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Regarding the granularity problem:

Here is a worst case scenario:

M2 Monetary Supply is 66 trillion. If it all moved to BitCoin, each coin would be worth 3.1 million dollars.

Math: 66000000000000/21000000 = $3,142,857

One Satoshi is the smallest possible denomination of BitCoin at 0.00000001 of a BitCoin.

If all of M2 moved into BitCoins, each Satoshi would be worth 3142857*0.00000001 = .03, or three cents. And since the M2 supply is increasing at around 6% per year, all else being equal, a Satoshi would reduce to a penny in about 20 years.

Math: (1.06)^19 = 3

This is simplistic and extreme, but points out that the sheer numbers required to cause concern over the 21 million coin cap just aren't there for the foreseeable future.

Consider too that BitCoin is just a single form of Crypto Currency. It’s plausible that a second alt coin, possibly an inflationary one, will be used in addition to BitCoin. Where BitCoin would serve as more of a store of value, and an alternate coin would serve as every day cash. In fact, this is already being experimented with today.

** Regarding the liquidity trap problem **

First want to point out that the liquidity trap problem is commonly used as a replacement for the granularity problem. They are different. Granularity problem is addressed in the above section.

The liquidity problem stems more from:

Once you have C coins, you also have P percentage of the total number of Bitcoins. And as long as you hold steady, P never changes. Conversely, with the dollar for example, you have P percent today, but P decreases tomorrow when more dollars are printed.

So there is more incentive to put a dollar to work than a bitcoin.

This theoretically results in hoarding of the coins, reducing the number of coins in circulation, making them more valuable, causing a downward spiral.

Regarding calling it an investment:

People are trying to make sense of something we’ve never seen before in history. This is a new invention. And it is money by definition. There’s no more “if” when you can use it to purchase goods, gamble, and settle debts. We’re already at this point.

It can be seen as an investment from the perspective of “If I spend US $1,000 on BitCoin today, I might make a 2x return by end of year.” But it’s very short sided trying to compare it to an equity. As mentioned above, it makes more sense to look at in terms of “how much of the overall money supply will be made up of bitcoin?” Today it’s 10 Billion US dollars and growing. That's nothing to scoff at.

Crypto-currency is an invention first and foremost. And at this point we are engaging in an experiment. That’s why it’s risky. We don’t know.

Regarding calling it a bubble:

A bubble is “A theory that security prices rise above their true value and will continue to do so until prices go into free fall and the bubble bursts.”

To call it a bubble means that you must have a tangible grasp on its true value.

Nobody knows what the true value is, but we know that:

  • As of this posting, BitCoin exchanges with the US dollar at around $750 per coin.
  • You can use it today to buy a grilled cheese sandwich and a haircut in Seattle, and coffee in San Francisco
  • You can also use it today to buy computers online, houses, cars, and to bet on sports, play poker, etc.
  • As much as Bitcoin can be volatile, it is still very attractive as a store of wealth for citizens of countries whose governments are destroying their local currencies. This is already happening today.

The network affect is already here. People want to use it, and it’s adoption rate is exponential.

If BitCoin saw only a 1% adoption worldwide, each coin would be valued at $31,000 US dollars. From that perspective, it’s a deal today at $750 per coin.

The point being, you can’t call it a bubble unless you can identify what its value should be.

Regarding comparisons to Beanie Babies and Tulips:

Bitcoin is a currency that is easier and faster to transact on a large scale than anything else in existence. It's not a collectable. This comparison is simply misguided.

Regarding "It's too complex for the average citizen to understand and secure against getting hacked/swindled":

Very true today, but today this is less true than it was three years ago. The ecosystem around BitCoin and Crypto-currency in general is growing rapidly, and backed by leading venture capitalists investing in startups, big banks, and big technology companies like IBM. The issues around ease of use will dissolve in a relatively short amount of time. And hacking will always be a problem, just like bank robberies and muggings will always exist. As these issues are diminished over the coming years, we'll see more mainstream adoption.

Potential concerns:

We could encounter issues in the underlying architecture down the road, such as attack vectors, inability to upgrade crypto algorithms, performance issues as the network scales, etc.

Political issues like taxation, cross-border exchanges, and central governance. This is the biggest can of worms, but not the type of problem we should call unsolvable. In fact these concepts may very well be reinvented and evolved in a better way. My point here is that just because it doesn't fit into an existing framework doesn't mean it won't work. This is a problem that great inventions commonly encounter, and not a de-facto deal-breaker.

In summary

This is a new invention, and directly addresses many issues we have with today's mediums of exchange. It can be compared to many things, but it is not any of them. It's an experiment, and an exciting one at that.

Today it represents .015% of the world's currency. The question we ought to be asking is, what will that number look like in 2014, 2015, and the foreseeable future?

  • 1
    I don't think our q&a format is really a good fit for soliciting comments on your essay. It would be better suited for a blog. – Nate Eldredge Dec 31 '13 at 18:14
  • "So there is more incentive to put a dollar to work than a bitcoin." Quite the contrary, there's much more incentive to put a bitcoin to work since all you have to do is nothing and you are more heavily rewarded for it. – David Schwartz Aug 21 '17 at 22:58
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Regarding the liquidity trap concern: The common and agreed upon solution is to allow a few more decimals in a bitcoin client update when the time comes.

Regarding calling it an investment: All good, for some people it's not an investment but a belief in the idea.

Regarding calling it a bubble: Value is what people are willing to pay, not set.

Everything is sound otherwise.

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I don't know why you're calling the first point a "liquidity trap", that has nothing to do with the words that follow. Did you mean "granularity problem"?

the 21 million cap isn't a problem, not because it reduces to .03 cents in an extreme scenario, but because the code could be changed to go out to more decimal places, no math required.

There is no way bitcoin would serve as a store of value and not a medium of exchange. That's the point of bitcoin; to be easily transferable. If another coin becomes adopted as better to transact with, it would replace bitcoin, not supplement it.

Bitcoin can certainly be an investment. Don't know what your argument is here.

You can call it a bubble. Gold was a bubble, housing was a bubble. Doesn't have to be worthless to be a bubble. I also disagree with "you can't call it a bubble unless you can identify what it's value should be". If its value were well established it wouldn't be a bubble.

Agreed that the tulip comparison is misguided. tulips and beanie babies had no context in which they were of objective value, of which bitcoin does.

agreed.

you say a real issue is "in the underlying architecture" which is a pretty huge thing for you to say, considering you're trying to counter-argue critiques. You should really be more specific. Do you believe Bitcoin is safe or not?

What are you saying about the ability to replace existing crypto algorithms?

transaction time can be changed if necessary. Another altcoin will not rise due to this.

There is no potential address collision problem.

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