A few thoughts - Thursday, June 5, 2014
Posted: Thu Jun 05, 2014 1:30 pm
Today's thoughts:
Welcome
Welcome! Yesterday, there was quite a discussion in /r/bitcoinmarkets. As I told /u/Kibubik, after the discussion erupted it became untenable for me to continue posting these thoughts there, because no matter what was said, someone would say it was off-topic and another huge discussion would follow.
But that's fine. People who want to visit /r/bitcoinmarkets can continue to do so, and those who want to read these posts can come here (or do both). I'll still read all the bitcoin forums.
If you want to post your thoughts, then feel free to create a new topic. Feel free to talk about anything about cryptocurrencies; it doesn't have to do with markets. Make sure your post has some content and isn't just a link with a direction to "discuss." As long as most of your post is about cryptocurrencies, you can also add comments on other stuff, too. Consider this a multi-person blog; we'll see if anyone is interested in posting.
It is unbelievably difficult to retain data (and wallets)
Retaining data for a long time is unbelievably difficult. Over the past four years, I have had two instances where costly catastrophes have ensued. In the first case, I was restoring a large amount of data from a backup when the backup array also failed, so I had to pay $1500 for data recovery (but all the data was restored). In the second case, despite using a RAID-6 with every piece of data backed to six external drives, the array got corrupted and one of the external drives had unrecoverable read errors on it. I was again able to restore all the data because the only corrupted files were one CD I had ripped, which was easily replaceable. But it took almost 2 months each time before the system was back.
If you are trying to come up with a system to store a bitcoin wallet, security is important, but actually retaining the wallet is even more important. People may not know that the average hard drive lasts only a little longer than three years, but we'll round down to 3 for easy math. If you make three copies onto three independent disks made by different manufacturers at the same time, and you don't constantly verify that the disks work, then the odds of losing all your money is as high as 1/8!
To make things worse, there are things called unrecoverable read errors, which can occur when a disk still spins but only the sector where your wallet is stored can't be read. These errors are so common that they occur every 10 terabytes of writes or so, which means that a 2TB disk only needs to be overwritten five times before you are more likely than not to have these errors in them.
Making one backup is not enough. If you are trying to secure a wallet for cold storage, encrypt it with a long password, and then store it on five disks.
By the way, as I said in a post yesterday, /u/evoorhees, the guy recently fined by the SEC, had three backups of his wallet at one point, but he still lost 10,000 bitcoins ($6.5m) because none of the backups were working.
Trading is possible, but not the most profitable
/u/greenearplugs has been very vocal lately about how he believes that it is impossible to beat the averages. I agree with him when he says that daytrading is not a better strategy than buy-and-hold. But that is not the same as saying that you can't make money if you sit in front of your computer all day.
This Sunday was a perfect example of a time when you could have made easy money. Bitcoins are so volatile that a good plan is to buy every time there is a huge crash, and to sell immediately thereafter, because there is almost always a recovery within a few hours. You can make money this way - I tried this on paper.
But when you look at the results, you notice that there are a lot of trades that look like: huge crash at $339, buy, then sell at $450. Huge crash at $630, buy, sell at $660, and so on. It's easy to make money this way, but you can make a lot more money if you didn't sell at all, and you don't get killed by fees that way.
Trading on the bubble cycle is the only more profitable strategy than buy and hold
I propose that trading on the bubble cycle is the only strategy more profitable than simple buy and hold. Bubbles are so predictable and so dramatic that you don't have to sell at the top and buy at the bottom to make money. You don't have to sit in front of a screen all day; just buy and sell at 6 and 2 month intervals.
As I discussed with /u/moral_agent yesterday, people should be looking at what the next bottom is, 7 months out from now, not what the next top is going to be. Everyone knows that if bitcoins rise to $5k this summer it will be a bubble, not a "new paradigm." If you are conservative and sell at $2.5k, and then put all that money back in whenever the news looks to be the absolute worst the next time around, you'll probably still be ahead.
If you look at the charts, you'll notice that you could even have made money by panic selling during the initial bubble crash, and then coming back six months later - so you don't even have to be worried whether this actually is the "new paradigm" or not. The biggest concernto be worried about is not buying in much above the all-time high of the previous cycle.
The 1MB transaction limit is about freedom
There are some users who take the position that not only does nothing need to be done about the 1MB transaction limit, but that even if something could be done, no action should be taken. They are wrong.
This limit is important because it restricts the ability of people to send bitcoins without dependence on others. It is possible that services like Coinbase will provide free transactions. But in jurisdictions like China, where bitcoin services are likely to be permanently banned, people will need to be able to install the bitcoin-qt client directly and sign their own transactions. If fees rise too high, then it will become impossible for people in dictatorships like China to work around their governments' regulations.
Centralization is one solution to this problem, but centralization significantly degrades one of the core promises of bitcoins - to allow anyone to send money to anyone without relying on the government.
Bubbles aren't that complicated
People are now starting to talk about bubbles as if they have five or seven phases. To me, it seems that this is just curve-fitting taken to the extreme. If one looks hard enough, (s)he can find patterns in just about any data.
The three-phase bubble cycle (down, steady, up) is a much more simple and accurate model than trying to separate bubbles into seven phases. Not only that, but the first few bubbles don't fit the seven-phase cycle, making this model have little support.
Other
Welcome
Welcome! Yesterday, there was quite a discussion in /r/bitcoinmarkets. As I told /u/Kibubik, after the discussion erupted it became untenable for me to continue posting these thoughts there, because no matter what was said, someone would say it was off-topic and another huge discussion would follow.
But that's fine. People who want to visit /r/bitcoinmarkets can continue to do so, and those who want to read these posts can come here (or do both). I'll still read all the bitcoin forums.
If you want to post your thoughts, then feel free to create a new topic. Feel free to talk about anything about cryptocurrencies; it doesn't have to do with markets. Make sure your post has some content and isn't just a link with a direction to "discuss." As long as most of your post is about cryptocurrencies, you can also add comments on other stuff, too. Consider this a multi-person blog; we'll see if anyone is interested in posting.
It is unbelievably difficult to retain data (and wallets)
Retaining data for a long time is unbelievably difficult. Over the past four years, I have had two instances where costly catastrophes have ensued. In the first case, I was restoring a large amount of data from a backup when the backup array also failed, so I had to pay $1500 for data recovery (but all the data was restored). In the second case, despite using a RAID-6 with every piece of data backed to six external drives, the array got corrupted and one of the external drives had unrecoverable read errors on it. I was again able to restore all the data because the only corrupted files were one CD I had ripped, which was easily replaceable. But it took almost 2 months each time before the system was back.
If you are trying to come up with a system to store a bitcoin wallet, security is important, but actually retaining the wallet is even more important. People may not know that the average hard drive lasts only a little longer than three years, but we'll round down to 3 for easy math. If you make three copies onto three independent disks made by different manufacturers at the same time, and you don't constantly verify that the disks work, then the odds of losing all your money is as high as 1/8!
To make things worse, there are things called unrecoverable read errors, which can occur when a disk still spins but only the sector where your wallet is stored can't be read. These errors are so common that they occur every 10 terabytes of writes or so, which means that a 2TB disk only needs to be overwritten five times before you are more likely than not to have these errors in them.
Making one backup is not enough. If you are trying to secure a wallet for cold storage, encrypt it with a long password, and then store it on five disks.
By the way, as I said in a post yesterday, /u/evoorhees, the guy recently fined by the SEC, had three backups of his wallet at one point, but he still lost 10,000 bitcoins ($6.5m) because none of the backups were working.
Trading is possible, but not the most profitable
/u/greenearplugs has been very vocal lately about how he believes that it is impossible to beat the averages. I agree with him when he says that daytrading is not a better strategy than buy-and-hold. But that is not the same as saying that you can't make money if you sit in front of your computer all day.
This Sunday was a perfect example of a time when you could have made easy money. Bitcoins are so volatile that a good plan is to buy every time there is a huge crash, and to sell immediately thereafter, because there is almost always a recovery within a few hours. You can make money this way - I tried this on paper.
But when you look at the results, you notice that there are a lot of trades that look like: huge crash at $339, buy, then sell at $450. Huge crash at $630, buy, sell at $660, and so on. It's easy to make money this way, but you can make a lot more money if you didn't sell at all, and you don't get killed by fees that way.
Trading on the bubble cycle is the only more profitable strategy than buy and hold
I propose that trading on the bubble cycle is the only strategy more profitable than simple buy and hold. Bubbles are so predictable and so dramatic that you don't have to sell at the top and buy at the bottom to make money. You don't have to sit in front of a screen all day; just buy and sell at 6 and 2 month intervals.
As I discussed with /u/moral_agent yesterday, people should be looking at what the next bottom is, 7 months out from now, not what the next top is going to be. Everyone knows that if bitcoins rise to $5k this summer it will be a bubble, not a "new paradigm." If you are conservative and sell at $2.5k, and then put all that money back in whenever the news looks to be the absolute worst the next time around, you'll probably still be ahead.
If you look at the charts, you'll notice that you could even have made money by panic selling during the initial bubble crash, and then coming back six months later - so you don't even have to be worried whether this actually is the "new paradigm" or not. The biggest concernto be worried about is not buying in much above the all-time high of the previous cycle.
The 1MB transaction limit is about freedom
There are some users who take the position that not only does nothing need to be done about the 1MB transaction limit, but that even if something could be done, no action should be taken. They are wrong.
This limit is important because it restricts the ability of people to send bitcoins without dependence on others. It is possible that services like Coinbase will provide free transactions. But in jurisdictions like China, where bitcoin services are likely to be permanently banned, people will need to be able to install the bitcoin-qt client directly and sign their own transactions. If fees rise too high, then it will become impossible for people in dictatorships like China to work around their governments' regulations.
Centralization is one solution to this problem, but centralization significantly degrades one of the core promises of bitcoins - to allow anyone to send money to anyone without relying on the government.
Bubbles aren't that complicated
People are now starting to talk about bubbles as if they have five or seven phases. To me, it seems that this is just curve-fitting taken to the extreme. If one looks hard enough, (s)he can find patterns in just about any data.
The three-phase bubble cycle (down, steady, up) is a much more simple and accurate model than trying to separate bubbles into seven phases. Not only that, but the first few bubbles don't fit the seven-phase cycle, making this model have little support.
Other
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