Thursday, May 10, 2018

A case for bitcoin

Mavrodi "biletov"

In this post I'm going to outline a case for bitcoin. I still think bitcoin is a bad medium of exchange and a rubbish store of value. It's just too volatile and unhinged, and it'll always be that way. But bitcoin still has an important role to play... just not the role that most people assume.

Sara Hess and Eugene Soltas recently published a fascinating article on the life of Russian ponzi-scheme architect Sergei Mavrodi, who passed away last month. I found it interesting that in the latter part of his career, Mavrodi openly advertised that his schemes were pyramids, yet people still bought in.


This got me thinking. I've always sort of assumed that ponzi schemers were just con men who fooled innocent people into giving up there money. But even after Mavrodi lifted his skirt and told the truth, people still flocked to join his schemes. Maybe there is a constant demand on the part of willing and informed individuals for ponzis. Which would mean that folks like Mavrodi aren't just conmen. Rather, society genuinely needs them to manage ponzi games.

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We already knew that anyways, you might say. After all, Las Vegas exists, right?

The role that lottery and casinos operators play is certainly similar to that played by ponzi schemers. People take joy in gambling, and lottery operators and croupiers make sure these games run smoothly. Ponzis, lotteries, and poker are all versions of a zero sum game. If you win $10, it's only because someone else who was playing the game lost $10. Zero sum games are different from win-win games, say like stocks, bonds, and other liabilities including banknotes. Someone doesn't have to lose $10 on Google shares for you to be able to make $10 on Google. The underlying business generates income from its customer base and this provides each and every shareholder with a return.

What differentiates one type of zero-sum game from another is the rule used for redistributing money from losers to winners. Ponzis and pyramids are early-bird zero sum games: the jackpot goes to the earliest entrants and is funded by money provided by the latest entrants. A lottery, on the other hand, awards a randomly chosen participant with everyone else's money. Being the last buyer of a lottery ticket provides one with the same odds of winning the jackpot as the first buyer.

The coexistence of different types of zero sum games indicates that while the public has an ongoing demand for the chance to win jackpots, it also values the way those jackpots are rewarded. Perhaps early bird game like a ponzis provide a different set of psychic returns than other zero sum games; getting in line early and looking back at all the late comers may offer a sense of satisfaction that a lottery can't provide.

Society has typically legalized lotteries while criminalizing ponzis and pyramids, although in Mavrodi's case there was some ambiguity since he cheekily advertised them as ponzis rather than trying to decieve the publi. Luckily for authorities, ponzis and pyramids are easy targets. They have central points of failure. An administrator needs to collect money from new entrants and then pay it out to older entrants. So there is a physical entity with an address that can be sued by unhappy participants or pursued by the authorities.

Because they are illegal, ponzis have been driven underground. Unfortunately, the delegitimization of markets can have perverse effects. For instance, street drugs are often mixed with dangerous contaminants, say like how heroin is laced with carfentanil, an elephant tranquilizer. If the drug market were brought into the open, it could be that producers would be pressured by market forces to provide a purer product and fewer users would die from accidental overdoses.

The same argument applies to ponzis. Those who play them have to rely on fly-by-night operators who may abscond with the funds at any moment, the ponzi collapsing before reaching its natural end. If ponzis were legitimized, it would be much easier to have a transparent and well-run ponzi market.

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Like ponzis and pyramids, a chain letter is an early-bird game, a type of zero-sum game that use entrance order as its redistribution rule. And like ponzis and pyramids, they are illegal. The Circle of Gold chain letter that began in San Francisco in 1978 and spread to the rest of the U.S. through 1979 and 1980 is a good example of the genre.

In brief, I buy an existing copy of the letter from you for $50, and simultaneously mail $50 to the name at the top of the list, for a total outlay of $100. I then make two copies (removing the name at the top of the list an inserting my own at the bottom) and sell them for $50 each, for a total of $100, thus breaking even. By selling the letters directly rather than sending them via the mail, presumably I avoid mail fraud. The buyers in turn make copies and sell them on, the chain continuing. Once my name starts arriving at the top of the list the money will pour in. The letter exhorts recipients not to break the chain.


Whereas a ponzi relies on a central node—or operator—for managing the game's flow of funds, a chain letter decentralizes the role of operating the system. Any participant who has bought a copy of the letter is delegated the job of faithfully modifying their version of the ledger (by removing the name at the top and inserting theirs at the bottom), sending the $50 by mail, and then passing the updated ledger on. Lacking attackable central nodes, chain letters are more difficult for the authorities to shut down than ponzis.

There are still a few key flaws with a chain letter. The first is that everyone who joins the chain letter needs to leave their physical address. And so it is possible for the authorities to target participants by getting a copy of the chain letter, visiting their home, and shutting it down that way. To avoid this risk, many would-be ponzi players will probably choose not to play.

The second flaw is that chain letters are not secure. Each participant has an incentive to mis-copy the list and put themselves at the top, thus cutting into the queue. This lack of credibility hurts the chain letter's ability to propagate.

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All of which gets me back to bitcoin.  Bitcoin is not a win-win game. It is a zero-sum game that uses entrance order as its redistribution rule, or an early bird game like a ponzi, pyramid, or chain letter. The only way to get ahead is if a subsequent participant buys one's bitcoins at a higher price.

But bitcoin brings a few unique features to the table. To begin with, Bitcoin is decentralized. Rather than a lone administrator like Sergei Mavrodi handling the scheme, the ledger is maintained by a disparate set of nodes. This makes bitcoin much harder to shut down than a ponzi.

Chain letters are also decentralized, but Bitcoin doesn't inherit the weaknesses of a chain letter. Although there are many different copies of the bitcoin ledger, these copies are constantly being checked against each other to ensure that they are all in sync. This means that—unlike a chain letter—there is no way to budge in line, say by re-writing the bitcoin ledger in one's favour. And this improves the durability of bitcoin.

Before I bring this all together and make my case for bitcoin, there is one other early bird game I haven't got into yet: the speculative bubble.

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Unlike chain letters, ponzis, and bitcoin, which are pure early bird games, bubbles occurs on the back of an already useful asset, say like a stock or commodity. During the late 1990s internet mania, for instance, the return on an internet stock could be decomposed into two components: a fundamental component and a zero-sum game that was being played on top of the stock's fundamental value. Those playing a zero sum game by purchasing internet stocks didn't give a damn whether the underlying internet business made sense. No, they were betting that a late-comer would arrive to take the stock off their hands at a much higher price.

To a fundamental investors (say like Warren Buffett), zero-sum game players are a nuisance. The zero sum game that they are playing adds a wasteful premium to stocks, pricing fundamental investors out of the market. At the same time, zero sum game players are probably just as annoyed by the fundamental component of the asset they are buying and selling. Its presence dampens the jackpot that they stand to win.

Prices provide useful signals to society. A zero-sum game that runs on top of an intrinsically valuable asset like a stock or a commodity distorts that signal. This can lead to wasted resources. Producers who decide to add capacity—say a new production plant—in response to a commodity's high price may only be reacting to the transitory mood changes of those playing that commodity's attached zero-sum game, and not a fundamental need for new supply.

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So having said all that, let me finally make my case for bitcoin. Bitcoin shouldn't be categorized along with monetary instruments like bank deposits, coins, and banknotes. Nor does it belong in the same category as win-win games like the stock and bond market. No, bitcoin should be grouped with other zero-sum games such ponzis, pyramids, speculative bubbles, and chain letters.

But this isn't necessarily a bad thing. It should be embraced.

City planners build bike lanes in order to prevent the dangerous mixing of cars and bikes. Likewise, if people who are playing zero-sum games on top of regular stocks and commodities can be diverted into bitcoin (and other pure early bird games like ponzis) instead, maybe that would make for a more ordered financial system. Early-bird games that are played on top of useful assets taint their price, and thus play havoc with the signal this price provides. But bitcoins, ponzis, and chain letters have no use as commodities, so there is no underlying real good that can be contaminated by the presence of zero-sum game players.

When criminalization drives ponzis underground, the supply of trustworthy ponzis shrinks and the supply of untrustworthy ones increases. Bitcoin has a role to play here. It is an open system. The set of rules that governs it are automatic and available for all to see, unlike the closed books of a ponzi administrator. There is no way for the system operator to abscond with everyone's funds. So bitcoin is a safer zero-sum game than an illegal ponzi. If people have a genuine need to play zero-sum games, shouldn't they at least be able to play a good one?

Is bitcoin expensive? Sure. Lots of electricity is required to ensure the integrity of bitcoin. But if bitcoin has managed to displace a bunch of poorly-run underground ponzis and pyramids, as well as reducing the signal-destroying participation of zero-sum game players in traditional financial markets, maybe the expense was worth it.

28 comments:

  1. There are numerous errors in your argument but I can't tell if you're being serious or tongue in cheek.


    If you want a more serious bullish case for Bitcoin I wrote one here:

    https://medium.com/@vijayboyapati/the-bullish-case-for-bitcoin-6ecc8bdecc1

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  2. There is always forex. Not much in the way of distortion there either given the size.

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  3. Fascinating about Mavrodi. So how do lanes of zero sum speculation get sealed off from the rest of the economy? Look at the dot com crash, which coincided with the end of a multi-decade runup in asset prices. Nothing was hidden from the public about the dot coms' financials, yet everyone kept feeding the machine. Did this lane of speculation keep the price of GE closer to its fundamentals?

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  4. Returning to your argument that "a pure Keynesian beauty contest asset" like bitcoin can't store value well the long run: what if certain things have a store-of-value premium, akin to liquidity premium, that's self perpetuating rather than anchored to other properties of the thing? So if current industrial uses of gold were all displaced by some cheaper substance and all cosmetic uses went out of fashion tomorrow, would gold's price necessarily destabilize and collapse? We already saw it lose its exchange medium properties without a collapse.

    (Note: I'm not sneakily claiming bitcoin or any other digital asset has obtained this premium. Just curious if it exists and what it requires.)

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    1. "...store-of-value premium, akin to liquidity premium, that's self perpetuating rather than anchored to other properties of the thing?"

      Dunno, what motivates individuals to drive this store of value premium? A liquidity premium emerges because individuals value the ability to pass something off to the next person in a transaction at the same price. The premium that zero-sum game players generate arises because they expect to be able to pass it off to the next person at a higher price. (Bitcoin is mostly the latter, a banknote the former). Are there other premia than this?

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    2. Well, here's my Shower Thought: a store-of-value premium is a liquidity premium calculated over decades rather than days.

      Say I have a lump of gold in one hand and a Swiss franc in the other. I know the gold will fetch a lot more than the metal's utility would suggest. I know the franc will fetch a lot more than paper's utility. And I'm confident both of these pricing anomalies will hold tomorrow. I could chalk it up to mass delusion, or I could ask what services each of these objects are providing to the economy besides what I can see and feel.

      Like anyone holding anything, I "value the ability to pass something off to the next person in a transaction at the same price" to whatever extent I need liquidity. The liquidity premium I assign to the franc instead of the gold doesn't come from my values. It's reasoning from induction: a lifetime of observing networks of exchange around Swiss francs (especially if I live in Switzerland). These networks are near ubiquitous and their participants behave predictably enough to get me in and out of francs without delays or volatility. That's worth something in itself.

      My assignment of a store-of-value premium to the lump of gold is another induction based formula. I can track gold's purchasing power over decades. My fifty year projection of gold's value is less exact than my five hour projection of the Swiss franc's value, but it's also less arbitrary than anything I might project for cryptocurrencies or rare comic books or Netflix shares. That too is worth something.

      If the induction based formula driving a liquidity premium goes something like "thing has desirable properties of a liquid instrument, and therefore is liquidated more often, making it still more liquid for the next buyer or seller, and so on", then the formula driving a store-of-value premium goes something like "thing has desirable properties of a store of value, and therefore people store value in it for longer and longer periods, making it a still more secure place to store the next holder's value, and so on". No?

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    3. Jason, I don't have any objection to thinking about liquidity premia extending over many decades.

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  5. Dear Mr. JP Koning,
    This is a brilliant argument and i cannot refute it. My context is role of money itself. If we take social and ecological value together, the role played by money is actually zero-sum. Dollar is money and not a zero-sum only because it is a monopolist player and does not take ecological inefficiency into consideration. Bitcoin is not a zero-sum game against monopolist dollar but it is if it acts simply as an accounting means across global players. The real problem is that any zero-sum game can be corrupted by systemic inequality of capital as 1 exahash is as good as 31 exahash. So, true value of money is only achievable if there are too many versions of bitcoin. It means that we need a multi-currency permaculture instead of fiat currency monoculture.

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  6. I'm wondering if JPKoning thinks that all goods and services that reduce transaction costs are also a zero-sum game. Because that would be extraordinary for an economist.

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    1. Peter, you're using zero sum in a different sense that I did in my post.

      I've argued that Mavrodi-style ponzi schemes may actually increase social welfare. But they are zero-sum games (specifically of the early-bird type) in the sense that the only way that the x-th participant will make a pecuniary return is if a y-th participant emerges.

      Same with bitcoin. I've admitted it may increase social welfare. Society enjoys ponzi schemes (in the same way that they enjoy lotteries and casinos), and bitcoin it is better than an underground ponzi. You think it increases social welfare too, but for different reasons. But you can't deny that bitcoin is a zero-sum game in the sense that the xth participant will make a pecuniary return if a yth participant emerges.

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    2. By holding a good for its liquidity services, you are obtaining a service of protection against uncertainty. By controlling an identifier defined within a protocol, you can control computers connected to the network that belong to other people. For example, renting an IP address allows you to visit web sites. These are two examples of utility that do not depend on a financial profit.

      On the other hand, almost anything that has sufficient durability and you have a sufficient control over its supply can be used as a basis for a zero-sum game.

      For the two reasons outlined (existence of non-pecuniary demand and zero-sum game being able to be based on a wide range of goods/services) I object to the analogies drawn in the article.

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    3. "By holding a good for its liquidity services, you are obtaining a service of protection against uncertainty."

      Certainly.

      But that doesn't change the fact that if you hold a liquid bond (for example), and that bond provides a flow of liquidity services that an illiquid bond doesn't, and a liquidity premium develops, that premium is based on the premise that others will emerge to quickly buy the liquid bond. If this premise fails, then the liquid bond becomes an illiquid bond and the premium diseappears.

      Put differently, a liquidity premium is a ponzi game that provides a valuable set of services. But its still a ponzi, a type of zero-sum game.

      "For example, renting an IP address allows you to visit web sites."

      Ok, but what is your bitcoin example?

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  7. Are you assuming that the supply of zero-sum game players is limited in any way. If that route becomes attractive, more people go there, right? For example, index funds might be doing a great favour to the world by making intelligent people reconsider going into active investing due to the shrinking space. But if for whatever reason, the rewards in finance rise, they all come right back, don't they?

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    1. "Are you assuming that the supply of zero-sum game players is limited in any way. If that route becomes attractive, more people go there, right?"

      I think that's probably right. There's probably a permanent supply of repeat zero sum (early bird) game players, or regulars, and then once the game starts to grow people who have never played before jump into the game.

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  8. There is certainly a large core of truth in your argument, but there are also multiple errors (which may or may not invalidate it).
    - If some stocks can go into a speculative bubble, then the market for that stock was inefficient in the first place. Were it efficient, arbitrageurs could have shorted the stock and popped the bubble well before it inflated to any significant size. Sometimes, though, it happens that a security (or other asset, e.g real estate) cannot be shorted, and even a tiny minority of market participants (on the order of 1%) can bid its price up into a bubble. In this case, even though 99% of participants anticipate (correctly, even) that the price will come crashing down, they cannot make a profit off of that by shorting it---and as it happens, due to this they cannot correct the pricing error. (To avoid any possibility of misunderstanding: shorting does not lower the price due to increasing quantity. Shorting lowers the price because the sellers throw a bunch of *market* sell orders at the exchange, thus wiping out the top bids. The top bid price and last-filled-price move down; the top ask doesn't necessarily follow, so the bid-ask spread may widen a bit. In other words, it's the market impact cost of the short seller that moves the price initially.)

    - Traditionally, irrationality of market actors (e.g. gambling) is seen as a problem (by macroeconomists and politicians) or as an opportunity to rip people off (by con-/businessmen). The view that these schemes should be allowed, because their existence increases social welfare---rather than trying to educate people so that they don't fall for them---is quite ...outside the Overton window. You might as well be saying that "positional goods are great, because they provide a solution to the question of how to soak up infinite productive capacity while only producing finite utility". (Keynesians should like this statement.)

    - Your comparison of Bitcoin to a chain letter is rather shaky, because the stake is transferable (as a vestige of its originally intended purpose to serve as money). A stock bubble is much closer in mechanism, except, of course, a stock actually promises some underlying stream of dividends. Indeed, looking back to the first point, it is difficult to short Bitcoin (as far as I know).

    - If you separate investment and speculation (Platonic ideal holding period: forever and one tick, respectively), the first is the positive-sum (well, hopefully positive-sum) game, where somebody uses your capital more efficiently (with a higher return) than you could have used it yourself. On the other hand, the "ideal speculator" doesn't hold positions long enough to actually get much income from the underlying revenue stream, instead gaining arbitrage profits from closing market errors---which comes at the expense of whoever held the opposite position. This is true even if the other person doesn't particularly care about that, e.g. because he is a retail investor saving for retirement.

    - "so there is no underlying real good that can be contaminated by the presence of zero-sum game players."
    Sure there is, the price of computing hardware (GPUs, in particular) have been rather inflated by the Bitcoin mining craze.

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    1. Sometimes I wonder how much the classic example of bubbles, the tulip mania, was a pure bubble, rather than a topological catastrophe. Let me explain. Take an asset/commodity with very inelastic supply that is also a Veblen good (which tulips definitely were). The latter category is defined by having an inversion in the demand curve. However, that inverted part cannot continue infinitely, because at some point "society runs out of money" (which is an awful way to phrase it, I know), and the demand curve inverts again into a normal sloping direction.

      Now, given this setup, what happens if the (inelastic) supply falls, or equivalently, the demand curve shifts to the right? At some point, the lower intersection of the curves ceases to exist, because it falls off the inversion point of the demand curve. However, there *is* another stable intersection, just at a much higher price. In theory, the price should quickly jump there. (Of course, this "fundamental jump" sets off a speculative bubble, but in principle, after the bubble pops, the price should still stabilize at the very high level, because that's the only intersection it can stabilize at.)

      Now, after some time, the very high price will result in a gradual increase of supply. Eventually, this will shift supply beyond the high-price inversion point of the demand curve, and the price will quickly plummet. However, this is distinct from a speculative bubble popping, because the preceding price plateau could have lasted for a long time.

      Naturally, there exists a mirror image of this setup. Take a "self-complementary" good, such as telephone, with an infinitely elastic supply (e.g. due to a monopoly). Initially, the marginal utility of telephones is small, because there are very few others to call. Nonetheless, this marginal value is positive, thus the company can offer a lower price. At that point, as the number of telephones starts to rise, their marginal value increases, and the company can charge more, without decreasing demand. However, there is a point that if the company tried to charge more that that, the price would exceed the marginal utility of telephones, and people would cancel their subscriptions. And as the number of telephones decreased, their marginal value would fall, unwinding the whole network.

      Both of these cases are examples of a hysteresis loop in the supply-demand diagram. Mathematically, look at this diagram with *a* having a fixed negative value: en.wikipedia.org/wiki/Catastrophe_theory#Cusp_catastrophe

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    2. Hi Basil,

      "If some stocks can go into a speculative bubble, then.. to this they cannot correct the pricing error."

      I have no problem with that. Maybe you can explain further why that contradicts my argument?

      "Traditionally, irrationality of market actors (e.g. gambling) is seen as a problem (by macroeconomists and politicians) or as an opportunity to rip people off (by con-/businessmen)."

      Dunno about that. Economists traditionally advocate for legalizing drug markets.

      "The view that these schemes should be allowed, because their existence increases social welfare---rather than trying to educate people so that they don't fall for them---is quite ...outside the Overton window."

      Allowing these schemes isn't an alternative to trying to educate people about not falling for them. It's easier to talk to people about the dangers of drugs and gambling when they are brought into the open.

      "Your comparison of Bitcoin to a chain letter is rather shaky, because the stake is transferable (as a vestige of its originally intended purpose to serve as money)."

      It's not a perfect comparison. In a modern version of the chain letter, maybe you could be able to sell the letter to someone else.. .i.e. offload your position in the chain. But I don't think that would change any of my arguments.

      "Sure there is, the price of computing hardware (GPUs, in particular) have been rather inflated by the Bitcoin mining craze"

      Yep, good point.

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    3. Hello JP,

      None of my points contradict your conclusion, just show that some pieces of the argument you brought in as support for that ("zero-sum game on top of stocks annoys investors") don't really hold. I mean, if somebody told you there's a speculative bubble in S&P500 or in T-bonds, you could ignore that assertion out of hand, because it's simply impossible. These securities are simply too easy to short for there to be a bubble. Even "average" stocks have enough liquidity for that.

      "Economists traditionally advocate for legalizing drug markets."
      Some do; others advocate for more effective policies to curtail its activity. The main example is that authorities shouldn't go after the supply side so much (because that drives quality down, as you mentioned), instead they should target the demand side.

      "It's easier to talk to people about the dangers of drugs and gambling when they are brought into the open."
      Rationally, yes. Actually, unfortunately most people don't understand economics. Thus I believe there are two very large confounding factors.
      1) If the activity is illegal, it breeds an opaque market with wildly varying quality, and usually quite a bit of violence behind the scenes. The presence of these ancillary bads makes it easier to convince people about the dangers of the product. Economically, this is a non sequitur, but is highly convincing to most people.
      2) Possibly many people see The Law as a thing that just is. If something is illegal, they see it as "inherently" illegal. To suppose that it could possibly be not illegal simply doesn't make sense to them.
      3) To draw a parallel, I'll refer to the congestion charge and other traffic economics. Apparently, most people don't understand commons problems, and seem to model the problem as if there were a fixed number of cars. They don't seem to think about substitute services either. Thus if somebody proposes a congestion charge, or road diet, etc., most people imagine that the number of cars will stay the same, and they evaluate the proposal negatively. I've experienced this firsthand: a few years ago, my home city tried to introduce congestion charging. Even though multiple newspapers explained how that works, still there was enough public opposition that the mayor backpedaled on the issue.
      By the same token, many people don't understand the "you don't build a bridge because too many people are swimming across the river" idea, that bus or bike lanes should be created to draw more people to use these modes.

      +1: Not only is Bitcoin a pure betting game, there are also a few cash-settled(!) "Bitcoin futures" built on top of it (sold in packages of $10), plus a "perpetual futures" synthetic Bitcoin on BitMEX.

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    4. "I mean, if somebody told you there's a speculative bubble in S&P500 or in T-bonds, you could ignore that assertion out of hand, because it's simply impossible. These securities are simply too easy to short for there to be a bubble. Even "average" stocks have enough liquidity for that."

      You don't believe in the adage that the market can remain irrational longer than you can remain solvent? Another thing that pops to mind is the "on the run" bond premium. Why does that not get arbitraged away?

      "Rationally, yes. Actually, unfortunately most people don't understand economics....that bus or bike lanes should be created to draw more people to use these modes."

      Yep, agree with you on that.

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    5. I believe that an investor/speculator wrongly believes himself to be rational (and hence, the market irrational) far more easily, than I believe that a lone investor gleans something from publicly available data that the rest of the market doesn't. That is not to say that the latter doesn't exist, but it's far more rare than single investors wrongly thinking themselves more rational than the market.

      IIRC somewhere you wrote that "on the run" bonds were more liquid. There are more than enough traders in T-securities for the EMH to apply. There really should be a less implausible explanation for the phenomenon than market inefficiency.

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    6. By the above, I mean that I consider the adage to be *useful* investment advice. But its usefulness isn't due to being true if taken at face value, since it's false under normal circumstances. However, if you are mistaken about the proper valuation of something (and consequently see the market as irrational), the advice stops you from going broke.

      Of course, if the market is such that shorting is not possible, then it can actually be irrationally overpriced. But then you cannot go short either, so this is not where the advice applies.

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  9. Hi JP - great insights as always. You might be aware that there have always been quite a lot of explicit Ponzi schemes running on the Ethereum blockchain. The ability to execute smart contracts gives investors a little assurance that the scheme will be executed faithfully, though the average investor still loses money. One of the most interesting was even called PonziCoin, and was always meant as a joke, but even so investors got very excited about it. If you have time to spare, it's interesting to track the discussion and reactions in real time here: https://bitcointalk.org/index.php?topic=474730.0. This reinforces your point that there really is demand for these sorts of schemes.

    This paper by Bartoletti, Carta, Cimoli and Saia provides a great overview of Ponzi schemes on Ethereum: https://arxiv.org/abs/1703.03779

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    1. Pete, just looking through it, the Ponzicoin link perfectly illustrates the demand for safe and transparent ponzi games. Will check the other one out too.

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  10. Doesn't fiat money fit into that broad Ponzi definition as well? The only thing that separates us from the hyperinflation is a collective delusion. All value is subjective.

    Yes, Bitcoin has many properties of such schemes (as many other things), but it doesn't prove it will end like one. Cryptocurrency is also similar to a religion. A lot of people are in Bitcoin not for profits but for ideological reasons: cypherpunks, developers, miners, people who invested everything, etc. It's not about gains anymore. For them, Bitcoin is part of their identity. Those people – called by Trace Mayer "hodlers of last resort" – will never sell. This is where the Ponzi analogy breaks. I met a lot of those people, so I intuitively feel the power of this community that many experts miss entirely.

    Bitcoin is not a zero-sum game. First of all, like other forms of money, it absorbs the economic growth. Then we have Bitcoins being lost continuously (deflation). Then we have Bitcoins used not to buy stuff but rather to keep the voting power (golden bars held by central banks works similarly). Those three forces can keep the price growing as long as the civilization is going.

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    1. Hi klos,

      "Doesn't fiat money fit into that broad Ponzi definition as well?"

      I've written about this a lot, but the short answer is no. Banknotes and deposits are backstopped by an issuer. Their value doesn't depend on another person entering the game.

      "Yes, Bitcoin has many properties of such schemes (as many other things), but it doesn't prove it will end like one. "

      End like one? I don't see why a chain letter can't continue indefinitely.

      "Cryptocurrency is also similar to a religion. A lot of people are in Bitcoin not for profits but for ideological reasons: cypherpunks, developers, miners, people who invested everything,...so I intuitively feel the power of this community that many experts miss entirely."

      Yep, I've written about bitcoin's plunge protection team.

      http://jpkoning.blogspot.ca/2013/04/bitcoins-plunge-protection-team.html

      Traditional chain letters can of course have their true believers too, and that can help them continue. But that doesn't stop them from being zero-sum games.

      "it absorbs the economic growth." Not sure what that means.

      "Then we have Bitcoins being lost continuously."

      Yep, a lost bitcoin is exactly like a new entrant. Both absorb the selling of someone who wants to exit, thus allowing the chain to continue. We might also imagine a stock bubble, and people losing their bearer shares. But that wouldn't stop us from calling it a bubble (i.e. a an early bird zero sum game.

      "Then we have Bitcoins used not to buy stuff but rather to keep the voting power (golden bars held by central banks works similarly)."

      Central banks hold gold in order to vote? I don't follow. People buy bitcoin in order to vote? On what?

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    2. Sure, there are limits of the scheme analogy, I agree. However, I think it works for Bitcoin as well. First of all, this notion that new people coming into Bitcoin are essential for its existence is a theory at best. There are new people coming and other people betting on it. However, it doesn't mean it would not work without it. Yes, probably the price would be way lower, but it may still reach a critical mass above which it will not die. Since I use Bitcoin as a medium o exchange quite a lot – I can definitely see it.

      The main difference with the letter chain is that while the letter chain is going on, it doesn't serve anything useful for society. That's why it's like cancer. It uses some strong social dynamics for bullshit purposes. Bitcoin is like a letter chain that – in the meantime – is money and store of value. With that notion, I accept this analogy.

      >"it absorbs the economic growth." Not sure what that means.
      When people using Bitcoin create more goods and services, those goods and services being chased by the same number of coins, and deflation happens. The economic growth pays off the national debt in the same way.

      >Yep, a lost bitcoin is exactly like a new entrant.
      I agree. I mention it as one of three forces driving the price long term.

      >Central banks hold gold to vote?
      Ok, I admit that I've read too much of Jim Rickards' books and did a bit of a stretch. In my opinion, gold in the central banks' vaults is used as kind of a "Proof-of-Stake" voting. It's rarely exchanged – the majority of the time it sits in the vault to demonstrate the power of the owner. This power can be used to enforce some of the owner agenda in case of a dispute. Rickards point is that in case of global financial collapse; it may be used to establish "the new order" what is the main reason why Russia and China are buying gold right now. I don't necessarily support this claim fully, but it's an example of such a "voting" situation.

      The most important aspect of it is that no central bank will ever say: "ok, the price of gold is so high that it's the time to take profits." No, they will keep a big chunk of it forever, possibly increasing it over time.

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    3. "The main difference with the letter chain is that while the letter chain is going on, it doesn't serve anything useful for society. That's why it's like cancer. It uses some strong social dynamics for bullshit purposes."

      I'm not convinced that a chain letter is a cancer. Is poker a cancer? It's a zero-sum game that doesn't provide anything useful. But people have fun playing it. Same with a chain letter or a ponzi. It's an entertaining game.

      "Bitcoin is like a letter chain that – in the meantime – is money and store of value. With that notion, I accept this analogy."

      Ok, but what if someone designed a new type of chain letter that allowed for your spot in the chain to be digitally transferred to someone else? Maybe you could buy a coffee with it. Would you support that kind of chain letter?

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