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***Split from Correspondence and Coherence***

On 4/1/2021 at 8:12 AM, merjet said:


Most upbeat. What's to stop bitcoin crashing in a year or two? There's no inherent or objective value/standard that I can see, and the huge fluctuations seen in its value point to its obvious attraction for speculators, well above the individual freedom and practicality the writer justifies. Does one want to own a speculative cryptocurrency which can soar or crash, the value varying by market demand day by day? Could make one nervous.

Edited by dream_weaver
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Posted (edited)

Since I don't own Bitcoins I haven't any feelings. The info would interest me. What would guarantee a crypto currency's longevity, not to add stability? The confidence of the Bitcoiners?

Edited by whYNOT
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9 hours ago, whYNOT said:

Since I don't own Bitcoins I haven't any feelings.

LOL. You have expressed being very wary of cryptocurrency due to its price volatility (instability) and it having "no inherent or objective value/standard."
 

9 hours ago, whYNOT said:

What would guarantee a crypto currency's longevity, not to add stability? The confidence of the Bitcoiners?

If you value stability so much, there are stablecoins (link). 

I can't speak for all or most bitcoin fans. So I will only indicate some reasons for my own confidence.

1. Competition. There are several cryptocurrencies. Ethereum is 2nd most popular behind bitcoin. If a bitcoin holder gets wary, will he or she swap it for another cryptocurrency or a fiat currency?
2. The fan base and usages are growing. I have already indicated advantages of crypto for international transactions, collateral, and protection from fiat currency inflation.    

There is also its protection from government confiscation. 

I'm not suggesting putting all of one's investment/savings in crypto or transacting in crypto as much as possible.    

Edited by merjet
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Yes, I hear the useful, practicable, rational and even the idealist attractions of bitcoin. A little bit of those does seem to me self-justifying.

There are two aspects, either it is a currency - or it is an investment. Fine and well that one should speculate in bitcoin, and that's for certain how the large numbers of people - only - see it. The greed motive. A massive return to be made, short-term. Like getting something almost for nothing, to most.  

If one is going to invest in stocks and commodities etc. you'd definitely have your money solidly accounted for (in dollars, preferably) and would speculate with some of it, according to risk-reward assessments.

But you wouldn't speculate with the dollar! You want your cash holdings to be in a stable currency that holds its value (20 years from now, ideally, if it weren't for gvt. Treasury printing more bills and devaluing your wealth). You don't want to see crazy fluctuations up or down in your dollars.

And- crucially, you are getting and seeing tangible assets to back your investments. Company shares, property, etc.

There doesn't have to be a false alternative, one can do both - one could put only 10-20% of one's savings into bitcoin, say. Your last comment holds. Don't go all in, I'd guess.

But there's still a question of identity, fish or fowl. Speculation opportunity or -a currency. Which is it? That I've heard, promoters of bitcoin are pushing it both ways and there's a self-contradiction. When the big and early speculators start selling up bitcoin to take their profit, and they will, how long will the price hold or rise, balanced by huge, new buyer demand? What goes up must come down...

Edited by whYNOT
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I believe the days of spectacular gains from Bitcoin are over. After Bitcoin reaches its maximum number of coins, other crypto currencies will experience greater demand. This has already happened. Who wants to link one's debt or other obligations to a currency that rapidly appreciates?

2 hours ago, whYNOT said:

But you wouldn't speculate with the dollar! You want your cash holdings to be in a stable currency that holds its value (20 years from now, ideally, if it weren't for gvt. Treasury printing more bills and devaluing your wealth).

The $US will not hold its value for the next 20 years. Inflation of at least 2% per year is planned. A 2% inflation rate implies depreciation of 1 - 1.02^(-20) = 0.327 or almost 1/3rd. Spendthrift Joe Biden (and many other Democrats) and the accommodating Federal Reserve likely means even greater depreciation.

Oher currencies, with a few possible exceptions like the Swiss franc, will depreciate even more.  

2 hours ago, whYNOT said:

There are two aspects, either it is a currency - or it is an investment.

 

2 hours ago, whYNOT said:

But there's still a question of identity, fish or fowl. Speculation opportunity or -a currency. Which is it?

You like to pigeonhole. 

Edited by merjet
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I know several people who made money and some who lost a lot due to the girations of Bitcoin so I don't have any fascination either way. But from the technical side, bitcoin or blockchain used in bitcoin type electronic cash has at least one built in use. It cuts out the middle man in financial situations where "proof of funding" is necessary.

Proof of funding means, I know what your account number is and I know the balance ... right now.

Let us say, you have a volunteer fire department. There are a thousand inhabitants, that sign up for the protection. At any moment, the users of the service want to know if the service is fully funded. But ... some or all the users of the service don't want anyone to know if they paid or not. Some will pay extra and some will not pay enough. Nevertheless, people want to know if the service is fully funded, so that it is in operation. They want to know things like  "is it about to go bankrupt or not".

The way it is right now, with our cash and bank system, the ledgers are private. You have to jump through hoops to find out if the bank account of the volunteer fire department is fully funded.

With a bitcoin type solution, you would know if the service is full funded IMMEDIATELY. The ledger is available to all without a bank middleman, without auditors, accountants etc. You see the full funding of the entity without any of that expense.

Now, for that to happen, the fire department declares to everyone what their account number is. So everyone can determine what the balance is as it changes moment by moment.

People see money going from accounts that they don't know who owns, to an account that is known to everyone.

That was just one use. There are many in relation to the fact that no banks are involved.

One the other hand, there is a fundamental problem. There are other coins that could do it faster and cheaper as transaction cost and speed suffer. So bitcoin clones are created without anything to stop it. It's a speculation problem that requires "maturity", psychological growth, in understanding how this market works so that money is not printed infinitely. Right now, the crypto space is just a casino.

In the case of Etherium, the entire stock market can run on it, without any safeguards. It would be truly a free market type market.

 

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"Put all your eggs in the one basket and --WATCH THAT BASKET." - Pudd'nHead Wilson's Calendar. By Mark Twain/Samuel Clemens.

Mr. Twain was a wise man, except financially. (He lost a huge sum of money on a printing press.) I watch my speculative investing closely.

 

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Many speculators profited during the tulip mania. 

The Bitcoin phenomenon got me to explore the entrance to the rabbit hole. Metaphorically, like gold, one does not have to own a claim to own a final product of what starts as a claim. Panning river beds and delving into the earth have both yielded fruit. Both mining approaches have had products developed to enhance or improve productivity. 

To the depth I plumbed the Bitcoin, the above analogy is what I drew in parallel. Still, the claim of paper money is as valuable as gold is only as valid as redeemability goes. 

An appreciating currency offers lower prices on future purchases to net savers while discouraging speculative lending. The corallary to Gresham's law is based on bad money (currency) drives out good.

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Gresham's law is often stated as "bad money drives out good". Wikipedia: "In economics, Gresham's law is a monetary principle stating that 'bad money drives out good'. For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation" [my bold].

So "drive out" doesn't mean the good money no longer exists.  Its role is more a store of value and less a medium of exchange. Bitcoin's situation doesn't seems to fit. It is becoming more a store of value and more a medium of exchange. Fiat currencies are becoming less a store of value and less a desired medium of exchange.

Edited by merjet
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Bitcoin, hedging, speculation

Like this article https://bitcoinmagazine.com/markets/a-deep-dive-into-bitcoins-contango says, “contango” refers to a situation where the futures price of a commodity is higher than the spot price.

Bitcoin’s contango is the main topic of this article. Instead, I will use part of it to comment about hedging (decreasing risk) and speculation (increasing risk).

From the article: “Currently, the spot price (market price for bitcoin on exchanges) trades lower than futures prices. The spread for the June futures contract is more than 25 percent annualized on most major exchanges.

This means that anyone can buy bitcoin and use that bitcoin as collateral to sell the June futures contract. This trade locks in a risk-free 6 percent USD-denominated return (more than 25 percent annualized) no matter where the price of bitcoin goes over the following months.

The only risk is exchange custody (losing coins due to poor management or hacks).”

This is true and a hedged situation if the futures seller did not borrow $US (or another fiat currency) in order to buy the bitcoin. The bitcoin can be used to make delivery to the futures buyer when the futures contract expires. However, it is false and speculative if the futures seller will borrow $US later in order to buy and later deliver the bitcoin.

Suppose bitcoin’s spot price is $60,000 and the futures price is $63,600 (= $60,000 x 1.06). Suppose bitcoin’s spot price moves to $65,000 and the futures seller then buys or borrows and buys. Then he will pay $65,000 but must deliver at $63,600, a $1,400 loss. Suppose instead bitcoin’s spot price falls to $55,000 and the futures seller then borrows and buys. Then he will pay $55,000 and will deliver at $63,600, a $8,600 gain. In either case, subtract any cost of borrowing.  (The futures seller might unwind his contract before delivery and the gain or loss will differ. But I ignore that for simplicity.)

Edited by merjet
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Federal Reserve Notes are currently fiat by law. Bitcoin and other cryptocurrencies, as well as many other forms of storing wealth, do not share that status. Instead of a tri-metal, quad-metal, etc., approach, the crypt-keepers are tossing their hats in the ring with the other fiat currencies while offering what appears to be a decentralized regulating process. Currently, Bitcoin is the rhodium of the genre.

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2 hours ago, dream_weaver said:

Instead of a tri-metal, quad-metal, etc., approach

I'm not sure what you meant by this. Cointelegraph reports that Fidelity Investments has filed for SEC approval of a bitcoin-linked ETF. However, the author deems it unlikely to get approval due to concentration of risk or lack of diversity of assets. "With equity funds, the SEC doesn’t want any single stock to comprise more than 25% of an ETF’s basket size as measured by market capitalization."

Despite this, Fidelity already offers investing in Bitcoin and Ethereum indirectly. Two of several ways are Grayscale Bitcoin Trust (ticker: GBTC) and Grayscale Ethereum Trust (ticker: ETHE). A buyer owns "shares", not a "wallet."

Oddly, Fidelity's profile of GBTC says: "Grayscale Bitcoin Trust (BTC) is an exchange traded fund launched and managed by Grayscale Investments, LLC. The fund invests in Bitcoins. It invests through derivatives such as futures, swaps, and other CFTC-regulated derivatives that reference digital currencies" (my bold).

More directly investing in cryptocurrency is available at crypto-dedicated exchanges such as Coinbase or Binance.

https://coinmarketcap.com/rankings/exchanges/

https://www.investopedia.com/best-crypto-exchanges-5071855

 

Edited by merjet
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2 hours ago, dream_weaver said:

with the other fiat currencies

Crypto is based on computing power and computing time. You're spending too much time coming up with clever metaphors, rather than the facts about crypto. 

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31 minutes ago, Eiuol said:

Crypto is based on computing power and computing time. 

That would be "the committee of they" providing the stamp of approval. Arguably a service rather than a finished good or product that can be assayed independently, as in an acid test for the purity of gold. 

To crypto's credit, the acceptance and use of it is based on mutual consent between the trading parties, for now.

Like many things, such as paintings and classic automobiles, moments of fame are granted when new highs (expressed usually in some form of government fiat) are attained. 

KFC is not expressing the price of a bucket of chicken in a decimal fraction of a Picasso though.

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2 hours ago, dream_weaver said:

Arguably a service rather than a finished good or product that can be assayed independently, as in an acid test for the purity of gold. 

I'm not sure what you mean, computing power can be evaluated independently. Not potential computing power; it is computing power. 

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2 hours ago, Eiuol said:

I'm not sure what you mean, computing power can be evaluated independently. Not potential computing power; it is computing power. 

Is the computing power of a bitcoin stored in a bitcoin wallet? Is it part of the exchange, something necessary for a user of a Bitcoin in a transaction needs to understand, or a background process like the printing presses that Federal Reserve Notes are made upon.

Even this conversation seems much more complex than need be for understanding a transaction. Granted, I have years of transactions at thousands of cash registers, on both sides of the counters. I've experience credit card transactions as a consumer. Pay Pal added an extra level of complication. Many accept such complications as part of the process. For an occasional user, it is an added aggravation to have to deal with.

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2 hours ago, dream_weaver said:

background process like the printing presses that Federal Reserve Notes are made upon

Everything has a background process.  Gold's background process includes:

Supernova explosions create gold and other heavy elements.

Some of this gold has ended up in the earth.

Humans find and mine the gold.

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I have no idea how this is going to end, and am heavily invested in gold and not at all in bitcoin. I'm enjoying the debate between Peter Schiff and his son, Spencer, a bitcoin fan, on this. The son reduces it to the false alternative of "intrinsic" vs. "subjective" value, so I think he's the one that's wrong. I don't understand the technology behind bitcoin, and I'm inclined to think it's merely a digital for of fiat captivating irrational people in an nutty society. However, I do grant the possibility that there could be some property or fact of the digital transaction system—the ability to barter things digitally—that does have an objective value in and of itself and therefore overcomes the conventional requirement for "real" money to have a commodity value. 

 

 

Edited by happiness
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There's an old parable about how, once upon a time, all the important banks put all their gold in a single vault, and they used a ledger to keep track of who owned what part of it, and to transfer ownership back and forth between people, so they ran the whole economy based on that ledger for many decades without even looking at the vault. Then one day they finally did look, and they discovered that, many years before, an earthquake had occurred, a fault line had opened up, the vault had broken, and all the gold had fallen into the fault and had been lost. But the economy at the time had proceeded without noticing, because it was all based on the ledger.

Bitcoin is just a decentralized, cryptographic "ledger," just like that, except its designer(s) decided not to have any gold in the first place. Instead, there's only so much Bitcoin, and the blockchain keeps track of who owns what. The cryptography and "peer review" (mining) makes it impossible for people to double-spend, or create value out of thin air. (Mining pays because a part of the "ledger" was originally set aside to pay miners for verifying the ledger. As a result the pay slows down periodically and will eventually stop. After that miners are expected to charge "transaction fees.")

As for what Bitcoin is worth, that totally depends on what people are willing to trade for it. That price is objective but it is a function of many variables and will vary from time to time, depending on who is in the market and what their priorities are. The same thing is true of gold.

There is no such thing as "inherent value," there is only "of value to whom and for what." Bitcoin has no use unless you can trade it for something. Gold does have a few uses; you can make jewelry out of it, or you can electroplate electrical contacts so they don't corrode, there might be others. Most of gold's value, like Bitcoin's, comes from what you can trade it for. Even the dollar is only worth anything because you can trade it for stuff.

Part of the reason physical gold and Bitcoin are interesting these days is that they are expected to withstand levels of government corruption that fiat currencies cannot withstand (because the government keeps printing more fiat currencies to finance its activities but nobody can print any more physical gold or Bitcoin).

However, I suspect that people interested in them for that reason underestimate the depths to which government corruption can go.

Also, government corruption tends toward the fall of civilization, and it's an open question how far civilization is going to fall. I feel like some Agent Smith is going to be saying to some Neo somewhere, "What good is your Bitcoin... if you have no... electricity..."

Physical gold at least doesn't require electricity and would thus be useful even in a horse-and-buggy scenario.

But neither one of them is of any use if there is nothing to buy.

There's a part of Atlas Shrugged where somebody (I forgot who) offered John Galt "a cool, neat billion dollars," and John Galt's reply was, "What would it buy me?" ...

Edited by necrovore
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