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Bitcoins - can't it only go down from here?
Here is my understanding of Bitcoins, would love to hear from people more knowledgeable than me on what I am getting wrong
- Only a certain number of bitcoins can be mined
- if the price of bitcoin goes up, it makes mining seem more profitable which encourages more mining
- If there is more mining, the difficultly of mining eventually increases, & so miners consume more electricity until mining becomes less profitable again
- Bitcoin is already consuming so much energy that countries are starting to actively discourage mining
This implies that any substantial increase in bitcoin price will result in substantial regulation of the bitcoin industry as it impacts the supply and price of electricity to other industries
- Bitcoin is highly volatile, and over time has increased in price substantially
- A significant portion of bitcoin investors are speculating on an asset rise
- If the asset stops rising, some speculators may start to sell
- Increased selling activity will lower the price
- A lower price will force more speculators to sell
This implies that if bitcoin does not keep rising, it will start to fall
- Other crypto currencies are highly correlated with Bitcoin price movement.
Therefore if bitcoin falls, other crypto currencies fall.
- Bitcoin is the current default for accepting cryptocurrency as payment
- Bitcoin has a limited number of transactions it can process (3-7 a second)
- If too many people want to process transactions, the fee will rise
Therefore one or more other cryptocurrencies that uses proof of stake, must become the default for accepting cryptocurrency as payment.
That's quite a jump, for one active governmental intervention is not a given - the US is often deadlocked between it's branches such that little more than the national budget passes each year, for instance. Minor governments may not care at all - after all, if a bunch of people spend energy mining, sell the bitcoins they make, and the government can tax it, as a minor power, doesn't really matter if you're taxing goods and services or sudoku puzzle rewards, USD is USD.
While that's certainly something that's possible, it's not like it's definite. Other buyers who, for whatever reason, look at a falling price and see that as a discount will start to buy and stabilize the price. Bitcoin has already had periods of stagnation, periods of decline, massive drops, and so forth without that calamitous fall. So the central thesis
does not have much empirical evidence, unless you keep hacking at the time window.
Now, the question of whether in the long term Bitcoin will go to zero is another one, and difficult to answer without hindsight. In some sense, in a perfectly rational market, assets with revenue streams (like stocks or bonds) would be preferred over ones that are purely speculative, but in the real world markets are filled with irrational humans, and as Keynes would say, in the long term we're all dead. So perhaps it will go to zero exactly as we all die a fiery death from climate change or whatnot, but in the, say, decade time window it's impossible to say, really. It's certainly possible for the market to maintain its irrationality for that long.
I mean that's quite a jump, for one it's not exactly fact that PoS even maintains consensus. Cryptocurrencies could become pure speculative devices, as they pretty much are now, or they could become defunct, or something like the original Libra design happens.
I mean, in general, no, Bitcoin can't only go down from here. It can go up, down, down, up, back down, way up, ad infinitum, trending up, trending down, or tending as brownian noise.
Thanks for the response.
If my thesis is correct, it would be the lower cost producers of electricity which would regulate first, which includes kosovo and china, not USA.
Did that work during the tulip bubble?
The price could indeed fluctuate, but how could it possibly go up? Take an absurd example. If the price went up 1000x, yet the price of electricity and computer chips remained the same, we would all be fools not to try to mine bitcoin, consuming all the electricity in the world. At some point, the price of bitcoin should drive the cost & availability of electricity, and my central thesis is that point is now.
Tulips are still a major part of Holland's economy. So yes, tulip prices did stabilize, albeit well below the manic prices of the bubble.
I certainly don't claim to be an expert on bitcoin, however, this is my take:
But the other side says that bitcoins can be fractioned and divided to whatever extent you want unlike fiat currency. For example, 1 BTC has a million satoshis and you can send half, quarter or even a tenth satoshi to someone if you want to!
Again, I don't know much about this but from what I've heard, even sustainable energy sources (like nuclear or solar or wind) can be used for mining.
Even assuming that's true, bitcoin is probably just the first chapter in the story or journey of blockchain technology. There are many other crypto currencies (like Nano) that don't need to burn electricity to validate payments. If I'm not mistaken, this is the area where the crytpo technologists are looking forward.
But there are also a significant number of blockchain enthusiasts who are here for the technology, not the asset or dollar value of BTC. These enthusiasts are only found on reddit forums and github PRs, not on BBC/CNN which is why you don't get to hear about them. But in reality, these enthusiasts are the real drivers of BTC and blockchain technology, not the Wall Street people!
Careful, this is true but meaningless. If you’re consuming a lot of energy, it doesn’t matter whether it’s dirty or not, you’re consuming part of the country’s energy supply. If you’re getting banned because you’re consuming too much, it’s the exact same impact (economical and ecological) whether you’re using renewables or non-renewables.
Also worth remembering that while switching from fossil fuels to green energy increases incentives for more green energy, it also slightly increases the price of green energy and decreases the price of your old supply, which means increased incentive for others to use fossil fuels.
Never trust those who say they’re “only using green energy suppliers”. Even if true, it’s meaningless unless they are adding to the supply of green energy (eg. by installing solar panels they actively draw from).
You're assuming all electricity is the same, but this isn't true. Power lines don't go everywhere and don't have unlimited capacity. Also, demand for electricity varies depending on time and place.
An example of an electricity source that's not connected to the grid might be burning natural gas from an oil well in a remote location, if it's not feasible to build either a natural gas pipeline or power line to deliver the power.
I don't know whether that could power a large enough amount of Bitcoin mining though. It's just something I've read about a few Bitcoin miners doing.
Anywhere you can mine cryptocurrencies, that power could instead be used for useful processing. Folding at home and equivalents, processing for commercial services etc. etc.
Yes, cryptocurrency probably isn't going to be the only possible use for off-grid electricity generation, but this is a specialized niche. It's unlikely that anyone is going to spend the money to install equipment on remote oil wells and maintain it in order to donate computing power to folding at home?
It's going to come down to what makes financial sense, and we don't know the numbers.
Most power grids are huge. The US for example is split into three power grids. Electricity generated in California can end up being used in Utah or Idaho, or vice-versa. Using up renewable capacity in one state could force an adjacent state to keep its coal and gas power plants online for longer.
This is true, but at the same time, you don't have to go very far out into the wilderness before you're off the grid.
What percentage of crypto mining is being done out in the wilderness using off-grid renewable energy?
Stranded gas, not renewable energy, and it’s in the early stages so I assume it’s a tiny percent.
But there are apparently people doing it in North Dakota so it doesn’t seem meaningless. It’s an interesting idea that may or may not work out.
I think this argument is nonsense. On the surface, it's 100% true. But it ignores the fact that renewable energy being used for crypto mining is not available to the rest of the grid, forcing dirty coal plants and other non-renewable energy sources to remain online pumping energy into the grid. Unless a given crypto mining operation is using its own off-grid renewable energy, or operates on a 100% renewable grid, then it is still contributing to dirty energy usage.
Thanks for your response.
Yet there is a limit to the number of transactions that can be processed. And when that limit is hit, the cost per transaction will naturally increase. Which means bitcoins can't be infinitely fractioned. No one will pay $50 to process a $0.01 transaction.
And computers will get more efficient. Yet there are more efficient cryptocurrencies available today.
Exactly.
I am not against blockchain technology. I am simply arguing that bitcoin is fundamentally flawed, and in spite of the first mover advantage, is ultimately fungible.
There are 100 million satoshis per bitcoin. You can't send a fraction of a satoshi. (The software records amounts as an integer number of satoshis.)
While this is true, the protocol supports infinite subdivision by design, it just needs a version update to push those changes. One could run the entire bitcoin ecosystem on fragments of a single bitcoin even if all the rest are lost. The eight decimal places supported now are just Satoshi's original arbitrary design choice for the first release. He planned for it to divide further.
If the miners all agree to it, they can even enable more bitcoins to be minted and mined. It just comes down to what the consensus of the network will support.
I'm purely looking at this from a supply/demand perspective. Commodities like gold require significant investment to mine. There are natural boom and bust cycles. When the price increases, mining increases. When the price decreases, mines eventually shut down. When real rates are negative, gold is a smart idea. When real rates flip positive, suddenly bonds don't seem so bad. What's unusual is that if bitcoin increases in price, it could theoretically consume all the electricity in the world, which would attract a lot of regulatory attention.
I think you're right that there is some limit and Bitcoin couldn't grow to consume all the world's electricity. But the upper bound is fuzzy and can't be used to predict much about future price swings.
Also, the price of Bitcoin determines miner revenue, not the other way around. If the miners can't keep up then the hash rate will be lower, that's all. If there are barriers to entry then the miners who can keep going will split more revenue.
Agreed Bitcoin price is fuzzy and could definitely go up. USA accounts for a large portion of mining and USA electricity prices are relatively high compared to global price arbitrage opportunities. Yet those lower cost countries may not have the capacity of the USA, and threat of regulation in many of these countries is clearly increasing.
Not entirely sure what your point is here.
Expected profitability drives the number of miners and the hash rate. Even with regulation, if profitability reaches a certain level, people will find a way. People have been using electricity to power illegal grow operations for many years. My point is that increased regulation likely enough to pop any speculative bubble in bitcoin. With speculative bubbles, when the price stops going up, it starts going down. A downward trajectory in price would force miners to reduce mining until the hash rate was low enough or the cost of transactions was high enough to ensure profitability.
Thanks for the response.
When you say "people will find a way" you're claiming that there will never be enough barriers to entry to keep new miners from joining the competition. I'm saying that whether that's true or not, the price of Bitcoin doesn't depend on it. From the point of view of Bitcoin speculators, it doesn't matter what happens in the competition between miners. Half of them could go out of business and it doesn't matter; the price of transactions will be the same.
I think that blockchain technology is a lot more harmful than people realise.
Cryptocurrencies (or at least proof-of-work ones like Bitcoin, Dogecoin and Ethereum) have absurdly high energy consumption requirements and have led to hardware like graphics cards being scalped. Not to mention that the transaction fees are also high and the price has fluctuated so much that it's simply unviable to use them when cash and card are available. It's a popular choice for laundering criminal proceeds too because of the audit trails (or lack thereof.)
Then there's this whole bluster about "Web 3.0" being a full blockchain-powered decentralisation of the web that will do away with servers and create censorship resistant domain registrars or even hosting services. Wouldn't that be a bad thing? We do not need the clearweb becoming more like the dark web.
This is very conventional criticism at this point, repeated every time it comes up. Why do you think people don't realize it?
The people with lots of skin in the game don't really care about the environment, or if they do, they don't think too hard about their own actions since they're in it for the money. It's like asking "why don't oil companies care about climate change" - they do, in so far as their refineries and oil rigs need to be made more resilient to reduce shutdowns to more intense storms, but other than that, their future depends on a) diversifying and/or b) the market for their primary money maker staying strong.
I'm not particularly sympathetic to this argument. How many people even understand how much power the consume? What sources their energy comes from? The embodied emissions of the goods they buy? This feels like an attack on character more than anything else.
In theory, it could be (whether that's a good thing or not depends on who you are and what hypothetical is being discussed), but in practice, it's neither decentralized nor censorship-resistant, as this article explains.
That's more of a rag on NFT's than anything else. The image itself is not decentralised and the certificate of ownership you're buying is effectively a link to an image that is hosted on an external server.
If somebody did something like... create a peer-to-peer networking protocol that uses blockchains to store website content, like images, videos, user comments, etc, then we may be getting somewhere with Web 3.0. Apparently services like Sia, Handshake and Skynet already do things like this.
I've wondered that myself. The classic pump and dump has ruled bitcoin for several years now. You could set your watch by the boom/bust cycles.
Pump and dump is most effective when you control most of the float.
If Bitcoin was ever a pump and dump, it was dumped a long time ago.
Bubbles are driven by sentiment.
We saw a lot of positive press & social media for Cathie Wood's ARK, WSB's GME, Cryptocoins during the meme stock bubble.
Once the meme stocks started to correct, we started seeing negative press gain more visibility.
But I dont think sentiment has fully turned to despair or capitulation.
I suspect we are in the fear stage of meme correction. There is more pain ahead.
edit: discussion from the bubble guru, Robert Shiller himself, back in 2017 calling FAANG & Bitcoin a bubble :)
https://qz.com/1067557/robert-shiller-wrote-the-book-on-bubbles-he-says-the-best-example-right-now-is-bitcoin/
We can't really be sure of how likely it is that more countries will ban Bitcoin mining at around this price level. It's possible that Kazakhstan was especially intolerant of mining's power usage because of their fuel shortages, and other countries can tolerate much more power usage. Maybe Bitcoin would have to double in price (and therefore mining revenue which is mostly spent on power usage) or much more before any other country is affected enough to decide to ban it.
But in general I think there's a lot of validity to this general argument. Proof-of-work cryptocurrencies which use mining will only invite more rightful political pushback on environmental concerns as they get more popular. I think the cryptocurrency market will increasingly shift to proof-of-stake competitors as this political pushback and risk of regulations increases.
Whats interesting is that bitcoin has that first mover advantage. Most VPNs that accept bitcoin, seem to only accept bitcoin, not other cryptocurrencies. The recent spike in transactional costs didn't seem to make any significant change in that.
There is the possibility that if bitcoin crashes significantly, the transactional cost could spike significantly. If everyone wants to get out the same door at the same time, and there is a variable fee to pass through the door, that fee will go up. This might encourage vendors to accept payments in more currencies.
Or we might see a technical revolution.
I am a little surprised coinbase hasn't stepped in and become the paypal of cryptocurrency for privacy conscious products & purchasers tbh.