A few thoughts - Wednesday, January 14, 2015

[Steve Sokolowski]

A few thoughts for today:

More optimism than yesterday

I didn't check the price of bitcoins this morning until after I had watched an episode of Shark Tank and had prepared to go to work. I noticed that prices were around what they were yesterday, at 210, and didn't think much of it. About an hour later, I looked at the charts and was pleasantly surprised to find that there was an enormous crash overnight. I was also frustrated that I wasn't around to buy.

Earlier in the week, when prices were steady at around 275 for days, I was worried that we were in for a long period of slow decline that would cause interest to dwindle out over a course of years and would result in one business failing after another. While businesses are still going to fail because of low prices, I'm more hopeful today than yesterday that this is a passing trend. Prices falling 30% in a matter of days is obviously more indicative of panic than an instant 30% decline in people using the network.

The volatility and lack of depth is amazing. There are buys and sells causing slippage of 3% in one trade. I don't think that the bottom has been reached yet. I'm going to tell my brother to watch the charts tonight and, if bitcoins ever reach $100, put in an order for 100 more. Unlike most people, when I see huge panics, they make me far more confident than do long, drawn-out declines.


Exceptional analysis coming out of the media

I love reading some of the absolutely exceptional analysis coming from media outlets these days. Topping the list today is http://www.wired.co.uk/news/archive/201 ... e-plummets. About halfway down, there is a quote from a woman who states that bitcoin price is falling because "supply exceeds the demand." Who would have figured that?


The effects of crashes

On the other hand, the article does make one correct assertion: the concluding paragraph, where the author asserts that the fundamentals of bitcoin are stronger than ever. If we are referring to transaction volume, I agree. But keep in mind that I've never bought the argument that transaction volume has been high in the first place. The volume has always been inflated by spammers and wallet consolidations and so on. The actual useful volume, however, has almost certainly increased since the early days, even if it is vastly inflated by spam.

That said, as I've stated numerous times, whether the infrastructure is there at this moment has little bearing on what things will be like in the future. In 1983, there were lots of video game consoles and game developers and manufacturing facilities. But then the price of games started to fall, and all of that infrastructure was re-purposed. Developers permanently left for other fields, factories changed machinery to manufacture other things, and the companies that produced the consoles failed, so the remaining solvent developers had nothing to release their games on.

Revenue dropped to 1/30 of what it was before the crash. These crashes have long-term effects; they aren't just something that puts a few people out of business. If it weren't for the crash, gaming would not be dominated by Japan. Most likely, game technology was set back five years by the crash, so that people living today would be playing fully-immersive virtual reality games instead of continually hearing about the vaporware Oculus Rift that gets hyped but is yet to appear.

A lesson here is that the price of games falling was the direct cause of the destruction of the industry. It didn't matter what the cause was for the initial price decline; it probably is impossible to determine the cause anyway. It's not as if all the companies went bankrupt when their games were selling for $40. They went bankrupt when they could only sell games for $1. Falling prices of games were not a result of the crash; they were what caused it.


Another note on "infrastructure"

When the Internet bubble crashed in 2001, there was lots of "infrastructure" available. It's a flawed assumption to believe that having so much infrastructure has any effect on the future recovery of an industry.

To see why, review the history of trans-Atlantic telecommunications cables. In the early 2000s, cables were laid to provide terabits of bandwidth across the ocean, but the companies laying them failed. Fifteen years later, those cables are still not used at even 50% of their capacity. Simply having the ability to communicate with Europe with seemingly infinite bandwidth was of no value because the IT industry was not profitable enough to light up the cables.

If there is a prolonged slump, my guess is that most of the infrastructure will be lost. Vault of Satoshi didn't do anything with their infrastructure despite being the best exchange in Canada; they simply turned it off and moved on. While there were calls to open-source the exchange, there are two problems with that. The first is that if bitcoins ever became profitable enough to be worth operating an exchange again, there is no economic benefit to the creators to having given their competition a leg up should they release something that they are getting no value for right now.

Second, and the reason why we wouldn't open-source this pool if it failed, is simply that open sourcing something takes an enormous amount of time. Our system has five virtual machines that are configured to back up to other servers and to interact with specific exchanges and coins. There are four distinct codebases written in different languages that interoperate. It would probably take 100 hours to be absolutely sure that we had purged all the customer data from the 63-table database and had added enough comments and documentation to the code for it to be open source. Software without documentation is just as useless as no software at all. While we would have no problem sharing our work in such a circumstance, we simply wouldn't be willing to spend the time, at no pay, to do what is necessary to make such a complex system open source. It's not surprising that Vault of Satoshi wasn't willing to pay its employees to do that either.


Nostalgia for the old days

One of the good things to come out of this crash is some nostalgia for the old days of bitcoin. I commented on this idea a few months ago in /r/bitcoinmarkets. As the big VCs and regulators came in, the old days of altcoin trading and normal people mining and people selling pizzas and socks to make a better system seemed to be at an end.

Perhaps that isn't quite true. Maybe cumbersome regulations will be delayed as bitcoin drifts out of the spotlight, allowing small businesses and innovators to experiment and come up with new ideas. I wouldn't be disappointed to see big business forced out if it means a return to more opportunity for those without millions of dollars in their pockets.