A few thoughts - Monday, August 4, 2014
Posted: Mon Aug 04, 2014 5:33 pm
Good afternoon! A few thoughts for lunch today:
Regulations will have another effect
Suppose that you agree with all the New York regulations and don't think that they will hurt small businesses. Or, you think that the bitcoin industry would be better served by large corporations that have compliance programs and insurance and all the other things that big banks do. However, if the New York regulations pass, bitcoins will actually become more expensive to use than dollars will, because the number of regulations proposed for bitcoins is higher than the number of regulations currently required for many types of banking activities.
Bitcoins are useful largely because they can allow anyone to transact with very low fees. Even if the 1MB transaction limit is resolved, it will be expensive for payment processors to accept bitcoins when they have to comply with hundreds of pages of regulations. It seems difficult to imagine that Bitpay could continue to operate with their current fee structure if they have to hire people to push the massive amount of paperwork demanded by Lawsky.
Hardware wallet launched
The greatest positive news this week was the launch of the TREZOR hardware wallet. The launch is significant because the wallet is the first device which is immune to the standard viruses that spread on cell phones and computers. Since the code on the TREZOR is far simpler than the code of an operating system like Linux, the wallet is far more secure. Linux has thousands of packages, and any one of them could contain a security vulnerability which allows access to a hacker. Nobody understands all the Linux packages, but it is possible for one person to understand the firmware in the TREZOR. The ability for one person to understand the entirety of the code for a hardware wallet makes it less likely that there was an oversight allowing remote code to execute on the wallet.
These are the devices that will expand bitcoin usage to people who don't know how to secure their money properly. Being able to plug one of these into a terminal at a grocery store is the end goal. They are more secure than cash, because they are useless to a hacker who steals them. Once the device is stolen, the person simply transfers the funds out of it before the hacker figures out how to break the password on the device.
Unfortunately, the TREZOR will not result in any immediate bitcoin uptake and will remain a curiosity because of its high price. They are charging $119, which is unattractive to most people. Knowledgable people are not going to spend so much on something they can do themselves, and lazy people are not going to spend so much to start using bitcoins because they don't have to pay anything to open a credit card. The TREZOR is only important as a proof of concept that will hopefully be supplanted by a company who manufactures these at a lower price.
Russia banned bitcoins again
While everyone was wondering why the price of bitcoins dropped so much last week, it turns out that Russia banned bitcoins again. I guess that these bans still have some impact on the price.
What's interesting about this is that the news was not reported anywhere - not in the press, not in /r/bitcoin, not on bitcointalk.org, but yet the price still went down a lot. That shows a few things: first, it's confirmation that people who hang around /r/bitcoinmarkets are not moving the market, and second, it means that the things that people around here pay attention to are not relevant to price.
I read a lot of posts discussing theories of price rises and falls. Some reasons given are that people get paychecks on certain days, they are saving for Christmas, it's August, which means it's the vacation month in Europe, and so on. These reasons are off the mark. Bitcoin is big enough that people who put in a few dollars from each paycheck are not going to be the cause of $50 rises and falls.
VC bubble is accelerating
While most people are paying attention to bitcoin prices, the venture capital bubble surrounding bitcoins is accelerating. The amount of investment in bitcoin companies last quarter was more than all of last year combined. This rate of investment is clearly unsustainable and most of the VCs are going to be burned.
It seems like there is a classic supply and demand problem here. There is a huge supply of money, with people wanting to throw millions into in anything that comes their way. On the other hand, there aren't that many products available for investment that require money. Most of the VC money has gone to mining hardware and exchanges, two types of companies that need money to get started. The cost of manufacturing ASICs is enormous, and complying with regulations is expensive. But there are only so many exchanges that the market can support. Eventually, the VCs will need to look for other companies to buy in to, like colored coin implementations and legal contracts and altcoin development.
The problem, however, is that software development is not expensive. You don't need huge fabrication plants to start programming a new application of bitcoin technology. And software is what is most needed, as the great challenge now is providing killer applications for users to adopt bitcoins. Innovative software applications don't need millions of dollars in VC money to get started, so software companies don't accept the money because they have no reason to give away 90% of their companies.
That creates the bubble. The VCs are squaring off against each other in fields which are saturated with competitors. Not only that, but the money going into those fields will push those businesses ahead of the curve. The VC-backed exchanges and payment processors will open, but the software that makes bitcoins useful to people won't be there yet. Most of those companies, which (like Circle) are burning cash at unsustainable rates, will collapse until the software applications catch up to them, and the VCs will lose a lot of money.
/u/moral_agent should create a "VC bubble" chart. I wonder if it is inversely correlated to the usual bubble chart.
An unbelievable waste of money
As another example of this bubble, the domain BTC.com was sold for $1.1m last night. If anyone reading this note can justify such spending, please let me know.
Domain names are important, of course, but there is no possible way that a company can make $2m more by having BTC.com than a more branded domain name. Note that I say that the opportunity cost of purchasing the domain is at least $2m, because the $1.1m could have been invested in some other aspect of the buyer's business. Of course, the company can make more than $2m total, but to justify this purchase it would have to make $2m more than if it had an alternate domain name.
On the other hand, like all bubbles, the buyer might be talking up his plans for the site just to hold on to the name for a while longer, so that he can sell it right before the VC bubble pops, so that the next sucker can lose all his money.
Other
Regulations will have another effect
Suppose that you agree with all the New York regulations and don't think that they will hurt small businesses. Or, you think that the bitcoin industry would be better served by large corporations that have compliance programs and insurance and all the other things that big banks do. However, if the New York regulations pass, bitcoins will actually become more expensive to use than dollars will, because the number of regulations proposed for bitcoins is higher than the number of regulations currently required for many types of banking activities.
Bitcoins are useful largely because they can allow anyone to transact with very low fees. Even if the 1MB transaction limit is resolved, it will be expensive for payment processors to accept bitcoins when they have to comply with hundreds of pages of regulations. It seems difficult to imagine that Bitpay could continue to operate with their current fee structure if they have to hire people to push the massive amount of paperwork demanded by Lawsky.
Hardware wallet launched
The greatest positive news this week was the launch of the TREZOR hardware wallet. The launch is significant because the wallet is the first device which is immune to the standard viruses that spread on cell phones and computers. Since the code on the TREZOR is far simpler than the code of an operating system like Linux, the wallet is far more secure. Linux has thousands of packages, and any one of them could contain a security vulnerability which allows access to a hacker. Nobody understands all the Linux packages, but it is possible for one person to understand the firmware in the TREZOR. The ability for one person to understand the entirety of the code for a hardware wallet makes it less likely that there was an oversight allowing remote code to execute on the wallet.
These are the devices that will expand bitcoin usage to people who don't know how to secure their money properly. Being able to plug one of these into a terminal at a grocery store is the end goal. They are more secure than cash, because they are useless to a hacker who steals them. Once the device is stolen, the person simply transfers the funds out of it before the hacker figures out how to break the password on the device.
Unfortunately, the TREZOR will not result in any immediate bitcoin uptake and will remain a curiosity because of its high price. They are charging $119, which is unattractive to most people. Knowledgable people are not going to spend so much on something they can do themselves, and lazy people are not going to spend so much to start using bitcoins because they don't have to pay anything to open a credit card. The TREZOR is only important as a proof of concept that will hopefully be supplanted by a company who manufactures these at a lower price.
Russia banned bitcoins again
While everyone was wondering why the price of bitcoins dropped so much last week, it turns out that Russia banned bitcoins again. I guess that these bans still have some impact on the price.
What's interesting about this is that the news was not reported anywhere - not in the press, not in /r/bitcoin, not on bitcointalk.org, but yet the price still went down a lot. That shows a few things: first, it's confirmation that people who hang around /r/bitcoinmarkets are not moving the market, and second, it means that the things that people around here pay attention to are not relevant to price.
I read a lot of posts discussing theories of price rises and falls. Some reasons given are that people get paychecks on certain days, they are saving for Christmas, it's August, which means it's the vacation month in Europe, and so on. These reasons are off the mark. Bitcoin is big enough that people who put in a few dollars from each paycheck are not going to be the cause of $50 rises and falls.
VC bubble is accelerating
While most people are paying attention to bitcoin prices, the venture capital bubble surrounding bitcoins is accelerating. The amount of investment in bitcoin companies last quarter was more than all of last year combined. This rate of investment is clearly unsustainable and most of the VCs are going to be burned.
It seems like there is a classic supply and demand problem here. There is a huge supply of money, with people wanting to throw millions into in anything that comes their way. On the other hand, there aren't that many products available for investment that require money. Most of the VC money has gone to mining hardware and exchanges, two types of companies that need money to get started. The cost of manufacturing ASICs is enormous, and complying with regulations is expensive. But there are only so many exchanges that the market can support. Eventually, the VCs will need to look for other companies to buy in to, like colored coin implementations and legal contracts and altcoin development.
The problem, however, is that software development is not expensive. You don't need huge fabrication plants to start programming a new application of bitcoin technology. And software is what is most needed, as the great challenge now is providing killer applications for users to adopt bitcoins. Innovative software applications don't need millions of dollars in VC money to get started, so software companies don't accept the money because they have no reason to give away 90% of their companies.
That creates the bubble. The VCs are squaring off against each other in fields which are saturated with competitors. Not only that, but the money going into those fields will push those businesses ahead of the curve. The VC-backed exchanges and payment processors will open, but the software that makes bitcoins useful to people won't be there yet. Most of those companies, which (like Circle) are burning cash at unsustainable rates, will collapse until the software applications catch up to them, and the VCs will lose a lot of money.
/u/moral_agent should create a "VC bubble" chart. I wonder if it is inversely correlated to the usual bubble chart.
An unbelievable waste of money
As another example of this bubble, the domain BTC.com was sold for $1.1m last night. If anyone reading this note can justify such spending, please let me know.
Domain names are important, of course, but there is no possible way that a company can make $2m more by having BTC.com than a more branded domain name. Note that I say that the opportunity cost of purchasing the domain is at least $2m, because the $1.1m could have been invested in some other aspect of the buyer's business. Of course, the company can make more than $2m total, but to justify this purchase it would have to make $2m more than if it had an alternate domain name.
On the other hand, like all bubbles, the buyer might be talking up his plans for the site just to hold on to the name for a while longer, so that he can sell it right before the VC bubble pops, so that the next sucker can lose all his money.
Other
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