How can Bitcoin stabilize if it's a Keynesian Beauty Contest?(tonysheng.com)
tonysheng.com
How can Bitcoin stabilize if it's a Keynesian Beauty Contest?
https://www.tonysheng.com/keynesian-beauty-contest-bitcoin
73 comments
I would say that stability refers to purchasing power, and doesn't need to be a flat line. It can also be a simple math function (liner, logarithmic, exponential) which means that it is somewhat predictable. (Edit: I think a better word than "stable" may be "dependable", which is probably what the article meant).
For example, the US Dollar loses purchasing power over time, but that is OK, since it is mostly at a predictable rate. But when something has wild swings up and down, and random times, then it is less suitable to either use as a currency (the stock person with the price gun will be working overtime correcting prices on everything several times a day), and it isn't that good of a store of value if there isn't any reason for it to not lose all of its value over a given period of time.
The Amazon graph you linked to does look fairly stable, a nice exponential function that has very good reasons to remain so for a good period of time (not saying this or anything else is guaranteed, but at least there is something tangible behind that price).
For example, the US Dollar loses purchasing power over time, but that is OK, since it is mostly at a predictable rate. But when something has wild swings up and down, and random times, then it is less suitable to either use as a currency (the stock person with the price gun will be working overtime correcting prices on everything several times a day), and it isn't that good of a store of value if there isn't any reason for it to not lose all of its value over a given period of time.
The Amazon graph you linked to does look fairly stable, a nice exponential function that has very good reasons to remain so for a good period of time (not saying this or anything else is guaranteed, but at least there is something tangible behind that price).
So the article concludes that Bitcoin can gain stability by being anchored to the price of gold. However isn't gold a "Keynesian Beauty Contest"? That is, gold is valuable because other people believe other people believe it is a store of value.
Gold also has intrinsic utility to industry. The same cannot be said for Bitcoin.
That value is minimal however, in comparison to the total market cap of gold.
I think there's something to be said about gold's utility as money. It's remarkably good at being money compared to other materials. It's easy to store, identify, divide, it's fungible, and it's scarce enough. If civilization were to collapse, I think that there's a fair chance that we'd be using gold and other precious metals as money again, whether or not it was used in the past.
I'm not sure I believe that. If civilization were to collapse, you'd want food, medicine, potentially gas. Potentially solar cells, and some other things.
I think you'd see more traditional bartering than money being introduced again in its earliest stages.
I think you'd see more traditional bartering than money being introduced again in its earliest stages.
The problem with bartering is that useful but rare products are a poor store of value because peot need to use those things. Useless but rare things are better as money, as long a users are confident that there is economic growth to spend money on (decoupling consumption from production)
[Citation needed]
Gold isn’t valuable because of its utility to industry. It is valuable because of its scarcity.
Would you say gold priced at, or above its level of utility to industry?
If gold was no longer wanted for investment, its value would go very close to 0, despite utility to industry. Why? Because there's 190,000 tons of it, most of which is being held as an investment. If it wasn't needed for investment any more, then all that becomes available for industry, and now supply absolutely swamps demand.
Jewelry demand wouldn't help, either. If the price of gold went to 0, how much would be used in jewelry? Sure, it's pretty, but being expensive is part of the point.
Jewelry demand wouldn't help, either. If the price of gold went to 0, how much would be used in jewelry? Sure, it's pretty, but being expensive is part of the point.
As price drops it would be useful for a wider range of things. Gold high voltage power lines for example are physically better, but cost prohibitive.
Gold is directly useful for a huge range of things and the use in industry provides a very real price floor.
Gold is directly useful for a huge range of things and the use in industry provides a very real price floor.
I think the tensile strength/density might make gold transmission lines a bit crap. Maybe steel core with a gold outer where the AC current flows, but not sure if it would actually be any better than aluminum.
Plenty of applications like transformers where mechanical stress is a non issue. Corrosion resistance is another useful feature that can be applied to a wide range of use cases.
Gold has a 3000+ year track record of being a store of value. Yes, people worldwide could decide that gold was just a fad that we've moved past. But I'd regard it as a pretty safe bet that they won't, at least not in my lifetime. Gold may be a Keynesian Beauty Contest, but it's been winning for long enough that it's almost in a different category by now.
Bitcoin, on the other hand, is still firmly in KBC territory.
Bitcoin, on the other hand, is still firmly in KBC territory.
It will eventually come down to the fact whether people feel it is or will end up becoming digital gold. It's very much a binary situation; true or false.
That outcome will likely also result in a further 50x return from here, or a further decline.
That outcome will likely also result in a further 50x return from here, or a further decline.
Doesn't seem binary at all -- as the market price fluctuates, clearly there is room for disagreement (middle ground).
Bitcoin doesn't need to stabilize to be successful. In the same way that the exchange rate of the hyperinflating German Mark and gold didn't need to stabilize. All bitcoin needs to do is continue to operate with it's programmed monetary policy such that its value can't be inflated away through coercion.
Money is a commodity whose goal is to transport value through space and time. We are living through -- in human-species scale -- a brief 90-year experiment in the artificial elimination of a free market of monies by violence of the state (until bitcoin was invented).
Artificially increasing and decreasing the supply of money in an economy has about just as much utility as artificially increasing and decreasing the supply of any other good -- which is none.
Bitcoin's success narrative doesn't depend on the amount of non-scarce dollars the market is willing to trade for it ceasing to change ('stabilize'). The success narrative is: an increasing set of people understanding that the hardest money always wins. Bitcoin is one halvening away from being harder than gold and is _the_ hardest money ever in existance. Those who have taken exposure to bitcoin will have more wealth preserved than those who denominate their value in inflatable dollars. As more people see bitcoin improving the quality of life of individuals they also take exposure to bitcoin. This process doesn't need a planner nor intelligent agents, it just needs bricolage.
Money is a commodity whose goal is to transport value through space and time. We are living through -- in human-species scale -- a brief 90-year experiment in the artificial elimination of a free market of monies by violence of the state (until bitcoin was invented).
Artificially increasing and decreasing the supply of money in an economy has about just as much utility as artificially increasing and decreasing the supply of any other good -- which is none.
Bitcoin's success narrative doesn't depend on the amount of non-scarce dollars the market is willing to trade for it ceasing to change ('stabilize'). The success narrative is: an increasing set of people understanding that the hardest money always wins. Bitcoin is one halvening away from being harder than gold and is _the_ hardest money ever in existance. Those who have taken exposure to bitcoin will have more wealth preserved than those who denominate their value in inflatable dollars. As more people see bitcoin improving the quality of life of individuals they also take exposure to bitcoin. This process doesn't need a planner nor intelligent agents, it just needs bricolage.
Thank you for posting this. Not surprising to see you getting downvoted to oblivion here, but this is something that people really need to keep an open mind about.
It's downvotes because it's using false facts as a basis for opinion, and using weak logic to connect them. Fiat money is over 90years old, Bitcoin is deflationat by design, and neither of these facts matter. The open market is subject to manipulation (counterfeiting and cornering) as much as government fiat.
It is empirically the case that Keynesian beauty pageant assets can have stable prices: e.g. gold.
Bitcoin has actually become a lot less volatile, when measured objectively over the last few years:
https://twitter.com/lsukernik/status/864920873718951937
https://news.bitcoin.com/volatility-decreasing/
https://twitter.com/lsukernik/status/864920873718951937
https://news.bitcoin.com/volatility-decreasing/
Yes these two links to two images presented without comment from a cryptocurrency VC and news.bitcoin.com scream "objective" to me.
Price data is freely available from many sources for you to examine and issue your own conclusion. Here is another chart:
http://images.woobull.com/2016/10/volatility-btc-vs-fiat.png (from https://woobull.com/bitcoin-volatility-will-match-major-fiat...)
The long-term trend is that BTC is becoming less and less volatile.
http://images.woobull.com/2016/10/volatility-btc-vs-fiat.png (from https://woobull.com/bitcoin-volatility-will-match-major-fiat...)
The long-term trend is that BTC is becoming less and less volatile.
There is a belief that Bitcoin is following specific pattern [0] and will stabilize in 2030 at ~$1M per coin. So far the model was pretty accurate.
[0] https://1nodld1ltmqu3jimmy2xsgcu-wpengine.netdna-ssl.com/wp-...
P.S. Dear downvoters, this is not a financial advice!
[0] https://1nodld1ltmqu3jimmy2xsgcu-wpengine.netdna-ssl.com/wp-...
P.S. Dear downvoters, this is not a financial advice!
The data in that "model" appears to stop before the end of 2014. The last year of Bitcoin price breaks that "model". I'm also using scare quotes because those kind of "models" should be scary because they're misleading at best.
What makes you think this trend will continue to the future?
I have ZERO evidence to believe that the trend will continue. This chart is pretty popular amongst cryptocurrency followers. I'd actually love to know what experienced trading analysts think about these type of predictions and whether similar non-crypto models exist.
that chart is currently off by like 100%
Interesting that it called $10K/Bitcoin only a month early, though, and did so 3 years in advance. The actual Bitcoin price underperformed the model by about an order of magnitude throughout 2015 as well as a long stretch in 2012; Bitcoin seems to have a "big bubble, then it bursts and plateaus for years" pattern.
A standard die roll is right 1/6th of the time.
This is chart is not off at all. There is, actually, an updated version https://cryptoslate.com/wp-content/uploads/2018/10/chart.png. I have no idea if the trend will continue.
Your first chart stated that BTC would be over $10,000 by the beginning of 2018, and be somewhere in the ballpark of $20,000+ by now. Your second chart drastically reduces that forecast. You do know you are just overfitting a curve to data here, right?
Well to be fair it is just refitting not overfitting. If it was overfitting it would have heaps of free parameters and match the data really closely. The criticism should be what is the mechanistic explanation for why you would expect this logarithmic trend (for the log price, is that just linear or am I just confused?)
The red curve is an average price. The first chart states that BTC would be $10,000 on 22-11-2017. On that day, the price was $8310. The prediction was made in 2014, so this is pretty accurate I must say. There is also a belief that the reason for inaccuracy of the first chart is because of a hardfork (Bitcoin Cash), that "ate" part of the Bitcoin's market. Afaik, the second chart was made by the same author a few days ago. It's obviously different, because it takes recent prices into consideration.
> There is, actually, an updated version https://cryptoslate.com/wp-content/uploads/2018/10/chart.png.
That's a different chart. It's closer to being accurate because it's been modified to fit more recent data.
That's a different chart. It's closer to being accurate because it's been modified to fit more recent data.
Notably, the updated version moves their $100k/BTC projection from 2021 to 2025. Yikes to anyone who thinks these tea leaves have any meaning.
if which trend will continue? the one from the first chart? that one already hasn't continued dude.
Bitcoin is stable in reference to itself, just as USD is stable in reference to itself.
There is a powerful entity (the Fed) focused on keeping it stable in reference to consumer goods and services.
Right, and how is that going for them? The average home cost around $3,400 in 1913 (when the FED was created), and today is around $200,000. And $1 is still worth $1.
It's actually going very well for the US. Inflation has been been low and stable. The real economy is larger than it's ever been. Unemployment is very low. Out of all the countries and currencies on Earth over the past 100 years, the US and its dollar have had a better track record than almost any other.
A few corrections to some possible misconceptions:
(1) Fed is short for Federal Reserve. It's not an acronym.
(2) The goal of the Fed is not 0% inflation. Because downside risks are worse than upside risks, the Fed's explicit long-term target is 2%
(3) House prices aren't great to use as a metric of inflation. A house built today is far, far better than house built in 1913. According to the consumer price index, $3,400 in 1913 has the rough buying power of $88,000 today.
https://www.bls.gov/cpi/
In my opinion, if you want to make a serious argument against the Fed, you should (a) do more work than rhetorically asking how the past century has gone for us, and (b) at least be familiar enough with the thing to spell its name correctly.
A few corrections to some possible misconceptions:
(1) Fed is short for Federal Reserve. It's not an acronym.
(2) The goal of the Fed is not 0% inflation. Because downside risks are worse than upside risks, the Fed's explicit long-term target is 2%
(3) House prices aren't great to use as a metric of inflation. A house built today is far, far better than house built in 1913. According to the consumer price index, $3,400 in 1913 has the rough buying power of $88,000 today.
https://www.bls.gov/cpi/
In my opinion, if you want to make a serious argument against the Fed, you should (a) do more work than rhetorically asking how the past century has gone for us, and (b) at least be familiar enough with the thing to spell its name correctly.
Thanks. I am well aware of all the things you pointed out. I think we just have a different opinion of what stable is or should be.
I think a currency that has $1.00 worth of purchasing power when I am given it should not lose 99% of its value over the next 100 years if I do not spend it. I am aware that that is impossible due to inflation, and that is why things like gold are much better stores of value than the dollar.
I think a currency that has $1.00 worth of purchasing power when I am given it should not lose 99% of its value over the next 100 years if I do not spend it. I am aware that that is impossible due to inflation, and that is why things like gold are much better stores of value than the dollar.
A good currency is focused on being a good medium of exchange, not a good store of value.
This is really the fundamental disagreement: what is money? Is it a store of value or a medium of exchange?
Until or unless agreement is reached on that, debating other points is kind of a waste of time. You're not going to agree if you disagree on the fundamental goal of money.
I've personally gone over to the Keynesian/Monetarist side. IMHO the most important idea of Keynes by far is monetary velocity: that wealth is a verb, not a noun. To be wealthy is to have much activity. The desire for idle stores of wealth reflects a very deep and very ancient wish for a stability that does not exist in this world. In this world things are either alive, moving, and changing, or dead.
Austrians want "hard money" that can act as an inert store of value for the same reason the Egyptians elaborately mummified their dead and piled vast stores of wealth in tombs. It's a very ancient and unfortunately very misguided quest for immortality through stopping of avoiding time. It doesn't work. The mummies were just corpses, the tombs were raided, and with enough time the pyramids will be dust.
If there is ever any kind of immortality to be had, it will be by embracing change and using science and technology to modify our biology or even transfer consciousness and intelligence itself into another medium ("mind uploading"). Those kinds of sci-fi things would require immense technological progress, and that's far more likely to occur in a world of dynamic economic systems biased toward investment rather than stuffing money into mattresses.
Until or unless agreement is reached on that, debating other points is kind of a waste of time. You're not going to agree if you disagree on the fundamental goal of money.
I've personally gone over to the Keynesian/Monetarist side. IMHO the most important idea of Keynes by far is monetary velocity: that wealth is a verb, not a noun. To be wealthy is to have much activity. The desire for idle stores of wealth reflects a very deep and very ancient wish for a stability that does not exist in this world. In this world things are either alive, moving, and changing, or dead.
Austrians want "hard money" that can act as an inert store of value for the same reason the Egyptians elaborately mummified their dead and piled vast stores of wealth in tombs. It's a very ancient and unfortunately very misguided quest for immortality through stopping of avoiding time. It doesn't work. The mummies were just corpses, the tombs were raided, and with enough time the pyramids will be dust.
If there is ever any kind of immortality to be had, it will be by embracing change and using science and technology to modify our biology or even transfer consciousness and intelligence itself into another medium ("mind uploading"). Those kinds of sci-fi things would require immense technological progress, and that's far more likely to occur in a world of dynamic economic systems biased toward investment rather than stuffing money into mattresses.
Thank you. I think you are right. I think it’s impossible to reach any sort of consensus when two groups have fundamentally different views.
I’m going to just try to stay out of it from now on. Not worth the time or energy. Especially when my view is the minority view.
FWIW I don’t believe it is any sort of quest towards immortality. My biggest problem is how Keynesian economics tends to favor the central banks who are able to create money out of nothing.
I’m going to just try to stay out of it from now on. Not worth the time or energy. Especially when my view is the minority view.
FWIW I don’t believe it is any sort of quest towards immortality. My biggest problem is how Keynesian economics tends to favor the central banks who are able to create money out of nothing.
As I said I'm more on the Keynesian/Monetarist side, but you do have a valid point about how new money is introduced. Current central banks introduce new money in ways that disproportionately benefit banks, the rich, and of course the state. This is not surprising since banks, the rich, and the state chartered the central banks.
This is a separate point from the "what should money be?" debate.
There are other potential ways of introducing new money, especially in the digital age. I'm a fan of a smart version of the "money from helicopters" idea-- introduce money across the entire economy rather than just to the state (via bond purchases) or banks (via fed lending-to-lend).
This is a separate point from the "what should money be?" debate.
There are other potential ways of introducing new money, especially in the digital age. I'm a fan of a smart version of the "money from helicopters" idea-- introduce money across the entire economy rather than just to the state (via bond purchases) or banks (via fed lending-to-lend).
That’s an interesting idea. How could you see that working in practice?
With a basic income you could make it variable and raise or lower the nominal basic income payment to vary the rate of money supply growth. This could run alongside the regular interest rate system. If inflation got too high you could raise the interest rate to vacuum up excess currency.
Are you planning to hold on to that dollar for a hundred years?
Do you think you'll be alive then?
Do you not think that perhaps if you want it to maintain or grow its value you should put it to work, rather than just sitting on it?
Why should society value whatever it is you did to earn a buck today the same in 100 years?
I understand that that is the driving force behind Keynesian economics, and I think you have a valid point.
That said, when you consider the way inflation actually works most of the new money pumped into the system disproportionately benefits big businesses and banks at the expense of the rest of the population. It is essentially a hidden tax on the rest of us.
Central banks pumping more money into the economy actually helps them because it equates to more interest payments they can collect and puts more people and governments in their debt. Also they don’t have to do any work to create the money so could you explain how that is considered a fair system?
Some elite bankers are able to just summon new money out of thin air to serve their interests but money that I worked hard to earn is going to lose its value if I hold onto it for too long?
Why do you think there is such a huge gap in income inequality that began as soon as we broke off completely from the gold standard in 1971?
That said, when you consider the way inflation actually works most of the new money pumped into the system disproportionately benefits big businesses and banks at the expense of the rest of the population. It is essentially a hidden tax on the rest of us.
Central banks pumping more money into the economy actually helps them because it equates to more interest payments they can collect and puts more people and governments in their debt. Also they don’t have to do any work to create the money so could you explain how that is considered a fair system?
Some elite bankers are able to just summon new money out of thin air to serve their interests but money that I worked hard to earn is going to lose its value if I hold onto it for too long?
Why do you think there is such a huge gap in income inequality that began as soon as we broke off completely from the gold standard in 1971?
some amount of inflation is a desired property to have in a currency, and this result is for the most part the intended result
USD is also stable in reference to almost everything else.
Bitcoin isn't.
Bitcoin isn't.
Would you consider USD also subject to a Keynesian Beauty Contest?
Yes, there's a 24/5 FX market where people decide what it's worth in relation to other currencies.
The prices fluctuate not due to mere speculation (on the beauty of currencies) but the need to convert currencies to run a company or live your life (e.g. you have dollars and you need to pay your supplier in yuan).
agreed
> Would you consider USD also subject to a Keynesian Beauty Contest?
No. The Fed puts its thumb on the scales. We've known since about the 19th century that growing economies and fixed-supply currencies don't play well together.
No. The Fed puts its thumb on the scales. We've known since about the 19th century that growing economies and fixed-supply currencies don't play well together.
> We've known since about the 19th century that growing economies and fixed-supply currencies don't play well together.
Can you give some examples? I don't know much about 19th century economics.
Can you give some examples? I don't know much about 19th century economics.
The late 1800s had some rather severe panics that were caused by deflation - specifically, the Panics of 1873 and 1893.
The problem with fixed-supply currencies is that if the economy is growing, and the supply of currency stays constant, currency is worth more.
If your debt is measured in that currency, your debt just increased, and you might no longer be able to pay it. Large numbers of foreclosures are bad.
Incidentally, one of the biggest political movements in response to these panics was a push to put the US onto the silver standard. Silver is more common, so it's easier for the supply of currency to increase (read: inflation) as the economy increases. A guy named William Jennings Bryan made a rather famous speech[1] about it.
Today, we eschew a metallic standard entirely and just focus on achieving a constant rate of inflation. Zero inflation would be fine, but it's hard to achieve, and any missteps might lead to deflation. So, the Fed aims for 2% inflation - low enough for the value of the dollar to be pretty stable, but high enough that if the economy does something weird, we don't enter a deflationary state.
[1] https://en.wikipedia.org/wiki/Cross_of_Gold_speech
The problem with fixed-supply currencies is that if the economy is growing, and the supply of currency stays constant, currency is worth more.
If your debt is measured in that currency, your debt just increased, and you might no longer be able to pay it. Large numbers of foreclosures are bad.
Incidentally, one of the biggest political movements in response to these panics was a push to put the US onto the silver standard. Silver is more common, so it's easier for the supply of currency to increase (read: inflation) as the economy increases. A guy named William Jennings Bryan made a rather famous speech[1] about it.
Today, we eschew a metallic standard entirely and just focus on achieving a constant rate of inflation. Zero inflation would be fine, but it's hard to achieve, and any missteps might lead to deflation. So, the Fed aims for 2% inflation - low enough for the value of the dollar to be pretty stable, but high enough that if the economy does something weird, we don't enter a deflationary state.
[1] https://en.wikipedia.org/wiki/Cross_of_Gold_speech
Along with most stocks. I think the key isn't whether something is/isn't a KBC, but how much other stuff exists that helps anchor it to some kind of objective reality.
Bitcoin has been pretty stable around $6500 for the past month. And for six months has been way more stable than The Shitcoins (BTC has gone from 30% to 50+% of total market cap in that time).
Humorous summary of price fluctuations since 2010: https://www.youtube.com/watch?v=XbZ8zDpX2Mg
Humorous summary of price fluctuations since 2010: https://www.youtube.com/watch?v=XbZ8zDpX2Mg
You're talking 6 months. Would you want to be paid in BTC for your full time job, or start a business that pays its employees that way?
[deleted]
Absolutely.
This comparision is empty because anything exchange into the same results with the same. in other words: nobody exachange dollar into dollar unless they are not sound-minded.
Fiat currency is at its best second degree KBC because other countries decide on accepting or rejecting US economical indicators by temporarily betting on their short term future and set currency exchange point for the next 24 hours or so. Nobody buys US dollar because american flag is pretty or english is second broadest language in the world or some other “pretty face” indicator, as currency exhange dollar versus everything for the last 25 years clearly shows USD strenghtening +500% and weakening even 50% all the time.
No, Feds do not decide on this beauty contest. May be suprise to you but only 20% of printed dollar remains in usa. 80% is being shipped out for all sorts of purposes such as balancing countries oil wallets (aka petrodolar) to aiding other countries ending on fact that many countries prefer intra-use of greenbacks to its own currency. So Feds at its best control pretty face of dollar on its local playground aka USA, but in reality they dont because again dollar strength comes from evonomical indicators, not from how much feds prints.
Fiat currency is at its best second degree KBC because other countries decide on accepting or rejecting US economical indicators by temporarily betting on their short term future and set currency exchange point for the next 24 hours or so. Nobody buys US dollar because american flag is pretty or english is second broadest language in the world or some other “pretty face” indicator, as currency exhange dollar versus everything for the last 25 years clearly shows USD strenghtening +500% and weakening even 50% all the time.
No, Feds do not decide on this beauty contest. May be suprise to you but only 20% of printed dollar remains in usa. 80% is being shipped out for all sorts of purposes such as balancing countries oil wallets (aka petrodolar) to aiding other countries ending on fact that many countries prefer intra-use of greenbacks to its own currency. So Feds at its best control pretty face of dollar on its local playground aka USA, but in reality they dont because again dollar strength comes from evonomical indicators, not from how much feds prints.
True, but not relevant. The dollar is relatively stable as measured by everything-in-the-entire-economy-that-is-not-dollars. Bitcoin? Not at all.
"When they measure themselves by themselves and compare themselves with themselves, they are not wise." - 2 Corinthians 10:12 (NIV)
"When they measure themselves by themselves and compare themselves with themselves, they are not wise." - 2 Corinthians 10:12 (NIV)
It would have been easy to make the article more clear. Simply explain what aspect of Bitcoin is supposed to stabilize.
Given the unending fascination with the USD/BTC exchange rate, it can be assumed that the author is referring to this metric. The inclusion of the heading "Does the price of Bitcoin have a Nash equilibrium?" also supports this idea.
However, if this is the case, why does the author include the following quote the middle of the article:
Why has Amazon stabilized, and will bitcoin do the same? When Amazon shares debuted back in 1997, earnings were non-existent. […]
The USD price of AMZN has in no way stabilized:
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?s...
As you can see, it's a concave-upward curve, punctuated by various declines, all the way back to 2003.
This may sound like hair-splitting, but I think there's a real possibility the author is actually talking about USD/BTC exchange rate volatility. This is an animal of a completely different stripe.