I  hear that bitcoin is like gold, with a limited supply, and chosen (by many) as a medium of exchange. Bitcoin is often compared to gold and fiat currencies, but those comparisons often miss important differences. I am no expert but I am suspicious.

• diff: highly similar competitors
• diff: productive use — gold has industrial and jewelry usages.
• diff: fresh supplies — I blogged about gold production capacity
• diff: stable valuation — gold is unstable compared to fiat currencies, but BTC is much worse. I don’t think mainstream merchants would accept BTC as payment. Employees would not want to receive salary in BTC.

The supply of a given crypto is limited, artificially. Increasing demand would bid up the valuation, until another crypto (a new kid on the block) is born with a 100B initial circulation.

Like gold, mastercard also became a medium of exchange. Each system enhancement on a given cryptocurrency could increase its competitive chance of becoming the next mastercard.

— comparison with mastercard … is flawed. Mastercard facilitates payment in USD (or another fiat currency) but is not an alternative currency competing with USD.

I feel the blockchain is comparable to mastercard network. As such, blockchain technology is useful, but it doesn’t mean “any blockchain currency is automatically useful as medium of exchange”.

https://www.investopedia.com/tech/eos-new-btc-pay-attention-peter-thiel/ shows that EOS and many other competitors are still trying to create a cryptocurrency acceptable as M@E.

— risks beside market risk:
I think some regulatory crack-down, some technical flaw, or an alternative cryptocurrency could (slowly) wipe out entire bitcoin market value.

— purely speculative, without intrinsic value like a fiat currency or gold
risk capital — is what you invest into bitcoins.

Are there major retailers accepting bitcoin?

• eg: PoS has math in the policy. The policy is subject to change
• eg: The amount of reward for each PoW is also mathematical and subject to change.
• eg: The level of difficulty (how many leading zeros) is a mathematical control, subject to change.

All of these policy complexities are breeding grounds for bugs and fraud. The complexity undermines the public trust and stability of this “currency”.

Imagine a network policy change (among other changes) requires a software upgrade. What if 44% of the nodes object to the policy change?

Who approves the pull request? Is there any oversight on the approval process? The approver and the original author could be brothers or even the same person using two identities 🙁

How can the millions of end-users trust the implementation, when the software is so complex?

In the legal system, individual judges form a hierarchy. The top judges are highly visible, under the spotlight. Their verdicts are constantly scrutinized and peer-reviewed. This legal system has evolved for thousands of years.

— I told Dahlan about my trust in linux or mysql or other OSS
The banks who use linux to maintain accounts have a big job to ensure each linux upgrade is well-tested. That layer (of protection) shields customers from the potential vulnerabilities in OSS.

I never had a doubt in any of my banks using linux. Similarly, I never had a doubt in them using manual calculation.

 

 

Gold is immune to unauthorized “money creation”. Fiat currency creation usually requires approval by multiple government agencies on behalf of voters.

Every new bccy creator promises a hard limit on the amount of the new currency. Investors and users of this currency would suffer if there’s any dilution as happens in start-up stock options.

However, is there any audit, any checks-n-balances on this hard limit? I think it’s quite possible for the programmer to cheat the system and create some new coins for herself.

An unauthorized creation sounds like fraud, but is actually subject to interpretation. The legal contracts might be phrased in a way to give the issuing company some leeway. Some leeway to adjust the money printing machine. So someone could argue that the unauthorized creation is harmful, unfair to the investors/users, but technically not unauthorized. Off the hook.

A security hole is more likely negligence [coding error, insufficient test coverage…], rather than deliberate. If one security hole is uncovered, the people responsible are seldom punished. “Honest mistake… No one is perfect.” The team does a quick scan of similar holes, and usually fail to uncover the other holes 🙁

How good is a “veteran” system auditor?

• Remember how you interview a tech candidate? You give her the benefit of the doubt if she looks decent.
• Remember how we validate the IMPACT changes? It took 10 minutes. If I miss something hidden, it’s not my fault as I’m not perfect.
• Remember lockfree algorithms? These algorithms are so hard to reason that 98% of published solutions are flawed.
• If you need to read the source code to find flaws (white-box audit, or peer-review), it’s too hard and too time-consuming
• If you rely on tests (blackbox audit), then how good is your test coverage? Do you know all the scenarios?

Therefore, I think we really need to rely on trust, reputation, integrity/motivation of the developers. There’s no effective checks and balances to their power. I kinda know it from experience as a developer.

(In 2020) Some economists said bitcoin is a solution looking for a problem. Read https://sg.finance.yahoo.com/news/economist-bitcoin-is-a-pyramid-scheme-204217615.html

The people who bought into digital currencies have a keen interest in recruiting others to continue purchasing these currencies. The more people that get involved and buy into crypto, the higher prices will go. That means those at the top, the early buyers, will become even wealthier. In fact, 1,000 people own 40 percent of the entire Bitcoin market.

For any ICO, the founders can dump their coin holdings and abandon the investors.

Some reputable retailers now accept BTC, partly because the owner owns BTC.  Imagine you operate a reputable retailer and have bought some BTC. You can make one low-risk move and announce online that you accept BTC as M@E. Actually, 0.01% of your customers would bother to use this M@E, but 60% of them would see your announcement. Your high visibility and your marketplace reputation would be a boost to the bccy.

Similarly, anyone with an audience, with a mass following can make one low-risk move — buy $1000 or $1 worth of BTC, and announce to the world that “Am long BTC.” If you search online you may find many celebrities did that.

Q: does gold have a pump-n-dump tendency?
%%A: I don’t think so. I think PnD mostly affects new securities with questionable underlying values.

— a new token is like a new stock.. https://www.trality.com/blog/how-crypto-pump-and-dump-work points out that “The people who are developing a project are as important as the idea they are working on. Many investors consider the management team to be one of the most important parts of an investment thesis. Keep in mind that people can lie about who is working on a project.”

Tech churn refers to newer (often better) technologies affecting the popularity, valuation of a incumbent bccy.

Proliferation refers to highly similar alternatives. Millennia ago, gold beat other metals and minerals to become the #1 precious metal. BTC and other popular blockchain currencies have highly similar competitors. In fact central banks have the technical capabilities to create their own cryptos, or stablecoins.

A hard-fork is a special case of churn. Hard-fork leads to fragmentation of an existing market share. It affects the M@E adoption.

— devaluation due to technology churn…  Traditionally, reserve currencies are the currencies of the strongest economies. Central banks won’t hold some small country’s weak currencies as reserve (unless backed by oil reserve) because the holding could lose value over 30 years. Technology churn is too fast. Over 30 years, the current crop of blockchain currencies could be displaced/eclipsed and consequently lose value.

M@E use case hates the churn, for similar reasons. However, M@E may benefit from proliferation because more choices and free competition tend to benefit consumers.

— why so many cryptocurrencies?
I think one key reason is startup funding. If you have some innovation related to blockchain, you have a choice. In the past you can create (out of thin air) shares of your business and sell to investors.  Now you can create (out of thin air) coins of your own currency and sell to investors. This new currency contributes to both churn and proliferation.

Issuing shares reduces your control over your startup’s direction. It also leads to dilution.

—–

Q: does technology churn affect visa, mastercard, Amex etc?
%%A: I think newer, better systems (hyperVisa++?) affect the popularity of incumbents, but not the value of USD.