideal. The exponential deflation of Bitcoin is worse than most inflation in history.

As Bitcoin’s only claim to fame is as a means to transact, the cost for each transaction can be gauged by summing the total current price by all the coins on issue and dividing by the total number of transactions ever made. On 3 December this figure came to $666. It has gone up since then.

No one would pay this for a transaction using a stable coin.

The only reason to pay this is the belief that others will pay more in the future.

Once there are no more buyers, the sellers will want to quit their stock. But without buyers, the price will fall. As the price falls, holders will want to get out. But without buyers, there is no floor.

Bitcoin is the worst possible incarnation of what will become an indispensable tool: a stable crypto that is costless to produce with minimal transaction costs.

Let’s focus on what we need, and forget the current crop.

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