Sunday, February 1, 2015

The zero problem






The price of bitcoin is a capricious thing. Imagine that you've saved enough bitcoin to take your significant other out to a fancy restaurant. When the bill comes you discover to your horror that the price of bitcoin has crashed sometime between main course and desert. For the next few hours you're both stuck doing the restaurant's dishes. Far less embarrassing to choose dollars as your payment media at the outset given the unlikelihood of a dollar crash. This has always been one of bitcoin's main problems. The burden that a consumer must endure in absorbing bitcoin's incredible volatility until the time of payment outweighs any reduction in transaction fees that they might enjoy.

Or maybe not. Marc Andreessen recently posted a number of thoughts on twitter. The most interesting ones are #9 to 17, namely that bitcoin's fabled volatility needn't deter regular folks from using it as a cheap and fast payments mechanism.


In effect, it's possible to enjoy all of bitcoin's benefits without having to hold an inventory of the schizophrenic stuff. Consider that when merchants currently receive bitcoin in exchange for their product, their payments processor (say Bitpay or Coinbase) will instantaneously convert those coins into US dollars, thus sparing the merchant the risk of holding volatile bitcoin. As for shoppers, a service that allows them to purchase bitcoin in the instant prior to paying for a good would preclude them from having to bear the risk of a bitcoin crash. (1)

It's the "never-hold" approach to bitcoin. As long as just-in-time bitcoin purchases and sales are possible, shoppers and merchants can avoid bitcoin's worst feature, its volatility, while enjoying all of its best features, low fees and speed. These just-in-time services aren't free. Bitpay and Coinbase extract a fee for providing merchants with protection from bitcoin hyper-volatility, and a provider of shopper volatility protection would also expect to be compensated. Now I'm not sure how large these two fees would come out to. However, as long as the total cost is less than the fees levied by competing mechanisms like credit card networks, then bitcoin provides a net benefit to society. (2)

Touché, Andreessen. En Garde!

I've been talking about the potential for bitcoin to be displaced by stable-value cryptocoins as media of exchange for a while now. But if Andreessen is right (and I'm inclined to think he is) then who really cares if bitcoin suffers from +/-50% daily price changes? Whether it's worth $100 or $100,000, either way it serves regular folks as a superior last-second value transfer mechanism (subject to the above cost condition). We may not need stable-value cryptocoins after all.

But Andreessen is missing one of the larger points of the volatility criticism, which I'll call the zero value problem. Granted, we needn't care whether bitcoin is worth $100 or $100,000, but we do care if it is worth $0. While no categorical difference exists between any two given positive bitcoin prices, a categorical difference *does* exist between a positive price and a price of zero. Bitcoin works smoothly at any positive price, but it breaks down as value-transfer mechanism when it's worth nothing.

A key pillar of the volatility critique is that bitcoin's price earthquakes arise because the only players in the market are speculators. A more fancy way to say this is that bitcoin has no non-monetary demand. By non-monetary demand, I'm referring to that portion of an asset's total demand that would remain if prospective owners were notified that they could never sell that asset after purchasing it. Given this imposition, I sincerely doubt anyone would be willing to buy bitcoin. By and large, people only want the stuff because it can be got rid of in the future.

By way of comparison, gold has both monetary and non-monetary demand. There are consumers who will purchase the yellow metal knowing that they can never sell it again, say as jewelry or ornamentation. Same with an IOU like a stock or banknote. Because an IOU offers dividends (or a promise of cancellation at an attractive price), investors will be content to hold that IOU knowing that they can never resell it. This is the Warren Buffett approach to holding an asset, whereby one's favorite holding period is forever.

With the only folks holding bitcoin being future sellers, i.e. speculators, enter the zero value problem. An object whose value is purely speculative has no equilibrium price. In economics-speak, its price level is indeterminate. A $10,000 price is as good as a $10 price, or a $0 price. And that last price will inevitably arrivemaybe in 2015, maybe in 2020, maybe not till 2025when for some reason or other speculators all begin to get antsy at the same time. It could be something as innocuous as the belief that everyone else is about to sell (because they expect everyone else to sell, because they expect everyone to sell, etc). When a reflexive process like this begins, the only way for the bitcoin market to accommodate everyone's desire for an exit is for the price of bitcoin to hit zero.

For illustrative purposes, gold isn't subject to the zero value problem because if a speculative panic begins, consumption demand kicks in to anchor gold's price at some lower level. The same goes for central bank money.

At $1, bitcoin still works. But at zero, bitcoin breaks down as a payment mechanism. Since bitcoin no longer has a positive purchasing power, regular shoppers can no longer make just-in-time bitcoin purchases in order to consummate a transaction. Merchants will quickly pull bitcoin price quotes from their websites, unwilling to trade something (their wares) for nothing (bitcoin). Since the financial reward to mining will have disappeared, the process for verifying the blockchain may become tenuous. All the hard work put into building a payments mechanism will be gone in a few moments of speculative fervour. And what happens to all of the other "use cases" that Andreessen describes, like bitcoin apps and sidechains, when bitcoin hits zero?

Even if bitcoin hits $0 for an hour or two, won't the inevitable dead cat bounce fix the problem? Not necessarily. The best theory for how bitcoin rose above zero back in 2009 is the 'bootstrapping theory.' A small clique of insiders conspired to trade what was then an intrinsically-useless token among each other, generating a long enough history of positive prices so that bitcoin began to be accepted by naive outsiders at a non-zero price. From nothing, otherwise worthless tokens had pulled themselves up by their own bootstraps. Andreessen admit as much in his eleventh tweet.


The point I'm trying to make here is that if bitcoin were to fall to zero, a dead cat bounce isn't the natural next step. Rather, as in 2009, an outlay of time and resources would be required to fabricate a positive price. In essence, bitcoin would need to be re-boostrapped. But how to go about this process? Who would be willing to join the front line and risk their capital trying to trick the market into valuing bitcoin at a positive price again? Surely not all the former bitcoin millionaires. Keep in mind that it might take multiple efforts to jump start the system. And with bitcoin being so much more widely known than before, the re-bootstrapping process might take significantly more resources than it did in 2009. Finally, even if the system is successfully kickstarted after a few days, what about the damage that is incurred in the interim thanks to a period of inactivity? Could it do irreparable damage to bitcoin's reputation as a payments mechanism, in the same way that Visa would suffer if it went down for a few days?

How to overcome the zero problem

Luckily, there's a pretty easy fix to the zero problem. Set bitcoin's minimum price at US$1 so that it never has to go through a re-bootstrapping process.

To set a minimum price, bitcoin believers like Andreessen should consider donating US$21 million to a bitcoin stabilization fund. The fund will have a standing bid to purchase all bitcoin at $1. Since there will never be more than 21 million bitcoin in existence, the fund will have the financial resources to credibly support this price. In an extreme scenario in which all speculators run to the exits, the stabilization fund will be left holding 21 million bitcoin and no dollars. The good thing is that no harm will be done to bitcoin as a just-in-time value transfer system. The fund will make a market in bitcoin at $1, providing shoppers with an avenue to acquire the requisite bitcoin from the fund (say at $1.01) just prior to consummating a purchase, and providing merchants with a right to sell bitcoin at $1 in the moment after a sale.

The core idea here is that if speculators are for the moment unwilling to set a positive value for bitcoin, then someone else needs to. At some point after hitting the fund's $1 floor, speculators will likely gain enough confidence to once again take up the baton and drive bitcoin's price above $1. The roller coaster ride begins anew. If so, the stabilization fund's job is done, for the time being at least. It can start selling its hoard of bitcoin into the rally, replenishing its dollar reserves so that it can once again enforce the $1 floor should that necessity arise.

Think of the provisioning of a bitcoin stability fund as a public service. If bitcoin's promise is as enormous as folks like Andreessen believe, then the fund's $21 million price tag is a small cost to ensure that said promise isn't destroyed in a zero-value bitcoin scenario.



(1) I was going to point out that I don't think anyone is offering this service, but now I see that one is: Cryptosigma.
(2) If the combined cost of merchant protection and shopper protection +  bitcoin transfer fees are higher than the costs that banks and the card networks earn on transactions, then bitcoin may not be the panacea that everyone makes it out to be. 

51 comments:

  1. Interesting idea, but it seems very likely that the cost of conversion for the consumer, plus cost of conversion for the business, plus the cost of verifying the transactions on the Bitcoin network, in total, is going to exceed the costs of established payment networks.

    What happens if $1 bitcoin is below the cost of mining them? Who is going to mine them at a loss and provide the power to verify transactions? If the price of mining Bitcoins falls low enough due to a reduced network of miners, will it still be a fast enough to process instant or near instant verification? Even with the recent price falls and cloud miner closures I've been reading of some 10-15 minute transaction verification wait times. It seems to me that there's more to retaining a sustainable Bitcoin network than the price of the bitcoins.

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    1. If transactional costs exceed that of competitors, than bitcoin isn't a panacea (see my footnote #2).

      "What happens if $1 bitcoin is below the cost of mining them?"

      Good question.

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    2. Very good points, Bullion Baron. I think even $100/BTC would be too low for anyone to mine profitably; the electricity costs alone run into the hundreds of millions of dollars per year. No miners = dead blockchain.

      Again, more advantages for Ripple. IOUs allow people to transact in familiar currency units. Even before the establishment of widely accepted IOUs, a Bitpay-like system could use XRP instead of BTC. Ledger maintenance is cheaper and faster, and XRP won't face the zero problem because of its chartal value.

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    3. I mined when the price of Bitcoin was below 100USD/BTC and it was profitable (or it would have been if I sold my bitcoins). The difficulty adjusts. It does not adjust as smoothly as with some of the newer adjustment algorithms like the KGW, but it works.

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    4. I mined when the price of Bitcoin was below 100USD/BTC and it was profitable

      Roughly, between which dates were you mining? I can only assume it wasn't recently, since you could make a lot of money if your costs are still low enough to be profitable at $100/BTC.

      The difficulty does adjust, but as you know, it takes around 2 weeks (2016 blocks, 10 min/block) for each adjustment. If The Big One hits, a downward price spiral could certainly outrun difficulty adjustments.

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    5. it would have been if I sold my bitcoins

      Just curious--do you have any idea what miners are doing with newly mined coins? Do they mostly hold onto them, sell them immediately, or do both in roughly equal measure? Any guesses would be appreciated.

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    6. John: blockchain could still operate but will charge a fee for that? Yet I agree that Ripple solves the problem entirely.

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    7. I understand that the difficulty retarget is not smooth, but on the other hand neither are the expenses. You don't pay your electric bill hourly, for example.

      Further issues that I have with the "price spiral outrunning difficulty adjustment" argument are twofold: assumptions of partirucar profit curves, and assumtion that everyone herds (i.e. everyone behaves like a sheep). If I see price dropping, I might start looking for used mining equipment from liquidation sales, for example. For argument's sake, I will however admit that it is a theoretical possibility.

      I think that nowadays most miners are driven by business plans, and they use the stuff they mine for expenses. Some use hedging, e.g. selling hashing capacity and thus offload the volatility risk to customers. In the past (over about 2.5 years ago), it wasn't like this, and "investment" miners were more typical, I for example have not used anything that I mined to pay for electricity or mining equipment.

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  2. But why would it be harder for bitcoin to be re-bootstrapped if the price drops to the natural floor of $0 than when it drops to an artificial floor of $1? What difference does the $1 make?

    Is it a psychological issue? A mining issue? Finance?

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    1. It wouldn't have to be re-bootstrapped if the price drops to $1. The stabilization fund would make a market at that price, ensuring that the blockchain continues to provide the same transactional services as before.

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    2. Oh, I may now understand what you meant. Sorry for being dense. At a stabilized $1 price, people can still use bitcoin for 'in-out- transactions, only holding bitcoins for the time it takes to transact. And this is not possible at $0 because bitcoin would by definition not be worth anything anymore.

      Yes, true. But the reason that the 'stabilizers' would be incentivized to continue to make it possible for these kinds of transactions to take place is because they think that this kind of demand could grow in the future, making the bitcoins they are holding increase in value. So they'd have to stimulate/create/provoke some additional market demand for bitcoins so that the price can increase from $1 to $1+x.

      But in this respect the difference between $0 and $1 does not seem categorical or even all that relevant.

      In the case of a $0 bitcoin, the remaining bitcoin enthusiasts will also have to create additional market demand so that the price goes from $0 to $0+x. In both the stabilized-$1 and the $0 scenario the holders of bitcoin speculate that the value will increase and they are incentivized to help that process along. The only advantage that the $1 stabilizers have is that they can show bitcoin in action & make it directly useful for consumers even though it's not profitable for themselves until demand grows so that the market price will be >$1.

      (Also, if the bitcoin enthusiasts at the $0 price think they even have a remote shot at creating market some demand for bitcoins again, these enthusiasts themselves will be willing to pay at least some non-zero amount for bitcoins, thereby immediately giving it a >$0 price anyway, also gaining the just-mentioned advantage, albeit to a lesser extent)

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    3. "But the reason that the 'stabilizers' would be incentivized to continue to make it possible for these kinds of transactions to take place is because they think that this kind of demand could grow in the future, making the bitcoins they are holding increase in value.."

      Actually, the main incentive I had imagined in my post was altruism --- the desire to ensure the integrity of the network. A move to $1 + x is not requisite. See last paragraph.

      "The only advantage that the $1 stabilizers..."

      The "only" advantage? It sounds to me like your downplaying this point. It's a huge advantage to stabilize the price at $1 rather than $0 since transactions can still flow, otherwise not.

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    4. I don't hink that the "bootstrapping" is a practical issue, rather a theoretical one. If anything, bitcoin showed us that the difference between zero and non-zero (or as JP might say, manufacturing initial liquidity) is easier to achieve than previously thought.

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    5. Thanks for your responses.

      Yes, if the incentive is solely altruistic then you're right, but do note that at a price of $1 or less the total of ((the size) x (number) of transactions) and hence the 'size' of the public good that bitcoin can support is very limited (a tiny fraction of the economy), and an increase in that total (assuming constant velocity) is only compatible with a higher price.

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    6. "... the 'size' of the public good that bitcoin can support is very limited..."

      The velocity of bitcoin might be very high, so that a small base supports an incredibly large number of transactions, all at the $1 peg.

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    7. That's definitely possible, but I don't see a good reason for thinking that it's also plausible. I mean, why would the velocity go up by that much?

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    8. Why not? There's no reason for velocity to be stable. Milton Friedman used to think that money velocity was stable until the data blew his assumption out of the water.

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    9. I understand there is no reason for velocity to be stable and hence that it is possible for bitcoin's velocity to go up (especially by this much), but I'd need to hear additional reasons to think that it is also plausible / likely for this to happen.

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  3. In equilibrium, Marc Andreesson will own all the Bitcoin. There is an infinite supply of things that speculators can speculate with.

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    1. Sure, but even though central bank fiat money is a speculative bubble, it's value hasn't fallen to its fundamental floor of 0.

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    2. Put differently Andreessen's peg would be like the Fed saying that they'd redeem $1000 worth of Fed banknotes with 0.01 ounces of gold, far below its current market price of ~$1000 per ounce. Will the Fed own all the banknotes?

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    3. JP: but there's a stock demand to hold Fed banknotes for monetary purposes (if they have strictly positive value). We are imagining a world in which there is no stock demand to hold Bitcoin for monetary purposes, because its price is too volatile.

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  4. Volatility per se is not a problem.

    Hedging volatility per se is not a problem – it’s a matter of pricing the bid-offer spread.

    What is a problem is if the ultimate hedger/speculator also has no valuation anchor.

    The system requires more than an instantaneous hedging network for the end user. It requires ultimate dealers in the thing that is subject to the volatility and requiring hedging and/or speculation. Until the whole thing collapses in panic selling, ultimate dealers will still be quoting much larger spreads than is the case for liquid foreign exchange markets for example - due to the outsized volatility. That will be a competitive problem in gaining market share in the medium of exchange.

    He’s blowing smoke. This thing is going to zero – or perhaps under your idea a bunch of 1’s held by Andreessen, like Nick said. Otherwise, Facebook would have offered $ 20 billion for it already, and integrated it with WhatApp (which also hasn’t yet been monetized).

    :)

    Andreessen thinks he can eliminate the distinction between currency and payment system by Vulcan mind probe. From an economics standpoint, maybe technology hubris is an inverse operator to physics envy.

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    1. Good point on bid ask spreads. Have you taken a look at their size? They are small:

      http://bitcoincharts.com/markets/bitfinexUSD.html

      As for foreign exchange, I'm not sure what the spreads are, but I've incurred some pretty awful wait times and fees while trying to transfer funds overseas.

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    2. Well, that's one way of making a good point

      :)

      I'm obviously not familiar enough with the distribution system

      I should have referred to wholesale/retail spreads if there is such a thing

      FX wholesale/retail spreads are pretty bad

      Just bought some Mexican pesos and was horrified at that - maybe a reflection of C dollar volatility against US as well

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    3. Is there such a thing as a wholesale market for bitcoin, or wholesale/retail differentiation, or wholesale/retail spreads?

      If not, will there be?

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    4. That's going a little beyond my knowledge of bitcoin. There could be something like a wholesale market for bitcoin, but I'm not aware of it.

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  5. I think such an abstract problem is not worth of the price of 21 millions. A bitcoin equal to zero would mean there is no demand at all. So, whatever you do to make the value safe, it won't work, because no demand = no users.

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  6. "There are consumers who will purchase the yellow metal knowing that they can never sell it again, say as jewelry or ornamentation."

    Though to be sure, the value of gold as an ornament / jewelry may be in large part the result of its monetary function (medium of exchange & (speculative) store of value) instead of the other way around, so that in the absence of monetary demand for gold the non-monetary value would drop a lot too.

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    1. How so? If the price of gold falls relative to that of platinum, palladium, silver, and copper, I'm going to want to use more of it to build transistors, in wiring, and to adorn my body.

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    2. If gold were as abundant as rock, I doubt that the people currently using gold for jewelry would continue to use it in that way, even if none of its properties (e.g. its shininess and durability) change. People wear gold because it signals wealth, and it signals wealth because gold is expensive and it is expensive mostly because of its monetary role (interpreted broadly so that it includes the use as a speculative store of value).

      Use in industrial processes *would* increase when the monetary demand for gold decreases, because in those uses gold behaves as a regular good.

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  7. The biggest risk of Bitcoin units becoming worthless comes from the system itself breaking, for example a major failure in the crypto algorithms or network/mining incentives, making existing balances insecure or untrusted or non-transferable.

    In such a scenario, a standing offer to purchase can't help. The seller can no longer prove their ownership… or the value can't be transferred… or the buyer can't hold their purchase.

    Thus such a stabilization fund, while an interesting thought experiment, strikes me a 'maginot line' with respect to any real threats.

    The same $X million invested into fortifying Bitcoin against technical/game-theoretic/legal risks would offer more practical value-protection.

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    1. You could be right. A stabilization fund is a very specific solution to a very specific problem; speculative panics. Whether that is bitcoin's biggest problem, or even on the top 10, I'm not capable of saying.

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  8. I read Andreessen’s NYT article and it just solidifies the impression that he is totally confusing currency and payment systems:

    “Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today – volume and velocity of payments running through the ledger – and speculation on future use of the payment system. This is one part that is confusing people. It’s not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and as a result it has value.”

    That's no explanation of value. No it doesn’t. The trading system has value. Not the currency. The system could be monetized with advertising for example. The currency has the perception of value because people are mesmerized by the idea that the value of the system confers a non-zero value on the currency - any non-zero number will do.

    Here is a question:

    How can the value of Bitcoin change (as per trading records) without somebody somewhere being exposed to being net long or short before closing out his position? Is that possible? In other words, aren’t trading losses inevitable? Are these losses currently muted because scale is so small and small size liquidity is easy to attain?

    Other questions:

    Has no wholesale trading system developed because scale is currently so small?

    Would a more realistic scale in future imply that wholesale trading must inevitably develop?

    Will that mean jumbo size scale speculative activity?

    Will that mean far more abrupt intra-day volatility?

    And would that means bid ask spreads at the retail level would widen due to increasing scale in trading?

    Conversely, would the absence of a wholesale market mean that scale would never be attained and that Bitcoin remains in the playpen?

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    1. Good questions. Maybe one of the more connected readers of this post can answer.

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  9. A bunch of remarks.

    First of all, it is not true that the price of bitcoin (or a cryptocurrency) is purely a liquidity premium, and thus that the price level is indeterminate. Cryptocurrencies are not only demanded for their liquidity, but also for reduction of transaction costs. And reduction of transaction costs is utility by itself. Admittedly, in this particular case, there is a big overlap, but they are economically not the same phenomena, and the overlap is not complete. Cryptocurrencies can be used for property rights enforcement in general, and thus compete with other mechanisms that provide the same functionality, such as registries, lawyers, police, warehouses or transportation machinery. Or security devices/service such as the Yubikey, Authy or Google authenticator. I recently started using BitID on my servers. It would be odd to claim that because the price of lawyer services is indeterminate because those services cannot be consumed and give no cash flow for the buyers. The reduction of transaction costs is not consumed itself, rather it allows a fuller consumption of existing goods. And as Carl Menger explained, transaction costs are heterogeneous and omnipresent, so there will always be demand for goods and services that reduce them and always the possiblity of a new market entrant to establish itself.

    JP himself, in a an earlier article, explained how to use a stock that trades on multiple markets to conduct arbitrage in case of capital controls. This proves that there are cases when you can reduce transaction costs by using something which has lower liquidity. It might appear paradoxical on first look, but Menger's insight explains why it works.

    We also need to consider in what situation would Andreessen's pledge be actually relevant. What dramatic thing would occur that the price of Bitcoin would drop to zero and at the same time Andreessen would credibly able to hold its promise? If there are major technical problems with Bitcoin, Andreessen's pledge would be powerless. If there is a regulatory attack on Bitcoin, Andreessen's pledge would be illegal. In other words, it is a nice theoretical exercise which entirely misses the issue of the costs of property rights enforcement and thus has little practical relevance. In the future, the situation would be actually the reversed: people will use cryptocurrencies to enforce pledges, rather than pledges to boost cryptocurrencies.

    I also don't buy that rebootstrapping is an issue. My impresison is that from practical point of view, manufacturing initial liquidity and manufacturing additional liquidity has little difference.

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    1. "First of all, it is not true that the price of bitcoin (or a cryptocurrency) is purely a liquidity premium, and thus that the price level is indeterminate. Cryptocurrencies are not only demanded for their liquidity, but also for reduction of transaction costs."

      The point I'm making is that the volatility that shoppers endure as they hold cryptocurrency up to the point of making a purchase is itself a major cost, or inconvenience. Just-in-time bitcoin payments are a way to protect from this risk--you get the best of both worlds, no volatility and a reduction in transaction costs. However, that means the only holders of the stuff are speculators. By definition, this means the price level is indeterminate.

      "We also need to consider in what situation would Andreessen's pledge be actually relevant. What dramatic thing would occur that the price of Bitcoin would drop to zero and at the same time Andreessen would credibly able to hold its promise? "

      No we don't need to consider this. What caused the 1987 stock market crash? We don't know. That's the point of speculative panics --- they don't need to have causes, they just happen, say because of the flap of a butterfly’s wings in Brazil. A bitcoin peg is agnostic on causes, it's main point is to protect against speculative implosions, which we know from observation that bitcoin is highly susceptible to.

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    2. Volatility is not merely a cost, but also an opportunity. Furthermore, even existing currencies are differently volatile, so they do not have the same relative advantages over Bitcoin.

      It is true that in the scenario you described, only speculators hold bitcoins. However, this neglects the other part of the transaction: the transaction costs of obtaining bitcoins for customers. For the same reason a merchant can decrese transaction costs by allowing customers to pay with bitcoin, a customer can decrease transaction costs by holding them for longer than just for the transaction. It is only because the encumbent payment systems are crap. If they weren't, neither side could reduce their costs and there would be no reason to use Bitcoin for payments at all.

      It is news to me that during speculative panics prices go to zero. But even if they did, why would that happen with Bitcoin? Bitcoin has been through several bubbles and panics, and the price never went to zero. Why should it happen in the future for this reason?

      Fiat currencies go to zero in a panic. If anything, that's one more reason to avoid holding them.

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    3. Also, as far as I know, no cryptocurrency went to zero due to a panic. They went to zero for other reasons, such as loss of interest, technical problems or fraud.

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    4. Can't really think of a fiat currency that went to zero due to a panic.

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    5. Hungarian pengö or zimbabwean dollar? In case it is not clear, I wanted to say that hyperinflation (or the last phase of it) is a type of a panic.

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    6. I think it's probably as fair or as unfair to say that a whole lot of cryptocurrencies went to zero because of a panic as it is to say that a whole lot of fiat moneys went to zero because of a panic.

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    7. I wasn't trying to be unfair. I wanted to investigate the motivations of people. Why would the price go to zero due to a panic? Just because we can assume it, it doesn't mean it's a practically relevant. If it really went very low due to a panic, I would buy them all up for, say, about 900 USD (which was the money supply value when price first emerged) just to disprove the criticism.

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    8. I know you weren't trying to be unfair. My point was just that it probably makes as much or as little sense to say that e.g. the Hungarian pengö [sic] and the Zimbabwean dollar went to zero (did they though?) because of a panic rather than because of other factors such as excessive money creation & low quality government than it is to say that e.g. Chinacoin or whatever other failed cryptocurrency we can think of went to zero because of a panic rather than because of other factors such as loss of interest, technical problems or fraud.

      And so that your remark that "Fiat currencies go to zero in a panic. If anything, that's one more reason to avoid holding them" would apply equally well or equally poorly to both cryptocurrencies and fiat money.

      I agree with you btw that it is unlikely that bitcoin will ever go to zero due to a panic. Or even at all. As long as they are scarce I think they will continue to have some value as a collectors' item (being the first cryptocurrency in the history of the world) even if they totally fail as a currency.

      So in addition to me thinking that there is not much of a categorical difference between $0.00 and >$0 *when it comes to trying to revive bitcoin*, I also think it is unlikely for bitcoin to ever again reach $0.00 in the first place.

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    9. It looks like we're suffering from imprecise definitions. At one of the conferences, someone gave me a Zimbabwean dollar bank note for free. Does it mean its price is at zero?

      According to Wikipedia, after the reform following the hyperinflation, "In effect, the total amount of circulating pengő notes had a value of less than 0.1 fillér (0.001 forint).". Does that mean it's zero?

      For our purposes, what is probably relevant if any exchanges are willing to list the cryptocurrency (or in case of fiat, forex markets). We can imagine that a forex market would delist the Zimbabwean dollar. They forex markets will still continue operating. But what if a cryptocurrency exchange delists Bitcoin? There would be nothing left for them to do. They can just shut down. At least hypothetically, it is of course possible, just like it is hypothetically possible that suddenly everyone decides to stop using the internet. But I see little practicality in musing about what should be done to prevent that.

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    10. "Volatility is not merely a cost, but also an opportunity."

      Questioning the idea of risk aversion is probably not a path you want to take.

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    11. I am not questioning the idea of risk aversion. Risk aversion is not the inverse of volatility. Rather, volatility is one aspect of risk. There are all kinds of other risks, and cryptocurrencies and fiat money have different components of risks. There are people who are risk averse, but think that fiat money is more risky than cryptocurrencies due to systemic issues, for example, even if it may be less volatile.

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    12. "There are people who are risk averse, but think that fiat money is more risky than cryptocurrencies due to systemic issues, for example, even if it may be less volatile."

      That would be quite an extraordinary position to take, especially because currently it is overwhelmingly the case that the average fiat money is much much less risky than the average cryptocurrency, or even the best performing cryptocurrencies. So I assume that the reason one might take this position is theoretical in nature and I wonder what exactly it is.

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    13. I don't think it's extraordinary. There are many risks that you're exposing yourself to when dealing with fiat currencies, such as the risk of identity theft, the counterparty risk, the risks following from systemic leverage, various forms of regulatory restrictions, capital controls, the volatility of the supply, and so on. As time goes on, I'm becoming more and more pessimistic about the viability of fiat currencies.

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    14. JP,

      I do not think that Bitcoin (or the USD for that matter) suffers from what you call the "zero problem."

      The theoretical result in which fiat money suffers from the zero problem relies critically on an absolute complete lack of intrinsic worth. If one adds even an "epsilon" of backing, then the zero problem disappears.

      In the case of the USD, this epsilon backing might come from the ability of legal tender to discharge a tax obligation.

      In the case of Bitcoin, this epsilon backing comes from the intrinsic value in a P2P global value transfer system.

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    15. http://jpkoning.blogspot.ca/2015/07/stablecoin.html?showComment=1437918531580#c6295630248626775830

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