Bitcoin and hyperdeflation

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These are the four different kinds of people:

  • Hodlers who acknowledge bitcoin as digital gold and do not care much about short term fluctuations and what others think. They believe the natural growth of their group is very likely to prevent them from losing money.
  • Speculators who contributes to high volatility.
  • Observers that might become speculator or hodler.
  • Nocoiners that either do not care or are ideologically biaised against bitcoin.

For those who aren’t hodler, you might think it will not affect you but you might also be underestimating it. Bitcoin has everything to be chosen to replace the gold standard and whether you like it or not you cannot do anything about it.

It is so obvious that its price will likely rise greatly that you will not be entitled to complain about what you missed. The life changing choice for our parents was to buy a house. Those who didn’t weren’t compensated. The life changing choice for us is to leave them with their debt backed currencies and build our freedom. You’ll take major risks if you over do it but if you don’t follow this major shift you’ll be in an unfair position.

If from outside it looks like a bubble waiting to burst, once you are inside you start to see things differently because you are freed from the biais of missing something that makes you wish it fails but your risk to become too impatient and not see that it takes many years to build confidence. The opportunity to be part of such an experience does not occur often and only this is a sufficient reason for at least trying it and understanding how it works. If you stay aside you’ll never give yourself the chance to understand it.

Since it is technically possible to have a censorship resistant currency it will always be there. Bitcoin itself could disappear but the underlying idea is indestructible. A flippening toward a competitor is not impossible but never underestimate the resilience of bitcoin. Confidence creates strong inertia. To overtake bitcoin you don’t need something which is just better, you need something which is an obvious successor. No such thing exists yet.

It will take many years for bitcoin to overtake gold and it will also take a while for something to replace bitcoin. If bitcoin is able to challenge gold that has been here for thousands of year it is because the world has changed more in the last 50 years than in the last 2000 years and gold has lost a lot of relevance in our ever more digital world. Gold trading evolution made it lost the properties making it attractive. It just became a likely manipulated maket with no indisputable proof of stocks and authenticity. And for those complaining about energy without really understanding how it works they should start with why are we extracting gold just to store it under ground.

You might be tempted to compare bitcoin to others speculative phenomenons that have happened in the past such as the tulip mania but you should consider that what you know could be mostly wrong and that bitcoin is sufficiently different to have a closer look. Just look at the diversity of people participating in this market. This has never happened before.

We used to think that everything had already been studied by great minds but things get more complex and there is now so much to learn that we don’t know anymore who are the great minds. We are in uncharted territory and it has become hazardous to judge new things via analogies with similar things from the past. Bitcoin isn’t anything like a stock market or tulip mania. It’s much more than that and worth more than peremptory judgement.

The institution in charge of money could have anticipated digitalization and made a new money suited to our economies. But they are stuck in the last century and bitcoin filled an empty space soon after it became technically possible. Things from the past have to evolve or they get replaced. You have to have an open mind of bitcoin. It’s a sign of change. Nobody understands it. When you think you do it becomes something bigger. It has exceeded all expectations and we might have seen nothing yet.

Tectonic movements are reshaping our society and bitcoin is a sign of this. Shifts of power are inevitable. Those in charge of taxes and regulation are trying to keeps thing under control but a new world is being built and it is escaping from their grasp. The power is moving towards those who know how to use technology.


Bitcoin is not fair and making easily a lot of money was possibly part of Satoshi’s intention but most likely not for his personal benefit and this might even have been the key for it success. It could have had an infinite embedded inflation rate close to the world growth rate to aim to build something stable but that would have probably not attracted enough attention. Once bitcoin is definitely well established there might be a consensus to make it more stable to make it less deflationary.

How it works.

Blockchain uses cryptography in a clever way that allows to remove the traditional need of a trusted party in guaranteed exchanges and that is why it was called P2P electronic cash.

It’s like a ponzi scheme in which everything is disclosed in advance and you have everybody’s consent. Of course you have to stimulate adoption with a reward but it was done in way too excessive to be sustainable except that history has proven that to be wrong. It was actually key to its success.

Bitcoin is not a fad but blockchain might be one. Blockchain has been around for a while and we have not yet seen any essential use case. It might be useful but it’s not something that will make us a lot more efficient or productive anytime soon. It was a good way to rationalize the excitation about bitcoin but the excitation was all about the price not about the technology. Blockchain has been a good excuse to bring attention but judging it relatively to the level of excitation is misleading.

Bitcoin has a great power of attraction and it’s never ending. It started in a universe with geeks, drug dealers, hackers and worse. Not something you can expect to go mainstream. But as it grows so does its power of attraction. It went through hard times but ever more people fall in love with bitcoin and everybody has its own story. It can be the lack of trust in institutions and people managing them. The feeling that they don’t deserve the right to manipulate money because it always ends up in a mess. The fear of growing debts illegitimately affecting you. The need for more privacy and freedom. The geeks taking over the world. Everyone has something.


Hyperdeflation

Bitcoin is very good at selling dreams but it’s also very good at something which is very real : a fast rising price. It’s even accelerating which means it takes less time every time the price double. It sounds too good to be true but it’s really happening and it has been perfectly designed for that.

Bitcoin has no intrinsic value and price is purely driven by supply and demand. The supply is arbitrarily fixed. It has been quickly released at the beginning to reward people running the infrastructure then rewards have been halving regularly to stop inflation and let the price rise.

Demand creates a virtuous circle: more people wants to buy bitcoin, there is pressure on the circulating supply, the price rises more, this attracts more people and it keeps going on. The supply is being split in smaller fractions which are spread among the participants and stored with different time horizons. Some are not careful enough and coins are being lost. As the market strengthen you feel more confident to keep the coins for longer which reduce the supply and stimulate the price. You are stuck in an hyper deflationary market.

If you have heard about hyperinflation, it is the exact opposite. Here is the tale of hyperdeflation: Bitcoin price keeps accelerating. You are scared to loose your virtual gain and you want to cash out to lock it. You are now confident it is real but the price keeps going up and you don’t see anything coming to stop this. You feel as if you were losing money and you fear to miss out. You are ready to pay a premium to make your come back as you really don’t want this to keep going without you. It’s to difficult to take advantage of dips and tops. You already had your lesson and you do what everybody advises to do. HODL!

Then you perception changes. You started with bitcoin worth pennies and you end up with Satoshis (fractions of bitcoins) worth valuable items. An iPhone is about 0.05 BTC. And if you hodl more who knows what you will be able to afford tomorrow ?

You perception changes even more as you become frustrated to see your savings lose value and you’re being tempted to convert them in bitcoins because you’re more confident and bitcoin feels safer than cash which is constantly losing value.

You’re not worrying about moving prices because you’re not spending you money anyway. You are rewarded for not spending as everything gets cheaper. The most ridiculous price predictions aren’t crazy anymore.

Until now price rise has been backed by a strong growth of the number of participants but as confidence grows a mania could start and the bitcoin price could reach irrational levels. So irrational that it could wipe out a weak currency. If you are in a small country with a currency relatively small compared to bitcoin every body could stop using it.

Can this be stopped ? It has been a bumpy ride because you technical issues could have broken the system but it had enough time to evolve in something robust to support massive adoption. With no intrinsic value there cannot be surprises on the reality of what you are buying. Ethereum was a challenger promising a better technology but now that it is quite clear that people are buying bitcoin just for the price appreciation it has found its success in niche market. Its biggest success is an auction market on crypto kitties instead of digital coins.

Regulation is seen as the biggest threat but there is no switch off button. Some countries have tried to ban bitcoins and if it is quite effective it is also hard to justify. Bitcoin has become big and banning it means trying to erase a considerable amount of wealth and turn this thing into a giant ponzi where an unjustified redistribution of wealth from a mass market to insiders is legally enacted. That would be outrageous especially if it happens in a democracy.

It’s far too late for this to happen and regulation cannot be much more than taxing and going after criminal activity. Forbidding speculation on digital currencies when you allow it on almost everything else including gold will just make it come back under a different name.

In fact the real risk is bitcoin being broadly accepted. Doomsayers have spread the FUD (Fear, uncertainty and doubt) to slow bitcoin. They don’t like it because they think they have understood it and that they have missed it. They have been calling bitcoin a bubble forever. They kept saying that there was no more gains to be made and that it was an unattractive gamble. As often with something which is not compatible with your mindset you keep being wrong until you accept to open your eyes.

And you have to be open minded to understand bitcoin. We have never seen a market like this before. It’s not something localized with participants sharing similarities. It is the broadest market ever and it’s still exploding. People from all over the world with any kind of wealth or interests are participating together in the same market at different times of the day. What is the power of a crowdedness in such situation ? Does it still have an effect ?

If something having an effect on the price is happening somewhere it will be seen as an opportunity somewhere else. There are too many participants to let the price drop. As the market grows price drops are becoming shorter and weaker. And there is still so much potential left, so many people already in and waiting to build confidence, so many people outside frustrated waiting for an opportunity. And then you have businesses, banks, funds, pension and governments that might have no other choice than participating.

I don’t believe in bitcoin taking over the world, I never really believed in bitcoin though I kind of like and dislike it, but we don’t see anything that is going to stop this. Until somebody gives me a scenario I cannot not have an exposure to this. That would feel like having a huge financial risk. If someone explains me how this thing is going to end with a credible scenario I’d be more than happy to free myself from the bitcoin mania but for now I feel forced to put in it everything I can afford to lose.

It is too irrational to say it’s going to drop just because you’ve heard of tulips mania and stock market crashing. We are consciously collectively ruining our planet but we can’t find a consensus to stop it. How could we be able to stop bitcoin ? Wouldn’t it be ironical to successfully tackle the bitcoin issue without making any significant progress on life threatening issues ?

Fred for Netcash.

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