Earlier this month, Bitcoin collapsed by more than 20% in the space of 48 hours, underscoring (again) that it’s not a reliable store of value.
That episode also served as a reminder that if you insist on calling Bitcoin a “currency,” it belongs in the emerging market category, and even that’s a stretch. If a widely-used “currency” were prone to fluctuating by 20% in a 48-hour period, we’d be better off on a barter system.
Of course, the plunge was quickly forgotten. Bitcoin subsequently surged back near the highs and all was “right” in the world. After all, if Bitcoin at ~$30,000 isn’t a “bargain,” then what is?
Fast forward 10 days and there was another “glitch in the Matrix” — figuratively and, some claimed, literally.
Bitcoin plunged 10% Thursday, at least in part on fears of a dreaded “double-spend.”
What, you might ask, is a “double-spend?” Well, as Bloomberg helpfully explained (in language your grandfather might have used to describe his first Ford), “it’s like if someone bought a car, paid the seller, drove off with their brand new wheels and then later yanked back all the money.”
(“Brand new wheels.” You’ve gotta love that.)
Basically, it’s fraud. But, as noted above, it’s also a literal glitch in the matrix. “A double-spend would effectively mean the blockchain had been manipulated, obviating Bitcoin’s heralded security claim,” Bloomberg went on to say.
So, the spreadsheet was purportedly corrupted. Or something. Who knows. And that’s really the point, isn’t it? You don’t want to find yourself in a situation where “who knows” is a phrase that applies to an asset in your portfolio after a 10% plunge.
That simple observation is apparently lost on Michael Sonnenshein, CEO of Grayscale Investments, though. “Corrections are a natural part of any market and are especially natural in the bitcoin ecosystem,” he told CNBC. “From 2016-2017, we experienced six corrections of approximately 30% or more on the way to new highs.”
He said that as though it’s a good, healthy thing.
In an (inherently futile) effort to get to the bottom of this digital rabbit hole, Bloomberg interviewed a couple of folks who were able to offer what I suppose passes for plausible accounts in the crypto world.
But for at least some new investors who perhaps boarded the Starship Enterprise only recently and aren’t yet used to this kind of insanity, it’s a bit confusing, as evidenced by a surge in the number of people Googling “double-spend.”
Who wants to see something funny? That’s a rhetorical question. Have a look at the figure (below).
Somebody get Scott Minerd on the phone so we can clear this up.
Because I haven’t seen a chart like that since… well, since Bitcoin.
There was no double spend. The reporting of such, which spread virally, is totally inaccurate. A block was reorganized, a common occurrence. There were two versions of a single transaction available for confirmation because a user subsequently increased the fee so it would go through, but only one transaction was accepted. It’s basic, common stuff and the reporters got it wrong. I won’t say maliciously, but obviously click bait and scandal attracts eyeballs so who knows.
Concur with Anaximander; this was an instance of a journo being unfamiliar with blockchain protocols who perceived a “vulnerability” which is, in fact, an inherent limitation of distributed systems, and which should be well understood by anyone who participates in Bitcoin.
The nature of the issue is, however, amusing, if you take H’s position (as most of us here do) that Bitcoin isn’t suitable as a currency. The network clears a bag of transactions every ten minutes, and not every pending txn is cleared every time. Moreover, the first time I hear that my txn has cleared, it is NOT CERTAIN to be the case! The network could reorganize, invalidating my txn.
In other words: when you spend Bitcoin, rather than a sharp transition between “in my wallet” and “in someone else’s hands,” we have a kind of probability curve: with every ten minutes that passes, we can be MORE certain that money has been spent, but we can never be ENTIRELY certain. The best we can do is wait for so many intervals that the probability of the money not having been spent is negligible.
Based with real-life eventually-consistent Heisenmoney, most market participants would probably throw up their hands trying to use it as currency.
While there are workarounds and fixes for this uncertainty risk, it can never be eliminated entirely — just assigned to different participants as a matter of protocol. (Currently the sender and receiver split the risk entirely.)
This is good color. I don’t think anyone who is non-religious about it thinks it will be used as a ‘payment’ rail, as there are other blockchains more suited to and optimized for that purpose. However it is very well suited as a highly secure settlement layer for high quality collateral.
If every owner of bitcoin and their identity and balance be available would that make matters easier to identify and rectify legally. That may make it less of a barter instrument.
I, by the way, think all tax returns should be public information. Some countries do to no ill effect.
Yup; the transparency and non-repudiatability of Bitcoin & friends are touted as one of their major benefits. The entire world knows who holds what, at any given time, and who has paid what to whom.
In practice, there are many ways to preserve anonymity because as one person on the network, I can have thousands of addresses — akin to having thousands of account numbers at a bank. There are mixing services that effectively launder money, allowing me to send small amounts from 100 addresses that I control and receive from 1000 third-party addresses who send to as many of my other addresses as I want. However, when cryptocurrency is exchanged for cash, that transaction is tied to one specific address and, in most countries, to a human’s identity.
If our goal is a settlement mechanism, where all participants are known to each other and have mutual real-world trust, then we don’t need to worry about anonymity; we could overlay a trust rule whereby every participant will reject txns whose addresses aren’t known to belong to a real-world business entity.
Another aspect of blockchains is that most of them are capable of recording more than a simple value transfer. Each txn can encode contract rules such as “void if SPX is not at or above 3800 on such-and-such date,” or “this txn is contingent on NY Times publishing an article containing the word ‘hollihocks’ before Feb 28th.” Smart contracts are an interesting idea unto themselves.
Lots of applications here … currency just ain’t one of them. 🙂
Thank you.
Janet Yellen, on Tuesday, suggested lawmakers curtail the use of Bitcoin amid terrorism concerns.
Honestly, the “terrorism concern”, seems like it is being used as a convenient excuse as to why the Secretary of the Treasury of the USA does not want to allow any currency that could ever impact the USA’s ability to print USD.
Terrorism can be paid for in USD, euros, bitcoin, etc.
Seems like her position on virtual currencies is a good one.
Here’s an explainer on what actually happened. There was neither a double spend nor an attempt at a double spend.
https://twitter.com/LucasNuzzi/status/1352325295999754241?s=19
From John Hussman (money manager) in his recent Market Commentary:
Blockchain is a remarkable algorithm. Bitcoin is a limited-supply token generated by a replicable, low-bandwidth, wildly energy-inefficient blockchain app, with neither government fiat, physical convertibility, nor reserve requirements to compel its use, or to make it something other than an abstract numeraire. The value of any currency is essentially the discounted stream of services it is expected to provide as a medium of exchange and a store of wealth. That value relies on the willingness of a whole sequence of successive holders to accept the currency. It’s turtles all the way down. Ultimately, the confidence of those successive holders requires some feature — fiat or convertibility — to pin it to the real world, so it’s not entirely self-referential.
Thus far, the main use of these tokens outside of speculation seems to be for the purpose of exchanging the tokens themselves (which smacks of money laundering). The psychological value of these tokens seems to be largely based on the backward-looking sunk-cost of the energy wasted to “mine” them, by producing a validation hash (as “proof of work”) for a given block of transactions. Whoever produces that hash first gets paid. Everyone else’s computational “work” is completely wasted. It’s rather tragic from an environmental perspective, and I wouldn’t be terribly surprised if Bitcoin was actually a brainchild of the energy industry. There’s also a subtle Ponzi-like aspect in that once you own Bitcoin, you’ve got to participate in a future transaction block to get out, regardless of how much that future block costs to validate.
Still, even if a bubble is entirely self-referential, it doesn’t mean people who get in early can’t also obtain a transfer of wealth from some subsequent speculator before the bubble collapses. It’s just that everyone assumes it will be someone else. Give people a limited-supply object coupled with a speculative mindset, and Dutch tulips gonna Dutch tulip. I also hear that on the Neopets app, paintbrushes and unconverted Neopets are selling for over a million NeoPoints.
What’s hilarious is that crypto proponents don’t seem to appreciate the extent to which the very fact that this is a debate in the first place and/or that people have to worry about it and/or are scrambling to Google it to find out what it even means, is itself an indictment.
The whole thing is wildly silly. Anybody who holds Bitcoin as anything other than a speculative gamble gets what they deserve — both on the upside and on the downside.
That’s how gambling works. If you’ve got the disposition to stomach the volatility and risk, you deserve any gains you garner. But, at the same time, when it goes poorly, nobody is going to feel sorry for you or otherwise be inclined to listen to a belabored explanation about what went wrong.
Bitcoin = when complexity becomes value. If that’s true, then it’s self defeating as complexity erodes value.
Incidentally, I’m glad we have a couple of people here in the community that can weigh in on this in favor of Bitcoin without getting angry at me for the humor I inject into the articles.
Twitter was irritable about this piece today, despite my making no definitive claims. I realize humor isn’t for everyone, but I’d hope that even Bitcoin adherents can step back and see that irrespective of whether you believe in it or not, and regardless of what you think its purpose for existing is, it’s undeniably funny on some days.
Hard to laugh if you lost 30% of your net value?
I mean no matter how much I might disagree on finer points of crypto and with some of your conclusions… You are generally so accurate and insightful that if this happened to be your blindspot I could hardly fault you for it. Not claiming with certainty it isn’t me that is wrong but either way… Yelling at the weather man because you got 3 inches of snow instead of 6 is a type of lunacy. Heck even if you got rain… at some point the world is chaos more than it is pattern.
Yeah, but if you are “invested” in Bitcoin and surprised by the volatility or, worse, cannot afford to lose 1/3 of your “investment”, you should not be “invested” in Bitcoin in the first place (or second or third).
Other than that, the above Google Trends chart reminds me of the “What does Brexit mean” spike after the vote to leave the EU.