5 ms·

This all sounds intuitively correct, and it seems that similar arguments can be made about gold bullion, right? It costs some amount of money every year to mine

by caf 5y ago

This all sounds intuitively correct, and it seems that similar arguments can be made about gold bullion, right? It costs some amount of money every year to mine, refine, transport and store it, and none of that is accruing to the actual holders of bullion. (One difference being that there is some residual value of the gold for industrial and jewellery uses, but that's hardly what's keeping the bullion price where it is).

arcticbull 5y ago
It's similar gold, yes. Gold is an unproductive asset. You are correct that there is base demand for it in the form of jewelry and electronics. In fact, a percentage of the world's gold output goes into making Bitcoin miners each year. However, its value is not supported by its demand in these industries. This is why I personally do not invest in gold. The difference is that if you shut down gold mining, existing gold would still retain all its value. If you were unable to protect your gold reserves, they still retain all their value. If you shut down Bitcoin mining it's immediately worth nothing. In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless. Mining gold consumes resources, but once extracted it does not. I would consider it to be zero-sum, as compared to the negative-sum nature of Bitcoin. I would argue if institutional demand and even jewelry demand for gold fell, it would still be a fairly valuable commodity, and its use in electronics would likely expand substantially as it became less expensive. Connectors, switches, wires, PCB contact plating. All big demand drivers, and gold is better than the status quo - just too expensive at the moment.
- caf 5y ago
  There are still holding costs for it, though - the guards at the New York Federal Reserve don't work for free - so doesn't it have a similar "value continuously leaving the system" dynamic that suggests that it's negative-sum? Maybe the answer is that the quanta of value leaving is so minimal compared the the amount invested in the stock of bullion that "ever so slightly negative-sum" and "zero-sum" are the same to a first approximation.
- irae 5y ago
  > If you shut down Bitcoin mining it's immediately worth nothing. Except that it is impossible ever shut down Bitcoin mining at once(). It might be more similar to gold than what you think. There are too many incentives to keep it up. The holders want value to be kept, the miners have vested interest in the system to continue to work. If you shut down, say, half the miners, this will create opportunity to other miners to invest and expand. If it drops too much, people inject money into the system, which gives liquidity to the miners again, that can continue to trade their work for goods and services with Bitcoin or by trading Bitcoin for fiat. It is very similar to Visa, Mastercard, Stripe, Square and other centralized systems. The fees you pay for transactions keep the centralized finance business working and profitable as well as they invest back in software and hardware. For miners the Bitcoin fees, based on Bitcoin price, keep their systems profitable too. Not to mention some mining companies started to get listed on the stock market too. (): Yes, you can shut down Bitcoin eventually, bugs, attacks, etc., but those have been tried and not very relevant to my point.
  - wpietri 5y ago
    This is like arguing that the Beanie Baby market will never die. It's precisely the belief that the bubble will be eternal that helps inflate the bubble. For those unfamiliar, Beanie Babies were a collectible toy that had a multi-year fad in the 1990s, with 5-dollar toys trading for thousands: https://www.ft.com/content/1563d643-332f-3887-8c6e-caf7435f396a https://www.ft.com/content/1563d643-332f-3887-8c6e-caf7435f3... It's true that the Beanie Baby market never totally went away. And I'm sure that some die-hards will keep Bitcoin going for decades after it ceases to be practically relevant. But however much the bubble incentives keep major players aligned during the bubble, that doesn't mean the prices will stay up forever.
    - Animats 5y ago
      The Beanie Baby market on eBay is useful to study because it shows much the same behavior as NFTs. Beanie Babies are non-fungible - each one is different. So there's no "market price", just lots of individual offers. On eBay, you'll see asking prices around $5000. But if you look at completed transaction info, prices are around $50. That's what an illiquid market looks like. NFTs behave the same way - high asking prices, few transactions. Such markets don't crash, they stall.
- jkhdigital 5y ago
  > In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless. This is not really true--it's not like lowering the security budget means all the old blocks can be rewritten at will. Roughly speaking, the cost of rewriting a block is the cumulative PoW cost of that block and all the blocks after it, although this amount typically decreases over time as better mining equipment lowers the present cost of hashrate. For current transactions, if the security budget relative to the transacted value gets low, all it means is that one must wait longer to achieve the same level of confidence in transaction finality. It doesn't abruptly render the currency "utterly worthless".
- gpsx 5y ago
  I think you are a little unfair in your comparison of bitcoin and gold. Gold has advantages over bitcoin, but bitcoin also has advantages over gold. Storing gold is more expensive then storing bitcoin. Transacting gold is much more difficult than transacting bitcoin. One of the downsides of bitcoin is that it could go to zero for some reason. I think gold has less of a risk of that, but other investments have a significant risk of going to zero. I am not sure I understand the negative sum game you mention. The first payment miners get is (I don't know the proper name) a bounty, which is equivalent to a gold miner obtaining gold. This can be seen as a built-in inflation, which not only gold but also any fiat currency has. The difference is there is no known limit on this inflation factor for gold or fiat currencies. For gold we assume some gargantuan deposit will not be found and that it will maintain its scarcity. I don't think anyone thinks there is an inflation limit for the US dollar or any other fiat currency. Bitcoin has a known amount limit. (As a disclosure, I own gold, bitcoin, and US dollars.) The other part of what miners make is a transaction payment. That exists in every other payment system I assume, except I guess physically handing an object to another person, which covers a pretty small fraction of transactions.
  - caf 5y ago
    AIUI, the negative-sum game breaks down like this: consider a black box around the entire bitcoin ecosystem. This black box is consuming $20B/year worth of real resources, which (given that you can't generally buy electricity or generation assets with bitcoin) means $20B/year is flowing out of it. Now to be sure there are some customers of the bitcoin system, using bitcoin as an intermediary to move money across borders or purchase from certain online marketplaces, and those customers are paying some amount of money into the system to use bitcoin for this purpose (analogous to the 2% that VISA skims off the top when you use your card to buy something on Amazon), but the majority of the money flowing in to balance that $20B outflow is from investors buying in. Unless you think bitcoin has managed to capture something in the order of $20B/year in transaction fees from the likes of Western Union, AMEX and Paypal, what's mostly happening is money being funnelled from investors taken as a whole to the the supplier industries that bitcoin relies on.
    - gpsx 5y ago
giaour 5y ago
Gold was also legal tender within living memory in many jurisdictions —- until 1971, you could freely exchange USD for gold and vice versa. In some ways holding gold as a hedge asset is a survival, though as with its intrinsic value, this doesn’t account for its current role in the market.
- njarboe 5y ago
  This is not correct. Gold in the US was freely exchanged for about $20 an ounce in the US until the Great Depression when, on April 5th, 1933 Franklin D. Roosevelt signed Executive Order (no. 6102) prohibiting the hoarding of gold coin, gold bullion, and gold certificates, and requiring them to be delivered to the Federal Reserve Bank. After getting all/most of the gold, on January 31st, 1934, the dollar was set to a new price of $35 an ounce by Franklin D. Roosevelt's Presidential Proclamation (no. 2072). Debts and contracts that specified gold in payment were made illegal and people had to use dollars instead of gold for transactions. Exchanging dollars for gold was not possible at a bank and actually illegal to do with your fellow citizens (certain exceptions applied). This ended in 1971, when the Bretton Woods agreement of exchange rates broke down and Nixon took the US dollar off the gold standard and in 1975 we were allowed to buy gold again. [1]https://en.wikipedia.org/wiki/Gold_Reserve_Act https://en.wikipedia.org/wiki/Gold_Reserve_Act

by caf 5y ago

arcticbull 5y ago

It's similar gold, yes. Gold is an unproductive asset. You are correct that there is base demand for it in the form of jewelry and electronics. In fact, a percentage of the world's gold output goes into making Bitcoin miners each year. However, its value is not supported by its demand in these industries. This is why I personally do not invest in gold. The difference is that if you shut down gold mining, existing gold would still retain all its value. If you were unable to protect your gold reserves, they still retain all their value. If you shut down Bitcoin mining it's immediately worth nothing. In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless. Mining gold consumes resources, but once extracted it does not. I would consider it to be zero-sum, as compared to the negative-sum nature of Bitcoin. I would argue if institutional demand and even jewelry demand for gold fell, it would still be a fairly valuable commodity, and its use in electronics would likely expand substantially as it became less expensive. Connectors, switches, wires, PCB contact plating. All big demand drivers, and gold is better than the status quo - just too expensive at the moment.

caf 5y ago
There are still holding costs for it, though - the guards at the New York Federal Reserve don't work for free - so doesn't it have a similar "value continuously leaving the system" dynamic that suggests that it's negative-sum? Maybe the answer is that the quanta of value leaving is so minimal compared the the amount invested in the stock of bullion that "ever so slightly negative-sum" and "zero-sum" are the same to a first approximation.
irae 5y ago
> If you shut down Bitcoin mining it's immediately worth nothing. Except that it is impossible ever shut down Bitcoin mining at once(). It might be more similar to gold than what you think. There are too many incentives to keep it up. The holders want value to be kept, the miners have vested interest in the system to continue to work. If you shut down, say, half the miners, this will create opportunity to other miners to invest and expand. If it drops too much, people inject money into the system, which gives liquidity to the miners again, that can continue to trade their work for goods and services with Bitcoin or by trading Bitcoin for fiat. It is very similar to Visa, Mastercard, Stripe, Square and other centralized systems. The fees you pay for transactions keep the centralized finance business working and profitable as well as they invest back in software and hardware. For miners the Bitcoin fees, based on Bitcoin price, keep their systems profitable too. Not to mention some mining companies started to get listed on the stock market too. (): Yes, you can shut down Bitcoin eventually, bugs, attacks, etc., but those have been tried and not very relevant to my point.
- wpietri 5y ago
  This is like arguing that the Beanie Baby market will never die. It's precisely the belief that the bubble will be eternal that helps inflate the bubble. For those unfamiliar, Beanie Babies were a collectible toy that had a multi-year fad in the 1990s, with 5-dollar toys trading for thousands: https://www.ft.com/content/1563d643-332f-3887-8c6e-caf7435f396a https://www.ft.com/content/1563d643-332f-3887-8c6e-caf7435f3... It's true that the Beanie Baby market never totally went away. And I'm sure that some die-hards will keep Bitcoin going for decades after it ceases to be practically relevant. But however much the bubble incentives keep major players aligned during the bubble, that doesn't mean the prices will stay up forever.
  - Animats 5y ago
    The Beanie Baby market on eBay is useful to study because it shows much the same behavior as NFTs. Beanie Babies are non-fungible - each one is different. So there's no "market price", just lots of individual offers. On eBay, you'll see asking prices around $5000. But if you look at completed transaction info, prices are around $50. That's what an illiquid market looks like. NFTs behave the same way - high asking prices, few transactions. Such markets don't crash, they stall.
jkhdigital 5y ago
> In fact if you reduce your energy expenditure below some unspecified threshold it becomes utterly worthless. This is not really true--it's not like lowering the security budget means all the old blocks can be rewritten at will. Roughly speaking, the cost of rewriting a block is the cumulative PoW cost of that block and all the blocks after it, although this amount typically decreases over time as better mining equipment lowers the present cost of hashrate. For current transactions, if the security budget relative to the transacted value gets low, all it means is that one must wait longer to achieve the same level of confidence in transaction finality. It doesn't abruptly render the currency "utterly worthless".
gpsx 5y ago
I think you are a little unfair in your comparison of bitcoin and gold. Gold has advantages over bitcoin, but bitcoin also has advantages over gold. Storing gold is more expensive then storing bitcoin. Transacting gold is much more difficult than transacting bitcoin. One of the downsides of bitcoin is that it could go to zero for some reason. I think gold has less of a risk of that, but other investments have a significant risk of going to zero. I am not sure I understand the negative sum game you mention. The first payment miners get is (I don't know the proper name) a bounty, which is equivalent to a gold miner obtaining gold. This can be seen as a built-in inflation, which not only gold but also any fiat currency has. The difference is there is no known limit on this inflation factor for gold or fiat currencies. For gold we assume some gargantuan deposit will not be found and that it will maintain its scarcity. I don't think anyone thinks there is an inflation limit for the US dollar or any other fiat currency. Bitcoin has a known amount limit. (As a disclosure, I own gold, bitcoin, and US dollars.) The other part of what miners make is a transaction payment. That exists in every other payment system I assume, except I guess physically handing an object to another person, which covers a pretty small fraction of transactions.
- caf 5y ago
  AIUI, the negative-sum game breaks down like this: consider a black box around the entire bitcoin ecosystem. This black box is consuming $20B/year worth of real resources, which (given that you can't generally buy electricity or generation assets with bitcoin) means $20B/year is flowing out of it. Now to be sure there are some customers of the bitcoin system, using bitcoin as an intermediary to move money across borders or purchase from certain online marketplaces, and those customers are paying some amount of money into the system to use bitcoin for this purpose (analogous to the 2% that VISA skims off the top when you use your card to buy something on Amazon), but the majority of the money flowing in to balance that $20B outflow is from investors buying in. Unless you think bitcoin has managed to capture something in the order of $20B/year in transaction fees from the likes of Western Union, AMEX and Paypal, what's mostly happening is money being funnelled from investors taken as a whole to the the supplier industries that bitcoin relies on.
  - gpsx 5y ago

giaour 5y ago

Gold was also legal tender within living memory in many jurisdictions —- until 1971, you could freely exchange USD for gold and vice versa. In some ways holding gold as a hedge asset is a survival, though as with its intrinsic value, this doesn’t account for its current role in the market.

njarboe 5y ago
This is not correct. Gold in the US was freely exchanged for about $20 an ounce in the US until the Great Depression when, on April 5th, 1933 Franklin D. Roosevelt signed Executive Order (no. 6102) prohibiting the hoarding of gold coin, gold bullion, and gold certificates, and requiring them to be delivered to the Federal Reserve Bank. After getting all/most of the gold, on January 31st, 1934, the dollar was set to a new price of $35 an ounce by Franklin D. Roosevelt's Presidential Proclamation (no. 2072). Debts and contracts that specified gold in payment were made illegal and people had to use dollars instead of gold for transactions. Exchanging dollars for gold was not possible at a bank and actually illegal to do with your fellow citizens (certain exceptions applied). This ended in 1971, when the Bretton Woods agreement of exchange rates broke down and Nixon took the US dollar off the gold standard and in 1975 we were allowed to buy gold again. [1]https://en.wikipedia.org/wiki/Gold_Reserve_Act https://en.wikipedia.org/wiki/Gold_Reserve_Act