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Given the ultra-speculative and very volatile nature of bitcoin so far, aren't these models effectively numerology? I really fail to see how you can reasonably
by simias 6y ago
Given the ultra-speculative and very volatile nature of bitcoin so far, aren't these models effectively numerology? I really fail to see how you can reasonably tie bitcoin's rate of production with its price.
After all the last halving was in July 9 2016. Since then the production has been reasonably constant while the price has been a complete rollercoaster.
With logarithmic scales and big enough error bars you can fit anything into anything.
>If you're wondering why your friends who are into cryptocurrency are in a tizzy
Being into cryptocurrency is reason enough to be honest.
- cortesoft 6y agoI think the idea is that production has a real world cost (hardware, power, and space), and those costs determine the price (eventually)
- vertex-four 6y agoThat's literally backwards to how this works though. Just because you fire up a bunch of miners doesn't make Bitcoin's value jump - it's the opposite, Bitcoin's value jumping makes it cost-effective to run additional miners.
- nannal 6y agoFiring up additional mining would split the rewards between more people causing fewer rewards per participant. Miners engaged in mining before I arrived would have the same costs they had before, but now with fewer BTC to cover them, this would force them to sell at a higher price or operate at a loss until they drown the competition. There are two ways to look at it.
- Nursie 6y ago"Force them to sell at a higher price" ... so they decide the market? Nope. Miners have costs to cover, mining unprofitably and holding makes no sense whatsoever (you're literally better off turning off your rig, buying on the market and holding at that point)
- nannal 6y agoTurning off your rigs makes them an unprofitable investment you almost certainly are paying interest on if you're running a large operation.
- Nursie 6y agoTurning them on to acquire bitcoins at a higher cost to yourself than the market price just doesn't make sense, investment or not, it won't help you pay down your loan. You're better off buying them from others at that point.
- legolas2412 6y agoForced to sell at a higher price? My dreams of being a millionaire are forcing me to sell this orange for a million dollars. Ergo, oranges will now retail for a million dollars.
- jkhdigital 6y agoExcept that oranges are consumption goods and can be produced in whatever quantity is demanded by expanding production. Bitcoin production is perfectly inelastic, and Bitcoin itself has no consumption value. You need a different analogy.
- nannal 6y agoThat's a terrible analogy. Orange supply could be infinite should we maximize orange production, this is not how Bitcoin works. If there were only 12 oranges produced on all the trees in the world every hour & it cost $500 an hour to operate your orange farm. You therefore have to sell your oranges for at least $42 to cover costs and make a small income However now there are only 6 oranges produced every hour (not 12), what can you do to maintain profitability?
- legolas2412 6y agoAnd if people don't value your oranges that much, you close shop. It is not going to make the people suddenly value your oranges more.
- cortesoft 6y agoI wasn't trying to make a causal argument... just saying that the price to mine and the price of the coins will meet an equilibrium.
- jkhdigital 6y agoIts value is circular. Bitcoin miners provide social proof that someone, somewhere, is willing to burn $X to acquire a Bitcoin. That how intrinsically worthless items gain monetary value—social proof.
- amiga_500 6y agoSo they are predicting a 70% drop in the value of usd in energy terms. Hmmmmm.
- alvarelle 6y agoI believe you got it backwards. The price of bitcoin determines how much the miners are going to spend to produce it. (Or we are both wrong)
- mywittyname 6y agoOr your both correct. There are two sides to the coin. Miners are more likely to enter or expand in a profitable market. Profitability is measured by income - costs. Thus, costs -- in this case, electricity, real estate, equipment price -- set a long-term price floor for bitcoin. They can be mined at a loss temporarily, in order to drive out competition, but at some point, a miner operating at a loss will go bankrupt. This is no different from the oil industry, where capital outlays so high that most players continue to produce at a loss, temporarily. But long-term, the price must at least match costs of production.
- AgentME 6y agoThe cost of mining doesn't set a price floor. If the price of Bitcoin falls so that the revenue of mining falls below the costs of mining, then miners will drop out until the cost of mining falls enough too. Bitcoin is minted at a predefined global rate; the amount minted doesn't depend on the number of miners. Miners compete with each other for a share of the predefined minting action, so some dropping out does not decrease the minting rate of Bitcoin, but instead makes it more profitable for the remaining miners.
- mywittyname 6y agoIt does set a price floor for exactly the reasons you say: miners won't operate below a certain cost of mining. Setting a price floor.
- AgentME 6y agoIf Bitcoin's price fell so it becomes unprofitable to mine, that will not cause Bitcoin's price to go up until it is profitable for miners. Instead, what will happen is that miners will drop out until mining becomes profitable for the remaining miners.
- simias 6y agoIsn't that supposed to be an equilibrium? As in, if the price of bitcoin increases (because the economy expands, assuming that it's the main currency) then miners make more money, so more miners enter the competition which means fewer rewards for individual miners and we're back to equilibrium? Given this feedback loop, how do you establish what's the proper equilibrium? What's the total amount of hardware bitcoin is supposed to stabilize on? As a thought experiment, if BTC stabilizes at $30k, that means that the total value of all bitcoins will be about half a trillion dollars. How can that work if Bitcoin becomes the new dollar? Clearly the entire world ecomony is more than that. Normally I'd assume that I'm missing something and the people who came up with that model know more than I do, but then again we're talking about cryptocurrencies so...
- petters 6y agoYes, I think you are right. If the price were somehow fixed at $1000, the difficulty would eventually be adjusted so that miners would barely break even. Same if the price were somehow fixed at $100,000.
- AgentME 6y ago>As a thought experiment, if BTC stabilizes at $30k, that means that the total value of all bitcoins will be about half a trillion dollars. How can that work if Bitcoin becomes the new dollar? Clearly the entire world ecomony is more than that. If people overall wanted to purchase enough Bitcoin to have more than half a trillion dollars in Bitcoin, then demand would outpace the supply and the price of Bitcoin would go up, making it possible to have whatever amount of value in Bitcoin. It's nonsense to presuppose the price of Bitcoin staying still while demand outpaces the supply. No one sets the price of Bitcoin but supply and demand.
- AznHisoka 6y agoThat's like saying the harder you work on a software product, the more you should charge for that product...
- paulgb 6y agoThis is essentially the (discredited) labor theory of value. https://en.wikipedia.org/wiki/Labor_theory_of_value https://en.wikipedia.org/wiki/Labor_theory_of_value
- ashtonkem 6y agoWhich ironically is one of the underpinnings of Marxism. Edit: it’s literally the second sentence in the Wikipedia article: > LTV is usually associated with Marxian economics The irony is in a Bitcoin investor and Marxists sharing some economic common ground for their beliefs, since otherwise those groups rarely have much in common.
- dnautics 6y agoAdam Smith believed it, too.
- bkwagon 6y agoThat's not a good illustration of LTV, which is not discredited at all. For traditional software, the vast majority of the labor involved takes place at the initial creation. The rest is (much less costly, in LTV terms) distribution and licensing.
- claudiawerner 6y agoThere are some pretty well-mounted contemporary (i.e. last 20 years) defences of Marx's formulation of "the labour theory of value" (the terminology is up for debate, since Marx never used that phrase himself, and his theory is distinct from Smith's and Ricardo's) and the theory's normative conclusions. These defences come from philosophers and heterodox economists alike. There's a Reddit comment here[0] with links to them, but it's up to you to decide if they're worthwhile or not. I have some doubts, but I would not go as far as to throw the word "discredited" in so casually. The comment also includes links to research against the "LTV". [0] https://www.reddit.com/r/badeconomics/comments/fht0ti/marxs_aggregate_labour_theory_of_value/fkomy1g/ https://www.reddit.com/r/badeconomics/comments/fht0ti/marxs_...
- kortilla 6y agoThat effect goes the other direction though. The price has to go up for people to bother to produce. If the speculation dries up a bit, the price won’t increase and this halve reward will wipeout miners with low margins and the remaining will still keep producing the same amount with a higher cost. Remember, production is built right into the protocol. 10 miners could keep the network going at the same pace.
- gridlockd 6y ago> Remember, production is built right into the protocol. 10 miners could keep the network going at the same pace. A network with only 10 miners could easily be attacked with minimal effort. The only thing stopping the attacker would be the fact that it's a waste of time, because a cryptocurrency with only 10 miners is worthless. Wiping out too many miners at once is dangerous business.
- ashtonkem 6y agoNonsense. First of all, you regularly consume items where the price is determined by demand, not production cost. Cars, housing, and premium products regularly sell for multiples of what they cost to produce. Secondly, just because something’s expensive to produce doesn’t mean that it’s valuable to anyone else. This is a common problem in customized products, but also happens when market demand either fails to materialize or collapses. Your ultra premium buggy whip might be incredibly expensive to produce, but if nobody wants buggy whips you can’t sell it high enough to make a profit.
- kryogen1c 6y ago> Cars, housing, and premium products regularly sell for multiples of what they cost to produce. many multiples! this is incorrect. the luxury versions of those products you listed certainly have higher margins, but id be surpised if you could find anything with 100% proft margin, much less 3x and beyond.
- ashtonkem 6y agoI’ll admit that saying “multiples” was a mistake with that specific list, but you’re picking a nit that does not actually affect my original point.
- jariel 6y agoNo, it's not nonsense and you just kind of just proved the comment to which you are responding to. Price is a function of supply and demand and because most markets are fairly competitive, the market-clearing price can be predicted roughly from the cost of production. 'Cars' do not sell at multiples they cost to produce, once you factor in all of the overhead of sales and distribution, margins are fairly thin. Those are 'real costs'. Almost every single good ever produced is commoditized on some level, and therefore market prices are predictable from the cost of production. BTC is no exception: if it costs $1 to make $2 in BTC, you can be sure a lot of people will be 'making' BTC until the cost of making BTC and it's market value start to merge. The remaining demand for BTC ... given the fact it has no use, it's not a currency or a generally accepted store of value ... is speculative in the purest sense. It's whatever a bunch of dudes holding it want to buy and sell them as. Like baseball cards.
- ForHackernews 6y agoExactly, just like how workers get paid a salary in accordance with the real-world costs they bear in order to produce their output...er wait, this isn't how prices work is it?
- unhashable 6y ago“All models are wrong, but some are useful.” - George Box
- paulgb 6y ago"And some are not" -- Anyone who has watched people apply technical analysis to Bitcoin charts as a source of amusement over the last decade
- santiagobasulto 6y agoThank you. I have a very close friend that has been doing this for some time, and it’s really painful to see him lose money to those “forecasts” that resemble more astrology than science. I see from your profile you’re a Quant. Is there any guidelines I could give him? Any recommendations to go to the more “scientific” side of finance, and stop looking at charts and draw arbitrary lines to try to come up with patterns.
- hutzlibu 6y agoWhat is a "quant", when referring to a person?
- pizza 6y agoQuantitative analyst https://en.wikipedia.org/wiki/Quantitative_analysis_(finance) https://en.wikipedia.org/wiki/Quantitative_analysis_(finance...
- lottin 6y agoBasic economic theory and econometrics. Finance theory is just a thin layer on top of that.
- paulgb 6y agoSure, I can try. My thoughts on this actually come more from my experience in prediction market betting than my work, which is hard to apply at an individual level. I think just properly accounting for wins and losses can be good at instilling a sense of humility; I'd recommend he calculate his track record if he hasn't already. I enjoyed the book Thinking in Bets by Annie Duke, which is about the psychology of developing some habits around making bets and the cognitive biases we have. A Random Walk Down Wall St. is also a classic that is good at instilling a sense of humility in you as an individual investor.
- DC-3 6y ago> With four parameters I can fit an elephant, and with five I can make him wiggle his trunk - John von Neumann
- javert 6y agoThe bitcoin stock-to-flow model has only three parameters: stock, flow, and price. I'm not here to argue that the model is good or bad, but I will say that it's surprising, and interesting.
- pizza 6y agoWith 26.2 million, I can make the Mona Lisa wink (stylegan) :)
- qubex 6y agoWith 52.4 million, I can make her dance a jig.
- wmf 6y agoThe stock-to-flow model posits a causal reason for the price: a roughly constant influx of money buying a declining rate of BTC production. This seems a lot stronger than technical analysis based on "fear and greed" psychology.
- jkhdigital 6y agoExactly. Nothing about Bitcoin has changed... except the supply flow. Demand might adjust but it certainly won’t magically drop in half overnight.
- nateberkopec 6y agoWhat passes for "technical analysis" is rather insane, and isn't limited to the crypto community. It seems to grow around assets that are easily purchasable by the lay public, have lots of random price noise, and unclear fundamentals. Foreign exchange is another good example.