The End of Bitcoin
No, I’m not talking about the recent crash in price, wiping out 50% of the value of something that shouldn’t have a lick of sane value in the first place. I’m talking about the very real and inevitable end of Bitcoin. It’s all about entropy and algorithms.
The number of Bitcoin is capped at 21 million. Once the 21 millionth coin is awarded, no more can be mined. That’s it. It’s a limitation built into the algorithm itself. Of course, you can change the algorithm, but then all the arguments of why Bitcoin is different go right away. Now you’re just printing money like the Fed, only you don’t have a continent of land and minerals to back up its value.
What’s more interesting to me is the fatal flaw of passwords. You have to protect your Bitcoin wallet passwords at all costs. Bitcoins are like bearer bonds. If you steal them, they’re yours. The rightful owner can’t get them back. And if you lose your password, you can’t retrieve them. There are already people freaking out because they mined Bitcoins years ago, when they were worth pennies, and now they can’t remember how to get their Bitcoins back. Not only that, but everyone who passes away without leaving their password behind means those Bitcoins are also gone forever. Poof.
Bitcoin was designed to fight inflation. The growth rate is capped by making mining more difficult over time, and the total number of coin is capped at 21 million, so a deflationary period is to be expected. What wasn’t accounted for in the algorithm (or any of the crazy hype about blockchain) is human fallibility. We can’t remember our passwords. We also refuse to plan appropriately for our deaths. We are going to keep losing Bitcoin, and it is going to go to the grave with us, until there is no Bitcoin left. This ratchets in only one direction.
The end of Bitcoin is as sure as the winking out of our sun, only it’ll happen a whole lot sooner. The max cap of Bitcoin, and the entropy of human recollection, mean that Bitcoin’s days are numbered, not just as a bubble, but as a thing with any kind of existence, real or imaginary.
If you write your passwords down, they can be stolen with no recourse. If you don’t, they’ll be lost for good one day. I didn’t think it was possible, but somehow the Winklevosses are going to look even dumber in the sequel.
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For a sci fi writer you certainly are resistant of the future! ;)
I love Hugh, but I'm not sure he's done enough research on this topic.
I would have said the exact same thing a year ago. And then, after years of being relatively flat in USD valuation, it jumped into the upper $2,000s in early June of 2017. At that point, I thought "this bubble is insane – people better start selling while the gettin's good". No doubt about it, if I had owned Bitcoin at the time, that would have been the point at which I would have sold it all and started dancing in the streets, celebrating the considerable ROI.
But go figure, it then continued to grow and grow and grow at an insane pace throughout the remainder of 2017, reaching just shy of $20k in the middle of December – proving definitively that I, and everybody else, know absolutely nothing.
The fact is nobody knows what to make of cryptocurrency. To anyone hedging their bets for or against the long-term success of Bitcoin, the odds they're betting against are 50/50, period. Not 80/20, not 70/30, and not even a measly 60/40. Nobody knows what's going to happen because this phenomenon is unprecedented in history.
I don't see the finite amount of bitcoin as a cause for concern. I feel the fixed amount of bitcoin is what makes it valuable. As you know, historically our currency was backed by gold, and this is a return to a similar standard. Each bitcoin can be split into 100,000,000 pieces. Each unit of bitcoin, or 0.00000001 bitcoin, is called a satoshi. When you buy and trade bitcoin you don't have to buy a whole one. Bitcoin can totally fail, but I don't think the finite amount of them is anything to worry about unless your're a bitcoin miner. Then your future looks less certain. They say the miners will make money off of transaction fees, but there is concern that this won't be enough for them.
Mr Howey has done enough homework to possess as much or more of a grasp on the topic than the majority of bitcoin holders, however bitcoin has value as long as buyers and sellers agree it has value akin to gold, the difference being bitcoin has greater utility (though not as long as it's price remains unstable).
John wrote: "For a sci fi writer you certainly are resistant of the future! ;)"the future needs a good editor
Ross wrote: "I don't see the finite amount of bitcoin as a cause for concern. I feel the fixed amount of bitcoin is what makes it valuable. As you know, historically our currency was backed by gold, and this is..."The problem is that this will cause deflation. Deflation is an economic disaster.
1. It causes investment to dry up... Why invest in a company that might grow by 10% when the sky is the limit on money not-spent?
2. It causes long-term loans to become untenable. I agreed to pay you 100 bitcoin for my house over 15 years. But, by the second year, it's looking like my house is only worth 90 bitcoin and by the third it's only worth 80 bitcoin. The only sane thing to do is default.
3. It causes food (and other long-term-to-produce-item) shortages. Farmer Joe cannot pay 4 bitcoin for seeds this spring in order to sell his corn for 2 bitcoin in the fall. So, it's better if he reduces his risk by only buying 1 bitcoin in seeds.
4. It causes employment to be unstable and employee dissatisfaction. With deflation, most employers will not want long-term employees with agreed upon contracts. The cost of the things these companies sell will be going down, so their HR costs will need to go down, too. Many people would be ok working month-to-month. But, employee satisfaction takes a huge hit when you have to decrease salaries over time. It turns out that people who get raises even below the rate of inflation have higher job satisfaction than people who get reduced compensation during a cost-of-living drop. Basically, people have trouble feeling good about an abstract benefit. They want to see something concrete in their paycheck.
The good news is that the organizations behind every commonly-used currency on the planet, strive for a little inflation. (The US Fed strives for 2%). This seems to be enough to encourage investment and long-term production while not causing price instability or other issues with high-inflation.
R. Andrew wrote: The problem is that this will cause deflation....
That my friend is still up for debate.
There are many that argue that bitcoin won't have a deflationary effect because it's a conduit to normal currency transactions.
Only time will tell!
But if you're right about it causing deflation, then that would not be good for the rest of the economy.
A dollar bill is not lawful money, but rather “legal tender.” From the Treasury; “Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything.As to your main point, the "we" that can't remember passwords can use helper tools to help "us" remember. You're missing the forest (the benefits in decentralizing means of exchange) for the trees.
I love your books but this blog post is meh
