When will the hash rate level out?

What goes up must come down.

Despite the vicissitudes of the bitcoin price during the last 5 years, the hash rate of the network, the measure of brute force levered against the protocol to secure the fidelity of the consensual ledger, has risen by about 15% per month.

Bafflingly so, the hash rate continues to rise. Currently, the network is uncovering north of 50 million gigahashes per second. To put it in more digestible terms, collectively, Bitcoin miners, rather than seeking a needle in a haystack, are applying the equivalent of the power of the world’s 500 most powerful supercomputers to blow-torch a haystack the size of mount everest in their quest to uncover a needle-sized block reward.

There is a relevant term known as the “miner’s fallacy” which posits that a purchase of mining equipment is inferior to an outright purchase of bitcoin if the expected mining potential of a “rig” is less than the quantity of bitcoins which can be obtained for the same price. Nevertheless, the arms race of acquiring mining equipment entices both the adept and the average. In short, most miners will lose money.

However, the miner, although stuck with his rig (if he received it in the first place), now faces a new economic reality. Despite any disparity between buying bitcoin or mining equipment, the decision which determines whether to not to mine boils down to a simple equation: mining revenue vs. electricity cost.

This implies that an individual who spent 1,000 BTC on a 1TH mining outfit, who may only see 50 BTC over the course of his rig’s life, will continue to mine, provided that his monthly electricity cost is less than his BTC earnings (denominated in fiat). 

Only recently has the increased network difficulty risen to a level which pinches this ultimate barrier. Over the last 12 months many individuals have rued their acquisition of mining equipment instead of simply buying the world’s favorite crypto currency, but have continued to mine because it brought in more money than it costed.

It is difficult to call the top, but it will come. At current bitcoin prices we are certainly close. Electricity costs per kilowatt hour trend ever closer to the pooled mining rewards. The author personally knows an individual who plans to shut down a 30-rack of 10 GH mining units in the next 3 months. After all, they are noisy, and hot.

Absent a rise in the price of bitcoin, the attrition of borderline mining rigs will accelerate. Whether this manifests as a gradual decline or an acute one, its effects should be interesting to witness. Although the Bitcoin community has become accustomed to relatively fast transaction confirmations, it should prepare itself for the possibility of a steady march downwards in hashing power. Even though the difficulty will adjust accordingly, it will do so more slowly than it adjusts upwards.

That said, a downward trend in hashing power, although imminent, will probably be temporary. After all, we’re on a trip to the moon.

For Bitcoin to succeed, the money that people use must rot. Coincidentally, it will.

Many people focus on the benefits of Bitcoin to the merchant and the customer as reasons for the ultimate success of the world’s favorite crypto currency.

Technically, it’s true, that by using Bitcoin properly, people can save money on transaction costs whether buying a sofa at Overtock.com or sending money to relatives in Mexico.

But practically, it’s not enough. Over time, a more efficient method of payment should find purchase, and succeed on its own merits, incrementally, but surely. 1% on revenue is a lot of money, particularly for intermediaries such as Amazon who play within the single digit profit percentages. Going from a 4% margin to a 3% margin is a big deal. And yet, somehow we are still uninspired.

The last 5 years has seen an explosion is payment processing innovation. From the handheld convenience of Square to the fee-less email transactions between Bank of America accounts, the world is making it easier and cheaper to send and receive money.

But the payment mechanism of Bitcoin is only half of the equation. The singular advantage that Bitcoin has over its contemporaries is that it uses a new and honest currency.

Regardless of how convenient, or fast, or fee-less, that companies can strive for, they are all at a large disadvantage: the currencies that they use are faulty.

Almost poetically, all of the world’s fiat currencies are already nearly 100% digital. There is little more than simple ledger accounting taking place as people sweat and toil to earn a higher number in their bank account, and equally so as it diminishes with each purchase of a car, or a roll of paper towels.

So as far as payment networks are concerned, Bitcoin faces stiff competition. Most of the infrastructures in place are expensive precisely because they haven’t had any competitive pressure to be inexpensive, but that tide has turned, and the consumer is benefiting from a collective race to the bottom of transaction fees.

The magic of Bitcoin won’t be truly recognized until these currencies start to misbehave. I speak specifically of the US dollar, the Euro, and the Yen. Even if prices remain constant, consumers are being robbed through inflation. Individual productivity has gone up dramatically over the past 50 years, and yet wages struggle to follow suit. Absent inflation, the prices of the common goods we all buy would have gone down: milk, petrol, electricity, copper. To the average consumer, this would have been a good thing.

Inflation hides the benefits of increased productivity and punishes the people who work every day to live, save, and provide for themselves and their families. Unfortunately, and insidiously, it steals from their wallets without taking out any bills.

Bitcoin may fail, but if it doesn’t, it won’t be because of incremental and steady progress due to its low-cost payment network. If Bitcoin succeeds, it will be amidst financial and monetary crises, providing a safe haven for those who have finally woken up and realized that the money they work for is shiny on the outside, but rotten to the core.

Like ashes in the fire, the illusion of debt-based money can disintegrate very quickly.

 

I’ve got a psychological disorder. It’s called hoarding bitcoins, and it’s making you rich.

Bitcoin is always more fun when it’s down in the dumps. When the price languishes for weeks on end and people start to question whether they should bail on the whole crypto-whatsit-mathingy, it is often the best time to take observations.

Prices are determined on the margin. What that means is that the price of something – anything – is relayed to the world in the market place, but that it is only a function of the interplay between buyers and sellers. Precisely, most salable items are not on the market, but they are still subject to the public perception contingent on prices paid for their contemporaries.

People don’t like hoarders. I’ve never understood why. A hoarder is a person you can trust; somebody with self discipline who is willing to sacrifice satisfaction today for greater satisfaction later. Hoarders are careful and risk averse. They don’t often bother people.

Today, price is important, because despite the echolalia of the “price is not important”-ists, price is both a trivial and profound matter. To most, the prices of items are somewhat… disgusting. Most people are consumers. To the entrepreneur, to the manufacturer, to the importer, to the investor, to the venture capitalist, the price of an item is a singular signal, an unobscured view into the substance of a good, a window to opportunity. The price doesn’t lie.

Because the price doesn’t lie, it makes fiddling with prices counterproductive. When central banks set targets for interest rates, they fix the price of the most valuable good on earth: money. With their help, prices can deceive even the most cunning mogul. 

Bitcoin is down in the dumps, relatively speaking. Obviously it depends on your timeframe whether you are looking at a 60% haircut or a 10,000% gain. To anybody who cares about the price, I encourage you to laud the hoarders, the people like me. Since 2011, I have managed to accumulate a portion of coins, lose 20% through terrible trading (for anybody who thinks it is easy, it’s not, and I was genetically engineered to be a trader), invest another 20%, 90% of which will be written off at a loss, and keep the rest.

This brings me to my psychological disorder. The coins I have, I cherish. I respect them. Other than a supremely alluring investment opportunity, few things can wrench my “bitties” from my hand.

Some criticize the “buy and hold” Bitcoiners. After all, they are riding on the backs of the entrepreneurs. They are enjoying a free lunch at others’ expense; they should be reprimanded for it, and it’s a shame. But the critics forget that the bitcoin price is set on the margin. The only reason that the companies being started have any chance of success is because people like me are willing to keep their coins off the market, safely tucked away – in some cases, indefinitely.

I have a psychological disorder. It’s called hoarding bitcoins, and it’s making you rich. That new Ferrari: I can afford it. The 10,000 square foot house on the waterfront: I can afford that too. But instead of buying these things, I’m going to take one for the team. To those of you who do not suffer from the same irregularity, rest easy. I’m making you rich, and you shouldn’t be ashamed about it.

We hoarders are a bit weird, but very determined, and – most importantly – abundant.

We’re still here

When I first discovered Bitcoin in 2011, it changed my life. Some people tend to use that term indiscriminately, but in this case, I mean it. From that point on, I’ve been completely obsessed – another word that people tend to use carelessly.

From 2011 until early 2013, I was busy educating myself, connecting with other Bitcoiners, and investing in some of the early Bitcoin start-ups, most of which are long gone. It wasn’t until April of 2013 that a new, and large, influx of people discovered Bitcoin, thanks to media coverage of the Cyprus crisis. It was at this point that I started my Blog, “Real Virtual Currency (a factual Bitcoin blog),” and posted daily to dispel myths about the ways in which Bitcoin worked. Most of my time was spent addressing concerns over it being a scam, a Ponzi scheme, insecure, “not real,” lacking “intrinsic value,” or some combination thereof.

By mid-2013, to my great delight, it seemed that most people had grasped that Bitcoin was indeed something special, and not just Tulip 2.0 or another Furby fad. Media outlets stopped making blatant errors, so I eased up on the gas and began to post more infrequently. I even changed the tagline of my blog to “Real Virtual Currency (a curious Bitcoin blog)” to allow myself a bit more op-ed flexibility.

This is going to be a short post, because I only really have one point to make. Despite claims by seasoned entrepreneurs that early adopter libertarians and anarcho-capitalists will turn on Bitcoin, or that the next phase for Bitcoin will grow beyond these roots, we’ll still be here. We’ve always been here, and we love that the rest of the world is joining in.

We don’t particularly mind that others want to regulate Bitcoin for it to gain legitimacy. Sure, we contest the legitimacy of the IRS to steal property, but most of us pay our taxes. For many of us, the singular compelling feature of Bitcoin is that it does not compel a single person. It is a beautiful, free, and voluntary system, wherein people can interact with one another peacefully to create value and economic liberty. And it’s really hard to change that.

So please, carry on! We’re happy that our baby has grown up so much, and that it has brought others with a rich and diverse set of values into the fold. I never really thought that Bitcoin would catch on with communists, but I stand corrected. The benefits of Bitcoin are so broad and far-reaching that there seems to be a little bit of everything for everybody. And as for Dogecoin… wow.

I do miss some of the great discussions, though. Maybe I’ll start writing again just to remind new Bitcoiners that the crazies are still here :-)

 

May you live in interesting times… and have the wits to recognize it

If you are 100 or older, you have been around since before modern automobiles were commonplace.

If you are 50 or older, you have been around since before humans walked on the moon.

If you are 30 or older, you have been around longer than video games (most of them anyway).

If you are 20 or older, you have been around longer than the cell phone was popular.

There are grey areas regarding the exact dates when these technologies emerged, yes. But the point remains: We live in interesting times.

What might not occur to everybody, however, is that in geological terms, we are in the midst of a flash bang of technology. Many authors and futurists from Arthur C Clarke to Ray Kurzweil have spoken at length of accelerations in technology – hockey sticks, which are at or near their inflection points, from which further advancements snowball until the world becomes virtually unrecognizable… and recognizably virtual.

And yet, for all the incredible advancements of the past few decades, humans remain oddly… unimpressed. Rather than gawking out the airplane window, marveling at how a steel tube can fly at 600 miles per hour through the sky without killing every passenger on board, we complain about the seat, or the food, or the service.

We are all guilty of this odd complacency. Maybe it’s some sort of prehistoric adaptive trait for humans to quickly take things for granted. Even so, sometimes circumstances give us the chance to catch a glimmer of how magical a world we live in.

For instance, between 2006 and 2008, I was literally off the grid, sailing a 43-foot boat across the seas while writing educational articles for school children. When I returned, broke and malnourished, I was shocked to see people casually accessing full web pages on their phones. Before I left, there were some WAP enabled phones, but nothing like these sleek fancy full-screened buttonless beauties! People had the internet on their phones. People had the internet on their phones! For at least 5 minutes I felt as if I had been teleported into the future. Of course once that feeling wore off, I joined in with the others, complaining about trivialities such as loading time and icon design.

People of earth, your money is getting an upgrade. But there is a risk that you won’t even notice once it has happened. Bitcoin increased in value about 100x last year, and the new normal is now high 3 figures for a single bitcoin. To many, this change doesn’t feel monumental – it feels incremental. Even detractors dismiss the run-up as a faddy mania with no underlying fundamentals.

Perhaps our collective ability to get used to change is accelerating as well, matching the speed of technological advance. Maybe it doesn’t take more, but more faster to get our attention and raise our eyebrows. Recently, I attended the North American Bitcoin Conference in Miami, and had the pleasure of posing the final question to Roger Ver (Bitcoin Jesus) after his presentation. I pointed out that we were somewhat “ahead of schedule” with Bitcoin’s progress compared to what we thought possible only 3 years ago – and from that vantage point, how would he define the “ultimate Bitcoin success?”

He assured me later that his answer was off the cuff, but I found it thoroughly convincing. His response was, to paraphrase: that so many battles are fought due to the simple fact that they can be funded, and so many wars are funded due to the simple fact that the state controls the money supply, and can thereby skim wealth from its citizens to pay for destruction, death, and harm. In a world where people use Bitcoin, the state is limited in the amount it can unilaterally expropriate, and it then follows that on some level, Bitcoin can bring greater peace to humanity.

Believe me, I know how the claim that “Bitcoin can create peace on earth” sounds a bit naive. But that wasn’t what Roger was saying. He was describing some of the superlative potential of Bitcoin, which could come to pass given the proper conditions, and even then, probably incrementally.

However, I get immense satisfaction in knowing that a tool such as Bitcoin really could make a large-scale difference – quickly too. But my question is whether it can outrun the zippy pace of our own indifference. Bitcoin might change the world, in more ways than we can imagine. But will we even notice?

I hope so. But for an interesting experiment, I encourage people to live under a rock for a few years, then come back and tell us what we’re missing. We live in interesting times, so let’s take a minute to stop and look around once in a while. 

Bitcoin compared to the most exotic alternative investments

It’s a currency. It’s not a currency. It’s a digital commodity. It’s a virtual barter token…

People call Bitcoin all sorts of things. But whatever you call it, you’ll agree that holding Bitcoin carries an incredibly unique risk profile, and that you should never put any money into it that you can’t afford to lose – in fact, it’s probably best to just mentally subtract any investment you have in Bitcoin from your portfolio.

Yet, there is a certain class of investment vehicles that specializes in uber-high risk/reward. And whether you are a cautious billionaire looking for some extra return, or a swashbuckling college student with nothing to lose, it’s worth the exercise of comparing Bitcoin to other traditionally unorthodox investments.

Specifically, I would like to cover the following:

Art, Race Horses, Antique Cars, Coins, Stamps, Films, and Spirits

Along the following criteria:

Barrier to entry, Downside Risk, Upside Potential, Costs, and Liquidity

And assign the familiar A-F grading scale.

Art:

Barrier to entry: A. Luckily, all it takes to get started in art investing is buying a cheap work from your upstart painting friend. You know, the one who will be world famous in a few years.

Downside Risk: B. If the painting you purchase is of known provenance, and has documentation to back it up, and you are willing to hold on to it for a decade or more, chances are low that it will depreciate in value. Of course, painters do fall in and out of favor, so you’re still rolling the dice.

Upside Potential: C. For most collectors, the process is a labor of love. Sure, from time to time you hear about a lucky son of a gun who accidentally purchases a Picasso at a garage sale for $5, and sells it for $5 million. But those examples are the exception.

Costs: B. Other than the insurance, which you should probably have, a painting just sits happily on your wall.

Liquidity: D. Unloading a painting can be a frustrating and time-consuming activity and to find a buyer for an expensive piece of art you may need to employ the expensive efforts of Sotheby’s or one of its competitors.

Race Horses:

Barrier to entry: F. How many race horse owners do you know? If the answer isn’t zero, you probably have a house in Monaco.

Downside Risk: D. Only one horse wins each race, and if you think betting on a loser is painful, imagine owning one.

Upside Potential: A. If you buy the right horse, hire the right jockey, and win the triple crown, you can retire your steed and have him submit to a cushy and lucrative life of breeding and collecting stud fees.

Costs: D. Boarding fees, jockey fees, vet bills, entrance fees, shoeing, transportation…

Liquidity: C. Buying and selling prized horses isn’t exactly easy, but there are established avenues.

Antique Cars:

Barrier to entry: B. It won’t be an expensive car. But picking up an old washed up Camaro and applying some elbow grease can get you started, even on a shoestring budget.

Downside Risk: C. You’ve got to do your homework. The natural progression for cars is to become worth less over time at an ever-decreasing rate. The trick is to pick up a classic car on the bottom of the depreciation curve, and put it in tip-top condition.

Upside Potential: C. Most antique car investors prefer to collect rather than to flip their beauties. But if you do decide to sell, chances are you’ll break even after taking into account your maintenance costs.

Costs: B. After the initial tune-up, you have the option of garaging the car and keeping it covered as long as you wish, and even letting the insurance expire to save a few bucks in the meantime. If you intend to drive it, this will obviously drastically increase your yearly upkeep.

Liquidity: A. Thanks to the internet, buying and selling antique cars is pretty easy.

Coins:

Barrier to entry: APut your hand in your pocket. Do you have any coins? If yes, now you’re a numismatist.

Downside Risk: D. Coin collecting is a life-long and enduring process. More often than not, you’ll overpay along the way trying to complete a particular collection. When it comes time to sell, you’ll probably do it wholesale, and effectively discount all of your precious treasure.

Upside Potential: C. Most valuable coins are already in the hands of collectors, so to win at this game, you’ll need to try your hand at predicting the future. Which coins can I find today which will be rare and coveted in 30 years? Some can succeed at this, but most fail.

Costs: A. Just stick them in a shoebox in your closet, or a safe if they are worth something substantial.

Liquidity: B. You’ll always be able to find a buyer if you’re willing to sell for the face value of the coin. In a worst case scenario just spend them at your local supermarket (except for international coins, obviously).

Stamps:

Barrier to entry: A. Did you receive mail today? Congratulations, you’re a philatelist!

Downside Risk: A. With stamp collecting, chances are that you’ve acquired your papery trophies at mostly market rates. If you paid top-dollar for a well-known or famous stamp, then you do expose yourself more substantially, but typically stamps are picked up in bulk on the cheap.

Upside Potential: D. Less and less people are trading stamps, and real “winners” are hard to come by these days.

Costs: A. Just stick them in the shoebox where you keep your coins!

Liquidity: D. Unless you are part of a stamp-trading community, it’s going to take you a while to unload your stash at a price that’s acceptable to you.

Films:

Barrier to entry: D. It’s not hard to find independent film makers who will take your money. But to get on board with any type of significant position in a film with potential, you’re going to need to be an accredited investor, and probably plop down at least six figures at a minimum.

Downside Risk: D. Films go bust all the time. And even if you succeed in completing your film, the ultimate jury is the viewership around the world. If nobody pays to see it, it’s a flop.

Upside Potential: A. Most films lose money, and yet the average rate of return on film investing over the past 5 years has been about 8%. Why is that? Because the winners win big. If you invested in a movie that hits blockbuster status, it’s not uncommon to see in excess of 10x your initial investment.

Costs: A. After you put your money in, assuming that you’re not actively managing the project, it’s just a waiting game.

Liquidity: F. Most contracts will relieve you of the right to sell your position during production. Plus, there aren’t really many places to go and find buyers. In addition, if you’re trying to unload equity in a movie, chances are that you expect it to fail, and you’re just trying to recoup what little you can before the ax comes down.

Spirits:

Barrier to entry: B. It’s not an A because technically you have to be old enough to purchase liquor.

Downside Risk: B. Even if you can’t get the right price for your whiskey, you can always unlock it’s true value by pouring yourself a double neat and crying into your cup.

Upside Potential: C. Some spirits do tend to get more valuable with age. So when the time comes, you should be able to get a reasonable price for your abstinence.

Costs: B. It’s not hard to store liquor, but if you’re going to go big, you might need a warehouse, which will cost you money.

Liquidity: A. If you can’t find a friend to buy it, just call up the local fancy restaurants in your area. If your bottle has a certain prestige, they’ll be happy to take it off of your hands.

As you can see, alternative investment vehicles aren’t for everybody, but they can be lucrative if you are willing to lose the money you speculate with. Before bitcoin becomes a viable currency, it will be similar in this respect. For our own entertainment, let’s see how Bitcoin measures up:

Bitcoin:

Barrier to entry: B. Could be an A, but today it’s still hard to get ahold of Bitcoin quickly and easily. Nevertheless, anybody with determination and some tech savvy can get some.

Downside risk: FIf you don’t assign a very high chance to losing all the money you’ve invested in Bitcoin, then you’re fooling yourself.

Upside Potential: A+What else do you know if that is up almost 100x in the last year but still has the potential to grow another 100x if it’s successful?

Costs: A. Holding Bitcoin is just about as free as can be.

Liquidity: BIt’s an A if you are verified on an exchange. But otherwise you still have to find somebody on localbitcoins to trade with in person.

And below, we’re compiled an extremely scientific representation of our comparisons. Enjoy!

Screen Shot 2014-01-08 at 12.43.52 PM

The Gini Coefficient, and why you only have yourself to blame

Bitcoin brings together ideologues from all ends of the spectra – and not to mention a few normal people, too.

Ostensibly, everybody can find something good, and bad, about Bitcoin.

Recently, many individuals have been posting about the unfair distribution of Bitcoins, thanks to the inherent transparency of the protocol which allows us to observe the largest wallets – certainly not indicative of individual holders, but at least a proxy into the coffers of the early adopters.

As Bitcoin undergoes its 4th (or 5th?) bubble bursting, it may make sense to evaluate the inverse inevitability of the process: A high Gini Coefficient, a measure of the inequality of assets among a group of people, also necessitates an overrepresentation of losses on behalf of those who own a larger portion of Bitcoins. I would like to direct the following questions to those who believe that the distribution of Bitcoin is somehow unfair:

1) I have personal friends who have lost over $50 million “on paper” over the last couple of days. Do you think that this loss is unfair?

2) I know at least 2 individuals who have invested over $100,000 in USD in Bitcoin when it was $1,000 per coin. They have also lost a significant amount of capital. Was this unfair?

3) As the price grinds lower, the Bitcoins that were so inaccessible yesterday have drawn within reach. Perhaps this is an opportunity for those who did not previously score highly on the Gini curve to accumulate more coins. Would you agree?

Depending on your reaction, I hope that you will at least consider the possibility that unfairness cuts both ways. The word “risk” is used relatively loosely in normal conversation, but in the financial world it is very precise. What appears to be somewhat axiomatic, regardless of the political system, religious system, or social system, is that risk and reward are intertwined – two sides of the same coin.

I sympathize with those who view financial inequality as corrosive. But somehow I cannot agree. I’m more concerned with how the poorest fare on an objective basis. Do they have food? Do they have shelter? Do they have a 50-inch television?

Bitcoin is designed to be fair, in the utmost sense. It doesn’t play favorites, cannot be arbitrarily allocated, and isn’t controlled by a human. Most importantly, nobody is forced to use Bitcoin. If you don’t like it, you are welcome to abstain, and even encouraged to do so if your appetite for risk is low.

Could it be that the Bitcoin distribution is fair?