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Comment by jpereira | Hacker News Reader

Stable coin systems are going to be massively important and there's a ton of different projects trying to make it happen.

This [1] is a really solid explanation on how one of them, Dai from MakerDAO, works.

[1] https://medium.com/cryptolinks/maker-for-dummies-a-plain-eng...

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One of the other parallels that interests me is that there's very little incentive to be publicly skeptical of the nonsense.

People were immensely critical of Warren Buffett during the dot-com bubble. He was frank that their valuations didn't make sense to him, and he took a pasting for it. He turned out to be right, but only after taking a lot of heat: http://news.bbc.co.uk/2/hi/business/1217716.stm

There's little glory or money in being critical of Bitcoin and cryptocurrencies. But there is a great deal of money and attention for hyping them. That means anybody new to the topic receives an unbalanced information diet, deepening the problem.

Even if I were a Bitcoin fan I'd be concerned about this; bubbles misallocate resources and cause a lot of damage when they pop. The taint can last a long time. E.g., it took Florida decades to recover from their 1920s land boom.

Calling bitcoin a bubble seems like the wrong word. There are basically two possible outcomes: total market cap zero, or in the trillions. How much you think bitcoin is worth depends on your guess (and it really is just a guess, nobody has any idea what is going to happen) about the relative likelihood of each.

I would have thought the third was that it maintains some sort of marginal utility, but isn’t worth much. Though it’s becoming increasingly useless, really.

From Wikipedia:

"An economic bubble or asset bubble (sometimes also referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania, or a balloon) is trade in an asset at a price or price range that strongly exceeds the asset's intrinsic value."

Seems like a reasonable description of bitcoin to me

I have yet to see a well thought out, rational, specific description of the intrinsic value of bitcoin. If it is the case that people think it will either be zero or a trillion market cap, that suggests to me that people aren't thinking seriously about the real world end game for bitcoin and thus that there's is no solid bounding of the potential intrinsic value

Bubbles are formed by people who think they are being rational, but in fact are not. One sign that you aren't being rational is when you don't think critically, quantitiavely, specifically and probabalistically about possible future states

Is Gold in a bubble right now? Because the current price of Gold strongly exceeds the intrinsic value of the material and it has been like that for a while.

Bitcoin has pivoted away from being a currency. Bitcoin is now a store of value, like gold.

gold has always been a weird instrument since it was decoupled from fiat currency, and it has a unique position because it has been around for a long time so investors sort of understand it. the value of gold is determined a lot by confidence in the asset's performance as a "non correlated" backup medium of exchange. there is a long track record here, which matters, despite how "soft" and "squishy" this line of thinking may seem to someone who doesnt work in markets. bitcoin doesnt have this: it is not widely used as a store of value, and it does not have a track record. basically, the perceived probability of it going to zero is infinitely higher than the perceived probability of gold going to zero

this article does a much better job than i just did: http://www.businessinsider.com/economist-jim-rickards-bitcoi...

and heres an intersting history of gold: https://www.investopedia.com/articles/investing/071114/why-g...

The optimistic scenario is that Bitcoin becomes a currency like cash or a store of value like gold, in which case it will be valued in the trillions. Somewhat conservatively let's say that the market cap in these scenarios is $2 trillion USD. At today's ~200B market cap, this implies the market is giving 10 to 1 odds that bitcoin is going to zero.

Not sure how any of this is on its face "irrational".

the irrational part is 1) an overestimation of the likelihood of bitcoin becoming worth $2 trillion in a reasonable timeframe (1 in 10 odds of that happening!?) and 2) underweighting the value of large changes in low probability levels: based on the above back of the envelope math, you ascribe 10 to 1 odds of bitcoin failing. the math that supports that is so imprecise as to be almost nonexistent, but the details are important: if the odds of it succeeding were 1%, or 0.1%, would you still invest? what evidence do you have that this number should be 10 to 1 rather than one of the above? have you given any thought to this, or to what probability of failure would make you get out of bitcoin?

have you thought through the likelihood that one of the binary scenarios you describe doesnt actually happen, but in fact that a gray area wins out: for example, bitcoin may continue to exist as it does now, as a fringe speculative asset class with vaguely defined but high potential. it may stabilize into the go-to currency for money laundering, funding illegal activities, etc. it may serve as a stable currency for a subset of the digital economy that just likes the libertarian appeal of bitcoin. if you look at where bitcoin is now, and try to draw a straight line to the future, it seems to me that youd intersect one of these scenarios rather.

if you havent thought these things through, but still invest, you are being irrational

edit: maths

If the odds of success are anything less than .1, then buying at the current price is a bad idea. I agree with you that the odds are in fact less than .1 but it's just a guess - if somebody else thinks it's .5, well, who am I to say that they're wrong.

Pretty much any investment thesis involves guesswork at some point. That doesn't make investing irrational.

> total market cap zero

The end game for any currency is a market cap of zero, with a long enough t -> infinity.

> or in the trillions.

Nonsense. That's like saying that the total market cap for vkou's collectible post-it-notes may be in the trillions.

Surely option 3 is "it finds a niche and hits some sort of equilibrium" ?

Of course this option exists, but given that it's less likely to happen, that the market cap in this scenario is unknowable, and that when averaged with the two scenarios I mentioned it doesn't move the needle, it's almost irrelevant to any kind of reasonable investment thesis.

Sure, you can't definitively say something's a bubble until later. If the value ends up high, it's a boom; if not, it's a bubble. But every serious Bitcoin proponent should be concerned that we have crossed from boom to bubble, because the latter can be harmful to serious participants.

I also think there are reasonable cases where Bitcoin ends up with a modest non-zero value. It's not a bad technology for a narrow slice of the cross-border money transfer market, and people could make it more useful if they wanted to. But those outcomes are much less likely if they're a giant crash.

I think Warren Buffet also questioned Bitcoin a few years ago, will try to find that reference.

I also just remembered that I questioned it too on Twitter, after seeing some hype from Andreessen, and he promptly blocked me.

Dai seems like a clever idea, but I'm not convinced it will ultimately be necessary.

For one thing, the idea that dollars are stable is illusory. And the volatility we see in BTC these days is largely due to the ratio of speculation to storing value in its usage pattern.

So if you buy 500 Dai with Bitcoin today, and the price of Bitcoin goes up, you simply have more Dai to spend, and if the price goes down, you have less to spend, but all the while Dai was pegged to USD and the exchange was going on behind the scenes.

Two factual quibbles with the article, in case you can offer insight:

The example about doing a bet using Ether does not make sense, because chances are the smart contract would collect collateral for the bet at the time it was made, with the idea that upon resolution of the outcome the collateral would be used to pay off the bet. So if I bet 1 ETH on the superbowl outcome, 1 ETH is collected from me and from my counter-party, and then after the game finishes the smart contract awards 2 ETH to the winner.

The other issue has to do with commerce. What's the difference between a store marking prices in USD and also accepting payment in BTC vs marking prices in Dai?

During checkout, if I'm paying with BTC I'll see how much BTC my purchase will cost. If the price in dollars is more useful to shoppers than the price in BTC, then merchants will denominate in dollars. Dai would seemingly just involve a predefined method of doing the exchange rate math (and fees), but I'm not clear on why this is really a significant advantage.

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