Cryptocurrency, part 2
It's twenty-nine knuts to the sickle, and forty rods to the furlong
Editorial note: There will be an article on the COP26 climate conference when it is ready. In the meantime, some light opera on cryptocurrency.
Last time, in Journey of the 十八coin, I struggled to purchase “Shiba Inu coin”, the latest trend in crypto-currency. In short, there are “on-ramps” from the US Dollar Banking System to the crypto-currency world, and when Heaven and Earth (and clearing delays) conspire to prevent you from buying, there is nothing to be done.
Nothing other than to wait 24 hours. At that time, all systems were working and I purchased a few hundred dollars worth of SHIBA.
NOTE: unlike BTC, SHIBA is simply a barter-token in a bubble. Once the bubble bursts, nobody will want to hold SHIBA. Apart from the reputational value of being able to say I lost a few hundred dollars buying SHIBA, I’m not sure why I’m holding it.
Bitcoin has inherent value; I currently own .1 BTC to hedge future spending as Bitcoin, rather than to spend in barter for assets. The only value SHIBA has is the value from the impressive marketing campaign they have just run.
Uncharitably, SHIBA is a Ponzi scheme everyone wants to ride and get out of before it pops. Charitably, it is a more convenient way than credit cards to do electronic financial transactions. While there are better places to park your money1 it works fine as a temporary store of value to use for online transactions.
What is Bitcoin worth?
Owning Bitcoin allows you to send Bitcoin transactions2. The nature of Bitcoin is the Red Queen’s problem: nobody profits from the transaction fees. Right now, there is a competition to burn as much energy as possible to ensure nobody gets any profit. For some reason, the community thinks this is a good thing.
Currently, the price of a Bitcoin transaction is around 3 dollars. This seems like a high but ultimately reasonable fee. However, the price is denominated in Bitcoin3. The price is a variable number of Satoshis per byte4. People with a potential desire to send Bitcoin transactions in the future need to horde Bitcoin to be able to send those transactions later.
Based on the value of these transactions, I estimate a coin value of $7000 to $10000 per coin.
Bitcoin is not the check. It is the postage stamp.
In the 1950s, some people purchased postage stamps as investments. There was the possibility of stamps having serious value to collectors in the future, and even without that, surely they could not decrease in value compared to holding cash.
Except they have decreased in value. You can buy old postage stamps for around 50% of face value. A 3c stamp purchased in 1950 would have allowed you to send one first-class letter, something that costs 58c today. Today that stamp is worth only about 1.5c. Adjusting for inflation, it has lost 97% of its value.
Today, the USPS issues “forever” stamps, so the hoarder of today’s stamps will presumably lose less than 97% of their money over the course of the next 70 years.
In conclusion: if you could buy “forever” first-class stamps for 1c each, it would be a great investment. That is about what Bitcoin in 2017 was. Today, they are sold for 650c on the secondary market; it is far cheaper to wait for the bubble to burst unless you really need to use stamps now.
PS: What about NFTs?
What about them? Most of them are scams or money laundering. The BAYC is the Patek Philippe watch of a club of Bitcoin millionaires, most of whom didn’t pay the outrageous prices in the first place. I’m not sure what Beeple did to get millions. And as for most of the rest … at some point soon there will be so many NFTs that the illusion of scarcity will pop.
I am still trying to figure out how to set up an ecosystem denominated in SPY. My understanding is that a stable-coin pegged to $SPY would be illegal in the US. Then again, I didn’t start a stable-coin pegged to the USD in 2016 because I thought that was illegal.
Why are Bitcoin transactions valuable? Most commonly, drug dealing and money laundering - though you can use any cryptocoin for that. But also, various Smart Contracts really do need to rely on Nakamoto Consensus for time-keeping, and to do so they may have to own (and occasionally transact) in Bitcoin.
Due to the extreme price volatility, no sane person would denominate any future liability in Bitcoin if they could avoid it. The one situation that cannot be avoided is Bitcoin transactions themselves.
Bitcoin, if it had rational governance, would go to a larger blocksize and a fixed satoshi-per-byte transaction fee. It would also cut the block reward, relying solely on transaction fees.