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Why Cryptocurrencies Will Never Be Safe Havens

Discussion in 'Digital Currencies' started by Goldhedge, Aug 17, 2017.



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  1. Goldhedge

    Goldhedge Moderator Site Mgr Site Supporter

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    Why Cryptocurrencies Will Never Be Safe Havens
    8/17/2017

    By Mark Spitznagel

    Every further new high in the price of Bitcoin brings ever more claims that it is destined to become the preeminent safe haven investment of the modern age — the new gold.

    But there’s no getting around the fact that Bitcoin is essentially a speculative investment in a new technology, specifically the blockchain. Think of the blockchain, very basically, as layers of independent electronic security that encapsulate a cryptocurrency and keep it frozen in time and space — like layers of amber around a fly. This is what makes a cryptocurrency “crypto.”

    That’s not to say that the price of Bitcoin cannot make further (and further…) new highs. After all, that is what speculative bubbles do (until they don’t).

    Bitcoin and each new initial coin offering (ICO) should be thought of as software infrastructure innovation tools, not competing currencies. It’s the amber that determines their value, not the flies. Cryptocurrencies are a very significant value-added technological innovation that calls directly into question the government monopoly over money. This insurrection against government-manipulated fiat money will only grow more pronounced as cryptocurrencies catch on as transactional fiduciary media; at that point, who will need government money? The blockchain, though still in its infancy, is a really big deal.

    While governments can’t control cryptocurrencies directly, why shouldn’t we expect cryptocurrencies to face the same fate as what started happening to numbered Swiss bank accounts (whose secrecy remain legally enforced by Swiss law)? All local governments had to do was make it illegal to hide, and thus force law-abiding citizens to become criminals if they fail to disclose such accounts. We should expect similar anti-money laundering hygiene and taxation among the cryptocurrencies. The more electronic security layers inherent in a cryptocurrency’s perceived value, the more vulnerable its price is to such an eventual decree.

    Bitcoins should be regarded as assets, or really equities, not as currencies. They are each little business plans — each perceived to create future value. They are not stores-of-value, but rather volatile expectations on the future success of these business plans. But most ICOs probably don’t have viable business plans; they are truly castles in the sky, relying only on momentum effects among the growing herd of crypto-investors. (The Securities and Exchange Commission is correct in looking at them as equities.) Thus, we should expect their current value to be derived by the same razor-thin equity risk premiums and bubbly growth expectations that we see throughout markets today. And we should expect that value to suffer the same fate as occurs at the end of every speculative bubble.

    If you wanted to create your own private country with your own currency, no matter how safe you were from outside invaders, you’d be wise to start with some pre-existing store-of-value, such as a foreign currency, gold, or land. Otherwise, why would anyone trade for your new currency? Arbitrarily assigning a store-of-value component to a cryptocurrency, no matter how secure it is, is trying to do the same thing (except much easier than starting a new country). And somehow it’s been working.

    Moreover, as competing cryptocurrencies are created, whether for specific applications (such as automating contracts, for instance), these ICOs seem to have the effect of driving up all cryptocurrencies. Clearly, there is the potential for additional cryptocurrencies to bolster the transactional value of each other—perhaps even adding to the fungibility of all cryptocurrencies. But as various cryptocurrencies start competing with each other, they will not be additive in value. The technology, like new innovations, can, in fact, create some value from thin air. But not so any underlying store-of-value component in the cryptocurrencies. As a new cryptocurrency is assigned units of a store-of-value, those units must, by necessity, leave other stores-of-value, whether gold or another cryptocurrency. New depositories of value must siphon off the existing depositories of value. On a global scale, it is very much a zero sum game.

    Or, as we might say, we can improve the layers of amber, but we can’t create more flies.

    This competition, both in the technology and the underlying store-of-value, must, by definition, constrain each specific cryptocurrency’s price appreciation. Put simply, cryptocurrencies have an enormous scarcity problem. The constraints on any one cryptocurrency’s supply are an enormous improvement over the lack of any constraint whatsoever on governments when it comes to printing currencies. However, unlike physical assets such as gold and silver that have unique physical attributes endowing them with monetary importance for millennia, the problem is that there is no barrier to entry for cryptocurrencies; as each new competing cryptocurrency finds success, it dilutes or inflates the universe of the others.

    The store-of-value component of cryptocurrencies — which is, at a bare-minimum, a fundamental requirement for safe haven status — is a minuscule part of its value and appreciation. After all, stores of value are just that: stable and reliable holding places of value. They do not create new value, but are finite in supply and are merely intended to hold value that has already been created through savings and productive investment. To miss this point is to perpetuate the very same fallacy that global central banks blindly follow today. You simply cannot create money, or capital, from thin air (whether it be credit or a new cool cryptocurrency). Rather, it represents resources that have been created and saved for future consumption. There is simply no way around this fundamental truth.

    Viewing cryptocurrencies as having safe haven status opens investors to layering more risk on their portfolios. Holding Bitcoins and other cryptocurrencies likely constitutes a bigger bet on the same central bank-driven bubble that some hope to protect themselves against. The great irony is that both the libertarian supporters of cryptocurrencies and the interventionist supporters of central bank-manipulated fiat money both fall for this very same fallacy.

    Cryptocurrencies are a very important development, and an enormous step in the direction toward the decentralization of monetary power. This has enormously positive potential, and I am a big cheerleader for their success. But caveat emptor—thinking that we are magically creating new stores-of-value and thus a new safe haven is a profound mistake.

    The Mises Institute.
     
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  2. oldgaranddad

    oldgaranddad Gold Member Gold Chaser Site Supporter ++

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    I'll stick with gold. The original decentralized store-of-value and requires no electrons or computer hardware or software to spend or acquire.
     
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  3. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    Lets say BC goes to 8K. That's a 100% increase.
    Lets say you invest in the penny cryptos. They have room to grow thousands of % while BC will slow down or reverse when the money flows to the "new hot thing".
    Might have been great ride but it's reaching the to of it's natural bell curve while smaller cryptos are on ther way up.
     
  4. Ebie

    Ebie Midas Member Midas Member

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    It's fiat, isn't it? Unlimited supply?
     
  5. oldgaranddad

    oldgaranddad Gold Member Gold Chaser Site Supporter ++

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    Correct me if I am wrong but I believe that most crypto currencies are fiat but have a finite number of crypto coins. Now if they can invent a crypto currency that has inherent value and a finite amount then they'd be on par with gold.
     
  6. viking

    viking Silver Member Silver Miner

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    Bitcoins are limited.
     
  7. arminius

    arminius Gold Member Gold Chaser Site Supporter ++

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    Can I bite it and have it exactly reflect the shape of my tooth?
     
  8. Joe King

    Joe King Gold Member Gold Chaser

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    Considering that fact has been posted here at least 1,001 times so far, they should already know that by now.
    ...but I think that many people have difficulty wrapping their heads around the idea of a currency with limited quantity. People have become so accustomed to inflationary "money" in virtually unlimited supply, that anything else seems strange and foreign to them and are therefore extra suspicious of it. It's a fact that people typically fear the unknown.

    BTW, $4329 this AM. Holding nicely.
    ...and BCH is up. Just a hair under $500. Nice.
     
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  9. oldgaranddad

    oldgaranddad Gold Member Gold Chaser Site Supporter ++

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    Joe King, there have been many researchers who have stated that bitcoin's finite upper value could be raised. That was one reason a portion of the bitcoin population fought the recent update that raised the amount of wallets that could communicate with each other. All it takes is one code update.

    Back before 1964 some people said the government would never be able to pull off switching coinage from silver to base metals. I see the same parallel today.

    Never say "never".
     
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  10. Bigjon

    Bigjon Silver Member Silver Miner Site Supporter ++

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    Crypto means secret just waiting for a solution.
    Crypto uses ECDSA and ECDSA uses prime numbers to create the secret keys and this is all predicated on the difficulty in finding prime numbers where you have to search through all of the number set one by one.
    THE ELLIPTIC CURVE DIGITAL SIGNATURE ALGORITHM (ECDSA)
    http://www.cs.nthu.edu.tw/~cchen/CS4351/jurisic.pdf


    Enter James McCanney, who wrote a book that he sells for about $30 frn's.
    http://www.jmccanneyscience.com/

    http://www.jmccanneyscience.com/CalculatePrimesCoversandTableofContents.HTM

    If you have a table of all of the prime numbers it is a much simpler task to find anyone's key.
     
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  11. southfork

    southfork Mother Lode Found Mother Lode

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    Bit coin was created out of thin air along with the others, they are even making an etf for bitcoin but it wont contain any. Not unlike the Fed is it, just keep making up fake money
     
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  12. Ebie

    Ebie Midas Member Midas Member

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    Bitcoin may be limited but, it is still fiat, and, an unlimited # of other crypto-currencies can be created. =Fiat
     
  13. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    How many bit coins were produced? With a population of 330 million or a world population of 7.5 billion.......
     
  14. louky

    louky Silver Member Silver Miner

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    You sound old
     
  15. Joe King

    Joe King Gold Member Gold Chaser

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    The split wasn't about "how many wallets can communicate with each other". It was about the size of a block within the blockchain.
    There can be as many wallets on the network (communicating with each other) as people want.
     
  16. Joe King

    Joe King Gold Member Gold Chaser

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    No, fiat means by government decree. Ie: if congress declares seashells to be legal tender, then seashells would be fiat.


    No, that's called an open market where anyone can throw their hat into the ring with little to no barriers to entry, thereby allowing the ones with the best ideas and innovation to eventually become the winners.
    ....but I suppose a lot of people are so used to the gov creating barriers to entry for most markets, that they start thinking it's normal and expect it in all markets.


    Cryptos are like car mfgs were 100 years ago. Ie: there were many hundreds of them because it too, at the time was a new market. In the following decades, market forces picked winners and losers until we have the relative few car mfgs that we know (and love) today. lol
     
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  17. oldgaranddad

    oldgaranddad Gold Member Gold Chaser Site Supporter ++

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    If the number of bitcoins is truly finite then there was no need to enlarge the block in the block chain since this would have been taken into account with the original design of bitcoin. Unless bitcoin was created using a faulty (negligent?) design? Hence, the only real reason to enlarge the block was to allow a greater spread of wallets to communicate and more transactions to occur.

    If the block chain was increased to accommodate an increase the number of bit coins then the amount is truly not finite -- even if the change is to allow a 2 for 1 split -- or in another parlance: "a devaluation".
     
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  18. Joe King

    Joe King Gold Member Gold Chaser

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    The ones in question are.

    They made it smaller, not larger.

    The size of a block has nothing zero nada zilch to do with how many wallets can "communicate". Again, anyone with a sync'ed wallet is a node on the network. Ie: all 7billion people in the World could have a wallet for any and/or all of the crypto currency's if they so desired.
    ...and it wouldn't change anything.

    It wasn't.

    It is.

    That's not how a split in crypto's works. Maybe stocks, but not crypto's.
    The split means that the two coins, btc and bch, both use the same block chain up until Aug 1st. After Aug 1st all transaction in each respective coin is in it's own chain. Ie: a fork occurred.
    Edited to add: their blockchains are separate at this point, but the data contained therein is identical up until Aug 1st.
     
  19. arminius

    arminius Gold Member Gold Chaser Site Supporter ++

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    Sorry, all this crypto stuff is a little weird for this old fart. If I can't bit-e it, I'm not interested. Yeah, electricity is cool, but it's only money in a dream, in which dream I don't share. I like the net a lot, but it's a construct and not real either. The power system here is stable and continuing. Until it isn't. At that point I hope you all have something physical for the money so invested...
     
  20. Mujahideen

    Mujahideen Black Member Midas Member

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    I understand bitcoin more than I understand a frn.
     
  21. Joe King

    Joe King Gold Member Gold Chaser

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    That's because bitcoin is open source and anyone involved will practically bend over backwards in order to help people to understand it in detail.

    The FRN on the other hand, is privately controlled and is shrouded in mystery by its creators and explained by them in ways that only serve to further confuse most people who have bothered to ask.


    BTW, bitcoin cash has really started taking off. For all those who said that if btc ever dropped back to $400 they'd jump in. Well, it appears that bch just might fit that ticket. Better get in before it too ends up North of $2k
     
  22. Cigarlover

    Cigarlover Gold Member Gold Chaser

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    At what point do you have to pay taxes on the gains on BTC? With other assets its when you sell the asset. Since you can spend the BTC are the gains just based on its value at year end?
     
  23. Joe King

    Joe King Gold Member Gold Chaser

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    I would think it'd be the same with btc too.


    If it were actually treated as a currency, you shouldn't have to pay taxes on it at all if they (bitcoins) are spent to purchase goods.
    ...but the gov might see it differently. lol

    I say that because if you hold btc that doubles in value over the course of a year and then spend it, all that's happened is that what you held had an increase in purchasing power.
    How is that any different than if, for example, you held British Pounds and they doubled in purchasing power? Do you have to pay taxes on increased purchasing power if you spend them on your trip to GB? Or only if you convert them to dollars?

    Or what if the dollars in your bank account increase in value? Same number of dollars, but now each one gets you more stuff. Do you pay taxes on that increase in value?
     
    Last edited: Aug 19, 2017
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  24. Mujahideen

    Mujahideen Black Member Midas Member

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    And I've been studying frns for over a decade lol.
     
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