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How to know when bitcoin has bust and what replaces is
It is unknown whether bitcoin will bust. However, I have been trying to think: how do we know when the bubble has burst and what will happen? I have been thinking a problem with bitcoin is that is easily exchangeable with other cryptos. Anyway, when bitcoin burst, we can expect that all other cryptos will bust too just for that simple reason --
except for perhaps one.
So, what can replace bitcoin and why will it bust? I am thinking of a general Compute Coin, think Amazon Compute, could replace bitcoin. Why? Because, now you have an actual "good" of value being produced: compute cycles. The replacement bitcoin could be based on award for doing useful work. Amazon is in prime place with their cloud computing infrastructure to promote the new coin. By rewarding coin for actual work, you accomplish two important things. First, you offer an alternative to money exchange for acquiring the coin which makes it harder to regulate (regulate out of existence). Second, it gives the coin tangible value because computation is a tangible asset. Of course, computation is inflationary. Exactly how this new coin works isn't entirely certain but it would be tied to computation for cost service running on a distributed encrypted virtual machine.
Anyway, how might we know when bitcoin has burst?
1. If new coins fail to be mined because difficulty becomes too great.
2. If new coins become too easy to mine.
3. If less retailers accept bitcoin then in the past. This means they tried the BTC experiment and it failed.
4. If dollar to btc exchange volume decreases and trading volume increases.
5. If regulation stifles it or makes it unusable.
6. Carbon regulation and concern, generally speaking a green coin will be as efficient as possible.
In meantime, Bitcoin could rally a great deal.
Bitcoin is also at risk because it can't benefit properly from its monopoly advantage. Because decentralization without evolution results in fragility and eventual loss of monopoly advantage and deterioration of any network advantage. Basically, if you look at something like ebay or amazon, they have network advantage because they can evolve faster then any competition can introduce change. Unfortunately, bitcoin can not and even if it could then it becomes subject to political powers which negates some of the use.
The question is when will it fail. It is most likely to fail when no new coins can be mined. This is estimated to be around 2040. However, we know markets tend to move in advance, so let's say it only takes half that time. This yields around 2028. This seems somewhat reasonable for a time around when bitcoin should enter perpetual decline.
The key player to watch is Amazon and/or some consortium to see if/when they introduce their compute coin. It could also come from a collaboration between Amazon, Google, and other cloud providers. The new coin will be able to learn from bitcoin's mistakes. The new coin will basically be a distributed encrypted virtual machine, capable of running useful compute task without exposing the answer. This new coin can form the basis of a super computer that can run the internet.
Can you help answer these questions from other members on NexusFi?
I have been expecting corporation coming out with their own cryptos for years. I guess they are waiting for government regulation. If the government actually OKs them ( a big if) there will be more and more flexible cryptos with better usability than BTC.
As you said, Amazon own coin would be obviously accepted on Amazon, making the biggest online retailer available for using a crypto, maybe protectively not allowing competing cryptos. Then would come Walmart and so on.
Competition is good for the customer, but not so good for the price...
Not sure governments actually wants non state organisations to start controlling monetary value,
up to know that has been something they kept for themselves.
There are a number of concerns with the growing market value of the crypto's
- lack of KYC and anti-money laundry implementation
- tax evasions
- anonymous
All of which has been studied and parts have been under scruteny
- china forbidding issue of ICOs
- few exchanges have been under scrutiny for money laundering
- few exchanges went bust because of lack of supervision or hacking
etc..
Like with many new things, the regulator is way behind the wave and the evolution...
Most of the attention of the value for bitcoin has been on the blockchain and the network effect. However to expand on my previous thoughts
1. A significant value of bitcoin is the ability to mine it without requiring any official exchange. Even if it is mostly theoretical now as most mining is performed by corporations it was surely important in the start. This is important attribute because without it then it could easily be regulated away. The problem is that the mining is rather inefficient, not doing (much) useful work, and eventually runs out. Once it is impossible to mine bitcoin then it will be possible to regulate it away because there won't be any way to obtain bitcoin without exchanging it.
2. The solution is to have a distributed encrypted virtual machine where a unit of production is a unit of computation. It will always be possible to "mine" such a coin by simply performing work. The coin has intrinsic value in that eventually most of the internet would be run on the "coin/VM". So, it can always be exchanged without requirement for conversion to dollar. Of course, it could also be converted through exchanges to dollars or other denominations. Such a network rewards efficiency and performs useful work (super computing, running banking apps, etc). It will require some collaboration though from multiple industry. There are some missing parts with this idea as-is but that's the general design.
3. We have already seen other internet ideas follows similar patterns. The original captcha was just a unit of work for security against bots. But, later it was realized it was wasting a lot of human productivity and better designs such as uses for captcha's for translation were invented.
4. The monopoly benefits of the network effect also assumes that a central authority can innovate and guide the product. Bitcoin may have benefited from the network effect. However, because it is decentralized it cannot easily integrate innovations.
As an aside, I am still evaluating bitcoin for a small well-timed speculation. As I think it still has more room to run.
The key that you need to remember with crypto-currencies is that they are entirely speculative. Larger players take advantage of this by doing pump and dumps. That's why you can end up with these huge dips that end up moving even higher. The major peaks however always come with a news event invalidates a part of the trade. For instance, when Mt Gox initially went down it effectively destroyed the idea of Bitcoin as a currency to replace fiat because it proved that it can't be stable.
I believe this has already happened again in Bitcoin. Bitcoin initially moved up when the Bitcoin Cash fork didn't cause a complete disaster. However, the concerns with the larger blockchain were effectively demolished when they sucessfully mined larger blocks in Bitcoin Cash. Meanwhile Segwit still has issues, and Bitcoin users feel the transaction cost is simply too high. Obviously there's many people that will challenge these assertions, and the propoganda is particularly high from both sides of this fork war. So keep in mind that I personally think crypto-currencies themselves are worthless, and only a vehicle for speculation. So I don't trade them, but I do mine smaller coins for fun.
Anyways when you combine this with the regulatory moves from China, and you have a setup for a short term top. It's unclear however what happens next. Does this eventually lead to the flippening with Etherium taking over? That's what I've believed would happen, but so far Etherium is getting hit just as bad. Does Bitcoin Cash take over, and once everyone has forgotten about it we move for another leg higher? Or maybe that's just the end (I still believe it will happen some day). Impossible to say because again, it's entirely based on speculation. That's why I just stay away.
The common wisdom is that China won't crack down on bitcoin exchange but is rather trying to prevent new/scam coin offerings. However, I noticed also that China released a statement about transitioning to all electric vehicles. If countries don't see the value in Bitcoin and because it waste a lot of energy then they may be more inclined to try to stop it. The exchange ban could be a precursor to a mining ban. More over, one can now see a future where Bitcoin might compete with electricity needed for electric cars.
One problem I have with placing a valuation on Bitcoin is that it even if we can value the network then it doesn't tell us what the price of Bitcoin should be. I think this is relevant. The value of something doesn't have to relate to the price of it. As an example, the Linux operating system is immensely valuable but it's also free.
If we value Bitcoin at say 50% of one of the major credit card processors, we come up with a valuation of around 50 billion dollars. But, even if the Bitcoin network is worth 50 or even 100 billion dollars then it doesn't tell us what a Bitcoin is worth. I guess you could say if you owned all the Bitcoin then you should own the entire wealth of the network.
In that case, Bitcoin could be worth at 21 million bitcoin and given a major credit card company has a valuation around 100 billion
at 2% of the value of a major credit card = 95k?
100 billion * .02 = 2 billion / 21 million = 95k
Now give or take a 70% margin of error, we get 28k to 162k. This assumes Bitcoin is long term sustainable which still remains to be seen and there are many arguments it wont be. On the other hand, we can be pretty safe there are upper limits simply because there are many interests in keeping it too some small fraction of the economy. But, Bitcoin is further divisible into Satoshi's (100 million per bitcoin). Another way to solve the problem is to just imagine what the minimum price of Bitcoin needs to be to run the network.
Here's another problem, some people think Bitcoin has to increase in value simply because there are a limited number of coins left to mine: that it is scarce. But just because something is scarce doesn't make it valuable. But, even if it does then that should already be factored in unless there is a surprise factor.
For example, let's imagine bitcoin is a type of programmed annuity, it's not, but less imagine I create a product, i.e digital currency or shares, that is worth $100 today and is programmed to increase in value at 3% per year for 10 years. It is more or less possible to figure out what it is worth. You would want to hold it if it were greater then the risk free return rate. But, you also know how much it is worth.
If Bitcoin will be worth say even 40k one day then we can imagine that it should be priced in more or less already today. So, if Bitcoin is only trading at 4k then that means assuming it is fair value then we can imagine that the market is pricing in a 90% probability of Bitcoin going to zero.
I think I finally got it. Let's imagine in the worst case scenario the value of Bitcoin is really zero except as a trading, speculating, and gambling vehicle. The fair value is then a function of the money in-flow and out-flow combined with the pricing control exhibited by the traders. Even if Bitcoin is not such vehicle, there could be significant value for such a vehicle especially if markets become perfectly efficient or manipulated. In the future, there could be programmed trading vehicles that exist only for trading but would have some programmed predictability. This would allow for those with the skill to predict minimally predictive markets to profit in accordance with their relative skill over their peers.
Next, let's imagine a hypothetical scenario. Small traders all always buy high and sell low while a few large traders who try to control the product will always sell high and buy low. The value is more or less price of the moving average. The risk is that basically the large traders can manipulate the price. The other risk is that at some point the small speculators overrun the large traders and you end up with a feedback loop that cannot be controlled.
A bit more on a "trading programmed price stream" TPPS could be defined with the following properties. But, first why could a TPPS be an ideal trading product: we can say that traditional futures products for small speculators only serve the purpose of making money by way of relative trading advantage. So, they are just a product -- no different then what a TPPS would be. However, they have some disadvantages: there are trading costs/fees, the exchanges encourage HFT trading (which can disadvantage the small speculator), manipulation is possible, they might be unpredictable according to economists, and they represent large notional values which makes it difficult for the small speculator. A TPPS is designed to resolve all deficiencies while preserving majority of qualities:
1. The price stream is fully defined by its programming or TPPS contract. Manipulation is impossible. Transparency is guaranteed. All functional TPPS would be programmed in an evolutionary adaptive mechanism with varying amounts of randomness possible. The TPPS contract can, also, determine the minimum latency of the network. The TPPS contract would be modeled on a mix of real and idealized markets. For example, a TPPS contract could define a price stream and an artificial symbol/news stream. What is important is that while the TPPS programming is fully transparent, the price stream is defined in such a way that the price stream is not a random walk but not easily predictable and is furthermore always changing. So, the TPPS is an "idealized" trading vehicle where technical analysis is guaranteed to work: however, no particular technical analysis would be guaranteed to work. The system would need to distribute the computation of the TPPS across multiple computers to ensure no manipulation would be possible.
2. Actual trades would have no bearing on the PPS. The trades could be defined as contracts and/or payouts would be defined used some sort of fixed schedule from a pool.
3. The TPPS "markets" could be designed so that there are no trading fees. This makes them more efficient then markets and removes most of the monopoly that trading facilitators enjoy (i.e. the banks and exchanges). However, there might be some payout/reward for running the distributed TPPS machine.
4. This is just one envisioned model. It might also be possible to allow for trades to influence TPPS-- so you'd have the benefit of secondary market function.
For TPPS, you need a virtual machine that can keep the internal state of the program unknown to all participants but deterministically verifiable in the future and protected against tampering because the machine must enter predictable states for indeterminate time.
An initial idea, for TPPS, you could make it such that each trade could be sent to the network with a random number that you can validate on your computer. The combination random numbers would be fed into function that has deterministic but unpredictable output which would be used as the seed basis for the next state of the machine.
It might be such that it could work similar to bitcoin that the state would be indeterminate provided that no one controlled more then 50% of it. There needs to be a way to protect against someone from gaining too much control of the network, i.e. hidden state. The machine could increase or decrease difficulty to facilitate trading.
It could work either on a contract basis, binary options, or on a pool basis. In the pool basis form, you can buy/trade at any price but you would not know what the payout would be until after you made the trade because it would be determined based on the pool of traders. For example, if the machine entered a very easy to predict state and say everyone bought then you'd just get your money returned. On the other hand, if 10 people bought and 1 sold, you'd make a little extra. What's interesting is that you can make trading markets/products that would have idealized characteristics. For example, you could have guaranteed stop losses, step sizes, etc. The volatility could be completely controlled. The risk could be completely defined by the programming contract. A question is technically how you pull off computing the next state while keeping the internal state hidden. This is required so the system doesn't rely on any CA (central authority). At the same time, the state should be be verifiable.
Update
For TPPS markets, they could be defined to state what type of patterns would be programmed, as well. So you might have a market ABC with defined properties as such "Technical analysis, Seasonal, Complex, Behavioral, Adaptive, Fractal" which would describe the complexity and types of properties a programmed price stream would have. I do not think it would be that difficult to make such a system if we could trust a central authority. If you use the pool model then the system could self-adjust the randomness/difficulty level by seeking to make it such that 50% of traders are wrong at each turn. But, that's an interesting aspect in itself because then trades could start to influence the system. If you want to distribute the virtual machine, it is simple to see how it is possible as you just distribute a hash of the prior state and current state. However, you also need to reveal the source code, share product of the state but keep the next state indeterminate but deterministic. The last part is the difficult part. If you distribute the machine then someone could try to compute next states. If you made it just completely random then it would be easier because the next state could be defined as some complex (unpredictable) function of all the inputs and the current state.
A simpler model is to just to exchange dollars for tokens and define a programming contract which pays out based on the value of an existing market. I was thinking the nice thing if you exchange dollars for tokens is that you can get rid of all the frictions except for the transfer of in/out funds. The problem with the programming contract approach is that say it is programmed as a binary option. You send your funds to the program with a buy/sell and market. And every 10 minutes the programs goes out and reads the market and performs the payouts. All payouts are in tokens so can eliminate frictions to nearly nothing (cost of the hardware). The problem is that the program must be fully automated. So, if an external feed is down or whatever then you'd need either the entire network to validate the input or you'd have to make it redundant robust and/or intelligent enough to refund the tokens. This might be something Ether could do unsure. But, if you did allow for some authority or group vote then you become subject to any single entity controlling a large enough of the vote.
For example, say a single trader made a large bet that in 1 hour Bitcoin would be higher and say Bitcoin was actually lower. But, say they made the trade from dozens of shell accounts then those accounts could dispute the true value of Bitcoin -- unless it were completely programmed/automated. If it were a simple majority vote, they could try to reject the trade post fact.
I do see a lot of promise though. Even just considering a small number of possibilities makes the current financial products seem archaic.
We have to consider when evaluing bitcoin is the fact that it is incredibly easy to replace... Now one could argue against this, but it is still true. So if whatever reason btc had a glitch or would get banned there are plenty of other cryptos existing to take its place. (assuming they wouldn't get banned)
So how can we put a huge value on something that isn't scarce, easy to ban, easy to replace and has many competitors? Simply we can. It is tulip bulbs all the way up...
