Was very eloquently explained by NNT in one of his YouTube videos[0].The price of a security is the value of all present and future cash flows discounted to the present moment. Since the cash flow for crypto is zero, the present value is zero by definition, in mathematical terms.
But what about all of the real money that low-information retail 'investors' put into the crypto ecosystem as a result of the social media hype? Im not being facetious, isn't there potential future cash flow in the scam?
Just pointing out the flaw in NNT's reasoning. Obviously, USD (and EUR, BTC, CAD, etc.) has value despite lacking a cash flow. Essentially, it's worth something because people believe it's worth something.
> Obviously, USD (and EUR, BTC, CAD, etc.) has value despite lacking a cash flow. Essentially, it's worth something because people believe it's worth something.
Don't know about that but it seems an accepted fact, even here on HN, that it's worth two digits less than 18 months ago (due to inflation).
Btc is a more akin to a commodity like gold, which also has no cash flow. It can’t be valued by dcf’ing cash flows, hence methods like stock to flow for valuation or comps.
Pos assets like Eth also have a running yield so you can discount cashflows on those.
Gold and other precious metals are largely maintenance free, do not degrade over an historical horizon, and do not require maintenance to refresh their physical properties over time.
Cryptocurrencies require a sustained amount of interest in them.
This is something of a categorical error, and I'm surprised NNT would employ such sophistry.
Plenty of things have value that are not securities or contracts or bonds subject to net present value of discounted future cash flows. Gold, precious art or houses are all valuable but have zero (or negative) value under discounted cash flow analysis.
The proper way to interpret discounted future cash flow analysis of crypto is to say that crypto isn't a security. That isn't even necessarily true, since something like an Ethereum token could in fact have future cash flows and be security-like, but it is true for Bitcoin.
The problem is that the utility of crypto in the real economy is quite low, so its price is driven almost entirely by speculation, with some niche uses like being a relatively stable medium of exchange in failed state-economies like Venezuela. If you wouldn't have a reason in a functioning economy to buy anything beyond drugs with Bitcoin (and the public nature of its ledger makes even that use case suspect), then it won't have stable prices. That's a vicious cycle undermining BTC.
If Ethereum had one or two killer apps, I have a feeling Bitcoin would become both price stable and much more valuable. But that's a big "if." Crypto kitties, NFTs and weird monkey photos aren't it.
Idk about gold, but I'd argue that both houses and art have discounted cash flows if you decide to rent them out (or maybe avoiding paying rent is a sort of cash flow for your budget)
I don't know anything about art, but houses have positive discounted cashflow - at least, they do in the UK. Old houses tend to be worth more than new ones, and rents are currently going up steeply. Sale prices seem to be falling a bit, recently; but rising house-prices keep governments in power, so I expect the increasing prices to resume soon.
Gold, in the end, is a physical, shiny metal that people find aesthetically appealing and there's a limited amount of it out there. For thousands of years people have desired gold things and valued it.
Sure, people could collectively decide that gold isn't valuable and that certainly happens to some extent as the commodity markets fluctuate, but in general when you get to the bottom of the turtle stack, gold has more fundamental value than most other forms of money.
Gold is backed by the fact that no one can replicate supernovae which are required to manufacture it, so it must be found. Thus it is scarce. It has several industrial uses and is a source of vanity for many humans, which has inherent value, as humans naturally take pride in adorning themselves. Gold has proven itself over millenia, since before prehistory really, to have value on the open markets. In fact, all rocks do. Gold is hardly unique in this matter. Rocks all have value, but some rocks are rarer than others, thus have more value than others. For example, even sand has value despite its ubiquity. Many companies make their entire profit from collecting and selling sand.
So, in sum, gold can be used in the manufacture of durable, long-lasting goods. It's crucial for certain electronics. There's a constant demand for it for turning into goods. Other rocks can be used for other things, like ground covering, structural support, etc. Bitcoin can be used for?... ? ... ? ... ? nothing
But even without them its value would not go to zero; ignoring the purely aesthetic uses (jewelry, decorations, etc.,) elemental gold has a wide variety of uses including corrosion-resistant electrical contacts, dental fillings, etc.; the James Webb Space Telescope mirrors have a gold coating as it is a good reflector of infrared radiation.
Copper. If the world decided it didn't like gold for jewelry and storing wealth, it would displace copper in electrical applications where you can take a slight conductivity hit in exchange for it not corroding. It's a huge price difference, but it's something. Bitcoin has no floor.
> The fact that so many people bought into the hype will continue to amaze me for the rest of my life.
I'm on about year 10 of this amazement. Even tulip mania only lasted 1-2 years. Crypto keeps inventing new snake oil and is continually able to sell it. It's so odd to me.
I'm also amazed that this train is still rolling down the track. I mean, XMR is good for darkmarket transactions; apart from that, and some niche Ethereum games, I find it puzzling. I mean, I don't understand why sane people speculate on an "asset" with zero intrinsic value. Is it because it's easier to acquire Bitcoin than tulip bulbs?
that's exactly why. its easier so easier for joe shmoe on the street to invest thereby propping it up. joe shmoe had no ability to invest in tulips. There weren't superbowl ads asking people to invest in tulips
Me too but I know several financially smart people who acknowledged in private it was a giant bubble of thin air, but they had the trader mentality that it doesn't matter what the real price should be, as long as there is money to be made trading it. As long as they didn't get caught in the end, I don't think they were wrong.
By the way, it's not just a lot of second hand GPUs that will come back to the market. A lot of quants too!
Back when it actually worked as a decentralised global ledger capable of allowing transactions without trusting a central party it was revolutionary. Then it got hijacked to discard that property and it is indeed of zero value. There are still plenty of other cryptos that actually work, but the market is so stupid, scammy and manipulated, that this hardly matters and btc acts as a giant sink of value sucking all of the air out of the room and suffocating anything else that could actually work.
I think until it's dead we're not going to see any change from that.
Cryptocurrencies like Ether are backed by the network's virtual machine. You have to pay Ether to process a transaction on the Ethereum virtual machine and as transactions can do arbitrary computations, Ether is useful for things other than transferring Ether.
Cryptocurrencies like Bitcoin don't have that feature, but that just makes them more like fiat currencies. You could argue that fiat currencies are backed by the force the state is willing to use to get its population to pay taxes in the currency, but that's not a stable backing, as the state could decide to accept another currency at any time. Some states do allow for tax payments in other currencies, which means that some fiat currencies have no backing by that mechanism. Some people are also forced to pay in Bitcoin, for example to ransomware, which should have a similar effect in forcing people to use the currency.
Ultimately, I don't see why a currency would need backing. There is nothing wrong with a currency gaining value purely from its value and utility as a currency. Many other valuable things such as precious metals and art gain a large part of its value in the same way.
> There is nothing wrong with a currency gaining value purely from its value and utility as a currency.
I mean, the problem with that is twofold:
1. If it has value as a currency then it gaining value incentivizes hoarding of the currency. If it is going to be worth more tomorrow, why spend it? In that case it has failed as a currency since the economy cannot grow without economic activity; specifically currency movement
2. If it only has value because people perceive it to have value (specifically, there is no need to use this currency over any other) then it is all based on faith. At that point a rapid devaluation can be triggered by any number of market actions -- all it takes is a little wavering for a selloff to start and the snowball starts rolling down the hill. This is the reason that crypto cultures can be so toxic -- if you start to question any of it (rock the boat) it is an existential crisis and you get the appropriate response, so no one is willing to question the underlying economics for fear of social repercussions
Any kind of collateral is useless without a mechanism to guard it and enforce ownership. Bitcoin needs to acquire nukes. In a decentralized way. I know, i know
But what does this statement actually mean? What is "underlying collateral"? The US dollar doesn't have any physical assets backing it, but I'm pretty sure most lenders would lend against it.
The US dollar can be traded on very safe markets for any number of commodities fairly trivially. What can I purchase with bitcoin other than USD or other currency? Even the eshops that accept bitcoin only do so to immediately convert into fiat. Prices are still denominated in USD.
It doesn't have underlying physical assets, it does have the backing of large stable government. This is largely the same reason why the USD is more stable than, for example, the Kenyan Shilling.
It also has a de-facto underlying physical asset, since the Kingdom of Saudi Arabia will only sell oil to you in USD since ~1974 (based on the backroom deals between US & Saudis).
That's why our system is called the Petrodollar system.
Define "stable", because the USA has been anything but stable last few years. The currency itself is being quite volatible as well due to the inflaction going on right now.
Also, the fact that they can just print money of out thin air (which caused the inflaction) should scare people way more than it did.
Not that I like the petrodollar system but please, go ahead suggesting a better and more stable system, I'm sure if you find it you'll get plenty of support and boatloads of literal money.
> The fact that they can just print money of out thin air (which caused the inflation) should scare people way more than it did.
Yes, crypto bros are scared, that's why they invest in crypto. However, every exporter out there want to swap his/her physical assets with US dollars. That's the difference between the crypto crowd and others.
The collateral is "it will kill you dead". I call this the Blood Standard.
How many people can your organization / nation murder in 90 minutes? By comparing the numbers, we get a rough idea of the baseline value for each nation's currency.
It's one of the things that make nuclear weapons such a good deal; when you can kill a number of people equal to all of your neighbors, you become invasion-proof.
The US dollar has the US Fed, US government, US military, US industry, and US financial markets backing it. It's also the de facto reserve currency for many countries around the world. Do you know of any other currency, digital or not, having more physical assets backing it?
depends on who is the counterparty. US treasury doesn't offer collateral, neither do student loans. Also, the sentence doesn't parse. Credit against assets by definition collateralized by the assets. You also have credit against nothing.
As long as drugs stay illegal and some countries have worse money swings than the crypto does I can't see it being zero. It doesn't need to be high for either of those things, of course, and a stableish low price works fine for both. And you don't need a million random shit coins for either of those use cases so those would be worth 0.
> As long as drugs stay illegal and some countries have worse money swings than the crypto does
These are both problems that hopefully we will get better at solving. I think even if neither of those things quite goes to zero, there is a minimum combined level of both needed to keep the ecosystem running and secure. There needs to be enough economic activity passing through the system to pay enough miners to keep it running.
I also think that if the main usage of crytpocurrencies becomes avoiding unstable currencies, that will itself destablize cryptocurrency prices.
It needs enough diversity of users to be resilient against a 51% attack. If you don't have that, the value is 0. (You lose the benefit of the distributed ledger and may as well be relying on a central party's database at that point.)
Resilience against a 51% attack has nothing to do with a "diversity of users". It simply has to do with the security budget (block rewards and block space fees) being high enough to incentivize honest consensus over reorg attacks.
the "honest consensus" is the "diversity of users"; users doing the validation at least. Your rewards can be as high as you'd like, but if one party is in control of most of the validation, you're screwed. It's not the number of nodes or what you pay them or anything like that that matters. It's the actual people/entities behind them that matter.
This isn't true. One party being in control of most of the validation can't do much beyond performing a DoS attack, but that's not going to make them any money.
So what you actually need is a party who controls most of the validation and is willing to go against their own economic self interests in order to cause damage, that's a much bigger ask.
This is a completely solved problem, Monero is primarily powered by hundreds if not thousands of separate botnets. Mining will always be profitable because electricity costs are paid by someone else.
"If you owned all of the Bitcoin in the world and you offered it to me for
$25, I wouldn’t take it. Because what would I do with it? I’ll have to sell it back to you one way or another. It isn’t going to do anything."
Dollar bills are backed by the full faith and credit by the US Government. As long as the US Government decides those have value (IE: forces you to pay taxes denominated in bills), then anyone interacting with the government will value those bills.
As a centralized currency, the power flows from the Government. If the US Government loses power, of course dollar bills lose value. But generally speaking, the trust in the dollar is one-and-the-same as trust in the US Government.
There are only a finite number ever. The amount of Doge is limited by time. Unlike fiat, it is disinflationary (yearly supply rate goes down toward 0).
DOGE is -53% over the last year, which means its _actually inflated_ by 212% vs the Dollar (or really like 233% in real terms, after accounting for the 9%+ inflation of USD).
DOGE inflating by 233% in a single year is horrific policy.
The parent comment was obviously regarding total/circulating number of dogecoins. It erroneously made a hyperbolic claim there are infinite dogecoins. It is a common misconception even among cryptocurrency fans that the number of dogecoins increases at a high rate, because it doesn't have a hard max total supply number like bitcoin's 21 million. In a cryptocurrency context, inflation most often refers to the rate of newly printed units because the price volatility is just from market movements and has often little to do with the monetary policy
I'm not sure why you're trying to change the subject to money printing. But thanks for proving my point. You're right that dogecoins have value (for better or worse) and that value definitely doesn't come from any government.
You've changed the subject again--I didn't mention inflation. Are you a bot or are you just parroting random talking points without reading?
Since you brought it up, YoY returns are not really relevant for a long-term investor. If you're speculating/gambling on short-term volatility, then USD/VTSAX/BTC have done poorly--but I'm not much of a speculator. I'm very happy with my 10-year returns.
As long as you keep wildly changing the subject (this applies to your next reply as well), I'll assume you have no counterpoints and agree with everything I say. I'm glad we can agree!
How come people's only definition of value of currency is that it can pay taxes?
Everything else's value is determined by the market and not the government, so how does Bitcoin have trouble finding value if the market thinks it has its utility, which is a storage of value without any third party intervention which is its unique capability that people can't seem to figure out after 10+ years of its existence.
Seashells and Rai stones have been used as stores of value without any third party intervention.
The only thing a currency needs is widespread community coordination. US Government forces this through taxes and bonds/lending, so our system is largely built on top of the dollar and a centralized bank.
Other systems can be made however you wish. But solving the coordination problem is the fundamental issue.
You could pay your taxes. And all the others who need to pay their taxes, would need to trade valuable things to you for the dollars they need to pay their taxes. Also, almost all world trade is ultimately settled in dollars. And so, if you want to buy oil/food/fertilizer/machine tools/etc. on the world market, you need those dollar bills again.
It’s not worthless. The United States, which happens to be the largest economy in the world, requires taxes to be paid in dollars, regardless of how you’ve settled your transaction. If you and I trade a car for 40,000 chocolate bars, the IRS demands we figure out the dollar cost and pay them their due.
If I owned all the dollars, the US would simply decide to start demanding taxes in something else because it could not use those dollars for anything. If it refused to switch to another currency, it would not be able to pay the people who would force me to pay taxes, so there would be no reason for me to pay taxes.
But that would not make any sense if one person held all the dollars. The creditors would have no use for dollars, and the US would need to switch to another currency in order to be able to pay its employees. They could print however many dollars they wanted, and could pay back the debt that way, but that would not solve the problem of the dollar no longer being useful as a currency. The government's employees would have no reason to accept the dollar because nobody else would accept it. The dollar is primarily valuable because it's used as a currency. If it stopped being used as a currency, its value would be zero. This is no different from Bitcoin.
The United States can print more dollars. Hell, they can declare all your dollars not real and throw you in jail. Every dollar is owned by the US Government. You’re just borrowing them.
If you had all the dollars and people still had to pay their taxes in dollars. You would be able to get a LOT of stuff for those dollars because everyone would need them.
The actual concern with this argument is that "You can only pay your taxes in US dollars" is a backing that is contingent on the policy of the US Government. The strength of that backing depends on your view about the likelihood that such a policy will stay in place. (Edit: granted, if all USD were owned by a single entity, the likelihood that such a policy would be revoked is much, much higher.)
It does depend on the policy, yes, but note that government backed (local) monopolies exist in other areas too. Like for example with hospitals, or with phone network operators.
If you have all the dollars then you have a monopoly on them. If the government forces people to pay their taxes in dollars you have a government supported monopoly. It stands and falls with the government's support for it, the connected regulations, etc.
> (Edit: granted, if all USD were owned by a single entity, the likelihood that such a policy would be revoked is much, much higher.)
If all of USD were owned by a single entity, the US Government just prints more. They will always have that power. That may cause inflation effects that they would be concerned about in the long term, but they have an immediate reaction lever to increase the monetary supply in such a (weird) hypothetical. (Though the correspondence between monetary supply and long-term inflation has always been much more theoretical "cause-and-effect" rather than showing practical, real world correlation much less "cause-and-effect". Especially this side of the Gold Standard the practical relationship between monetary supply and inflation is incredibly complex, and while you will find many people still presume an inflationary relationship the practical effects have been much weirder. [There are times in recent US history where USD monetary supply was at all time highs and inflation at all time lows.])
(Unless you hypothesizing an even weirder hypothetical where the monetary supply is increased by the US Government just handing the dollars to the single USD dollar holder and hoping that provides incentive to "trickle down" dollars back to everyone, but there's very little anyone can do with the onion of dumb in that weird hypothetical.)
So Bitcoin should be priced according to the size of the El Salvadorian economy. Not all of the economy, but the economy conducted in bitcoin. Bitcoin can't take credit for people using alternative currencies to pay their taxes in El Salvador, or using it to buy groceries, pay rent, etc.
It is only possible to pay taxes with BTC in a few failed states like El Salvador. So that's hardly a positive. And I expect that little experiment will probably be terminated soon after Bukele leaves office.
Hey now, Colorado has started accepting Crypto payments recently. Per the CO Dept of Revenue - "Starting September 1, 2022, the Colorado Department of Revenue (DOR) will now accept Cryptocurrency as an additional form of payment for all state taxpayers. This includes individual income tax, business income tax, sales and use tax, withholding tax, severance tax and excise fuel tax."
The state is not actually accepting cryptocurrency tax payments. Tax liabilities are still denominated in dollars. All that they have done is partner with a third party payment processor which will sell you dollars for cryptocurrency at the current market price (minus fees), and then forward those dollars to the tax authorities.
If I owned all the dollar bills the Fed would add twenty zeros to them by printing a boatload of money, making mine worth a lot less and the new dollars useful.
Then you would hold a weird power over the worlds largest economy? It’s the official medium of exchange. The government could print more money, but you would be able to flood the market at any time, essentially being a second federal reserve. Everyone would depend on you for loans to be able to pay their taxes. Likely the US government would need to deprecate the dollar and move to a new currency, which would have incredible economic shocks. Doesn’t sound at all like owning all the bitcoin.
I get your point, but they are really not the same.
You would have an immediate market for them since dollars are the only legal way to pay your taxes. Since everyone must do this, it creates a kind of Schelling point such that everyone defaults to using dollars for everything else also.
If you produce something of value in return for Bitcoin, you must still acquire dollars to pay your taxes. If you refuse, men with guns will escort you to jail. That is what ultimately backs Buffet’s preferred currency.
Buffett began his answer by saying that if all the attendees in the conference owned “all the farmland in the United States” or “all the apartments in the country” and they offered him a 1% stake for $25 billion, he would write them a check on the spot. (then went on to say that about bitcoin)
Own assets people need. It’s a pretty simple investing philosophy.
Crypto doesn’t produce anything, nor can you buy anything with it you can’t buy with fiat except perhaps drugs online. What’s the value of magic tokens whose speciality is avoiding monetary controls for illicit goods? No one needs crypto (macro scale), so why would you buy it? Because you hope a greater fool comes along.
Yeah he doesn't do this buy low sell high thing. He is not a trader. He believes in owning things that generate value. He wouldn't take half of all btc for $25 either
Buffett is pretty consistent in living modestly in all aspects. He lived in the same house in Omaha from 1958 - 2022, which asked $877,000, which a lot less that a lot of Zen monasteries, if for no other reason than the monasteries house more people. But monasteries have a tendency to be pretty nice: you have to house a bunch of people, and the non-monks tend to donate money over time. Buffett is known for modest living. I think corporate headquarters now employs 10 people (market cap of almost $700 billion). He's pledged to give away all his money by the time he retires, and has already spent quite a few years giving it away, which is why he's down to a net worth of $99 billion.
He's no ascetic: he enjoys a good steak (and tons of Coke) and he had an $11 million vacation house. But fairly modest, especially for someone who has voting control of a $700 billion corporation (which he built from pretty much nothing).
Hmm. something wierd going on. Both of us don't seem to have a previous comment. Perhaps it got deleted or my memory is going poor. Anyway, my earlier point was that US dollars have an intrinsic value in that they keep you in good standing with the US federal and local Govs. You can pay your taxes in US dollars and nothing else. If someone had all the US dollars in the world, then everyone else would need to trade very value things to that person to get those dollars. The value of those dollars would go up a lot in terms of a basket of tradeable assets
Bitcoin is the opposite I think. If someone had all of the bitcoins, then I would expect bitcoin to be worth nothing.
Not quite. With US Dollars, you could pay the US government to not send the MenWithGuns to your house because you failed to pay income tax on "all the dollars in the world" coming in to your possession.
It is a crucial difference.
If you want to say, this isn't really that solid a foundation to build a money system on... hey, I'm right there myself, honestly. The US dollar really is based on "the full faith and credit of the US government", and specifically its ability to project power in order to harass people failing to pay its taxes. Looking out into the world, I'm seeing a negative first derivative on that, and possibly a negative second derivative too. But that is still a cut above the nothing standing behind cryptocurrency. At the present time, based on its behavior, cryptocurrency is a derivative of the US dollar and is dependent on it and the prior low interest rates it had, not a separate entity with its own trust base.
On a long enough time horizon all governments and empires fall. All paper money ultimately becomes worth only the paper it is printed on.
This is where I disagree with the maximalists of specific cryptocurrencies. If utility means anything, better payment networks will emerge as tech advances.
Of course gold solves for both of these issues.
Agree with your other points to a degree. Cryptocurrency is derivative in that it discounts the heavily regulated financial markets. The easy money policies can be viewed as part of that. Part of the value proposition in users choosing voluntary means rather than collaborating with coercive money.
Even for a simple use case like online shopping there is regulatory overhead. Chargebacks, merchant agreements and AML considerations all come into play. Try billing users $1 or 25 cents with PayPal as an example. Most shops won't allow you to buy a pack of chewing gum with a card.
Of course the hypothetical is intrinsically a bit silly, but the "US" in "US Dollar" is not extraneous. Even if you did somehow have All The US Dollars In The World, the "US" still would retain control over the currency, inasmuch as the currency that is the "US Dollar" is defined as being the currency they have control over. Even if you had all of them, they would retain the ability to print them, retain the ability to insist that you pay your income taxes to them, etc.
There have been many fiat currencies in history to look at. It doesn't take long to see that pure fiat currencies really are based on the full faith and credit of the issuing authority. These issuing authorities don't have to be governments; the only thing stopping private parties from issuing currencies is just that governments tend to see that as muscling in on their turf, but it's not otherwise impossible or even particularly difficult. (Getting everyone to accept your currency is what is difficult.) The US dollar is a derivative of the US government. Something that is not a derivative of the US government is something other than a "US Dollar". The US government really couldn't start a new currency because the base case of the currency, what it really is under layers and layers of finances and financial structures and loans and everything else, is "what the US government accepts".
Again, the hypothetical is impossible anyhow, which kind of skews how you think about it, but at its core, at the deepest level, what the US Dollar is is what the US government accepts as payment, and below that, the fact that it is the US Government that will come after you if they are not satisfied with your payment. Anything else that they would accept for the same reason is basically the same thing as a US dollar as a result, and if the US government tried to create "multiple currencies", the financial system would swiftly come to an exchange rate based on precisely how much of the US Government threat can be avoided with each one. That is the base case upon which all the further recursion is based.
And again, I'm not making any more claims beyond "that is what it is"; I'm not saying that's obviously good, or that's obviously stable, or that anyone who questions it is an idiot... this post is simply about understanding what is. How you feel about what is, and what further conclusions you come to about what is, are up to you.
I'm sure he meant this tongue in cheek, but dollars are ultimately backed and propped up by the US government. Sure, no currency is worth anything if it's literally controlled entirely by one person. There are plenty of cryptocurrencies that are pretty much identical to bitcoin but that didn't take off. The only thing that bitcoin has going for it is a shared belief that it's worth something.
On the other hand, the US Dollar is a worth something because of a shared belief that the US government is going to do whatever it takes to make sure it's worth something. Even if I thought that the US government is gonna get overthrown next year, I still need to pay this year's taxes in US dollars, so it derives at least some of its value from there.
To be fair to Buffett, he doesn't care about owning dollars either. Or even gold, which has a damn good track record of being valuable. His assets are pretty much entirely in some form of equity. He likes owning shares of companies that sell some product. Sure, he needs dollars to transact, but it's not like he's holding tons of dollars either.
Warren Buffet got his start with pinball machines, which have no inherent value beyond entertainment. His only option was to sell back the pinball machine either all at once or in pieces at a time through timeshare (quarters for a game).
Entertainment has inherent value in that humans for all of known history and prehistory have engaged in entertainment and expended energy (hence money, whether they knew it or not) to acquire it.
Money has no inherent value other than that which you can buy with it, and so far the biggest value of bitcoin is in being able to buy USD, or other fiat.
Great! So long as people like you exist, bitcoin has value .In fact, in my opinion, the entertainment aspect has been the main driver of bitcoin and other crypto value over the past year. In fact, almost any pump and dump is really fun for all players. It only settles in after you end up bag holding. It's like gambling.. People consistently love to lose money.
So if you view bitcoin as a consumable you are consuming to provide entertainment to you, that's great. I'd personally take a lower cost source of entertainment, but to each his own.
Your enjoyment on bitcoin is likely contingent on mass participation. If you owned all of it, your entertainment-per-BTC would probably be a lot lower.
Pinball machines are fun with or without this. Warren Buffet is saying he wouldn't want all bitcoin (in this hypothetical scenario where it is 100% concentrated under a single owner) because there is no reason for him to believe he could sell it to anyone.
Creating demand for essentially nothing is way harder than creating demand for something that has immediately demonstrable economic value. This is why crypto is so full of scams and pyramid schemes and shady marketing.
Bitcoin is entertaining to some people. It also allows you to lower transaction fees in certain situations, or make an electronic irreversible transaction relatively quickly compared to ACH/wire.
My point is that Buffet seems to understand non-tangible benefits are still valuable, and not only that he is hypocritical in his reasoning that he would have to sell it back to you.
Pinball machines do have inherent value. They are made up of actual physical components that can be used for something unrelated. Granted, that inherent value is much, much lower than any price you'll see them sold for, but it is there.
> Because what would I do with it?... It isn’t going to do anything.
This isn't strictly true. The fundamental utility of crypto assets is to pay for transactions that execute on blockchains. Blockspace is a scarce resource, and running transactions on-chain requires bidding for inclusion in a fee market that's denominated in the native currency of the chain.
This isn't just hypothetical. Currently, more than $2 million worth of Ethereum per day is being paid to the network as "gas" necessary for Ethereum transactions.[1] The blockspace demand comes from a variety of blockchain applications, such as NFT marketplaces, DeFi applications like Uniswap and AAVE, and stablecoin payments such as USDC[2]. (Not to mention simple peer-to-peer Ethereum transfers.)
We can debate a long time about whether blockchain based applications are here to stay or just fads. But there is a compelling case that some users and use cases will value the decentralization, immutability, censorship resistance and credible neutrality that comes with on-chain applications. In that type of decentralized digital economy, native crypto is very useful in the same way that crude oil is very useful to the industrialized economy.
In the same way that someone can also start a new city at any given time. Yet, the price of real estate in Manhattan remains expensive. Blockspace on major pre-existing chains is valuable because 1) the ability to compose with other applications running on that chain, and 2) higher value of native assets increases the security of consensus in PoS networks.
Again, this isn't just hypothetical. Today, users pay an orders of magnitude premium for Ethereum block space compared to other chains. That's because Ethereum has much higher value applications to compose against and better security guarantees around consensus.
This is all in the context of Buffet's quote, where one person owns all of the Bitcoin in the world at the same time.
In that situation, there is no scarce resource that has value. People can create as many new cryptocurrencies as they want. The fact that you happen to own all of the one called Bitcoin is meaningless.
Buffet wants investments, when Bitcoin is meant to be a low-time-preference store of value.
And of course, central planners and standard economists, Buffet's buds, are all high-time-preference and that's why the economy is an instant-gratification consumerist junk hellscape.
You just said it goes to zero after you get to 10 BTC, I assume for OCD reasons that are not going to be common.
I like old stock certificates with pretty designs or interesting histories; there's almost no situation where I wouldn't pay a couple of dollars for one. Being pretty pieces of paper, I imagine they have even more appeal than a number in a distributed database.
So that sets a nice theoretical ceiling for bitcoin's theoretical floor.
Which I why I think a deflationary "currency" like bitcoin is more like stock certificates, or, my favorite comparison, the old stone money used on Easter Island.
There is just this stupid argument that goes, either bitcoin is worth infinity or zero, which clearly isn't true. At some point nerds like us will start to collect it.
Clearly the thing that bitcoin sucks at right now is a currency, the algorithms don't scale in practice. Paradoxically, it was much better as a currency when it was cheap and niche. It seems to have its own roller coaster dynamics baked in, and the only way to stop is for collectively everyone to get off, and what's the fun in that?
On the Ethereum side, the cryptocurrency is used as an incentive for nodes to operate the global EVM (Ethereum Virtual Machine), which processes smart contract transactions. So one could argue that as long as the transactions have at least some value to some application, the cryptocurrency will also have non-zero value.
>On the Ethereum side, the cryptocurrency is used as an incentive for nodes to operate the global EVM (Ethereum Virtual Machine), which processes smart contract transactions.
You don't get paid for running a node unless you're also staking.
The constant combining of altcoins and bitcoin is not helpful. There's a use case that is 'money' in which the value of the object used as money is always deeply disconnected from the underlying asset value (i.e. we never trade factories and cars as money. We still don't even trade stocks as money). Bitcoin is attacking that use case head on. It has features like scarcity, no ability to stop a transaction, etc. as features over other forms of money.
Then there's a huge list of altcoins promising things that are different, are not actually different or helpful, and are really just still targeting being a money like bitcoin or the dollar except the founder of the new currency wants to be the one that centrally controls it. Thus 'crypto' is not a helpful space, but bitcoin could be.
In what way? There's a limited number of bitcoin (I get there's unlimited altcoins, but they're easy to distinguish). I've never heard of anyone being able to censor a transaction on the network (hard to imagine how you can unless you can cut off internet access). I'm making an honest try to understand how it could fail either of those, but I don't see it and need to be shown a bit more directly what you're claiming here.
That they simply aren’t features. Deflation is really really bad and I like being able to stop a transaction if there’s a mistake or an issue. Those are features of normal currency that Bitcoin lacks.
The problem with Bitcoin is that the current economics of the network are long-term unsustainable. The current incentive for miners to secure consensus are block rewards. But block rewards halve every four years (which is how Bitcoin enables the hardcopy of 21 million BTC).
That means that over the long-term the incentive for honest consensus tends towards zero. By 2032, the cost of 51% attacking the network for one day will be less than 0.1% of the outstanding market cap. The long-term theoretical solution is to replace block rewards with transaction fees, however because Bitcoin is not a Turing complete smart contract platform the demand for block space is essentially a rounding error.
Block rewards get replaced with fees. Part of the 'blocksize wars' was the decision to not just increase block sizes or (or course) increase issuance of bitcoin but to be honest and recognize that there will be constraints on what's in the core chain and it's going to cost money to get stuff in the core chain. There are fees now and eventually fees will replace inflation. But it's going to be hard to 51% attack it because there will be still people mining chasing those fees.
> the founder of the new currency wants to be the one that centrally controls it
By its choice of emission, Bitcoin ensured a concentration of wealth on early miners including Satoshi.
Some founders, on the contrary, want no-one to be able to control their new currency, by making the emission purely linear, thus diluting any early adopter.
There was no pre-mining in Bitcoin. There were early adopters, but I think we're all early adopters still at this stage. Really, it might not be CPU mine-able and $1/coin but it's still nowhere near final value if it managed to actually survive and win dominance over fiat. Clearly no one centrally controls it. Satoshi is gone and his money never seems to move.
The final price will only go to zero if someone finds an unpatchable exploit that allows infinite minting of coins. Otherwise, there will probably always be some nonzero epsilon of novelty value in owning one.
(Some might argue we are already at that stage and the epsilon just happens to be absurdly large at the moment).
I only think it has reached its mass adoption when people realize its usage as store of value that is decoupled from any other third party influence instead of as a risk asset that is linked to Nasdaq.
Isn’t crypto basically a collectible? People buy it in the hope that somebody in the future will pay more for it, but by itself it is pretty much useless. To me it seems no different from buying baseball cards. And just like saying the final value of those baseball cards may be zero, the final value of crypto may be zero, but I doubt it will have anything to do with collateral as baseball cards have no collateral either.
It's similar except you or the manufacturer can't cheat to duplicate a card or the manufacturer can't suddenly produce 10x more cards because the cards sell well. So, inherently they have different purpose.
It's not though. Some cryptocurrencies are still perfectly valid money laundering devices, and that means they carry transient but quite persistent value.
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[0] https://youtu.be/XeG0FzPxSh4
Don't know about that but it seems an accepted fact, even here on HN, that it's worth two digits less than 18 months ago (due to inflation).
Kinda hurts.
Pos assets like Eth also have a running yield so you can discount cashflows on those.
Plenty of things have value that are not securities or contracts or bonds subject to net present value of discounted future cash flows. Gold, precious art or houses are all valuable but have zero (or negative) value under discounted cash flow analysis.
The proper way to interpret discounted future cash flow analysis of crypto is to say that crypto isn't a security. That isn't even necessarily true, since something like an Ethereum token could in fact have future cash flows and be security-like, but it is true for Bitcoin.
The problem is that the utility of crypto in the real economy is quite low, so its price is driven almost entirely by speculation, with some niche uses like being a relatively stable medium of exchange in failed state-economies like Venezuela. If you wouldn't have a reason in a functioning economy to buy anything beyond drugs with Bitcoin (and the public nature of its ledger makes even that use case suspect), then it won't have stable prices. That's a vicious cycle undermining BTC.
If Ethereum had one or two killer apps, I have a feeling Bitcoin would become both price stable and much more valuable. But that's a big "if." Crypto kitties, NFTs and weird monkey photos aren't it.
The value becomes clear when you think about the amount of resources spent on that problem in the traditional financial markets.
The fact that so many people bought into the hype will continue to amaze me for the rest of my life.
Sure, people could collectively decide that gold isn't valuable and that certainly happens to some extent as the commodity markets fluctuate, but in general when you get to the bottom of the turtle stack, gold has more fundamental value than most other forms of money.
So, in sum, gold can be used in the manufacture of durable, long-lasting goods. It's crucial for certain electronics. There's a constant demand for it for turning into goods. Other rocks can be used for other things, like ground covering, structural support, etc. Bitcoin can be used for?... ? ... ? ... ? nothing
But even without them its value would not go to zero; ignoring the purely aesthetic uses (jewelry, decorations, etc.,) elemental gold has a wide variety of uses including corrosion-resistant electrical contacts, dental fillings, etc.; the James Webb Space Telescope mirrors have a gold coating as it is a good reflector of infrared radiation.
It's not just gold bugs: central banks worldwide are stockpiling on gold at record levels lately.
https://www.reuters.com/markets/commodities/record-central-b...
I'm on about year 10 of this amazement. Even tulip mania only lasted 1-2 years. Crypto keeps inventing new snake oil and is continually able to sell it. It's so odd to me.
By the way, it's not just a lot of second hand GPUs that will come back to the market. A lot of quants too!
Just morally bankrupt.
Edit: I obviously mean in the developed world.
I think until it's dead we're not going to see any change from that.
Cryptocurrencies like Bitcoin don't have that feature, but that just makes them more like fiat currencies. You could argue that fiat currencies are backed by the force the state is willing to use to get its population to pay taxes in the currency, but that's not a stable backing, as the state could decide to accept another currency at any time. Some states do allow for tax payments in other currencies, which means that some fiat currencies have no backing by that mechanism. Some people are also forced to pay in Bitcoin, for example to ransomware, which should have a similar effect in forcing people to use the currency.
Ultimately, I don't see why a currency would need backing. There is nothing wrong with a currency gaining value purely from its value and utility as a currency. Many other valuable things such as precious metals and art gain a large part of its value in the same way.
I mean, the problem with that is twofold:
1. If it has value as a currency then it gaining value incentivizes hoarding of the currency. If it is going to be worth more tomorrow, why spend it? In that case it has failed as a currency since the economy cannot grow without economic activity; specifically currency movement
2. If it only has value because people perceive it to have value (specifically, there is no need to use this currency over any other) then it is all based on faith. At that point a rapid devaluation can be triggered by any number of market actions -- all it takes is a little wavering for a selloff to start and the snowball starts rolling down the hill. This is the reason that crypto cultures can be so toxic -- if you start to question any of it (rock the boat) it is an existential crisis and you get the appropriate response, so no one is willing to question the underlying economics for fear of social repercussions
You may get amazed as many times you need before learning why people find value in it.
I love this quote. This is the reason I refuse to get involved in crypto.
But what does this statement actually mean? What is "underlying collateral"? The US dollar doesn't have any physical assets backing it, but I'm pretty sure most lenders would lend against it.
That's why our system is called the Petrodollar system.
Define "stable", because the USA has been anything but stable last few years. The currency itself is being quite volatible as well due to the inflaction going on right now.
Also, the fact that they can just print money of out thin air (which caused the inflaction) should scare people way more than it did.
Yes, crypto bros are scared, that's why they invest in crypto. However, every exporter out there want to swap his/her physical assets with US dollars. That's the difference between the crypto crowd and others.
How many people can your organization / nation murder in 90 minutes? By comparing the numbers, we get a rough idea of the baseline value for each nation's currency.
It's one of the things that make nuclear weapons such a good deal; when you can kill a number of people equal to all of your neighbors, you become invasion-proof.
Since we're grammar-sniping, that second sentence doesn't parse either.
These are both problems that hopefully we will get better at solving. I think even if neither of those things quite goes to zero, there is a minimum combined level of both needed to keep the ecosystem running and secure. There needs to be enough economic activity passing through the system to pay enough miners to keep it running.
I also think that if the main usage of crytpocurrencies becomes avoiding unstable currencies, that will itself destablize cryptocurrency prices.
So what you actually need is a party who controls most of the validation and is willing to go against their own economic self interests in order to cause damage, that's a much bigger ask.
Warren Buffet
As a centralized currency, the power flows from the Government. If the US Government loses power, of course dollar bills lose value. But generally speaking, the trust in the dollar is one-and-the-same as trust in the US Government.
DOGE is -53% over the last year, which means its _actually inflated_ by 212% vs the Dollar (or really like 233% in real terms, after accounting for the 9%+ inflation of USD).
DOGE inflating by 233% in a single year is horrific policy.
As far as things with inflation, we should be discussing why Cryptocoins are so terrible at it.
Since you brought it up, YoY returns are not really relevant for a long-term investor. If you're speculating/gambling on short-term volatility, then USD/VTSAX/BTC have done poorly--but I'm not much of a speculator. I'm very happy with my 10-year returns.
As long as you keep wildly changing the subject (this applies to your next reply as well), I'll assume you have no counterpoints and agree with everything I say. I'm glad we can agree!
You literally said this. Honestly, I'm not sure what subject you want to discuss anymore. But you were the one to first bring up inflation.
If you got something to say about my root post, feel free. But you're changing the subject more than I am: https://news.ycombinator.com/item?id=33789831
Everything else's value is determined by the market and not the government, so how does Bitcoin have trouble finding value if the market thinks it has its utility, which is a storage of value without any third party intervention which is its unique capability that people can't seem to figure out after 10+ years of its existence.
The only thing a currency needs is widespread community coordination. US Government forces this through taxes and bonds/lending, so our system is largely built on top of the dollar and a centralized bank.
Other systems can be made however you wish. But solving the coordination problem is the fundamental issue.
You can't pay taxes with worthless money.
The actual concern with this argument is that "You can only pay your taxes in US dollars" is a backing that is contingent on the policy of the US Government. The strength of that backing depends on your view about the likelihood that such a policy will stay in place. (Edit: granted, if all USD were owned by a single entity, the likelihood that such a policy would be revoked is much, much higher.)
If all of USD were owned by a single entity, the US Government just prints more. They will always have that power. That may cause inflation effects that they would be concerned about in the long term, but they have an immediate reaction lever to increase the monetary supply in such a (weird) hypothetical. (Though the correspondence between monetary supply and long-term inflation has always been much more theoretical "cause-and-effect" rather than showing practical, real world correlation much less "cause-and-effect". Especially this side of the Gold Standard the practical relationship between monetary supply and inflation is incredibly complex, and while you will find many people still presume an inflationary relationship the practical effects have been much weirder. [There are times in recent US history where USD monetary supply was at all time highs and inflation at all time lows.])
(Unless you hypothesizing an even weirder hypothetical where the monetary supply is increased by the US Government just handing the dollars to the single USD dollar holder and hoping that provides incentive to "trickle down" dollars back to everyone, but there's very little anyone can do with the onion of dumb in that weird hypothetical.)
1) You don't need bitcoin to pay taxes in El Salvador. You need dollars to pay taxes in the US.
2) Why would people in El Salvador give you their USD for bitcoin when you can pay taxes there in USD?
I get your point, but they are really not the same.
If you produce something of value in return for Bitcoin, you must still acquire dollars to pay your taxes. If you refuse, men with guns will escort you to jail. That is what ultimately backs Buffet’s preferred currency.
Crypto doesn’t produce anything, nor can you buy anything with it you can’t buy with fiat except perhaps drugs online. What’s the value of magic tokens whose speciality is avoiding monetary controls for illicit goods? No one needs crypto (macro scale), so why would you buy it? Because you hope a greater fool comes along.
It seems the issue was with buying _all_ the bitcoin, since it suggests that nobody wants it anymore, so he wouldn't be able to sell it.
He's no ascetic: he enjoys a good steak (and tons of Coke) and he had an $11 million vacation house. But fairly modest, especially for someone who has voting control of a $700 billion corporation (which he built from pretty much nothing).
The same argument applies.
It is a crucial difference.
If you want to say, this isn't really that solid a foundation to build a money system on... hey, I'm right there myself, honestly. The US dollar really is based on "the full faith and credit of the US government", and specifically its ability to project power in order to harass people failing to pay its taxes. Looking out into the world, I'm seeing a negative first derivative on that, and possibly a negative second derivative too. But that is still a cut above the nothing standing behind cryptocurrency. At the present time, based on its behavior, cryptocurrency is a derivative of the US dollar and is dependent on it and the prior low interest rates it had, not a separate entity with its own trust base.
This is where I disagree with the maximalists of specific cryptocurrencies. If utility means anything, better payment networks will emerge as tech advances.
Of course gold solves for both of these issues.
Agree with your other points to a degree. Cryptocurrency is derivative in that it discounts the heavily regulated financial markets. The easy money policies can be viewed as part of that. Part of the value proposition in users choosing voluntary means rather than collaborating with coercive money.
Even for a simple use case like online shopping there is regulatory overhead. Chargebacks, merchant agreements and AML considerations all come into play. Try billing users $1 or 25 cents with PayPal as an example. Most shops won't allow you to buy a pack of chewing gum with a card.
There have been many fiat currencies in history to look at. It doesn't take long to see that pure fiat currencies really are based on the full faith and credit of the issuing authority. These issuing authorities don't have to be governments; the only thing stopping private parties from issuing currencies is just that governments tend to see that as muscling in on their turf, but it's not otherwise impossible or even particularly difficult. (Getting everyone to accept your currency is what is difficult.) The US dollar is a derivative of the US government. Something that is not a derivative of the US government is something other than a "US Dollar". The US government really couldn't start a new currency because the base case of the currency, what it really is under layers and layers of finances and financial structures and loans and everything else, is "what the US government accepts".
Again, the hypothetical is impossible anyhow, which kind of skews how you think about it, but at its core, at the deepest level, what the US Dollar is is what the US government accepts as payment, and below that, the fact that it is the US Government that will come after you if they are not satisfied with your payment. Anything else that they would accept for the same reason is basically the same thing as a US dollar as a result, and if the US government tried to create "multiple currencies", the financial system would swiftly come to an exchange rate based on precisely how much of the US Government threat can be avoided with each one. That is the base case upon which all the further recursion is based.
And again, I'm not making any more claims beyond "that is what it is"; I'm not saying that's obviously good, or that's obviously stable, or that anyone who questions it is an idiot... this post is simply about understanding what is. How you feel about what is, and what further conclusions you come to about what is, are up to you.
On the other hand, the US Dollar is a worth something because of a shared belief that the US government is going to do whatever it takes to make sure it's worth something. Even if I thought that the US government is gonna get overthrown next year, I still need to pay this year's taxes in US dollars, so it derives at least some of its value from there.
To be fair to Buffett, he doesn't care about owning dollars either. Or even gold, which has a damn good track record of being valuable. His assets are pretty much entirely in some form of equity. He likes owning shares of companies that sell some product. Sure, he needs dollars to transact, but it's not like he's holding tons of dollars either.
Money has no inherent value other than that which you can buy with it, and so far the biggest value of bitcoin is in being able to buy USD, or other fiat.
Pinball can be entertaining without a market for pinball machines, I don't see how bitcoins would be entertaining if there were no market for them.
So if you view bitcoin as a consumable you are consuming to provide entertainment to you, that's great. I'd personally take a lower cost source of entertainment, but to each his own.
Pinball machines are fun with or without this. Warren Buffet is saying he wouldn't want all bitcoin (in this hypothetical scenario where it is 100% concentrated under a single owner) because there is no reason for him to believe he could sell it to anyone.
Creating demand for essentially nothing is way harder than creating demand for something that has immediately demonstrable economic value. This is why crypto is so full of scams and pyramid schemes and shady marketing.
If that sounds stupid that's because it is. It's like saying there "is no inherent value" in a textbook because all it does is teach you calculus.
My point is that Buffet seems to understand non-tangible benefits are still valuable, and not only that he is hypocritical in his reasoning that he would have to sell it back to you.
Parting out the visible bits could be lucrative too, especially if it's a desirable machine like No Good Gofers or Attack from Mars.
Entertainment is an inherent value of something.
This isn't strictly true. The fundamental utility of crypto assets is to pay for transactions that execute on blockchains. Blockspace is a scarce resource, and running transactions on-chain requires bidding for inclusion in a fee market that's denominated in the native currency of the chain.
This isn't just hypothetical. Currently, more than $2 million worth of Ethereum per day is being paid to the network as "gas" necessary for Ethereum transactions.[1] The blockspace demand comes from a variety of blockchain applications, such as NFT marketplaces, DeFi applications like Uniswap and AAVE, and stablecoin payments such as USDC[2]. (Not to mention simple peer-to-peer Ethereum transfers.)
We can debate a long time about whether blockchain based applications are here to stay or just fads. But there is a compelling case that some users and use cases will value the decentralization, immutability, censorship resistance and credible neutrality that comes with on-chain applications. In that type of decentralized digital economy, native crypto is very useful in the same way that crude oil is very useful to the industrialized economy.
[1]https://cryptofees.info [2]https://etherscan.io/gastracker
That might be true within a system. But anyone with the skills can start a new cryptocurrency at any time.
Again, this isn't just hypothetical. Today, users pay an orders of magnitude premium for Ethereum block space compared to other chains. That's because Ethereum has much higher value applications to compose against and better security guarantees around consensus.
In that situation, there is no scarce resource that has value. People can create as many new cryptocurrencies as they want. The fact that you happen to own all of the one called Bitcoin is meaningless.
And of course, central planners and standard economists, Buffet's buds, are all high-time-preference and that's why the economy is an instant-gratification consumerist junk hellscape.
Well, while it is still legal that is.
I like old stock certificates with pretty designs or interesting histories; there's almost no situation where I wouldn't pay a couple of dollars for one. Being pretty pieces of paper, I imagine they have even more appeal than a number in a distributed database.
So that sets a nice theoretical ceiling for bitcoin's theoretical floor.
You don't get paid for running a node unless you're also staking.
Then there's a huge list of altcoins promising things that are different, are not actually different or helpful, and are really just still targeting being a money like bitcoin or the dollar except the founder of the new currency wants to be the one that centrally controls it. Thus 'crypto' is not a helpful space, but bitcoin could be.
Those absolutely are not features of Bitcoin.
That means that over the long-term the incentive for honest consensus tends towards zero. By 2032, the cost of 51% attacking the network for one day will be less than 0.1% of the outstanding market cap. The long-term theoretical solution is to replace block rewards with transaction fees, however because Bitcoin is not a Turing complete smart contract platform the demand for block space is essentially a rounding error.
By its choice of emission, Bitcoin ensured a concentration of wealth on early miners including Satoshi.
Some founders, on the contrary, want no-one to be able to control their new currency, by making the emission purely linear, thus diluting any early adopter.
(Some might argue we are already at that stage and the epsilon just happens to be absurdly large at the moment).