## Friday, March 16, 2018

### Bitcoin dominance is an irrational faith

...or a mostly dishonest marketing slogan...

Peter Thiel has bought the Bitcoin for some $20 million which is really just some one percent of his assets (and/or his fund's assets) so this amount may be considered a silly, homeopathic part of his image. But according to CNBC, he is neutral to skeptical about all other cryptocurrencies. For the Bitcoin, there's a 50-80 percent chance that it will be worthless (which is a reasonable estimate of the probability, up to a factor between 2 and 1.25) and a 20-50 percent chance that it will be moving higher, whatever that statement exactly means. He is a Bitcoin bull despite the fact that the Bitcoin is "cumbersome for payments". But it will be the "Internet equivalent of gold". It must be the gold because it's the largest one. And that's why everyone will always be attracted to it. Thiel isn't the only rich supporter of the Bitcoin who says such things. They're slogans that aren't repeated just by the most stupid Bitcoin cultists but also by numerous smart folks like Thiel. I think that he's being nutty. Even if you drink the cryptocurrency Kool-Aid, there exists no rational reason to think that the Bitcoin should have a rosier future than the other cryptocurrencies, the so-called altcoins. If you think that the Bitcoin is like the iPhone, well, the Bitcoin is like iPhone 1 and most of the Apple fans no longer use iPhone 1 today. They use iPhone X and similar gadgets and even that model will be replaced within a year or two. Analogously, the Bitcoin is the Cryptocurrency 1.0 and there are newer "models" of the cryptocurrency. They're not just newer but some of them are smarter. Many of them are really silly clones that could have been created without any substantial added intellectual value. But the Ethereum, designed to be a currency capable of paying for the CPU time, surely does have an added value and its Russian-born founder is at least as brilliant as Satoshi Nakamoto – and he's also more honest than almost all the cryptocurrency salesman (Vitalik Buterin does warn the cryptocurrency buyers that all of the "stuff" may easily collapse to zero). If you decide to jump on that cryptocurrency bandwagon, is is right to invest in the Bitcoin, or in all the cryptocurrencies, or just the altcoins? Well, if you invest into all of them, you could argue to have made a more diversified "investment". On the other hand, that doesn't mean that your portfolio's value would be less volatile. Why? Because by adding many altcoins, their price variations could be expected to partly compensate each other to. On the other hand, the altcoins are observably (even) more volatile than the Bitcoin, just look at the numbers – with the exception of the Tether which is pegged to one U.S. dollar. Well, these days and most of the time, the relative prices of the cryptocurrencies oscillate much less dramatically than their prices in the U.S. dollar. So the portfolios with all the cryptocurrencies could very well be more volatile or less volatile than the pure Bitcoin holdings. I invite you to answer this question using the real-world historical data. I guess that the answer will depend on the algorithm by which you keep certain percentages of the cryptocurrencies as their prices vary and how you add new altcoins when they are being introduced – there's no canonical algorithm what to do. The BTC dominance – the ratio of the Bitcoin capitalization to all the cryptocurrency capitalizations – is over 42% now. Well, it was 95% in July 2013 and 85% as recently as in February 2017, about a year ago, when it began to drop. A minimum below 35% was reached sometime in January 2018 – so far. As you can see, the empirical data clearly show that the BTC dominance is generally dropping. So the claims – e.g. Peter Thiel's claims – that the "leadership" of the Bitcoin is bound to solidify itself are clearly wrong. Despite the Bitcoin-centered hype, if you have made an investment into the altcoins, you would have done better than with the Bitcoin. For example, Ethereum jumped from$10 in early 2017 to $600 now (and it has seen$1,300 in January). This 60-fold increase dwarfs the rise of the Bitcoin. And today, the Ethereum isn't any marginal silly player. Its value is almost 1/2 of the Bitcoin's.

By their capitalization, the five major cryptocurrencies are currently Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin at $140,$60, $27,$15, and $9 billion, respectively. Ethereum has already been closer to the Bitcoin. Also, if Thiel's claim that the "#1 cryptocurrency will stay #1" were based on sound logic, it would probably hold for the #2, too. But the #2 cryptocurrencies have been changed many times. Basically all the other 4 have already stood at the #2 at some point. Nothing special happens when Ethereum or Ripple surpasses Bitcoin Cash or vice versa – those are interesting events just for numerologists, just like the Pi Day or anything else. So the claim that the Bitcoin is #1 is just a description of the current state of affairs and there's absolutely no rational reason to think that it's a description of some moment in the future. Apple Inc is currently the world's largest company by capitalization – above$0.9 trillion – but there's no law of physics that would say that it has to stay there. Microsoft – at $0.7 trillion – may easily surpass Apple in a few months. The price of the stocks is dictated by some general facts from the corporate lives, not by insisting on some comparison or ordering. If the ordering changes, it changes. If it doesn't, it doesn't. There's no easy way to predict the ordering. Even if all holders of the cryptocurrencies believed in some "law of physics" that says that the Bitcoin has to stay the #1 cryptocurrency by capitalization, it wouldn't imply that it would stay there. Why? Well, it's because e.g. Ethereum is at roughly 50%. Ethereum may still be undervalued relatively to the Bitcoin. Its capitalization could increase to 95% and the "law of physics" that the Bitcoin is #1 could still be preserved. So nothing would prevent the Ethereum from getting much closer to the Bitcoin. And if it got very close to the Bitcoin, would the belief that the Bitcoin is #1 help to guarantee that the Bitcoin keeps the #1 spot? I don't think so. If the cryptocurrency holders knew that all of them hold the Bitcoin dear because it's #1, the rational among them could figure out that the Bitcoin would undergo a fire sale once it loses its crown. Why? Because people consider it expensive, relatively to the altcoin, because of the assumption that it's bound to be #1 forever. Once it fails to be #1, the assumption is ruled out and these people (well, at least those who aren't totally detached from reality) could sell their BTC because a top reason for them to hold it, relatively to the altcoin, would be gone. So it means that lots of the people could start to insure themselves against the looming drop of the Bitcoin price that could be dramatic, and they could therefore drive the Bitcoin price lower and its ranking to #2 or lower. Whatever you assume about the reasons why people hold one cryptocurrency or another, the belief that the Bitcoin has to keep the crown is a pure wishful thinking that forecasts desirable outcomes for the BTC holders. There is absolutely nothing rational about it. You may make the opposite statement – that the Bitcoin is bound to lose the crown – and justify it by analogously irrational arguments (e.g. the claim that progress is unstoppable) that will find persuasive to someone else. But I have serious problems with Thiel's assertions about the gold, too. He compares the Bitcoin to gold and this comparison is pure marketing – again, there is nothing rational about it. I may compare my rare daily excrements to gold as well. Some impressionable buyers may pay$1,300 or $8,200 for an excrement. But their behavior won't be rational. Ethereum or Ripple or something else may become the gold in the future marketing instead. (Google is banning all cryptocurrency adverts which is reasonable because almost all of the cryptocurrency ads were all about some misleading analogies such as "this and that is just like gold" and the deliberate obfuscation of the huge risks that almost all these virtual "products" pose. Yes, given the fact that he owns Bitcoin, I find Thiel's claim that the Bitcoin is just like gold to be a borderline criminal scam designed to increase the value of his assets by persuading morons into buying the Bitcoin. I would personally prevent him from spreading similar fabrications on my website.) The analogy of the Bitcoin to gold is misleading because there's no reason why the Bitcoin should keep the cryptocurrency crown in the long run, let alone for 6,000 years, as I mentioned. But more generally, the identification of any cryptocurrency with gold is just plain stupid. Gold is a real material you can use for jewels, coins, teeth, coating, applications in electronics, and so on which is considered pretty or valuable even by people who haven't been brainwashed – the good feeling of a woman looking at gold is a natural, innate trait of the average women. On the other hand, only brainwashed people are capable of paying$8,200 for a record with their unreadable address in a database. Clearly, people are only paying thousands of dollars for one Bitcoin because others are doing so at the same moment. Four years ago, the Bitcoin is around but no one would have paid thousands of dollars for that. The actual reason is that the total amount of the pro-Bitcoin brainwashing was lower by 1.5 orders of magnitude. Gold has a nonzero intrinsic value that is appreciated by independent people, the unbacked cryptocurrencies have none. They're stocks of vacuous companies that produce no profit and will never get any better. You need to be converted into a "member of a promised future rosy world" to behave as irrationally as the other Bitcoin buyers. The high price follows from virtue signalling of a social movement; it is not a genuine reflection of people's individual needs and desires.

But even the claims that "gold is the main asset class" is strange. Well, it's not the most expensive metal per ounce: rhodium and platinum have generally been ahead of gold throughout most of the recent century. But you may protest: the amount of rhodium or platinum is smaller so the total price of the metal held by the people is smaller than for gold. Yes, it is.

But in that category, the total price, gold isn't #1 either. One ton of steel costs between $500 and$1,000 these days. Multiply it by 1.7 billion tons that is produced in one year. You get one trillion dollars annually in steel! So just from 2000, it's pretty clear that a more expensive chunk of steel was produced that the $8 trillion in gold that the people have. So gold is neither the most expensive metal per ounce; nor the most expensive metal by total capitalization. The statement that gold is the "main asset class" is a superficial, mostly dishonest, misleading, marketing-style, pseudo-factoid favored by people who seem half-educated and it's disappointing to see that Peter Thiel is fond of such statements. If you wanted to claim that it's impossible to hold your wealth in steel, it's not impossible at all. One cubic meter of steel weighs about 8 tons. That's$4,000–$8,000 according to the aforementioned price. Let's say it's$6,000. To store one million dollars, you need just 160 cubic meters – a cube whose size is 5 meters. Or you need to fill your garage or dig a hole in your garden. It's not impossible at all. Similarly, a cubic with the edge that is 50 meters long is one billion dollars. In some respects, this amount of steel is harder to deal with than gold. In others, it's easier. You don't really need to check that it's the right material because it's among the cheapest metallic materials of the same size so if someone gave you platinum instead of steel, it wouldn't be so bad for you – he won't do it deliberately because he would lose.

People who have made it as "earners of money" may sometimes be smart but they just don't have the scientific integrity in general. They never seem to separate hype from accurate statements and in most cases, it seems that this conflation of misleading marketing with solid facts fills them not only with the money but with pride, too. Of course, there's nothing original about the observation that marketing is an example of an activity where the scientific integrity is too much to ask. Feynman wrote and said:
The easiest way to explain this idea [of scientific integrity] is to contrast it, for example, with advertising. Last night I heard that Wesson Oil doesn’t soak through food. Well, that’s true. It’s not dishonest; but the thing I’m talking about is not just a matter of not being dishonest, it’s a matter of scientific integrity, which is another level. The fact that should be added to that advertising statement is that no oils soak through food, if operated at a certain temperature. If operated at another temperature, they all will—including Wesson Oil. So it’s the implication which has been conveyed, not the fact, which is true, and the difference is what we have to deal with.
Incidentally, in this 1974 Caltech commencement speech, Feynman mentioned the misleading advertising by Wesson Oil. In 2011 i.e. 37 years later, Wikipedia says, Wesson Oil was sued for its advertising as "pure and natural" oil. Be sure that Feynman was prophetic when he noticed the misleading tactics of this Tennessee company.

You may see the general aspects of not really honest adverts. They say something that is true from some viewpoint but it also makes people think something else that isn't true. In particular, the comment about Wesson Oil may be true but the very fact that it was said suggests that Wesson Oil is an exception among all oils. But it's not. Exactly the same holds for the positive statements about the Bitcoin. It's possible to talk about analogies between the Bitcoin and gold but in a foreseeable future, it may also be possible to talk about the analogy between gold and a totally different or new digital asset.