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Bitcoin- A Virtual Mining Disaster Waiting to Happen?

Last week in The Case against Bitcoin I examined some of the flaws with Bitcoin that may prevent it from becoming a mainstream currency. I received some very intelligent comments and had a series of thoughtful conversations with many Bitcoin advocates who promoted Bitcoin’s value and efficacy as a currency. While I believe there is value in peer to peer financial transaction systems, I remain, however, unconvinced that Bitcoin will be a widely used digital currency of the future.

Here’s why:

http://smaulgld.com/bitcoin-a-mining-disaster-waiting-to-hap...

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bitcoin splits, divisibility, and inflation

The market cap is what should matter, and that's not affected by splits. That's true for stocks and would be true for bitcoin if a split were possible. In fact, the only fundamental unit in bitcoin is the satoshi, and you're right that there will eventually be 2.1 quadrillion of them. The protocol doesn't put the number of bitcoins in a transaction, it uses the number of satoshis. (https://en.bitcoin.it/wiki/Transactions) There's nothing special about a "bitcoin" it's just a user-friendly way of referring to a quantity of ten million satoshis. Right now the price is $1125/bitcoin but the software could easily be modified to show the price as $11.25 per centibitcoin (a million satoshis) or $1.125 per millibitcoin (100,000 satoshis) and so on.

A stock split or a bitcoin split doesn't change the market cap, but it can have a big psychological effect on investors who don't understand that. Even though the market cap wouldn't change, if everyone switched over from talking about bitcoins (100,000,000 satoshis) to talking about millibitcoins (100,000 satoshis) the price people saw would drop from $1150 to $1.15 and although nothing would have *really* changed -- it's all satoshis under the hood -- some people would be fooled into thinking that it was a cheap price to jump in. It's what kept a lot of the dot com stocks going during that bubble.

There is nothing rare about 2.1 quadrillion of anything.

That's an excellent point, and now I see what smaulgld has been trying to say about that. There are practical limits to how finely you can divide an ounce of gold. An ounce of gold is a sphere about 1.5 centimeters diameter. The size of a grape let's say. A gram of gold is a sphere about 5 millimeters in diameter. The size of a pea. A tenth of a gram is the size of a bb (as in bb gun). A milligram of gold would be a sphere less than half a millimeter in diameter. About 1/64 inch. I think that point we're below the limit of how sub-dividable physical gold is for any practical purposes.

And yet if an ounce of gold were as sub-dividable as a bitcoin, we'd be looking at spheres just 30 microns in diameter. That's about the size of one of those protozoa you looked at under the microscope in high school biology class.

I'm convinced that a bitcoin split (or the next best thing, just changing terminology from bitcoins to centibitcoins, say) happens, then there's nothing to stop that from happening again so that millibitcoin is the unit of trade, and microbitcoin and so on and so on and so on with nothing stopping it until you hit the 2.1 quadrillion limit.

Actually, you forgot tons

If you divide a ton of gold into tenth-ounce chunks, you would have 9,072,000 of them. That's not far from the 100,000,000 satoshis in a bitcoin.

Following on from that, if a ton of gold is now $48M then we've got up to 1/10th of that to get things to match. So if Bitcoin values reach $5M each and we can break them down 8 places, our smallest denomination is a nickel while gold's smallest (per your comment) is ~~$10. Not bad, given that means the final market cap would be $105 Trillion by the time all the bitcoins are dispersed. I can see the GDPs and short/medium terms stores of value totaling that by then.

Satoshis aren't scarce

Buffett said that world's total gold stock would fit in a cube about 68 feet per side. There are probably other estimates out there but I knew this one would be easy to find.

That's a little less than 9,000 cubic meters. Divide it by the number of satoshis that will eventually be mined, and each "goldtoshi" has a volume of 4.239868e-12.

That's a cube 162 microns on a side.

Double check by weight: The total weight of gold in the world, using Buffett's number, is 170,000 metric tons. Divide it by 2.1 quadrillion to get the weight of a goldtoshi, and it's 81 micrograms of gold.

Satoshis aren't scarce.

True but silver is really scarce

its cheap and been tossed out for decades Its market cap is something like $20 billion which means ONE rich person could buy it all!

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Still missing a couple pieces

Yes, 81 micrograms sounds small, however you're not accounting for the gold that will be mined between now and the time satoshis reach 2.1 quadrillion. I trended the last century's growth and extended it to 2140 and it's 2.22 times today's total above ground amount.

That takes your 81 micrograms to 178 micrograms. However, another way to look at it is 1/6th of a penny per satoshi in terms of gold supply. Or, 1/10th of a gram of gold at today's rigged prices equals 393 pennies or 560 satoshis. What's so different? It's all relative. :)

1/6 penny?

A penny weighs 2.5 grams. I'll round your 178 micorgrams per goldtoshi to 250 micrograms to make the division easy. A goldtoshi is one ten-thousanth the weight of a penny.

Here's why it matters. The protocol only defines satoshis. There's nothing in there about bitcoins, "bitcoin" is just a user interface shorthand for 100,000,000 satoshis. So although you can't do an actual bitcoin split like a stock split, you can just start talking about a different unit that represents fewer satoshis. A millibitcoin is 100,000 satoshis.

And people argue for doing this, because over a thousand dollars for a bitcoin "sounds expensive" even though it's absolutely no different than saying one dollar per millibitcoin. Since bitcoin is presently all about momentum speculation, getting people to talk in terms of centibitcoins or millibitcoins would no doubt spark a huge jump in the price -- it certainly worked that way for dot coms which is why they did stock splits so often. Here's an argument for jumping straight to microbitcoins:
http://blog.standardcrypto.com/2013/11/01/skip-millibitcoin-...
Here's one about jumping all the way to satoshis (but he gets the divisor wrong):
http://www.dailypaul.com/305983/for-bitcoin-to-move-forward-...
and there are lots more anywhere bitcoins are discussed.

But here's the thing: the only floor is the satoshi, and there are 2.1 quadrillion of them. In what sense is that scarce? Saying that bitcoin is scarce because there can only be 21 million of them is just playing with the units to make the number in front of the units look small. What it really means is that there are only 21 million hundred-mega-satoshis. Just like the national debt is only a 170,000, as long as you measure it in hundred-mega-dollars.

But are pennies scarce?

I get that you think 2.1 Q satoshis is far too many but it's not. And I'm not just displaying the numbers different to make it appear palletable.

If we had $21T dollars in existence (I know there's barely $3T physical and some larger number electronic, et cetera), but if we did, how many pennies would that be? Exactly. 2.1Q pennies - the smallest denomination currently in the reserve currency of the world. But that doesn't include the value of the other currencies or assets used as money (gold, silver, ...). If you look at the prospect of bitcoin replacing fiat (the eventual elephant in all these discussions), then good ole Nakamoto set the numbers up pretty well.

I get your argument on changing to a different scale. Personally, I like the uBit because it still leaves people with a hundredth unit to relate to the days of pennies and percents. And hey, we're only 870 times away from that. We've had that growth in 2 1/2 years.

But are pennies scarce? Not talking about physical pennies here but the value in our currency. I think they're probably a factor of 10-100 times too numerous due to inflation. Correcting this via BTC/satoshi's price would leave us with them worth 1/100th as much each. There goes the idea of keeping pennies for nostalgia. It would just cost 25 uBits for a gumball, not 25 satoshis.

What is the alleged "value"

What is the alleged "value" of all of the economies on Earth combined? Could Bitcoins theoretically become the default currency of Earth?

Absolutely. Wouldn't that be interesting?!

Google says the total value of all M2 currencies is $125T (converted to dollar amounts) as of 2000. That's 16 satoshis per dollar or about 6 cents per satoshi... or 6,000,000 per full Bitcoin.

And to start off this conversation, I'm sure there would be lots of problems doing this but one thing that I think people would miss is the change in needed currency. For example, we wouldn't need bankers or exchanges or ATMs or credit cards (since people would be much richer since the bankers aren't robbing them anymore). And hopefully there wouldn't be crazy things like derivatives that run up the virtual money by 10x to 100x. All in all, I think we could get by with less than half my estimate just because everything would run so much smoother.

Another thought is that if the bitcoin network/protocol indeed has the capabilities they say it does regarding contracts etc., would that eliminate the stock market? And if so, would trading become all HFT from home or would it settle down to people just buying what they support and holding it long term?

We can dream though, right?

A quadrillion here, a quadrillion there ...

So ... FRNs aren't scarce, and there are 100x as many pennies as FRNs, so pennies are even less scarce.

If the economy doesn't collapse first I guess the number of dollars in existence, in pennies, will get to 2.1 quadrillion. Or to look for a way to use numbers that big, the national debt is 1.7 quadrillion pennies, that's already in the ballpark. Google tells me that the Japanese national debt is a quadrillion yen.

Somehow I don't find these comparisons very reassuring for bitcoin but I don't deny that FRNs and debt in FRNs have blown up to the point that yes, counted in pennies, you can get into the quadrillions. Yikes.

The currency can be divided

So that it's not scarce in the sense that people won't be able to get any
The difference with commodities is that you can't divide gold into meaningful 1/100000 of an ounce as it would be less than dust

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Great thoughts. Need to look at bitcoin

from a different perspective

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