1. It's being mispriced by the market for some reason and will correct over time (i.e. it will lose valuation compared to other cryptos). This seems to have happened some in the past 2 weeks or so, but it's pretty early to see how this will play out.
2. The network effect of already being the biggest is strong enough to offset its "weaknesses" relative to other currencies.
3. The primary value of bitcoin, at least at present and in the short to medium term, is different than crypto enthusiasts believe. There is massive value in being a decentralized, secure, easily transferrable store of relatively large amounts of money, as basically a settlement layer. And there is relatively less value (at the current time) in being a new payment method to buy everything down to a cup of coffee, or powering smart contracts, or other things that crypto enthusiasts get excited about. To the extent that those things become important to the market, usage of Ethereum or other coins will increase. To the extent that privacy becomes important to the market, usage of ZCash or Monero or other coins will increase, etc. But the increases of these others won't necessarily reduce the primary value of Bitcoin itself.
I personally think #3 is true, although long-term factors like the energy consumption of mining may be strong enough to render other currencies significantly better even for this primary use case.
It's less and less true as time goes by, Bitcoin dominance on the other currencies was about 85% in February, now it's only about 38%.
The problem with market cap is that it multiplies the last traded price with total supply, thereby assuming that there exists people willing to purchase all coins in existence at the same price (the mid price of the order book).
Thankfully, we don’t need to make this assumption, since the order books of most exchanges are public. But, as far as I’m aware, no websites compare coins by market depth, unfortunately.
It’s a bit like me selling a painting I’ve painted for $10,000, and then creating 100 of the same paintings and claiming I’m a millionaire. It doesn’t work like that for illiquid assets (I’d probably be lucky to find even a single new buyer at the same price).
I disagree. Many exchanges have public order books, so you can see exactly how much the price would slip if you sold, e.g., $1m worth of a coin. This is what is relevant for something functioning like money, not the last traded price multiplied by number of coins in existence.
Yeah, but if you wanted to sell $1M worth of coins you'd probably use an auction at Gemini or elsewhere so you don't move through more than 2 or 3 price levels of the book.
You'd also probably enable some sort of smart selling algo for the same reason were you try and move $1M worth of BTC not at auction.
You could make the same argument for Gold or Platinum being over valued based on slippage from open interest at a point in time.
Selling $1m worth of bitcoins on GDAX, Bitstamp and Bitfinex results in a slippage of 0.2864%, 0.3527%, and 0.2910%, respectively.
As far as I can gather from Gemini's fee schedule[1], they take a >0.40% fee even if you've traded for more than $10m in the past 30 days, so I'm not sure it's worth it for a $1m market sell.
[1] https://gemini.com/fee-schedule/#fee-schedule
> You could make the same argument for Gold or Platinum being over valued based on slippage from open interest at a point in time.
I disagree. I'm not arguing that anything is over-valued. Simply that market cap as a measure of value of commodities does not make sense, because of the great difference in marginal utility between them.
BUY 10 BTC @ 15,000 USD
BUY 10 BTC @ 14,900 USD
BUY 50 BTC @ 14,800 USD
A trader can easily inflate volume by creating two accounts and trading back and forth with himself, thus making his two deposits count many times over in the trading volume of that exchange. But in the order book his deposits can only count once.
Only if the exchange in question charges trading fees.
> And If you don't like using the volume or market cap, what do you use?
Market depth. Looking at the order book to see how much money is bidding on/being sold for bitcoins right now. See my reply to other comments for an elaboration.
Of course, the huge dark side to that is that there's now a way to easily send money in a way you cannot reverse. This provides a huge incentive for things like kidnappers demanding their ransom in bitcoin. It's often valuable to be physically incapable of doing things.
I'm long-run bearish on Bitcoin because of this analysis - the majority of its value is in something that makes governments and other coordination mechanisms interested in destroying it.
Bitcoin just kind of flips the problem, it doesn't solve it. In a world where payments can easily be reversed, sellers take on all the risk. In a world where they can't be, buyers take all the risk.
You can get pretty far with a reputation system, and in a market with many more buyers than sellers it's nice that now only the seller's reputation matters. But for a lot of people there's still benefit in having a trusted middleman like Paypal.
Technically, but not legally.
Transfers are 100% reversible by going to court, so Bitcoin is really only non-reversible for criminal activity (dealing drugs, gambling, etc) where someone cannot bring an action because the contract was illegal in the first place.
This technical non-repudiability is a feature that only works for criminals and is an anti-feature for legitimate users.
There are definitely issues, but no one has managed to solve them so far. A lot of competing cryptocurrencies claim to have solved the challenges that Bitcoin faces, but there hasn't been any fundamental innovation in this space since Bitcoin. Except for MimbleWimble[1], which has made advances in terms of both scalability and privacy. All other solutions out there just move further towards centralization, while in the process gaining scalability (which everyone already knows is trivially possible).
[1] https://github.com/mimblewimble/grin/blob/master/doc/intro.m...
https://github.com/mimblewimble/grin/blob/master/doc/intro.m...
> In the above example, you had to share your private key (the blinding factor) with Carol. In general, even though private keys should never be reused, this isn't generally very desirable. Practically, this isn't an issue because transactions include a change output.
Yes - it's a change output and a new private key but it's not a great way of doing things.
Also - what's with the name? MimbleWimble?
Many weaknesses in tech can be fixed or built around. Adoption, community, and trust are hard to get.
Bitcoin is about the only cryptocurrency with serious usage, which is exactly the reason transaction fees are as high as they are.
The moment the transaction fees and block rewards go down, the very expensive Prof of Work mechanism will weaken and future transactions are unprotected.
Proof of Stake can offer the same protection mechanism without needing to finance a huge value destruction operation.
And to those saying that the electricity is not wasted because it protects the block chain: If a mechanism exists that works without throwing away electricity, then that's definitely wasted.
It's like saying my monster truck doesn't waste gas because it carries a child to school.
Exactly.
One critical, related vulnerability that I haven't seen people discuss:
Right now, every new block gives miners about (12.5 new BTC + 3.5 BTC in fees) * $15,000 = $240,000
So miners are making a quarter million every ten minutes.
That incentivizes massive capital expenditure on mining hardware and massive electricity burn.
If the price drops significantly -- or Lightning Network etc solve the scale challenges, and transaction fees come down -- or in June 2020, when the block reward halves -- any combination of those may lead to a future where it's uneconomical to mine again, except in places where electricity is unnaturally cheap.
When that happens, tons of mining equipment will fall idle. The network difficulty will adjust down, and in the immediate term Bitcoin will continue as normal.
But now there's a big pool of latent hardware left over from the bubble, which can be activated at any time.
This may break assumptions about the cost of attack. If, say, a Chinese mining group owns tons of hardware that is no longer economical to operate continuously, there's nothing stopping them from shorting BTC and then doing a "spawn camp" repeated 51% attack.
(If you already own enough hardware, then such attacks are pretty cheap--you only have to burn tons of electricity a few times, for a few minutes each time.)
Two new developments:
- Vast investment in mining hardware due to the bubble.
- Liquid BTC markets, including futures and shorting.
Say that the world's miners accumulate so much hardware that it costs $1m / hour in electricity to run it all. At current prices, they'd still be making a profit! But if that changes, datacenters in China will go dark, BTC difficulty will go down, lots of hardware will sit unused.
So if one group ever finds itself sitting on a ton of no-longer-profitable mining hardware, they could take a large short position and then attack the network.
Betcha that kid totally would think it's worth it, tho... Arriving to school in a monster truck would be a dream come true. :)
(Not that I disagree with your point...)
Being circular doesn't make it wrong, but it does seem like a fragile basis for value.
That doesn’t mean, though, that Bitcoin would lose its network robustness; before BTC had any value at all, people were mining it “altruistically”, purely for the sake of adding auditing strength to the network so that they could use BTC to make transactions. The Bitcoin mainnet has far more of those plain-old CPU miner nodes than any other network, and they’d still be there even if the profit-mining operations cashed out.
On the other hand, if the ASIC and GPU mining pools “went dark”, it’d always be a worry that someone would pay to start them up again just for long enough to execute a Sybil attack. But Bitcoin has been “steered” away from such attacks before with community forks, and I doubt such a future would be any different.
More generally, a severe hashpower reduction could be problematic. An emergency hard fork to a better difficulty readjustment algorithm (like what other coins use) would solve that. Ideally that change would be made before it ended up being needed.
It wouldn't need to be all of the ASIC mining, of course, just a large enough portion of it to result in massively increased block times.
It's possible that point would be far beyond any conceivable price crash, though, I don't know how to put it into anything resembling concrete numbers.
I know many would disagree with this, but while Bitcoin was the first of its kind, and it absolutely cleared the way for all the subsequent coins, its quickly becoming unusable. And that's not even considering the massive volatility of it. Such volatility implies that proper volumes aren't there to support its value. With that in mind, and also the notion of an aging technology, I think investing in it is not a good idea.
I read somewhere that several bitcoin mining facilities in China, when counted together own over 50% of the hashing power currently online in the Bitcoin network. If true, collusion scenarios could easily be imagined.
Consider that if a state goal was to wipe out the wealth of the other 49% as a plausibly deniable economic attack, then having a majority of the mining power within your borders makes a lot of sense.
How people think of that hypothetical if-then scenario depends a lot on numerous factors. I think, in places where corruption is more common, it is easier to believe it's less likely you'll get caught, or minimize the consequences when thinking about it. There's also a lower threshold for your imagination to go wandering off in that direction and begin architecting plans.
"If detected, could crash the whole thing" is a way of thinking more common in cultures where the rule of law is far more established in the common mindset.
I'm not making any sort of prediction (and I own bitcoin myself, though not a large amount). I'm just saying - this is how our minds work.
Some networks use other hashing methods, so just comparing hash to hash is pointless - if anything, you could compare instructions per second, not hashes per second.
Then, for certain hash methods, GPUs/FPGAs/ASICS give no speedup, so even if there are far fever instructions per second, they would be just as expensive to attack.
Also, there are POS/DPOS, and other proof of sth networks, where it's not really about hashes, but about other resources - again, cost of attack would be a better metric here, not hashes.
But most importantly - after a certain point, a network attack is so unlikely that additional security matters much less than other system properties, like speed, ability to execute smart contracts efficiently, or the ecosystem of startups around it.
In economic terms the best network hashrate would be the one that is sufficiently secure to protect against bad actors but uses as little electricity as possible. Anything more than that is waste, not added value.
Edit: typo
The idea that the value comes from the energy already burned is rather silly.
* Stellar: scaling and extremely low fees, with basic smart contracts. uses federated Byzantine agreement instead of proof-of-work or proof-of-stake
* RaiBlocks: scaling and zero fees, no smart contracts
The worst whitepaper I've read recently was for something called Verge, which was basically "we're gonna run a bitcoin wallet over Tor for anonymity you guys!"
And they say it ain't a bubble...
But it is also possible that Lightning (a second layer over the bitcoin base) will prove to be a good solution.
PoW is not ecologically friendly, and that will be one of its growth inhibitors.
> What's the benefit of being tied to a block chain if for a centralized currency?
https://ripple.com/insights/the-internet-of-value-what-it-me...
If this happens and LN truly solves the big issues with Bitcoin (slow transactions, high fees), I truly believe the value of Bitcoin will sky-rocket.
But who knows how long it'll take for a critical threshold of users to adopt LN payment channels.
And, of course, skeptics will just find another point of criticism, which is good because that's how technology evolves.
Bitcoin does scale, just not in the direction everyone thinks it should, which is transactions per second. It scales spectacularly well in two important other directions: number of validating nodes and hash rate.
If and when they are solved, the incredible hashing power of the network plus the massive amount of Bitcoin software and support should restore its reputation as the premier cryptocurrency.
AFAICT it's the other way around - the value makes more hashing economically viable.
The bitcoin protocol is not written in stone. Bitcoin community could adopt improvements from other crypto currencies. Segwit is the tip of the iceberg.
That said, the community is not very nimble...either.
That's why I'm bullish on Ripple ( Tick = XRP ). Transactions take about 3 seconds vs an hour on Bitcoin [1]. Plus Ripple's Blockchain technology has real use-cases with about 100 Banks around the world already using it for cross border transfers and liquidity.
[1] Source: Ripple CEO on CNBC - https://www.reddit.com/r/Ripple/comments/7miikv/ripple_ceo_w...
Also, here's the No Paywall version of the OP https://archive.is/6BD2U
Centralized.
https://ripple.com/insights/how-we-are-further-decentralizin...
I love decentralized crypto stuff. But let's be real, most people don't care how their payments are processed.
If XRP is actually valuable, the risk of compromise of its huge wallet should be really scary for anyone.
Use case is an advantage that Ripple has. However, then again, Ripple is pretty much owned by the banks, so that's a downer.
https://www.reddit.com/r/Bitcoin/comments/5f8w7f/if_both_seg...
Unfortunately it's a much wider ranging change than SegWit is and has a lot more gotchas and caveats, not least that you're essentially just running a second layer that has nothing to do with bitcoin, save that you need to lock your money in the LN to use it and must do this with a transaction. In order to get money back out of the LN, you need to settle it with the blockchain, which still relies on the blockchain.
Essentially, "how fast can SegWit + lightning go" is not actually all that useful a question. SegWit is wildly insufficient to let the LN work as a fast settlement layer over bitcoin because opening and closing LN channels still requires bitcoin transactions, and there simply isn't the throughput for this at scale. The only way that that can work is if we rely on the lightning network completely and effectively ignore bitcoin. In this case it can work, but the LN in this context is a centralised beast because you cannot afford to open new payment channels due to lack of space in the underlying layer.
The promise of lightning, way back when, was the idea that you'd be able to instantly send money to your coffee shop via your existing channels with bob and alice, and if you didn't have a path to the coffee shop then it was no big deal beacuse you could just open one, and then you become alice and bob's conduit. Unfortunately, with the lower settlement layer unable to scale, we're in the scenario where you cannot open that payment channel with your coffee shop because you can't afford the fees because even at 4x today's capacity there simply isn't enough room for everyone to open payment channels to their coffee shops.
So you open a payment channel once, to your bank or a bank-like entity, and they have payment channels to everyone else. Great, it works, you never touch the blockchain, and it's a centralised system again that has none of the properties people like about cryptocurrencies - whoops!
So, could you then make a new blockchain for all LN transactions, seperate from Bitcoin?
This is extremely inefficient for one transaction, though. You'd really need to commit a lot more money to your payment channel so you can use it for many things. If you use it for more than two things, you're gaining efficiency, but rememebr that you can't add money to it or take money out without going onto a blockchain.
This unfortunately still leaves us with the cruical flaw of blockchains, in that they're a decentralised and consistent ledger and that's actually really expensive to maintain. It's why there's so much push-back against making bitcoin's blocks bigger, 'cos the bigger your blocks are the harder it gets to move everything around fast enough to keep things running. It might seem trivial to move 1MB every ten minutes, but remember that that's 1MB every ten minutes to every node on the network, sometimes via connections which aren't very fast. Most notably, the great firewall of china is actually not very fast at all, and so blocks moving into and out of china have to do so relatively slowly. We triple the block size and maybe we can't keep up any more, and if the network can't talk to itself fast enough to move blocks around every ten minutes we have a network partition that won't fix itself and a big problem.
And that's fundamental, right? You can strip out PoW, you can tune all the values you like, it's just a question of bandwidth. 10MB blocks every ten minutes, 1MB blocks every minute, 100kb blocks every few seconds, it doesn't matter. The bandwidth to move that around a distributed global network isn't there. We can move all the LN opens/settlements to a different blockchain, but all we'll do is make it so that we have scaling problems on a different blockchain.
To be perfectly honest, I can't see a way for it all to work smoothly. There's unsolved, Hard-with-a-capital-H distributed computing problems which need solving to make this work, and there hasn't been any progress made towards solving them. Bitcoin and friends appear to work because they balance in a kind of "habitable zone" between throughput and usage, where eschewing Consistency and Partition Tolerance from the CAP theorem doesn't seem too bad, because even though we've dropped Consistency the fact that we don't really get long network partitions means that your transactions aren't going to get undone very often (but it absolutely can happen!), and even though we've dropped Partitian Tolerance that isn't that bad because we don't really get long network partitions and we have a partitian resolution operator that only drops transactions sometimes.
But if blocks can't get around the network fast enough then suddenly we do get major network partitions, and that means our mitigation for lack of consistency falls apart, and so we don't have a working partition resolution operator. We're left with our choice to pick only "A" from CAP, and have a highly available network that doesn't reliably commit transactions and very often splits into multiple partitions. Argh!
Multiple blockchains could mitigate this issue, but they can't really talk to each other very well, not without incurring further losses of efficiency. In that scenario we'd need four transactions to send our $5 - one to open the channel, one to close it, and two to jump blockchains. Ack!
These are just really hard problems and hopefully they can be solved, but right now there are no even proposed solutions which can fix this.
Yes, but I meant using a blockchain for the decentralised aspect of things.
> Multiple blockchains could mitigate this issue, but they can't really talk to each other very well, not without incurring further losses of efficiency. In that scenario we'd need four transactions to send our $5 - one to open the channel, one to close it, and two to jump blockchains. Ack!
Is it bad to use 4 transactions for 1 transaction when it makes your transaction througput 100000x higher?
> These are just really hard problems and hopefully they can be solved, but right now there are no even proposed solutions which can fix this.
Aren't there already altcoins that have solved the transaction scalability problem?
Not really. It'll increase latency on commit confirmation and that might suck, though.
>Aren't there already altcoins that have solved the transaction scalability problem?
Nope. There's ones that can scale better than bitcoin, but in the end there's only so many parameters you can tune and an actual solution requires more than just tuning block size / block rate.
Bitcoin was not designed to be a high-throughput currency. It's a store of value.
You put your money in it and let it sit. That's it.
If you don't want to do that, don't use it. But that's what it's for. Or at least what it's evolved into.
I think it can cause a gigantic speculative bubble that will put people like Thiel in control over even more wealth in the world than they already have – if BTC goes to $1M/coin, what do you think will happen? $10M? There's no upper limit.
But that's a separate issue.
Bitcoin doesn't have to do anything except what it was designed to do. And it was designed this way. Satoshi certainly thought through this scenario and specifically decided to do this, and not something else. So those who are putting money into BTC are betting on Satoshi's original vision.
Now, do you think Satoshi really believed BTC would be the only crypto? I think he knew others would spring up. He solved the byzantine generals problem with sybil resistance. Of course he knew others could solve it too, in slightly different ways.
So I think he just said "Well, let them do that." And hence, use different cryptos for different circumstances.
> A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
If I wanted to do that, I would ask my bank to do it, because they're better at it.
> And it is. When you pay Coinbase, they send you BTC. Then you're free to send your BTC around if you decide the $20 transaction fee is worth it.
The response when somebody tries to do transactions off-chain:
> That's why you don't store assets on coinbase...the whole point of crypto is that it allows you to be in exclusive control of your assets. Why is that so hard to understand?
The important thing is to make sure that no matter what anybody does, they're wrong, and that way bitcoin cannot possibly have any flaws.
Could've fooled me with the whitepaper title "A Peer-to-Peer Electronic Cash System".
Before a store of value it was also billed as a mechanism to high-fee trans-border remittances, a solution for micropayments on the Web, currency replacement for countries with high local currency volatility, etc.
You're free to snipe at it, but it's simply a financial wishing well. You throw your money in and wish for more, and maybe you get some.
The world will go along with or without you. And the more people that do, the more BTC fulfills its current purpose.
Careful, though, because if the entire world decides to do that, you could find that not having any BTC isn't a very good position to be in.
That's a straight up falsehood right there. Bitcoin was explicitly designed as a currency, or medium of exchange. It became a store of value (ha!) because it was growing in use as a currency so its value was increasing and more and more people started "investing" in it. But it's volatility and rapid rise in value diminished its value as a currency. Its present value is a collective delusion.
Read https://bitcoin.org/bitcoin.pdf. Read section 6, incentives. Note transaction fees. Read the conclusion. Note "We have proposed a system for electronic transactions without relying on trust." None of this has anything to do with being a currency, or being low-overhead.
I'm not sure how you can say it was only meant to be a store of value with a straight face. I don't know whether to question your sanity, your reading skills, or your integrity.
I think you should spend some time reading https://bitcoin.org/bitcoin.pdf before making factually incorrect statements. Bitcoin is only viewed as a store of value today because it no longer can be utilized for its original purpose. It's a complete failure in that regard.
> The incentive can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.
I think most people who read the paper focus on the early parts, rather than gaming out the implications of the later parts.
Maybe this was the intention all along, but this idea has only recently reached some saturation among information channels.
Because I haven't heard much about "store of value" until about a month ago. Which seems to be either a shifting of goalposts which is bad, or a complete morphing of why people are interesting in crypto which is even worse.
It means, people are scrambling trying to justify why the hell they're throwing all their money at crypto.
It's called Bitcoin, not Bitgold. It was sold to the public as an anonymous, decentralised, safe, fast, and cheap way to transfer money. It has failed on every single one of those claims.