A few thoughts - Wednesday, June 25, 2014
Posted: Wed Jun 25, 2014 5:19 pm
A few thoughts for lunch today:
An incorrect prediction and a correct one
Last week, I made two predictions: that there was no way the price could remain stable past this week, and I believed that the rise would begin on Wednesday as the insiders started trading based on what they knew. By now, it appears clear that the insiders know the exact opposite of what I predicted: that the bids are not going to be astronomical, so one of those predictions may be incorrect, assuming that there isn't a huge rally by the evening.
Many people say that markets in bitcoins are random. On the contrary, I believe that everything can be predicted, given enough information. Things only seem random when one does not have enough information to determine why they work that way. This maybe goes all the way down to the quantum level as well; scientists used to think that things like quarks randomly appear and disappear, but many now suspect there is probably a lower level which we do not yet understand.
When the price starts to fall without any news, there has to be a reason for that. The last time it happened, we later discovered that some people knew of the auction before it was announced to the public. This time, we don't yet know what we don't know.
You should always be concerned when something is happening and there does not appear to be a cause for it. There are definitely people who know more than we do and who are acting upon it. There is a guy in /r/bitcoin who is going to buy $90k in bitcoins. I wish him luck, but there is no way I would be buying today. There is plenty of money to be made after either the big crash, or once there is confirmation this is temporary.
A crisis moment approaching
I commented on this issue yesterday, but I think it is worth discussing again because it is important enough. What is approaching is a crisis moment for bitcoins, and for cryptocurrencies in general.
For as long as I can remember, which is years, all the bitcoin crashes have been associated with external events that did not affect the underlying fundamentals. For example, Mt Gox's incompetence caused several crashes. The Chinese government made laws and took actions to try to kill bitcoins (and failed). The US government issued the initial FinCEN regulations 15 months ago and there was a lot of consternation. Before that, there were high-profile thefts of bitcoins from poorly-designed wallet services, and so on. The only event affecting the fundamentals was the unintentional hard fork in March 2013, but the fork was corrected in hours and was a one-off event that people knew would not repeat.
Now, however, there are a lot of danger signs with the acutal protocol and user behavior that are converging, and there are things that people should actually take notice of. First, we have the issue of transaction volume stalling out. I don't agree with those who say that we can chalk it up to Coinbase. Even if Coinbase was processing transactions off-chain, the reason they are doing that is because the 1MB transaction limit is forcing them to because of the fees. Second, we see thousands of merchants adopting bitcoins, and the number of consumers spending them is very low by orders of magnitude (and there are many wallet services, including Coinbase, that make it easy to spend bitcoins now).
Third, as I said yesterday, people are still going to Western Union and paying 10% extra, which is a lot of money. We are talking about the same market as the extreme couponers who are willing to spend a day cutting out coupons and searching websites to save $30 on their grocery bill. Yet, these people obviously have no qualm about paying $50 for a $500 money transfer. You can't argue that the reason is "it's too difficult" to use bitcoins - while the bitcoin experience can be made simpler, people who have lots of time, and the will to save money will figure out a way to cut out a few bucks from bills wherever they can. They are not doing that. Other issues that can be examined include the low number of Google searches for bitcoins (the tiny spike the last few days doesn't indicate a recovery).
Finally, look at the devastating revelation in /r/bitcoin that /u/gavinandressen is the only developer actively working on protocol upgrades at the moment. This means more than any of the other reasons to be concerned. It shows that the big payment processors are not willing to significantly invest in protocol development, and it also shows that there could be beauacracy involved that is preventing development from moving forward. Remember, people problems kill projects, not technical ones. There are many pressing issues and bitcoin risks falling behind to another project like NXT, which as I said before, could cause cryptocurrencies to be viewed as a "flavor of the month" instead of a world currency.
Exponential growth is required for the success of bitcoins
Now that I've made the case that we are approaching a crisis moment, let's examine the scenario that could unfold if the auction turns out to have below-market prices. This would turn into a negative feedback loop. Every day the price falls below the auction, the asks in the market fall, and therefore the bids at the auction are going to be even lower. Then, the low price at the auction would signal that Wall Street is not that faithful in bitcoins, and there would obviously be a crash. I believe such a crash would break below the bubble cycle, signaling an end to the traditional pattern of exponential growth (at least for the short-term).
Because this crash would be caused by the fundamentals (lack of rapid adoption), rather than some temporary issue like the Chinese government futilely trying to stop free expression, recovery would be slow.
The problem is that, unlike several years ago, there is a lot of money invested in the system. When bitcoins were worth $2, nobody was working full-time on them and it was a hobby. These people could afford to continue developing services regardless of the price. Now, there are corporations like Coinbase that have large staffs and million-dollar budgets. These companies could not sustain a prolonged downturn in price and usage. There are also many companies that are developing products that require a higher price, and the VC money will only last for so long.
If there is a period where exponential growth stops, then the danger is that companies that were previously expanding suddenly find themselves overstaffed and unable to meet their bills. Layoffs would cause experienced people to move to other industries and never come back, such that if there is a recovery later, new developers need to be hired and they need to learn the protocol from scratch. At the current time, bitcoins cannot sustain a period of prices at levels of the previous cycle.
Mining is also at a crisis point, independently
Miners are coming online at the highest rate ever, with the difficulty expected to approach 18b by the end of the week. That would be the single largest difficulty increase in history.
Why people are turning on mining equipment at current prices doesn't make much sense to me, as there is simply no way that all of this equipment is profitable. This is clearly a "mining bubble," where many people spent millions on mining equipment that is not profitable even before it is turned on. I suspect that, even if the auction turns out in the positive, there is going to be a mining crash soon.
The difficulty rises are simply not sustainable, even if the price were to rise a lot overnight. We already see a lot of mining companies being sued and under investigation; the next phase of this mining bubble unwinding will be farm operators who overinvested and who declare bankruptcy as the difficulty continues to increase 40% every two weeks.
This isn't really relevant to the network's usefulness or to its future, but it is bad news for people who are invested in mining. If I had a cloud hashing contract or owned equipment, I would be selling it immediately, regardless of what I thought was going to happen at the auction.
Other
An incorrect prediction and a correct one
Last week, I made two predictions: that there was no way the price could remain stable past this week, and I believed that the rise would begin on Wednesday as the insiders started trading based on what they knew. By now, it appears clear that the insiders know the exact opposite of what I predicted: that the bids are not going to be astronomical, so one of those predictions may be incorrect, assuming that there isn't a huge rally by the evening.
Many people say that markets in bitcoins are random. On the contrary, I believe that everything can be predicted, given enough information. Things only seem random when one does not have enough information to determine why they work that way. This maybe goes all the way down to the quantum level as well; scientists used to think that things like quarks randomly appear and disappear, but many now suspect there is probably a lower level which we do not yet understand.
When the price starts to fall without any news, there has to be a reason for that. The last time it happened, we later discovered that some people knew of the auction before it was announced to the public. This time, we don't yet know what we don't know.
You should always be concerned when something is happening and there does not appear to be a cause for it. There are definitely people who know more than we do and who are acting upon it. There is a guy in /r/bitcoin who is going to buy $90k in bitcoins. I wish him luck, but there is no way I would be buying today. There is plenty of money to be made after either the big crash, or once there is confirmation this is temporary.
A crisis moment approaching
I commented on this issue yesterday, but I think it is worth discussing again because it is important enough. What is approaching is a crisis moment for bitcoins, and for cryptocurrencies in general.
For as long as I can remember, which is years, all the bitcoin crashes have been associated with external events that did not affect the underlying fundamentals. For example, Mt Gox's incompetence caused several crashes. The Chinese government made laws and took actions to try to kill bitcoins (and failed). The US government issued the initial FinCEN regulations 15 months ago and there was a lot of consternation. Before that, there were high-profile thefts of bitcoins from poorly-designed wallet services, and so on. The only event affecting the fundamentals was the unintentional hard fork in March 2013, but the fork was corrected in hours and was a one-off event that people knew would not repeat.
Now, however, there are a lot of danger signs with the acutal protocol and user behavior that are converging, and there are things that people should actually take notice of. First, we have the issue of transaction volume stalling out. I don't agree with those who say that we can chalk it up to Coinbase. Even if Coinbase was processing transactions off-chain, the reason they are doing that is because the 1MB transaction limit is forcing them to because of the fees. Second, we see thousands of merchants adopting bitcoins, and the number of consumers spending them is very low by orders of magnitude (and there are many wallet services, including Coinbase, that make it easy to spend bitcoins now).
Third, as I said yesterday, people are still going to Western Union and paying 10% extra, which is a lot of money. We are talking about the same market as the extreme couponers who are willing to spend a day cutting out coupons and searching websites to save $30 on their grocery bill. Yet, these people obviously have no qualm about paying $50 for a $500 money transfer. You can't argue that the reason is "it's too difficult" to use bitcoins - while the bitcoin experience can be made simpler, people who have lots of time, and the will to save money will figure out a way to cut out a few bucks from bills wherever they can. They are not doing that. Other issues that can be examined include the low number of Google searches for bitcoins (the tiny spike the last few days doesn't indicate a recovery).
Finally, look at the devastating revelation in /r/bitcoin that /u/gavinandressen is the only developer actively working on protocol upgrades at the moment. This means more than any of the other reasons to be concerned. It shows that the big payment processors are not willing to significantly invest in protocol development, and it also shows that there could be beauacracy involved that is preventing development from moving forward. Remember, people problems kill projects, not technical ones. There are many pressing issues and bitcoin risks falling behind to another project like NXT, which as I said before, could cause cryptocurrencies to be viewed as a "flavor of the month" instead of a world currency.
Exponential growth is required for the success of bitcoins
Now that I've made the case that we are approaching a crisis moment, let's examine the scenario that could unfold if the auction turns out to have below-market prices. This would turn into a negative feedback loop. Every day the price falls below the auction, the asks in the market fall, and therefore the bids at the auction are going to be even lower. Then, the low price at the auction would signal that Wall Street is not that faithful in bitcoins, and there would obviously be a crash. I believe such a crash would break below the bubble cycle, signaling an end to the traditional pattern of exponential growth (at least for the short-term).
Because this crash would be caused by the fundamentals (lack of rapid adoption), rather than some temporary issue like the Chinese government futilely trying to stop free expression, recovery would be slow.
The problem is that, unlike several years ago, there is a lot of money invested in the system. When bitcoins were worth $2, nobody was working full-time on them and it was a hobby. These people could afford to continue developing services regardless of the price. Now, there are corporations like Coinbase that have large staffs and million-dollar budgets. These companies could not sustain a prolonged downturn in price and usage. There are also many companies that are developing products that require a higher price, and the VC money will only last for so long.
If there is a period where exponential growth stops, then the danger is that companies that were previously expanding suddenly find themselves overstaffed and unable to meet their bills. Layoffs would cause experienced people to move to other industries and never come back, such that if there is a recovery later, new developers need to be hired and they need to learn the protocol from scratch. At the current time, bitcoins cannot sustain a period of prices at levels of the previous cycle.
Mining is also at a crisis point, independently
Miners are coming online at the highest rate ever, with the difficulty expected to approach 18b by the end of the week. That would be the single largest difficulty increase in history.
Why people are turning on mining equipment at current prices doesn't make much sense to me, as there is simply no way that all of this equipment is profitable. This is clearly a "mining bubble," where many people spent millions on mining equipment that is not profitable even before it is turned on. I suspect that, even if the auction turns out in the positive, there is going to be a mining crash soon.
The difficulty rises are simply not sustainable, even if the price were to rise a lot overnight. We already see a lot of mining companies being sued and under investigation; the next phase of this mining bubble unwinding will be farm operators who overinvested and who declare bankruptcy as the difficulty continues to increase 40% every two weeks.
This isn't really relevant to the network's usefulness or to its future, but it is bad news for people who are invested in mining. If I had a cloud hashing contract or owned equipment, I would be selling it immediately, regardless of what I thought was going to happen at the auction.
Other
- Days until the auction: 2
- Days until July 24: 29
- Price to break the lower boundary (according to /u/moral_agent): $540