Odd Thoughts On Cryptocurrencies

First, a photo – always start with a photo.

I put some of this on Facebook in comments on cryptocurrencies.

You’ve probably heard about BitCoin and the Blockchain in the news. Is it a mirage, a bubble, a new decentralised kind of wealth? Is it backed by anything?

The following comment is on an article I just read – (link at the end)

“I think the point here is not what is backing fiat currency or what is not backing fiat currency. Whether we consider current fiat to be spineless (which it has been since it was not backed by gold since the 70’s) does not matter. What matters is the perception that the value of world currencies is mostly due to the value of their stock market which is (theoretically) meant to represent the productivity of a given country. Ideally, a strong stock market index, results in a strong currency value – that is the perception (whether that is real or not is a different conversation and I myself believe it is actually all fairy dust).

Bitcoin however is backed by no perception of productivity at all. It is backed by the only fact that each of them is more and more scarse as the mathematical problems to solve become more and more complex – thus requiring more and more KWh to find. It is not backed by anything that is measured by human productivity and to actually say that “oh, but it is measured by machine productivity” is …. a little dystopian and useless – since nothing is produced other then a solution to a math problem – if the collective of these solutions would then be utilized to cure cancer – then heck… yes, you now have value – but to simply state “it has value because there is not a lot of it” well…. little naive imho

The moment you have a crypto-currency which is backed by a legitimate way of measuring human productivity – is the moment you have a crypto-currency that in my opinion is not fairy-dust. And honestly, If someone tells me that crypto-currencies can be backed by the stock-market I’ll puke a little because that would be like building a castle on a pile of .”

Here’s the article – This time is different

Answers /Questions

One answer could be part of the revolution in society that the Blockchain promises (rescue from the tyranny of banks and big corporations). It just needs a huge, enormous leap of faith.

The way to do it is for individuals to give a value – real value – to compassion, smiles, helpfulness, societal help, how much a person contributes to the wellbeing of the community.

Award Bitcoins to people who do that.

Haha, you dreamer – fat chance of that in this world.

Meanwhile, back on the subject of whether it is all a mirage, what we are not seeing is how thin the trade is for large purchases. Are lots of people trading large amounts or are lots and lots of naive people buying tiny amounts at the asking price?

If people new to the market are buying tiny fractions of a bitcoin, then that establishes the price because in their naivety they simply accept it.

Bottom line – Are any big buys happening?

And are owners with big holdings who want to sell large amounts actually finding buyers to fill their trades? Or are they dribbling their holdings out to help maintain the price from a pool of buyers new to the market who are each buying tiny amounts, taken in by the promise of a rising market?

Then there is the stumbling block of what you can actually do with these cryptocurrencies (Bitcoin, Ethereum, and many others that are appearing now).

What has to happen for a transaction to take place is for someone (many people) to compete to verify the transaction with proof-of-work.

One of the problems with the blockchain system is the high cost of verifying a transaction for small payments (and that also includes small transfers into and out of an exchange, which also have to be verified).

The cost does not relate to the value transferred, it relates to the complicatedness of the code, so the cost is greater relative to the value of small-value transfers.

To put it another way, let’s say it costs $2.00 to verify a $50,000 transaction. The problem is it also costs $2.00 to verify a $5.00 transaction. The verification cost is a drop in the ocean for a big transaction but a killer for small transactions.

There is a promise that the cost for verifying a transaction will come down when a new verification system that is being developed now, is introduced.

But when the cost of verification comes down, so does the incentive to the miners to verify the transaction with proof-of-work.

If that happens then the time it takes to verify the transaction goes up – which is no way to run commercial buy/sell transactions. Who wants to wait 24 hours to get confirmation that it is safe to ship their pizza to the customer who (pending verification) bought it 24 hours earlier?

Is there a way out of this or are cryto-currencies only going to be a way to store wealth?