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    Author Topic: If cryptocurrencies become huge, maybe none are good as a store of value  (Read 1643 times)

    • exapted (OP)
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    July 23, 2013, 06:12:08 AM
     #1
    Imagine when cryptocurrencies become standardized, accepting one is as easy as accepting another, and several cryptocurrencies trade in high volume. What will prevent everyone from simply selling all their Bitcoin and moving to Litecoin, then dumping Litecoin for Megacoin, then dumping Megacoin for Bitcoin again?

    Many people say that Bitcoin is a better store of value than gold. I would agree, if I could see an ecosystem of forces maintaining equilibrium. I can think of some potential candidates:
    (1) Vendors traders dealing in some exclusive set of cryptocurrencies (for example, Silk Road deals in Bitcoin only)
    (2) Software monopoly dealing in some exclusive set of cryptocurrencies (for example some popular cryptocoin wallet that only supports Bitcoin and Litecoin)
    (3) Brand and PR for some exclusive set of cryptocurrencies
    (4) Some big investors get into some exclusive set of cryptocurrencies
    (5) Exclusive features
    (6) Momentum, risk aversion (maybe it would be hard for a sell-off to get started once the price stabilized)

    Unlike gold, cryptocurrency featuresets are a dime a dozen. As soon as a feature is devised, it can be copied by a new cryptocurrency. Gold has many uses beside store-of-value and medium-of-exchange. Obviously silver can't always be substituted for gold, whereas it seems easier for Litecoin to be substituted for Bitcoin. So to me it seems easier for a powerful agent to manipulate the Bitcoin market than the gold market, and any single cryptocurrency seems much less secure than gold. Therefore I think gold is probably a better store of value than Bitcoin.

    While Bitcoin seems like a good medium-term investment, it seems shakier as a long-term investment and riskier than I would think were it not for the above.

  • Etlase2
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    July 23, 2013, 06:18:10 AM
     #2
    but.. but.. it's a stock! like apple! but... whoever gets there first wins! look at facebook! but... the utility bitcoin creates is unique! buy! buy! buy!
    Decrits

  • exapted (OP)
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    July 23, 2013, 06:23:12 AM
     #3
    Quote from: Etlase2 on July 23, 2013, 06:18:10 AM
    but.. but.. it's a stock! like apple! but... whoever gets there first wins! look at facebook! but... the utility bitcoin creates is unique! buy! buy! buy!

    Bitcoin's network effect is weak once cryptocurrency transactions become standardized and several trade in high volume.
    Lets assume that Facebook is easy to replicate (it's not). If I move to MySpace, I lose all my friends unless they move with me.
    If I sell Bitcoins for Litecoins, the risk is minimal and I can exchange it for a similar value.

    EDIT:
    Also, if I see Megacoin's value rising, and all the merchants accept Megacoin, then I might sell my Bitcoins for Megacoins. Others may follow. The network effect is weak, and the stampede effect is strong.

  • melon
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    July 23, 2013, 09:01:14 AM
     #4
    stocks used to sell based on their true quarterly net equity on the balance sheet according to selling real products with real profits and growth increase in net equity.. it seems now that w manipulation of every facet that real valuations either don't hold up  or in some cases ignored...whoever can tradse the fastest now is the new way and people get ruined...overproduction of alt currencies in a short time might wreak havoc too...all overinflation of one to the next even if each is set to a stable amount...but fun to watch...sometimes !
    Once was a man his name was Jed..had a lot of hair but it wasn't on his head !

  • exapted (OP)
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    July 23, 2013, 09:33:38 AM
     #5
    One way to make an alt-coin popular might be to get a retailer to accept it exclusively. When I first heard about Megacoin, I thought maybe MegaUpload would exclusively accept Megacoin in the future, propping up demand and increasing the exchange value of Megacoin. (I don't think it is related to MegaUpload, so don't take that seriously.)

    I think a strategy similar to the above could help to make Bitcoin retain the position as the main cryptocurrency with the most stable value. Basically, Bitcoin would be backed by a set of retailers or traders who refuse to deal in other cryptocurrencies.

    Right now, when someone decides to accept a cryptocurrency as payment, usually it's Bitcoin. In the future, I bet it would be just as easy to accept several cryptocurrencies without favoring any in particular.

    Imagine if Google decided to accept one cryptocurrency exclusively for Google AdWords. That cryptocurrency would get a persisting boost in value. But Google would need some incentive to do that, so it's a double-edged sword, so to speak.

  • kangasbros
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    July 23, 2013, 10:29:25 AM
     #6
    It might be, that no coin is good for long-term (10-50 years) value holding. I don't personally see this as a problem. Let the best cryptocurrency win, and then lose after even better cryptocurrency comes out.

    (Currently however I don't see any advantages in the existing altcoins over bitcoin).
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  • exapted (OP)
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    July 25, 2013, 05:24:24 AM
     #7
    One thing to add. If my analysis holds up, then with a few assumptions it is an endorsement of Ripple.

    If Ripple gains critical mass as an exchange platform, both for exchange within the Ripple network, and into and out of Ripple through its gateways, then XRP will have inherent advantages while Bitcoin will not (assuming no other forces come into effect, such as Zerocoin integration). In such case, I guess XRP could be a better store of value because there would be a persisting demand for it.

    I love the idea of Open Transaction + BitMessage, but it would not privilege any currency in particular, and so no cryptocurrency would be a good store of value (assuming high liquidity and no other forces in effect).

  • d'aniel
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    July 25, 2013, 06:49:42 AM
    Last edit: July 28, 2013, 02:02:55 AM by d'aniel
     #8
    I think this will be the third time I've dropped a quote from this insightful post:
    Quote
    In any realistic economy, real or virtual, there is a demand for at least one good which is used as a "store of value," that is, not used or intended to be used by the owner, but owned simply to transfer purchasing power across time.  Nonetheless, the owner holds this good and participates in the market for it.  If many owners standardize on the same good, they affect the market for this good.  We can think of their collective purchasing power as a sort of "energy" that flows into this market.

    It turns out that the correct collective strategy in this game is for everyone to standardize on the same asset as a store of value, and for this asset to be one of intrinsically limited quantity.  If the quantity is not limited, as for example in a manufactured good, a stable pool of savers will not increase its price.  If the quantity is limited, as with gold, Bitcoin, etc, the price will increase as savings energy flows in - and, of course, decrease as it flows back out.

    There is no way to eradicate this effect from anything like a realistic economy.  There is always at least one bubble.  Ideally, this bubble is stable, and we call it "money."  If you try to spread savings energy across all the goods in the economy, it will stay in storable goods and not in un-storable ones.  It will flee from manufactured goods and end up in rare collectibles.  Finally, it will flee from a broad spectrum of collectible assets and end up in a single standard.  Those who are late in fleeing are, by definition, caught in a bubble which pops - and taste the pain.

    And this one:
    Quote
    Bitcoin is an exceptionally pure test of the BTM, because it has no intrinsic utility.  It is uncomfortably reminiscent of that apex specimen of the South Sea Bubble, "a company for carrying out an undertaking of great advantage, but nobody to know what it is."  One of the problems with the South Sea Bubble - in fact, one of the reasons why South Sea Company stock could not become a new monetary standard - was the inability to define a reason why one security should be the standard, and not another.  There are Bitcoin clones, all more or less worthless.  Bitcoin is a protocol standard, and everyone in our era knows how protocol standards play: winner takes all.

  • halfawake
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    July 25, 2013, 08:05:31 AM
     #9
    Quote from: d'aniel on July 25, 2013, 06:49:42 AM
    I think this will be the third time I've dropped a quote from this insightful post:
    Quote
    In any realistic economy, real or virtual, there is a demand for at least one good which is used as a "store of value," that is, not used or intended to be used by the owner, but owned simply to transfer purchasing power across time.  Nonetheless, the owner holds this good and participates in the market for it.  If many owners standardize on the same good, they affect the market for this good.  We can think of their collective purchasing power as a sort of "energy" that flows into this market.

    It turns out that the correct collective strategy in this game is for everyone to standardize on the same asset as a store of value, and for this asset to be one of intrinsically limited quantity.  If the quantity is not limited, as for example in a manufactured good, a stable pool of savers will not increase its price.  If the quantity is limited, as with gold, Bitcoin, etc, the price will increase as savings energy flows in - and, of course, decrease as it flows back out.

    There is no way to eradicate this effect from anything like a realistic economy.  There is always at least one bubble.  Ideally, this bubble is stable, and we call it "money."  If you try to spread savings energy across all the goods in the economy, it will stay in storable goods and not in un-storable ones.  It will flee from manufactured goods and end up in rare collectibles.  Finally, it will flee from a broad spectrum of collectible assets and end up in a single standard.  Those who are late in fleeing are, by definition, caught in a bubble which pops - and taste the pain.

    And this one:
    Quote
    Bitcoin is an exceptionally pure test of the BTM, because it has no intrinsic utility.  It is uncomfortably reminiscent of that apex specimen of the South Sea Bubble, "a company for carrying out an undertaking of great advantage, but nobody to know what it is."  One of the problems with the South Sea Bubble - in fact, one of the reasons why South Sea Company stock could not become a new monetary standard - was the inability to define a reason why one security should be the standard, and not another.  There are Bitcoin clones, all more or less worthless.  Bitcoin is a protocol standard, and everyone in our era knows how protocol standards play: winner takes all.

    Bingo.  Even Ben Horowitz agrees with you, an extremely successful venture capital investor.  (See the YouTube interview - it's only about two minutes starting at that point.)  He compared Bitcoin to TCP IP, the foundation of the internet.  
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  • exapted (OP)
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    July 25, 2013, 08:19:16 AM
     #10
    Quote from: d'aniel on July 25, 2013, 06:49:42 AM
    I think this will be the third time I've dropped a quote from this insightful post:
    Quote
    In any realistic economy, real or virtual, there is a demand for at least one good which is used as a "store of value," that is, not used or intended to be used by the owner, but owned simply to transfer purchasing power across time.  Nonetheless, the owner holds this good and participates in the market for it.  If many owners standardize on the same good, they affect the market for this good.  We can think of their collective purchasing power as a sort of "energy" that flows into this market.

    It turns out that the correct collective strategy in this game is for everyone to standardize on the same asset as a store of value, and for this asset to be one of intrinsically limited quantity.  If the quantity is not limited, as for example in a manufactured good, a stable pool of savers will not increase its price.  If the quantity is limited, as with gold, Bitcoin, etc, the price will increase as savings energy flows in - and, of course, decrease as it flows back out.

    There is no way to eradicate this effect from anything like a realistic economy.  There is always at least one bubble.  Ideally, this bubble is stable, and we call it "money."  If you try to spread savings energy across all the goods in the economy, it will stay in storable goods and not in un-storable ones.  It will flee from manufactured goods and end up in rare collectibles.  Finally, it will flee from a broad spectrum of collectible assets and end up in a single standard.  Those who are late in fleeing are, by definition, caught in a bubble which pops - and taste the pain.

    And this one:
    Quote
    Bitcoin is an exceptionally pure test of the BTM, because it has no intrinsic utility.  It is uncomfortably reminiscent of that apex specimen of the South Sea Bubble, "a company for carrying out an undertaking of great advantage, but nobody to know what it is."  One of the problems with the South Sea Bubble - in fact, one of the reasons why South Sea Company stock could not become a new monetary standard - was the inability to define a reason why one security should be the standard, and not another.  There are Bitcoin clones, all more or less worthless.  Bitcoin is a protocol standard, and everyone in our era knows how protocol standards play: winner takes all.

    I think I understand. People often buy gold simply to hold it. There is excess gold, and people use that excess gold as a store of value, which is not extremely different from simply using something without any intrinsic value at all; the difference is perhaps that if everyone decided to store their value in silver, gold would still be worth something, and changes in the intrinsic value of gold would effect its value. Same for silver. Bitcoin is especially pure in that it has very little intrinsic value in a (future) world where accepting Bitcoin is almost precisely as easy as accepting Litecoin or any other coin. I still think Bitcoin has intrinsic value because each Bitcoin [so to speak] is a part of a network, and the network has value. Bitcoins are not tulips, because they do things that fiat currencies can't.

    There is one other relevant difference between metal and cryptocurrency (correct me if I'm wrong): If everyone switched from gold to silver, actual silver would need to be procured and stored. It's a lot easier to procure and store cryptocurrency, to say the least! So, it should be a lot easier for everyone to switch from Bitcoin to Litecoin (etc.).

  • halfawake
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    July 25, 2013, 08:37:57 AM
     #11
    Quote from: exapted on July 25, 2013, 08:19:16 AM
    There is one other relevant difference between metal and cryptocurrency (correct me if I'm wrong): If everyone switched to silver, actual silver would need to be procured and stored. It's a lot easier to procure and store cryptocurrency, to say the least!

    I really think you're discounting the network effect that Bitcoin has vs Litecoin (or whatever other currency).  The market cap of bitcoins is about $1 billion.  Whereas Litecoin's market value is $53 million, making it about 5.3% the value of Bitcoin's market cap.  Correspondingly, the amount of businesses that accept bitcoin is substantially higher than Litecoin. 

    So yes, it's easy to switch from one cryptocurrency to another.  But if one currency is worth this much more than another currency, and is accepted by (let's say) also 5% of bitcoin's merchants, why would anyone switch to Litecoin? 

    You also said,

    Quote
    Lets assume that Facebook is easy to replicate (it's not). If I move to MySpace, I lose all my friends unless they move with me.
    If I sell Bitcoins for Litecoins, the risk is minimal and I can exchange it for a similar value.

    This is true, but even if there are no fees to move between currencies, which likely isn't going to be the case, you're not taking into account that one currency is accepted by far more people than the other currency.  So it's worth a similar value.  Great, but now you can only use it at 5% of the locations you could previously.  Suddenly I'm not seeing a huge advantage of the altcoins...

    (The reason I only mention Litecoin here is that it's by far the most popular of the altcoins.  My point is even more true with the other alt coins.)
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  • exapted (OP)
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    July 25, 2013, 08:50:36 AM
     #12
    Quote from: halfawake on July 25, 2013, 08:37:57 AM
    Quote from: exapted on July 25, 2013, 08:19:16 AM
    There is one other relevant difference between metal and cryptocurrency (correct me if I'm wrong): If everyone switched to silver, actual silver would need to be procured and stored. It's a lot easier to procure and store cryptocurrency, to say the least!

    I really think you're discounting the network effect that Bitcoin has vs Litecoin (or whatever other currency).  The market cap of bitcoins is about $1 billion.  Whereas Litecoin's market value is $53 million, making it about 5.3% the value of Bitcoin's market cap.  Correspondingly, the amount of businesses that accept bitcoin is substantially higher than Litecoin. 

    So yes, it's easy to switch from one cryptocurrency to another.  But if one currency is worth this much more than another currency, and is accepted by (let's say) also 5% of bitcoin's merchants, why would anyone switch to Litecoin? 

    You also said,

    Quote
    Lets assume that Facebook is easy to replicate (it's not). If I move to MySpace, I lose all my friends unless they move with me.
    If I sell Bitcoins for Litecoins, the risk is minimal and I can exchange it for a similar value.

    This is true, but even if there are no fees to move between currencies, which likely isn't going to be the case, you're not taking into account that one currency is accepted by far more people than the other currency.  So it's worth a similar value.  Great, but now you can only use it at 5% of the locations you could previously.  Suddenly I'm not seeing a huge advantage of the altcoins...

    (The reason I only mention Litecoin here is that it's by far the most popular of the altcoins.  My point is even more true with the other alt coins.)

    Yes, more people accept Bitcoin than Litecoin. My points hinge on the idea that cryptocurrencies would be basically all the same in the future, and standardized, and cheap to exchange.

    Also, (related to what you mentioned earlier) there must be some kind of force such that if everyone is invested in one currency, they're less likely to switch for fear of losing their value; If the price of Litecoin begins to rise, there is always the fear that the trend could reverse.

    I guess I'm trying to wrap my head around the prospect of a future multi-cryptocurrency world.

  • d'aniel
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    July 25, 2013, 09:55:06 AM
     #13
    Quote from: exapted on July 25, 2013, 08:50:36 AM
    Yes, more people accept Bitcoin than Litecoin. My points hinge on the idea that cryptocurrencies would be basically all the same in the future, and standardized, and cheap to exchange.

    Also, (related to what you mentioned earlier) there must be some kind of force such that if everyone is invested in one currency, they're less likely to switch for fear of losing their value; If the price of Litecoin begins to rise, there is always the fear that the trend could reverse.

    I guess I'm trying to wrap my head around the prospect of a future multi-cryptocurrency world.
    I'll reemphasize this point:
    Quote
    In any realistic economy, real or virtual, there is a demand for at least one good which is used as a "store of value," that is, not used or intended to be used by the owner, but owned simply to transfer purchasing power across time.
    It doesn't follow that because you have frictionless transfer between two assets, the two assets do an equally good job of transferring purchasing power across time.  All else being equal, you use the more liquid one for that.  That's why the equilibrium is to converge on a single standard.

  • exapted (OP)
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    July 25, 2013, 10:51:13 AM
     #14
    Quote from: d'aniel on July 25, 2013, 09:55:06 AM
    It doesn't follow that because you have frictionless transfer between two assets, the two assets do an equally good job of transferring purchasing power across time.  All else being equal, you use the more liquid one for that.  That's why the equilibrium is to converge on a single standard.

    That makes sense, and bodes well for Bitcoin with its first-mover advantage.
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