Tuesday, December 17, 2024

After twelve years of writing about bitcoin, here's how my thinking has changed


What follows is an essay on how my thinking on bitcoin has changed since I began to write on the topic starting with my first post in October 2012. Since then I've written 109 posts on the Moneyness Blog that reference bitcoin, along with a few dozen articles at venues like CoinDesk, Breakermag, and elsewhere.

An early bitcoin optimist

I was excited by Bitcoin in the early days of my blog. The idea of a decentralized electronic payment system fascinated me. Here's an excerpt from my second post on the topic, Bitcoin (for monetary economists) - why bitcoin is great and why it's doomed, dated November 2012:

"Bitcoin is a revolutionary record-keeping system. It is incredibly fast, efficient, cheap, and safe. I can send my Bitcoin from Canada to someone in Africa, have the transaction verified and cleared in 10 minutes, and only pay a fee of a few cents. Doing the same through the SWIFT system would take days and require a $35 fee. If I were a banker, I'd be afraid." [link]

I was relatively open to Bitcoin for two reasons. First, I like to think in terms of moneyness, which means that everything is to some degree money-like, and so I welcome strange and alternative monies. "If you think of money as an adjective, then moneyness becomes the lens by which you view the problem. From this perspective, one might say that Bitcoin always was a money," I wrote in my very first post on bitcoin. Second, prior to 2012 I had read a fair amount of free banking literaturethe study of private moneyso I was already primed to be receptive to a stateless payments system, which is what Bitcoin's founder, Satoshi Nakamoto, originally meant his (or her) creation to be. 

A lot of bitcoin-curious, bitcoin-critics and bitcoin-converts were attracted to the comments section of my blog, and we had some great conversations over the years. My bitcoin posts invariably attracted more traffic than my non-bitcoin ones, all of us scrambling to understand what seemed to be a newly emerging monetary organism.

My early thoughts on the topic were informed by having bought a few bitcoins in 2012 for the sake of experimentation, some of my earlier blog posts describing how I had played around with them. In 2013 I wrote about the first crop of bitcoin-denominated securities market (which I dabbled in)predecessors to the ICO market of 2017. I also used my bitcoins to buy altcoins, including Litecoin, and in late 2013 wrote about my disastrous experience with Litecoin-denominated stock market speculation. In Long Chains of Monetary Barter I described using bitcoin as an exotic bridging currency for selling XRP, a new cryptocurrency that had just been airdropped into the world. I didn't notice it at the time, but in hindsight most of these were instances of bitcoin facilitating illegal activity, i.e. unregistered securities sales, which was an early use case for bitcoin.

Although Bitcoin excited me, I was also critical from the outset, and in later years my critical side would only grow, earning me a reputation among crypto fans as being a salty no-coiner. In a 2013 blog post I grumbled that playing around with my stash of bitcoins hadn't been "as exciting as I had anticipated." Unlike regular money, there just wasn't much to do with the stuff, my coins sitting there in my wallet "gathering electronic dust."

 "...the best speculative vehicles to hit the market since 1999 Internet stocks."

What my experimentation with bitcoin had taught me was that the main reason to hold "isn't because they make great exchange media—it's because they're the best speculative vehicles to hit the market since 1999 Internet stocks." But that wasn't what I was there for. What had tantalized me was Satoshi's vision of electronic cash, a revolutionary digital payments system. Not boring old speculation.

In addition to my practical complaints about bitcoin, I also had theoretical gripes with it. The "lethal" problem as I saw it back in my second post in 2012 is that "bitcoin has no intrinsic value." Over the next decade this lack of intrinsic value, or fundamental value, would underly most of my criticisms of the orange coin. Back in 2012, though, the main implication of bitcoin's lack of intrinsic value was the ease by which it might fall back to $0. As I put it in a 2013 article:

"Bitcoin is 100% moneyness. Whenever a liquidity crisis hits, the only way for the bitcoin market to accommodate everyone's demand to sell is for the price of bitcoin to hit zero—all out implosion" [link]

But if the price of bitcoin were to fall to zero then it would cease to operate as a monetary system, which would be a huge disappointment to those of us who were fascinated with Satoshi's electronic cash experiment. Adding to the danger was the influx of bitcoin lookalikes, or altcoins, like litecoin, namecoin, and sexcoin. In theory, the prices of bitcoin and its competitors could "quickly collapse in price" as arbitrageurs create new coins ad infinitum, I worried in 2012, eating away at bitcoin's premium. The alternative view, which I explored in a 2013 post entitled Milton Friedman and the mania in copy-paste cryptocoins,  was that "the earliest mover has superior features compared to late moving clones," including name brand and liquidity, and so its dominance was locked-in via network effects. Over time the latter view proved to be the correct one.

The "zero problem"

Despite my worries, I was optimistic about bitcoin, even helpful. One way to stop bitcoin from falling to zero might be a "plunge protection team," I offered in 2013, a group of avid bitcoin collectors that could anchor bitcoin's price and provide a degree of automatic stabilization. In a 2015 post entitled The zero problem, I suggested that bitcoin believers like Marc Andreessen should consider donating $21 million to a bitcoin stabilization fund, thus securing a price floor of $1 in perpetuity. 

No fan of credit cards, in a 2016 post Bitcoin, drowning in a sea of credit card rewards, I suggested that bitcoin activists encourage retailers that accept bitcoin payments to offer price discounts. This carrot would put bitcoin on an even playing field with credit card networks, which use incentives like reward points and cashback to block out competing payment systems.

My growing disillusionment

By 2014 or 2015, I no longer saw much hope for bitcoin as a mainstream payments system or generally-accepted medium-of-exchange. "For any medium of exchange to displace another as a means for buying stuff, users need come out ahead. And this isn't happening with bitcoin," I wrote in a 2015 post entitled Why bitcoin has failed to achieve liftoff as a medium of exchange, pointing to the many costs of making bitcoin payments, including commissions, setup costs, and the inconveniences of volatility.

In another 2015 post I focused specifically on the volatility problem, which stems from bitcoin's lack of intrinsic value. If an item has an unstable price, that militates against it becoming a widely used money. After all, the whole reason that people stockpile buffers of liquid instruments, or money, is that these buffers serve as a form of insurance against uncertainty. If an item's price isn't stable—which bitcoin isn't—it can't perform that role. 

Mind you, I did allow in another 2015 post, The dollarization of bitcoin, that bitcoin might continue as "an arcane niche payments system for a community of like minded consumers and retailers." I even tracked some of these arcane payments use cases, such a 2020 blog post on retailers of salvia divinorium (a legal drug in many U.S. states) falling back on bitcoin for payments after the credit card networks kicked them off, followed by a 2021 post on kratom sellers (a mostly-legal substance) doing the same. But let's face it, a niche payments system just wasn't as impressive as Satoshi's much broader vision of electronic cash that had beguiled me in 2012, when I had warned that "if I was a banker, I'd be afraid." 

The dollarization of bitcoin

By 2015 a lot of my pro-bitcoin blog commenters began to see me as a traitor. But I was just changing my thinking with the arrival of new data.

Searching for Bitcoin-inspired alternatives: Fedcoin and stablecoins

Bitcoin's deficiencies got me thinking very early on about how to create bitcoin-inspired alternatives. By late 2012 I was already thinking about stablecoins:

"What the bitcoin record-keeping mechanism needs is an already-valuable underlying asset to which it can be tethered. Rather than tracking, verifying, and recording the movement of intrinsically worthless 1s and 0s, it will track the movement of something valuable." [link]

Later, in 2013, I speculated about the emergence of "stable-value crypto-currency, not the sort that dangles and has a null value." These alternatives would "copy the best aspects" of bitcoin, like its speed and safety, but would be linked to "some intrinsically valuable item." A few months later I predicted that "Cryptocoin 2.0, or stable-value cryptocoins, is probably not too far away." This would eventually happen, but not for another few years.

My dissatisfaction with bitcoin led me to the idea of decentralized exchanges, or DEXs, in 2013, whereby equity markets would "adopt a bitcoin-style distributed ledger." That same year I imagined central banks adapting "bitcoin technology" to run its wholesale payments system in my post Why the Fed is more likely to adopt bitcoin technology than kill it off. In 2014 I developed this thought into the idea of Fedcoin, an early central bank digital currency, or CBDC, for retail users.

If not money, then what is bitcoin?

By 2017 or so, even the most ardent bitcoin advocates were being forced to acknowledge that Satoshi's electronic cash system was not panning out: the orange coin was nowhere near to becoming a popular medium-of-exchange. This was especially apparent thanks to a growing body of payments surveys (which I began to report on in 2020) showing that bitcoin users almost never used their bitcoins to make payments or transfers, preferring instead to hoard them. So the true believers pivoted and began to describe bitcoin as a store-of-value, or digital gold. It was a new narrative that glossed over Satoshi's dream of electronic cash while trying to salvage some monetary-ish parts of the story.

I thought this whole salvage operation was disingenuous. In 2017 I wrote about my dissatisfaction with the new store-of-value narrative, and followed that up with a criticism of the digital gold concept in Bitcoin Isn’t Digital Gold; It’s Digital Uselesstainium. (The idea that store-of-value is a unique property of money is silly, I wrote in 2020, and we should just chuck the concept altogether.)

But if bitcoin was never going to become a generally-accepted form of money, and it wasn't a store-of-value or digital gold, then what exactly was it? 

I didn't nail this down till a 2018 post entitled A Case for Bitcoin. We all thought at the outset that bitcoin was a monetary thingamajig. But we were wrong. Of the types of assets already in existence, bitcoin was not akin to gold, cash, or bank deposits. Rather, it was most similar to an age-old category of financial games and zero-sum bets that includes poker, lotteries, and roulette. The particular sub-branch of the financial game family that bitcoin belonged to was early-bird games, which contains pyramids, ponzis, and chain letters. Here is a taxonomy:

A taxonomy showing bitcoin as a member of the early-bird game family

Early-bird games like pyramids, ponzis, and chain letters are a type of zero-sum game in which early players win at the expense of latecomers, the bet being sustained over time by a constant stream of new entrants and ending when no additional players join. Pyramids and ponzis are almost always administered by thieves who abscond with the pot. Bitcoin, by contrast, was not a scheme nor a scam. And it was not run by a scammer. It was leaderless and spontaneous, an "honest" early-bird game that hewed to pre-set rules. Here is how I described it in a later post, Bitcoin as a Novel Financial Game:

"Bitcoin introduces some neat features to the financial-game space. Firstly, everyone in the world can play it (i.e., it is censorship-resistant). Secondly, the task of managing the game has been decentralized. Lastly, Bitcoin’s rules are automated by code and fully auditable." [link

This ponziness of bitcoin was actually a source of its strength, I suggested in 2023, because "it's tough to shut down a million imaginations." By contrast, if bitcoin had an underlying real anchor, like gold, then that would give authorities a toe hold for decommissioning it.

Bitcoin-as-game gave me more insight into why most bitcoin owners weren't using bitcoin as a medium-of-exchange. Its value as a zero-sum bet was overriding any functionality it had for making payments. In a 2018 post entitled Can Lottery Tickets Become Money?I worked this out more clearly:

"Like Jane's lottery ticket, a bitcoin owner's bitcoins aren't just bitcoins, they are a dream, a lambo, a ticket out of drudgery. Spending them at a retailer at mere market value would be a waste given their 'destiny' is to hit the moon." [link]

If bitcoins weren't like bank deposits or cash, how should we treat them from a personal finance perspective? Feel free to play bitcoin, I wrote in late 2018, but do so in moderation, just like you would if you went to Vegas. "Remember, it's just a game."

Bitcoin is innocuous, don't ban it

By 2020 or 2021, the commentary surrounding bitcoin seemed to be getting more polarized. As always there was a set of hardcore bitcoin zealots who thought bitcoin's destiny was to change the world, of which I had been a member for a brief time in 2012. But arrayed against them was a new group of strident opponents who though bitcoin was incredibly dangerous and were pushing to ban it.

A vandalized 'Bitcoin accepted' sign in my neighborhood

I was at odds with both sides. Each saw Bitcoin as transformative, one side for the good, the other for the bad. But I conceived of it as an innocuous gambling device, one that only seemed novel because it had been transplanted into a new kind of database technology, blockchains. We shouldn't ban bitcoin for the same reason that we've generally become more comfortable over the decades removing prohibitions on online gambling and sports betting. Better to bring these activities into the open and regulate them than leave them to exist in the shadows.

Thus began a series of relax-don't-ban-bitcoin posts. In 2022, I wrote that central bankers shouldn't be afraid that bitcoin might render them powerless. For the same reason that casinos and lotteries will ever be a credible threat to dollar's issued by the Fed or the Bank of Canada, neither will bitcoin.

Illicit usage of bitcoin was becoming an increasingly controversial subject. Just like casinos are used by money launderers, bitcoin had long become a popular tool for criminals, the most notorious of which were ransomware operators. My view was that we could use existing tools to deal with these bad actors. Instead of banning bitcoin to end the ransomware plague, for instance, I suggested in a 2021 article that we might embargo the payment of ransoms instead, thus choking off fuel to the ransomware fire. Alternatively, I argued in a later post that the U.S. could fight ransomware using an existing tool: Section 311 of the Patriot ActWhich is what eventually happened with Bitzlato and PM2BTC, two Russian exchanges popular with ransomware operators that were put on the Section 311 list.    

Nor should national security experts be afraid of enemy actors using bitcoin to evade sanctions, I wrote in 2019, since existing tools, in particular secondary sanctionsare capable of dealing with the threat. The failure of bitcoin to serve as an effective tool for funding the illegal Ottawa protests, which I documented in a March 2022 article, only underlined its low threat potential:

"Governments, whether they be democracies or dictatorships, are often fearful of crypto's censorship-resistance, leading to calls for bans. The lesson from the Ottawa trucker convoy and Russian ransomware gangs is that as long as the on-ramping and off-ramping process are regulated, these fears are overblown." [link]

Other calls to ban bitcoin were inspired by its voracious energy usage. In a 2021 blog post entitled The overconsumption theory of bitcoin, I attributed bitcoin's terrible energy footprint to market failure: end users of bitcoin don't directly pay for the huge amounts of electricity required to power their bets, so they overuse it. No need to ban bitcoin, though. The way to fix this particular market failure is to introduce a Pigouvian tax on buying and/or holding bitcoins, which I described more clearly in a 2021 blog post entitled A tax on proof of work and a 2022 article called Make bitcoin cheap again for cypherpunks! 

Lastly, whereas bitcoin's harshest critics have been advocating a "let it burn" policy approach to bitcoin and crypto more generally, which involved leaving gateways unregulated and thus toxic, I began to recommend regulating crypto exchanges under the same standards as equities exchanges in a 2021 article entitled Gary Gensler, You Should be Watching How Canada is Regulating Coinbase. Yes, regulation legitimizes a culture of gambling. But even Las Vegas has stringent regulations. A set of basic protections would reduce the odds of the betting public being hurt by fraudulent exchanges. FTX was a good test case. After the exchange collapsed, almost all FTX customers were stuck in limbo for years, but FTX Japan customers walked out unscathed thanks to Japan's regulatory framework, which I wrote about in a 2022 post Six reasons why FTX Japan survived while the rest of FTX burned.  

So when does bitcoin get dangerous?

What I've learnt after many years of writing about bitcoin is that it's a relatively innocuous phenomena, even pedestrian. When it does lead to bad outcomes, I've outlined how those can be handled with our existing tools. But here's what does have me worried. 

If you want to buy some bitcoins, go right ahead. We can even help by regulating the trading venues to make it safe. But don't force others to play.

Whoops, You Just Got Bitcoin’d! by Daniel Krawisz

Alas, that seems to be where we are headed. There is a growing effort to arm-twist the rest of society into joining in by having governments acquire bitcoins, in the U.S.'s case a Strategic Bitcoin Reserve. The U.S. government has never entered the World Series of Poker. Nor has it gone to Vegas to bet billions to tax payer funds on roulette or built a strategic Powerball ticket reserve, but it appears to be genuinely entertaining the idea of rolling the dice on Bitcoin.  

Bitcoin is an incredibly infectious early-bird game, one that after sixteen years continues to find a constant stream of new recruits. How contagious? I originally estimated in a 2022 post, Three potential paths for the price of bitcoin, that adoption wouldn't rise above 10%-15% of the global population, but I may have been underestimating its transmissibility. My worry is that calls for government support will only accelerate as more voters, government officials, and bureaucrats catch the orange coin mind virus and act on it. It begins with a small strategic reserve of a few billion dollars. It ends with the Department of Bitcoin Price Appreciation being allocated 50% of yearly tax revenues to make the number go up, to the detriment of infrastructure like roads, hospitals, and law enforcement. At that point we've entered a dystopia in which society rapidly deteriorates because we've all become obsessed on a bet.

Although I never wanted to ban Bitcoin, I can't help but wonder whether a prohibition wouldn't have been the better policy back in 2013 or 2014 given the new bitcoin-by-force path that advocates are pushing it towards. But it's probably too late for that; the coin is already out of the bag. All I can hope is that my long history of writing on the topic might persuade a few readers that forcing others to play the game you love is not fair game.

90 comments:

  1. Hi JP, thanks for your great writing—I always enjoy reading your balanced views. How likely do you think Bitcoin could evolve into a complementary asset—or even a rival—to the U.S. Treasury market as a store of value, especially if its market cap grows significantly? What factors would drive or hinder such a shift?

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    1. People buy t-bills and t-bonds because they want stability and predictability. Bitcoin doesn't offer those things. So I don't think it'll ever evolve into a complementary or rival to the treasury market.

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    2. Fair point. Considering Trump’s pro-crypto policies, what do you think are the likely scenarios for Bitcoin's future? Specifically, how do you see its long-term fate unfolding?

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    3. On the topic of where bitcoin's price goes in the future, my post "Three potential paths for the price of bitcoin" still mostly captures my views:

      https://jpkoning.blogspot.com/2022/02/three-potential-paths-for-price-of.html

      But as I wrote in the second last paragraph of this post, my worry is that I may have underestimated bitcoin's virality (of which Trump's pro-crypto policies are a symptom), such that in the future government force may be increasingly levered to keep the game going at the expense of basic services like transportation and health care.

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    4. I was initially very enthused by Bitcoin, DeFi and crypto but have also gradually come to the view that none of it has a real world use. It’s a shame because in theory the idea was transformative but it has not gained traction.

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  2. May I suggest a reference, and an opinion, about the El Salvador move about Bitcoin? thank you

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    1. I've mostly been documenting El Salvador's experiment on Twitter/X.

      The actual Bitcoin Law has been a failure. It tried to force bitcoin into circulation as a payments medium and has failed. There's pretty good evidence of this here:

      https://x.com/jp_koning/status/1693988625233699103
      https://x.com/jp_koning/status/1519368796053639169

      As for El Salvador's bitcoin purchases, as I said in my third-to-last paragraph, hardcore bitcoiners like Bukele shouldn't be forcing the rest of society into joining in the game by using public funds to acquire bitcoins.

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    2. grazie per la risposta

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  3. It's crazy to spend so much time studying Bitcoin and to still not get it.

    I think it's because you're trapped in the paradigm in which the Leviathan-State is the strongest.
    This has been true since the 16th century, when it replaced Leviathan-Church.
    But now a new Leviathan is emerging: the Leviathan-Network. Bitcoin is just a currency adapted to this new Leviathan, feeding it as it disrupts the old one.

    As long as you're in the old paradigm, you won't understand the most fundamental reason why Bitcoin is being adopted more and more.

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    1. Olivier, you sound like how I used to sound in my earlier "if I were a banker, I'd be afraid" days! But I moved on from those positions when the data changed.

      Bitcoin is not a currency. Very few people are using it for payments. And while I agree that its adoption rate is astounding, that has very little to do with its nature as a currency, and almost everything to do with its nature as an addictive number-go-up game.

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    2. This is such a typical bitcoiner comment lol. Meaningless word salad, if you disagree you don't "get it". I'd have so much more respect for you people if you just admitted that you were degenerate gamblers and dropped all of this pseudo philosophical nonsense.

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    3. I personally used Bitcoin as a currency in half a dozen countries. It works great. Its usage like this is still low, it's true, but higher than many currencies used by small states.
      For example, the Saint Helena pound is used by less than 5,000 people. Is it not a currency because of this ?
      If this is a currency, what makes Bitcoin not a currency ?

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    4. Because the main motive for holding bitcoin is price appreciation, as demonstrated by the data. See:

      https://x.com/jp_koning/status/1711714224664186943

      The main motive for holding Saint Helena pounds is to make payments.

      Can you see the difference?

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    5. I agree, yes. Bitcoin is more used as a store of value, it is true.

      But it is not because this is true that it contradicts the fact that it is a currency.

      A currency CAN be a store of value. So demonstrating that it is mainly used as a store of value is not enough to demonstrate that it is not a currency.

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    6. In my previous comment I used data to demonstrate that Bitcoin is mainly *not* used as a currency, which is sufficient to argue that it is not in fact a currency.

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    7. Just because a currency is primarily used as a store of value doesn't mean it isn't a currency. I'm sorry.

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    8. Now, if your point is that Bitcoin isn't a widespread or widely used currency, we can debate that. But you haven't demonstrated that it isn't a currency.
      I've used Bitcoin to buy mundane things like beers, tours and food in several countries on two continents. Where I live (Dubai) you can use it directly to buy real estate.
      It's much easier to use as a currency than gold. With an app like BTC maps you can easily identify thousands of businesses that accept it all over the world. I've been to places where so many people accept Bitcoin that you never need to convert it to fiat just to live your daily life (Jericoacoara in Brazil, El Salvador, Prospera in Honduras)

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    9. Olivier has a point. The fact that people do X with a Y does not make Y only an X.

      The fact that people play an early bird game in cryptos doesn't make those cryptos only an early-bird game, they can also be used for remittances, SoV, or for expressing an identity. So asking "if not money, then what is bitcoin?" is a bit of a misleading question to ask, even though the answer may be illuminating. Bitcoin is a mechanism people do multiple things with, and a lot of it is an early bird game. In particular, I believe some people do use them as SoV (although I personally don't).

      I offer another category to place cryptos in: they are memetic assets in competition with other memetic assets (precious metals, diamonds, art, collectibles, other cryptos). Each has its own memetic fitness. Memetic assets don't necessarily die out or take over the world on any known timeframe.

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    10. That said, I don't think you need to place bitcoin within a broader category to conclude that taxpayers should not be on the hook for bitcoin price risk, and that forcing them to accept that risk is unethical. A state's treasury should not be a hedge fund, and treasury departments are not well-structured to act as financial speculators - they are slow, rules-bound, get captured by special interests, and act after public deliberation that makes them easy to front-run by nimbler speculators. So a bitcoin reserve is an unethical plan regardless of whether or not people use bitcoin for payments.

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    11. "So asking 'if not money, then what is bitcoin?' is a bit of a misleading question to ask, even though the answer may be illuminating."

      I don't think its misleading; I think its the most important question. Years ago there was no easy way for investors to get funds into Zimbabwe, so people used equities in a certain insurance company as a medium of exchange, buying shares in London and selling them in Harare. But the fact that shares in this insurance company were now money-like for a select few didn't change the fundamental fact that they were still equity -- just more liquid than before.

      Likewise, Bitcoin is being used for for making niche payments by a few hobbyists like Olivier but that doesn't change the fact that it's fundamental nature is as a certain type of asset. What is that asset? It's important to answer that question because the fundamental nature of an asset will always dictate the degree to which people can or will use it for making payments.

      I've identified it as an early-bird game, and an early-bird game will always be awful for making payments because it is volatile and people would rather hoard it to win big. So bitcoin is no currency of the "Leviathan-Network," as Olivier puts it. It's just a run of the mill game that happens to be more liquid than other cousins in the game category.

      "...they are memetic assets in competition with other memetic assets..."

      I like the category memetic assets.

      "That said, I don't think you need to place bitcoin within a broader category to conclude that ...unethical plan regardless of whether or not people use bitcoin for payments."

      Good points, agreed.

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    12. I enjoy our debate.

      "But the fact that shares in this insurance company were now money-like for a select few didn't change the fundamental fact that they were still equity -- just more liquid than before."

      So in this case, if these shares had been used as currency by a larger share of the population, would it have ended up as currency?

      If so, how many people does it need to become a currency?

      And again, is the Saint Helena pound a currency with less than 5,000 users?

      I assume you'll answer no to the first question and yes to this last question. And that's probably because the Saint Helena pound is a currency officially designated as such by the local government.

      But 1) now Bitcoin is designated as an official currency by a country, and 2) being a legal tender is not a necessary condition to make a currency a currency.

      And what would have happened if the Zimbawe government had decreed that these shares were now currency? Would that have made it a currency?

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    13. "What bitcoin is" is an important question! and it can also mislead us in leading us to a good answer that fails to capture all of bitcoin's properties.

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    14. the saint helena pound is a currency, for its 5000 citizens because when the government decides you need to pay your taxes it will only accept its currency . the minute it accepts something else it loses control over the money

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  4. It's very simple. You're neither an engineer nor a hard money guy. Therefore, Bitcoin doesn't make any sense to you.

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    1. Red flag, that's an ad hom.

      https://en.wikipedia.org/wiki/Ad_hominem

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    2. Nailed it. Unless you can appreciate hard money, and have an "engineering" mindset that can understand the workings of bitcoin,
      and see monetary value as a form of energy that leaks from all physical assets you'll never be able to see bitcoin's true potential.

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  5. The very fact that we are still debating Crypto/Bitcoin's utility 15 years or so after it's creation says it all.

    The store of value argument is laughable in the context of the correlation of Bitcoin is negative relative to inflation (BTC price down in 2022 and up in 2024 for instance) and its correlation is positive to Nasdaq/Risk sentiment.

    It's just a liquid tool for people to play and speculate with. Period.

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    1. If it's just for playing and "speculating", surely the price would go down just as much as it goes up?

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    2. It continues to go up as long as people believe it will. That's what the speculation is. It's a pass the parcel game, and when it starts going down, the last person holding the bitcoin loses everything.

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    3. But it starts going down all the time. Multiple 80% drops in price over it's history. Can't you see this? If it was simply a Ponzi it would crash to 0 and stay there on the first major drop.

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    4. "If it was simply a Ponzi it would crash to 0 and stay there..."

      Bitcoin's cycle of crashes and dramatic rebirths is consistent with other early-bird games like pyramids. See:

      https://jpkoning.blogspot.com/2024/12/after-twelve-years-of-writing-about.html?showComment=1734818914733#c25045314551621733

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  6. Incredible post, thank you

    What I have been thinking of lately is that it should be a key weakness that liquidity itself could suffer from major volatility (albeit softly and incrementally) when direct holders of Bitcoin (which I assume concentrate around specific age groups) start to retire and have a reason/need to realize their wealth in hard currency.

    That is, unless newer generations can broadly join in as formidable buyers/absorbers of flow generated by selling agents and that there is ample value out there to absorb the flow

    What do you think of this?



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    1. Bitcoin is an early bird game, so by definition it needs a constant stream of new entrants to replace the exiting population to avoid an end-of-game scenario, just like a ponzi. You could be right about your older-owners-retiring theory, I wouldn't know. But I think you're using the right approach to analyzing bitcoin.

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  7. Not all cryptocurrencies are early-bird games. Some have the same supply in the year of launch as in any other year. Taking an entire century to drop yearly inflation to 1%, they are much more speculation resistant and more suitable as a means of payment.

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    1. "Not all cryptocurrencies are early-bird games."

      I agree, the best example of non-early bird games in crypto being stablecoins.

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    2. Fixed block reward coins are only very modestly helpful in reducing volatility, because most speculators have a time horizon of days or weeks and on that timeframe it makes no difference. And it only takes adoption to be faster than the ever shrinking inflation to go to the moon, so long term speculative value is still there to fuel volatility.

      I think Satoshi made a single character error: had he made the block reward double rather than halve every 4 years it might have worked out as mean of payment, because then there is stability on "payments" timeframes of days or weeks (fixed issuance in the short term) yet immunity against store-of-value cults as (slow) exponential issuance guarantees price decrease on "lifetime" timeframes.

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  8. You focus too much on bitcoin as a medium of exchange, rather than a store of value. In fact I don't think you mentioned the hard-fixed issuance once (mankind has never seen this before in a liquid, divisible asset).

    Do you understand and agree with Gresham's and Thier's laws?

    Also do you understand the fundamental monetary properties of gold, why they led to it becoming a global medium of exchange, and how the same fundamental properties of bitcoin are much improved which in turn will lead to it having much greater adoption? Michael Saylor and Robert Breedlove explain this very well. Assuming that you've listened to them, what is your disagreement?

    The "speculation" of bitcoin maxis is that they see a strange, slow and inefficient looking car on a drag strip but they've looked under the bonnet and put it on the scales, can see that it has more horsepower and less weight than the competitor and they're speculating that it will win the race.

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    1. "You focus too much on bitcoin as a medium of exchange, rather than a store of value."

      I focus on bitcoin as a medium-of-exchange because that's what Satoshi intended it to be -- electronic cash -- and that's what fascinated me and many others. The fact that the story has been rewritten to bitcoin being a system for storing (a highly fluctuating amount of) value is such a huge letdown.

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    2. But you already know that money won't be a widely-used medium of exchange until its a unit of account, and it won't be that until it has a stable value. And it won't have a stable value until its demand has reached its full potential, which could be 400x higher than it is now.

      At this point in its life cycle, bitcoin is proving itself (successfully) as long-term (4+ years) store of value. This could well continue for two more decades or more.

      The short and medium term volatility will only reduce as bitcoin approaches its ultimate value (which it clearly is nowhere near doing - it hasn't even exceeded the gold market cap yet).

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    3. "...it won't have a stable value until its demand has reached its full potential..."

      Bitcoin's price will never stabilize. It doesn't matter if more players join a zero-sum betting game; its underlying nature as a zero-sum betting game remains the same. The payout from a lottery doesn't get less volatile if it has 1 million players rather than 1 thousand. The same goes for a poker game. And the same goes for bitcoin.

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    4. Of course it will. Ultimately it will most likely be the world's unit of account and all values will be priced in bitcoin.

      If it's a zero-sum game, how does the market cap continue to increase enormously, now 15 years since it's inception, when it was worth a fraction of a cent?

      What is a zero sum game is the movement of all of the economic value in the world, and more and more is permanently moving from legacy finance and traditional store-of-value assets into bitcoin.

      In what way is bitcoin a poker game? You seem to be fixated on the price action. Bitcoin is simply doing the same thing continuously for 15 years - tick tock next block.

      In a free market there is always volatility in an asset that's growing. Try looking at the asset itself and ignore the price.

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    5. "...how does the market cap continue to increase enormously, now 15 years since it's inception..."

      Because Bitcoin is an incredibly contagious early-bird game—likely the best-designed example of its kind the world has ever seen.

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    6. You avoided answering the question about gold. Why does gold have such high valuation, when it, too, doesn't have fundamental value? By your reasoning, gold should be just a game of ponzi, yet that game has been going on for thousands of years. If Bitcoin is better than gold, why would it not be able to sustain it's value?

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  9. Maybe this will help you understand the demand for bitcoin:
    https://x.com/jackmallers/status/1869427435957322215

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    1. Innit the dude who cried when Nayib Bukele announced he'd be forcing bitcoin on his population?

      Look, he could be right that a lot of people are going to sell their other assets (house, equities, etc) in order to play the incredibly addictive bitcoin game, and that could push its price much higher.

      But Mallers is wrong that bitcoin is a good way to "store" value over time. The price of bitcoin is just way too crazy.

      For more, see:

      https://jpkoning.blogspot.com/2017/12/store-of-value.html

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    2. This is judging bitcoin by its price, not its fundamentals.

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    3. The price is the only reason why people are buying it. It's a game.

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    4. "This is judging bitcoin by its price, not its fundamentals."

      I am judging it by its fundamentals. Unlike say an apple or Netflix stock, bitcoin doesn't have any intrinsic value, so there's no "toe hold" for users to latch onto when they appraise bitcoin's value. The only toe hold is what other people think, but that leaves bitcoin as little more than a recursive mind game played out in the imaginations of millions of participants.

      Pure imagination can never be the basis for anything other than a crazy volatile price.

      And a crazy price makes for a bad store of value.

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    5. There's no such thing as intrinsic value. Economic value is simply demand / supply.

      Bitcoin's supply is fixed and the demand is as a long term store of value. That's it's use-case. A store of value which can't be stolen directly or indirectly via debasement.


      People are wanting to invest in the hardest divisible, portable, liquid, non-physical asset mankind has ever seen in order to store their wealth free from supply inflation, with the added advantage that many people like yourself don't really understand what it is yet, so it's far from reaching it's ultimate value.

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    6. Imagine everyone in the world who has bitcoin exposure is asked how many bitcoin worth they have. Add it all up. Does it come to more than 21 million?

      Yes, because there's a lot of paper bitcoin around which are not backed by on-chain bitcoin (derivatives, fraudulent exchanges, indirect exposure products).

      When leverage unfolds, the liquidator of Microstrategy will have to sell all the bitcoin to pay the dollar creditors, and same for all the other multiplier vehicles, which in turn will make non-ultras sell their store of value that cannot be debased but has just gone -90%. And it will go down another -90%. And another. All the remaining maxis will have left is their hardware wallet's recycling value as 200g of electronics junk and their 1BTC=1BTC t-shirt.

      The blockchain will still work reliably, maintained by retro-computing enthusiasts with a couple of rack of discarded mining kit, as the difficulty will have gone down accordingly.

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    7. That's hilarious.

      Perhaps you could explain how a new money that is better than both gold and fiat would monetise? And what fundamental (i.e. non-price related) properties would it need to have, in order to be better than them both?

      BTW, Microstrategy will not get liquidated. There's no bitcoin price at which their loan gets called in. Bitcoin could go to $1 and they would still be buying more.

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    8. There's like four different people called anonymous on this thread. Folks, feel free to call yourself John Doe or Ted7777. You don't have to all choose anonymous.

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  10. Amazing article. Why you don t say it s an outright ponzi? How different is this from Madoff (aside the tracability of blockchain)? I dont have a Google account but will create one to iterate if needed. Thank you anyway.

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    1. Madoff sat at the middle of it all administering pay-ins, pay-outs, PR, and running the back office. That's what puts the "scheme" into ponzi scheme. Bitcoin, by contrast, is a spontaneous game. It has no schemer, with almost all administrative tasks being crowdsourced to the public.

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    2. A Ponzi scheme's demand is *only* driven by the fact that it's price is going up. Hence once the price starts going down, everyone sells and the whole thing evaporates.

      The demand For bitcoin arises from its unique monetary properties that suggest it will ultimately store a large portion on the world's stored value.
      Hence when the price drops it always hits a higher floor and rebounds to higher highs, something a Ponzi scheme would never do.

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    3. Let's think about pyramid schemes, another type of early-bird game.

      Multiple branches of a pyramid can fail but the scheme can continue to limp on thanks to the few branches that are still functioning. The scheme may then go on to regenerate enough new branches to compensate for the dead ones, growing to new heights. So it's not strange for a pyramid to demonstrate a cycle of growth –> crash –> growth to a higher high –> crash to a higher floor –> etc.

      And that's exactly what we see with bitcoin. A series of incredible rises followed by truly awful collapses.

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    4. Can you give a concrete example of what you describe? Where, prior to Bitcoin, have you seen any game rise in value, crash to higher lows multiple times and reach new highs?

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  11. Two thousand years ago a story teller named Jesus showed up claiming to represent god. He supposedly died at the hands of the Romans but then rose from the dead. Like all fables this one was supposed to go away but then as more entrants bought into the story this one refused to go away. It got embedded into government and now we have this God-story that is likely to see civilisation to the end. The virality of Bitcoin and its infection of governments is likely to guarantee a similar tolerance by society at large.

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    1. I'm all for analyzing Bitcoin as a religion replete with a set of myths designed to increase its spread potential. Water probably never got turned into wine, just like bitcoin is never going to be an electronic cash system, but it doesn't matter because the point is getting converts.

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    2. Unlike a religion, it is incorrect to say that Bitcoin needs a constant stream of converts. What it needs is a constant stream of fiat supply and the reality of that is the reason why Bitcoin exists. Even if no new entrants are there, the fact that existing investors will have a continuing stream of fiat that they will allocate to bitcoin will maintain its value.

      As for type hold to latch on, it is not correct to say that Bitcoin has none. If we understand the reason for bitcoin to exist I.e as a hedge against continued fiat supply expansion then you can try to quantify the demand that arises from such a need and assign a value knowing the capped supply of Bitcoin. There is no basis to think that the toe hold is solely the imagination of others.

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  12. Do you think Ethereum has intrinsic value? Maybe after the (possible) big crash, it can stabilise and be used as a currency.

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  13. JP come on - 15 years is a very long period for observing a phenomenon where no fraud or hidden facts lie under the bonnet. On that basis, your commentary still appears sour about wanting to provide excuse after excuse for why you and your ilk simply failed to recognise a new monetary phenomenon. Instead of learning from the phenomenon, you are simply trying to hide your failure by couching Bitcoin as something that can only be explained by analogies like viral game, religion, etc. On the contrary, it is very clear particularly now that institutional money has entered that the phenomenon is clearly is a monetary one, just one that you have failed to imagine or be willing enough to concede the possibility of. Stay humble.

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    1. Completely agree. Clinging to some evolving-multi-branch Ponzi scheme/"no intrinsic value" reasoning at this point is embarrassing to see, especially from someone who prides themselves in their knowledge of money and is presented with a new form of money with fundamental properties that certainly superior to gold, and arguably superior to fiat.
      It's time to swallow your pride and listen carefully to some of Michael Saylor's explanations of bitcoin. I'd suggest the "What Is Money? Saylor Series" podcast series by Robert Breedlove.

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    2. Taking Saylor seriously is way more ‘embarrassing’.

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  14. I've relied on your prior assessment of bitcoin as a financial game for a while now. So thanks for elaborating on it.

    Still, it's an odd assessment of bitcoin that doesn't mention that it is built on open source software, and as a result bitcoin has spawned thousands of essentially identical competitors. Coinmarketcap says there are over 2.4 million tokens, and although bitcoin's supply accounts for over half of crypto's nominal value, that still leaves a lot of value scattered among many other tokens, with a corresponding societal impact.

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    1. The theory of bitcoin just being a game doesn't explain why much of the value continues to accrue into Bitcoin and doesn't simply dissipate into the thousands of other coins that arguably could be just as attractive as any other.

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  15. The concept of currency is obviously evolving, with a clear focus on digital payments and cryptocurrencies. Look at how fast paper money has vanished from everyday use -- since COVID-19, everyone has shifted to digital and contactless payment methods. And that is a jumping-off point for making crypto more palatable. Friends have purchased real estate using smart contracts and cryptocurrencies and use credit cards backed by crypto assets. Additionally, friends who run nonprofits in oppressed nations rely on btc and other crypto payments due to their anonymity. Which I realize is a double-edged sword, but the media likes to focus on criminals and not people who it truly benefits. Net net, crypto is far more versatile than the blanket statement of “not used much” suggests - which quite frankly comes across as opinion and not well researched. In the near future, currency will most likely be a hybrid model that integrates traditional fiat, CBDCs, and crypto. So, it makes sense to diversify or, at the very least, take off the neophobe hat and try to learn about what's coming.

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  16. What’s your take on bitcoin vs gold (especially non-US central banks buying gold and potentially bitcoin in the future)

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    1. https://www.bullionstar.com/blogs/jp-koning/bitcoin-isnt-digital-gold-its-digital-uselesstainium/

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    2. You really ought to introspect why your pass-it-off theory that you articulate in the above simply failed to play out like you thought. Anyone who only believes in theoretically arguing how things ought to be without taking any cognizance of how things are and actually turn out and then adjusting their viewpoint, cannot really be taken seriously.

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  17. Bitcoin is more like a "buy low game" than an "early bird game". You can regularly buy bitcoin at a big discount "later" (e.g. during the COVID crash @4k, @16k, @200 after the spike to 1000 in 2013 etc.).
    When you think about it, "buy low, sell high" is the basis of ALL financial speculation

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  18. "Every winner needs a loser" - let's say I bought 1 bitcoin for 80k from someone who bought it for 50k.
    Who is the loser here?

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    1. You are, unless you find someone else to buy it for more than 80k.

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    2. Do you mean that I personally, actively have to try to find someone who will buy it from me? Is that how it works?

      Let's say I also bought 1 ounce of gold for 2 000 dollars from someone who bought it for 1 200 dollars. Am I again the loser?

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    3. Yes, exact same mechanism.

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  19. Well, that was a long read that went nowhere. So, what is the conclusion after all these long years of writing?

    Perhaps fiat money is clearly the way forward and everyone should race to zero for eternity? After all, what’s the odd trillion worth of debt here and there?

    Or perhaps everyone will switch back to gold coins when the time comes and we’ll all hide sacks of them under our beds like the good old days?

    Or perhaps we should return to trading with rare shells?

    Perhaps ultimately, we’re at the beginning of a global transformation and you just haven’t got the patience.

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  20. Thanks for your candid and introspective perspective. What do you think is the role of geopolitical tensions here? I'm wondering how much does Bitcoin's persistence owns to Chinese and Russian ambitions to replace, if not to weaken, the US dollar hegemony and monetary system. The fact that crypto is now being framed as an "America first" thing is telling.

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    1. The dollar is dead. The trust is lost.
      Every cent has been lent out fifty times over already and the tide is going out now exposing it.

      America either moves to a Bitcoin standard immediately to try and save some of the wealth or the rest of the world will take it back using their own energy sources. Bitcoin is the space-race of the modern age.

      It’s that simple.

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  21. The BTC advocates often refer to its utility as a medium of exchange. Interesting thing is, other cryptocurrencies facilitate orders-of-magnitude lower L1 fees, faster transactions, and higher throughput, all while consuming negligible energy. So if user-facing medium-of-exchange properties would make bitcoin overtake gold, why wouldn't the better MoE economics of , say, Avax, drive out bitcoin?

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  22. You briefly mention the high consumption of energy required to create bitcoin. Energy that to some extent is derived from burning fossil fuels that is damaging the climate. Is bitcoin paying its dues in terms of climate cost?

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  23. I believe I'm anonymous #5.

    I enjoyed reading the article and the blogs. It was all quite interesting.

    According to the Elliott Wave Theory we are approaching the top of the 100 year stock market cycle. Once completed the S&P 500 and the stock market are predicted to fall for at least 10 years with short term rallies on the way down, and the S&P 500 eventually getting down to the $2,000 level before the next bottom is reached. This seems far fetched to many of you, but so did the great depression of the 1920's to those living in euphoria then, similar to today. (Some of you will say today is different than the 1920"s, but is it really when it comes to sentiment?).

    When that happens money will dry up and the Bitcoin rallies will get smaller and smaller because people will be concerned where the bottom of the market is as their stock market accounts also get smaller and smaller, if they didn't move their money out of the market earlier. This may eventually cause a panic Bitcoin selling spree to cover their margin calls. The common belief has been, the market will go back up soon, and I can ride it out and continue to collect the dividends. That may not happen this time.

    Those who are expecting Bitcoin to reach $200,00, $500,000 or $1,000.000 may be in for a bit of a disappointment unless it happens very soon before the 100 year stock market cycle reaches it's peak. Bitcoin has only been around long enough to see the stock market uptrend, and lots of loose money is available. It will be interesting to see if it survives a major downtrend when money tightens. Time will tell.

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  24. Hey JP! Great post.

    I agree with your thoughts. My main worry is that this "ponzi-like" nature of bitcoin will eventually be its downfall. At some point, some black swan event in combination with the constant diminishing mining rewards / increasing transaction fees and decreasing rate of adoption of newcomers will hit the Euphoria surrounding bitcoin and bring expectations back to a harsh reality. A reality where bitcoin has no actual intrinsic value, and fails at its goals to already existing coins.

    While I believe this might be long in the future, the price of bitcoin could near zero, or maybe some symbolic value just as a type of a cryptocurrency "antique", being the first of it's kind. Eventually, other cryptocurrencies, which are already being better at bitcoin's goal of being a means of currency will catch the eye of the public, and the taste of the masses will change as a result. This would be a downfall to behold, especially if the excitement around BTC keeps up at this pace.

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    1. Nothing original about your thought. It's a common theme being parroted since 2012 when the first altcoins arrived. It is remarkable though how that theme has continued to be a coping mechanism for nocoiners despite reams of empirical evidence since then that Bitcoin does not have its appeal diluted by copycats.

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  25. I want to say that I having gotten into Bitcoin in 2011 myself I could have written 80% of this article and you articulated it so well.

    The remaining 20% of what you had to say, especially about the unethicalness of the SBR, has broadened and crystallized my thinking about Bitcoin at this point. Truly transformative, thank you.

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  26. Hello. I read your blog after it got into eSylum which I read each week, a post for numismatists, especially those interested in numismatic literature.

    The functions of money are:
    1.a pricing mechanism
    2. a medium of exchange
    3. a store of value.

    Crypto is not a pricing mechanism. I do not see anything in any of my local stores in eastern Connecticut showing the prices of anything in bitcoin or any other cryptocurrency. I do not see anything priced in Bitcoin on Amazon or Walmart, the largest two internet retailers in the world. Neither accept Bitcoin to buy anything from them.

    Likewise, I have never been offered payment for anything as a medium of exchange. Currency, checks, and plastic, are the current mediums of exchange for goods and services in eastern Connecticut.

    Likewise I do not see it as a store of value as it is too volatile. From November 2021 to June 2022 it fell from $64,402 to 18,971. Who would want to be paid in a currency which could drop to 29% of its value in 7 months? That would be worse than living in Argentina!

    Thus, I do not see crypto as money. I have always had the feeling that crypto is "the emperor's new clothes". Certainly a boon for darknet and criminal dealings, but otherwise simply a Ponzi type scheme that seems to have gained traction with those who can see the emperor's clothes, which I can't.

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    1. It's okay. You think you have the right reasons for having missed out on all the gains so it's great and you can sleep easy with that thought.

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  27. The theory of bitcoin as a pure gambling token, something whose value is exactly its price, nothing more or less, and as a pure beast of supply and demand is probably the best explanation of it that I have seen so far. Do you think BTC is the one and only "killer app" of blockchain technology or is there anything more to this technology ?

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  28. Great and honest retrospective, JP. You nailed it in the conclusion: "to the detriment of infrastructure like roads, hospitals, and law enforcement," as money is required for any economy to grow. The rest is greed conditioned at a genetic level at this point in history; scarcity and debasement are driving mindsets at all levels, as we can observe. The historical (under)performance of currencies managed by unknown third parties makes people think that a pseudofixed supply open-source code will solve the underlying governance problem, where the populace doesn't even know how the current system works.

    It's remarkable Satoshi's comment to Sepp: "If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that," in connection with your point on stablecoins (or why not peggedcoins?) that "will track the movement of something valuable." The question here is: what should be considered valuable? What’s your take on this?

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    1. (I'm not JP but couldn't resist).
      An investment company holding a diverse and well-managed basket of assets would be suitable backing for a crypto asset that represents not only valuable assets but actually has increasing intrinsic value over time. Plenty of such companies out there, such as Berkshire Hathaway or North Atlantic Smaller Companies Investment Trust. All it takes is on-chain securitization, and that seems to have been implemented.

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