Inflation, gold and crypto

[Longnose]

13 minutes ago, gfp said:

Thanks for answering.  I understand your point of view.  Is "stable" a good quality for "money" to have?  Does extreme volatility and levered correlation with risk assets (vs behaving more like gold) make this super secure thing a poor substitute for things historically used as "money."

 

Why is it so hard for another cryptocurrency/chain to have security as good as Bitcoin?  Is this not something that is created by man and therefore man can do it again if they want to?

 

I'm trying to figure out if the "there is no bitcoin in space but plenty of every other limited resource" argument is any good.

 

 

Its about adoption and the rules. You can recreate BTC but who is going to use it? BTC adoption is growing and security is extremely strong. Another differentiator of BTC vs other crypto's even ETH is that the creator of BTC (satoshi nakamoto) didn't mint any BTC to himself. Many alt coins are pump and dump schemes where the creators gave themselves a bunch out the gate. With BTC every participant has to work to get more BTC. Every BTC minted need to show Proof of Work to get mined. The network only gets more secure as more people use it. For less than $200 you can run a raspberry pi in your basement and add to the security of the BTC block chain by being a full node validator. Your node contributes to the block chain validates the transactions. The more nodes that validate the more secure the network gets. 

 

@rkbabang is right on the money with ETH and BTC being different. BTC will be the basis for new currency. ETH and other cryptos will be the basis for smart contracts. I am still a big believer that in the next 20 - 50 years you'll see a new wave a businesses that will be built on blockchains (ETH, SOL, AVAX, and others) that will run more efficiently and leaner giving them a competitive advantage over their peers. It has the potential to eliminate opex and increase data accuracy across businesses and internal departments. 

 

To the question of "Why is it so hard for another cryptocurrency/chain to have security as good as Bitcoin?" 

The answer is: its not hard. Problem is that most people wanting to replicate it are replicating it with a twist (usually a twist that is less secure or more self serving). 

The rules of BTC are not self serving and are very unbiased. (they are public and you can read them). 

 

 

[ValueArb]

7 hours ago, Longnose said:

 

Its about adoption and the rules. You can recreate BTC but who is going to use it? BTC adoption is growing and security is extremely strong. Another differentiator of BTC vs other crypto's even ETH is that the creator of BTC (satoshi nakamoto) didn't mint any BTC to himself. Many alt coins are pump and dump schemes where the creators gave themselves a bunch out the gate. With BTC every participant has to work to get more BTC. Every BTC minted need to show Proof of Work to get mined. The network only gets more secure as more people use it. For less than $200 you can run a raspberry pi in your basement and add to the security of the BTC block chain by being a full node validator. Your node contributes to the block chain validates the transactions. The more nodes that validate the more secure the network gets. 

 

@rkbabang is right on the money with ETH and BTC being different. BTC will be the basis for new currency. ETH and other cryptos will be the basis for smart contracts. I am still a big believer that in the next 20 - 50 years you'll see a new wave a businesses that will be built on blockchains (ETH, SOL, AVAX, and others) that will run more efficiently and leaner giving them a competitive advantage over their peers. It has the potential to eliminate opex and increase data accuracy across businesses and internal departments. 

 

To the question of "Why is it so hard for another cryptocurrency/chain to have security as good as Bitcoin?" 

The answer is: its not hard. Problem is that most people wanting to replicate it are replicating it with a twist (usually a twist that is less secure or more self serving). 

The rules of BTC are not self serving and are very unbiased. (they are public and you can read them). 

 

 

I’m still waiting for the first business to be built on the blockchain. Hard to imagine 30 years is going to be enough time to see a much wider adoption of the worlds slowest and most energy intensive public database.

[JRM]

9 hours ago, ValueArb said:

I’m still waiting for the first business to be built on the blockchain. Hard to imagine 30 years is going to be enough time to see a much wider adoption of the worlds slowest and most energy intensive public database.

 

Blockchain is just an append only linked list, but distributed.   It's like if one toilet in the world needs to be flushed every other toilet in the world flushes at the same time.

[UK]

https://www.bloomberg.com/news/articles/2022-12-21/us-farmland-escapes-real-estate-slump-as-prices-soar-to-record?srnd=premium-europe

 

In the long term, a growing global population coupled with a changing climate makes productive land in the Midwest integral to global food production. 
Interest from outside investors is also on the rise. Farmland is considered a great hedge against inflation because the commodities it produces usually gain in value when overall prices rise. “Land is a real asset,” Gary Schnitkey, professor at the University of Illinois, said at a conference in Champaign. “Do you want to own a piece of dirt or cryptocurrency? It’s a good way to diversify your asset pool.”

[ValueArb]

8 hours ago, UK said:

https://www.bloomberg.com/news/articles/2022-12-21/us-farmland-escapes-real-estate-slump-as-prices-soar-to-record?srnd=premium-europe

 

In the long term, a growing global population coupled with a changing climate makes productive land in the Midwest integral to global food production. 
Interest from outside investors is also on the rise. Farmland is considered a great hedge against inflation because the commodities it produces usually gain in value when overall prices rise. “Land is a real asset,” Gary Schnitkey, professor at the University of Illinois, said at a conference in Champaign. “Do you want to own a piece of dirt or cryptocurrency? It’s a good way to diversify your asset pool.”

 

US farmland  has produced infinitely higher cash flows than crypto over any period you can measure. And in the long run the market weighs cash flows.

[TwoCitiesCapital]

On 12/20/2022 at 12:26 PM, gfp said:

Thanks for answering.  I understand your point of view.  Is "stable" a good quality for "money" to have?  Does extreme volatility and levered correlation with risk assets (vs behaving more like gold) make this super secure thing a poor substitute for things historically used as "money."

 

Why is it so hard for another cryptocurrency/chain to have security as good as Bitcoin?  Is this not something that is created by man and therefore man can do it again if they want to?

 

I'm trying to figure out if the "there is no bitcoin in space but plenty of every other limited resource" argument is any good.

 

 

@rkbabang already has an excellent response to this, but it can all be summarized by "the network". 

 

You could copy the BTC, verbatim, And launch BTC 2.0 tomorrow. And it would largely be worthless because 1) no one is using it, 2) no one is securing it against attack, and 3) you have no incentive to get everyone off of BTC and onto BTC 2.0 that does exactly the same thing. 

 

The end result is BTC retains its value and while BTC 2.0 flounders. There have been many hard forks and copies of BTC made (doge coin for instance is a copy of BTC with the removal of the 21 million hard cap).

 

They ALL degraded against BTC which continued growing in adoption, use, and value while the others didn't.

 

It's the network effect. The more people use it, the more valuable it becomes, and makes more people want to be a part of it and use it. The more people use/accept it, the easier it becomes for more people to use/accept. 

 

The more used/accepted it becomes, the more valuable the network as a whole is (as measured by the market capitalization of the coins being demanded which is increasing relative to supply). The more valuable it becomes, the more lucrative it is to provide computing power and resources to the network, which furthers the security and reliability, which leads to more adoption and use of the network because confidence in the network grows. 

 

The value is in the network. BTC has spent 13 years cultivating that network growth and being uncompromising on the things that matter for its use as money/wealth storage. That's what makes it better and why it can't simply be copied - you can't Ctrl-V the network. 

Edited December 22, 2022 by TwoCitiesCapital

[rkbabang]

8 minutes ago, TwoCitiesCapital said:

 

@rkbabang already has an excellent response to this, but it can all be summarized by "the network". 

 

You could copy the BTC, verbatim, And launch BTC 2.0 tomorrow. And it would largely be worthless because 1) no one is using it, 2) no one is securing it against attack, and 3) you have no incentive to get everyone off of BTC and onto BTC 2.0 that does exactly the same thing. 

 

The end result is BTC retains its value and while BTC 2.0 flounders. There have been many hard forks and copies of BTC made (doge coin for instance is a copy of BTC with the removal of the 21 million hard cap).

 

They ALL degraded against BTC which continued growing in adoption, use, and value while the others didn't.

 

It's the network effect. The more people use it, the more valuable it becomes, and makes more people want to be a part of it and use it. The more people use/accept it, the easier it becomes for more people to use/accept. 

 

The more used/accepted it becomes, the more valuable the network as a whole is (as measured by the market capitalization of the coins being demanded which is increasing relative to supply). The more valuable it becomes, the more lucrative it is to provide computing power and resources to the network, which furthers the security and reliability, which leads to more adoption and use of the network because confidence in the network grows. 

 

The value is in the network. BTC has spent 13 years cultivating that network growth and being uncompromising on the things that matter for its use as money/wealth storage. That's what makes it better and why it can't simply be copied - you can't Ctrl-V the network. 

 

Yes.  It's like saying what is so special about the existing internet?  Couldn't you just start your own separate network with all the same features and get everyone to leave the existing internet and switch to your network?  Say you come up with some novel networking feature, would it be more plausible that everyone on the planet leaves the internet and starts using your network instead? Or would it be far more likely that the current internet simply adopts that functionality and everyone continues to use it?

 

[tede02]

Crypto took over my thread. LOL. It's all good. Some interesting insights on a subject I don't know much about. 

 

To try and bring the discussion back to the original theme, is crypto (maybe bitcoin specifically) a good inflation hedge and why? Or is it the same concept as Twocitiescapital described about gold (that being the relationship between interest rates and inflation). 

[TwoCitiesCapital]

1 hour ago, tede02 said:

Crypto took over my thread. LOL. It's all good. Some interesting insights on a subject I don't know much about. 

 

To try and bring the discussion back to the original theme, is crypto (maybe bitcoin specifically) a good inflation hedge and why? Or is it the same concept as Twocitiescapital described about gold (that being the relationship between interest rates and inflation). 

 

Depends on your time horizon IMO - almost all traditional inflation hedges have OTHER risk factors that can dominate their performance in the short amd intermediate term. 

 

TIPS have been terrible this year because they've been dominated by their duration risk.

 

BTC has been a terrible inflation hedge this year because it's been dominated by its inelasticity and demand has cratered. 

 

Gold has been a terrible inflation hedge this year (but has still performed admirably relative to other assets) due to reduction in negative interest rates making short-term debt instruments more attractive. 

 

Oil has been a terrible inflation hedge (but has still performed admirably relative to other assets) due to political risks and the reduction in the SPR. 

 

All have underperformed inflation this year.

 

I think you're most direct inflation hedge is things tied directly to the CPI with no other risks (like iBonds). Those are inadequate due to purchase limits.

 

Second to those, I'd say oil given it's overrepresentation in CPI calculations due to its ability to flow through to everything down stream and the inability to be politically manipulated for long (though is still subject to the boom/bust cycle of capital investment in the industry).

 

Long term, gold and TIPS will be fine as inflation hedges. But you need to wait years for the other price moving risks to cancel each other out, or to amortize into maturity, to leave the underlying scarcity, value preservation, and inflation adjustments to principal to be evident. 

 

BTC might be similar to gold/TIPS in that regard, but I expect the secular growth trend AND inelasticity will dominate the price action for the foreseeable future while the inflation hedge aspect will be predominantly under the surface until it achieves mass adoption. 

Edited December 23, 2022 by TwoCitiesCapital