Tuesday, December 26, 2017

Some Underlying Economic Fundamentals of Bitcoin and Cryptocurrencies

I answer an Asshole Consulting client's questions about whether cryptocurrencies are in a bubble, is there a "crypto-cult" of technologists, what's driving the value of bitcoin and the future of cryptocurrencies.


4 comments:

  1. Anonymous4:53 PM

    Software dev here. If China shut off their miners, or the connection between us and them was cut, there would be little effect. As long as at least a couple full nodes were located in the US (there are hundreds or thousands, at least), China would merely have forked bitcoin into two blockchains. China would have theirs and we would have ours. The hash rate would plummet which means that transactions would move very slowly until the difficulty automatically adjusted. This was seen in the Bitcoin Cash fork. After a couple blocks the chains would diverge and likely never recombine. People who had coins on the original chain would have coins on both, again, much like Bitcoin Cash.

    TL;DR: There would be a temporary transaction processing slowdown. That's it.

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  2. Hey Cappy, I can tell you have been studying how Bitcoin proper works. Kudos for that. However, I do have a couple of corrections to add to your analysis. First, while bitcoins themselves have no intrinsic value, the Bitcoin network does. It functions as an excellent & automated value transfer & settlement system, as well as an immutable triple-entry ledger with unrivaled security. Since the value of the network only applies to transactions in bitcoins, this grants bitcoins some of the value that the worth of the network as a whole creates. Similar in nature to how the 'full faith & credit' of the US government provides intrinsically worthless paper artwork a stable trade value in our fiat world.
    Next, the powers that be would destroy bitcoin if they knew how to do it at this point, this was a concern early in the network's history, that if governments knew what the bitcoiners were developing, they'd make every effort to destroy it or marginalize it. That is where the nonsense about bitcoins being only a "black market" currency comes from.

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  3. Furthermore, Bitcoin has both the first mover advantage, as well as the ability to absorb any new features that the spin-offs create that are worth having. For example, Etherum is famous only because it has a working transaction scripting language, which allows "digital contracts" to be created and enforced by the network itself. Bitcoin has always had this ability, but it was turned off in the first year due to security concerns. If Etherum manages to develop a secure transaction language, there is literally nothing to prevent Bitcoin from simply taking it and adding it into the live network.

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  4. Finally, acceptance of bitcoin as a currency is proceeding faster in countries wherein the governments already impose currency controls or inflate their currencies too much, or the common man doesn't have access to modern banking but has a cell phone. The modern Western nations have very effective currency systems, and bitcoin may only win there after a major crisis that upsets the faith of the public that these fiat currencies will continue to have value.

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