I think Bitcoin has value because of its proven technology and narrative. It's mainly a Store of Value. It has a 21M supply cap, a small block size, minimal features. The technology is designed to be minimal to fulfill this narrative.

Bitcoin has minimal utility to be a Store of Value. It supports storing and transferring. If you believe or want Bitcoin to have more utility than that, you're going into Bitcoin maximalism. You'll go down the rabbit hole with people who think Bitcoin will eat all other currencies and assets.

I've written some posts on this.

https://bitflate.org/post/2020/03/17/bitcoin-is-a-store-of-value.html
https://bitflate.org/post/2019/11/24/bitcoin-will-not-be-a-medium-of-exchange.html

This is misunderstanding of gold history. Maybe early crypto pioneers were eager to replace gold. They deleted a huge chunk of gold history and made it a shiny metal with silly utilities, like, jewelry. Silver as a color is more appealing than gold.

According to archeological evidence, the first metal that humans learned to manipulate was gold 40k years ago.

https://en.wikipedia.org/wiki/Metallurgy#History

Then we went through Upper Paleolithic (Late Stone Age), Mesolithic & Neolithic (End of Stone Age), Chalcolithic (Copper Age), Bronze Age, Iron Age.

Notice these progressions were marked by advances in metal technology. Gold started metal revolutions. It's scarce enough to become valuable. It's been used as a symbol. Copper, bronze, and iron were the utilities.

It's not necessary for Bitcoin to have utility. Bitcoin's utility can happen indirectly. For example, if Bitcoin serves as the incubation for other cryptocurrencies and technologies. The same thing happened to gold. Gold did not have utility. But it was the first metal that humans learned to extract 40k years ago. Gold started mining industries for other metals. Humans later found utilities of other metals as tools and weapons. Gold is a Store of Value. Its utility happens indirectly in other metals.

I used to think a Store of Value needs to be stable. But maybe, that's wrong. A Store of Value does not need to be stable. The important requirement is to retain value over time. Bitcoin is digital and has 21M supply. There will never be enough. It is going to be volatile. Gold has 1.5% inflation rate. It's still volatile. Governments hoard gold to reduce its volatility. Gold screwed economies up badly over the years. People abandoned it. They don't like using gold as a medium of exchange because it's volatile. Gold has been a Store of Value for thousands of years.

Stock markets are volatile. Governments implement measures to stabilize the markets. Its stability is done through manipulation. We saw this in 2008 and now.

So a Store of Value is usually volatile.

The author of this article misunderstood gold. Gold used to be technology before it became money. Humans learned how to manipulate metals with gold. Then we started making metal tools and weapons. Gold then became decorative. Its primary use is money. Nobody likes to carry gold nuggets around. It looks dumb. That's why they make gold into jewelry. Gold was money before jewelry.

Defining Store of Value is a trap to walk into. The most accurate definition of a Store of Value is a store of VALUE. A close definition is a value that does not devalue with inflation. Some examples are gold, real estate. I think gold is the closest analogy. Real estate can be a Store of Value if the land is in high demand, like big metropolitans, agriculture lands. If you're in declining cities, like the US midwest areas, real estate is not a Store of Value. The US equity market can be considered a Store of Value. You've done well if you've invested after WW2. I'm not sure what the future holds for the equity market when we start having negative interest rates. My guess is it'll slowly lose its Store of Value status.

Bitcoin is unique because of its properties. I think it is a Store of Value on its own. It has two key differences from gold: (1) Its inflation will drop below gold and head to 0 (gold has 1.5% inflation rate), (2) It's very new (humans first used gold at least 40k years ago). These differences make Bitcoin more volatile. In the future, I think Bitcoin's market cap can match gold plus its 1.5% inflation.

Bitcoin is only a Store of Value. Bitcoin will not be a medium of exchange. Its supply cap of 21M is the reason. It's "good" money. It's desirable that people will dump other "bad" monies before they touch their bitcoins. I wrote an article on this topic:

https://bitflate.org/post/2019/11/24/bitcoin-will-not-be-a-medium-of-exchange.html

Other Bitcoin forks, BCH or BSV, face the same problem with 21M supply cap. Changing block size will not make a difference.

After last week's price crash, I saw some discussions regarding this topic. I have not changed my thesis. I wrote a post to explain my view.

Original Post: https://bitflate.org/post/2020/03/17/bitcoin-is-a-store-of-value.html

This article expresses a personal opinion of the Bitflate developer. It is not investment advice.

TL;DR

Long-term, Bitcoin is a Store of Value.

Short-term, Bitcoin is a speculative asset.

The coronavirus is spreading across the world. The US economy is feeling its impact. In time of crisis, people are dumping equities for cash. Crypto market had a hard crash last week. Bitcoin dropped more than 50% on March 12, 2020. Bitcoin analyst, Nic Carter, pointed out that it was the 2nd worst percentage drop in recorded history of Bitcoin trading. The worst percentage drop happened in 2013. This Bitcoin’s price drop coincides with the US stock market crash. This correlated price movement challenges Bitcoin’s value proposition as a safe haven Store of Value.

The magnitude of price drop shattered many bitcoin owners. They’re quick to dump and start to question the safe haven SoV thesis. This is understandable. As we are introduced to Bitcoin, the first most enduring thesis we hear is the Store of Value. The stock market drops 5-10% a day during this crisis, while the Bitcoin Store of Value drop 50% in a day. Bitcoin is peculiar. It lives in the fringe and extremities of our psychology. Can a Store of Value be extremely volatile? I think the answer is yes. We consider how we view Bitcoin in the short-term or long-term.

Bitcoin’s short-term price movements are dependent on traders

Bitcoin is a global digital currency. People trade it 24/7. There is no circuit break. No authority can intervene to stop its price movements. If we divide Bitcoin owners into hodlers and traders, we can see that traders dominate Bitcoin’s daily movements. Occasionally, hodlers will switch to be traders and vice versa. When Bitcoin price crashes, some hodlers may become anxious and start dumping their bitcoins.

Traders want to make money. They think short-term. They live off price movements. Bitcoin’s short-term price trend is speculative. It’s difficult to understand its daily price actions. With the stock market index, when many stocks can crash, some stocks remain well positioned. For example, this crisis greatly impacts Boeing due to decrease in air travel. But Costco benefits from increase volume. Bitcoin is a solo asset. Therefore, its price movement is very volatile.

Bitcoin’s fundamentals remain strong

During this price crash, we saw Bitcoin’s price dropped below $4k. But it bounced back and has hold above $5k in the past few days. This likely indicates that long-term investors remain holding and buying.

We see how Bitcoin price can make sudden and drastic changes. This recent price crash is entirely caused by external factors. Bitcoin’s fundamentals change very little. Besides a hashrate drop, we don’t see any other change in how Bitcoin trades and operates. It is still producing blocks every 10 minutes, or maybe a little slower. It is still issuing 12.5 coins for every block for the past 4 years. It is still secure. Bitcoin’s fundamentals remain strong.

Bitcoin is a Store of Value

If we zoom out the hours, days, and months of the Bitcoin price chart, we can see its long-term price trend remains up. The currently crisis is caused by external factors. The coronavirus is impacting the world’s economies. A sudden panic is causing people to flee asset markets. This has not changed Bitcoin’s value thesis. Long-term, Bitcoin is a Store of Value.

By long-term, I mean the time horizon is 5-10 years (more than 1 halving). Bitcoin’s price movement is affected by traders in the short-term. But in the long-term, hodlers will ultimately decide its price trend.

Long-term, Bitcoin is a Store of Value.

Short-term, Bitcoin is a speculative asset.

When to dump Bitcoin

People will move their money around. I follow but usually ignore short-term price movements. I try to stick with my timeline and how I allocate money. During tumultuous times, some bitcoiners advocate HODLism as a strategy. You should always hold. But I don’t think this is a sound strategy. I think a sound investment approach is to compare Bitcoin with other assets. If I see Bitcoin overvalued compared to real estate or equities, I would consider dumping Bitcoin. This is my personal view of how to deal with Bitcoin’s price movements. You should do your own research.

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.

I wrote a new article about DAI, a prominent Ethereum-backed decentralized stablecoin: https://bitflate.org/post/2020/03/14/the-problem-with-dai.html

I've told others that it's not viable to create a stablecoin on top of volatile assets. A viable approach for a digital native stablecoin is to add inflation. That's Bitflate. Since it is digital native crypto, we won't be able to control its short-term price. But over long-term, its price will remain stable. This is the tradeoff we have to make for decentralization.

Long-term, Bitcoin is a Store of Value.

Short-term, Bitcoin is a speculative asset.

By long-term, I mean the time horizon is 5-10 years (more than 1 halving). This is my current thesis. We can divide Bitcoin owners into two groups: long-term hodlers and short-term traders. The groups are somewhat fluid. Some hodlers switch to trading. Some traders switch to holding.

Bitcoin's price movement is mostly controlled by traders in the short-term. But in the long-term, hodlers will ultimately decide the price movement. Bitcoin price long-term has been up. That suggests a growing number of hodlers. Data also suggests growing hodlers.

People will move their money around. Know your long-term timeline. Ignore short-term price movement.

Mining update.

We passed 90k blocks!

This crypto and equity crash shows the need for a crypto for transactions. Existing blockchains with capped supply are very volatile. DAI stablecoin is failing under volatility. I believe that our best shot of making a digital native stablecoin is Bitflate.

Everything is crashing, Bitflate is marching forward. Smiley

Block: 90k
Supply: 4.5 million
Difficulty: 5M

90k block here:
https://explorer.bitflate.org/block/00000000000001b106a5ace1c4dc661fa8f0e775f591c4c54ab04898209fa76c

Reminder: Bitflate reward will halve from 50 to 25 at 210k blocks (10 million coins). It is designed to give more coins to early adopters. Still plenty of time to get coins before we reach 10 million coins.

0: 50 (10 million)
1: 25 (15 million)
2: 12.5
3: 6.25 (end of halving)
4: 6.56 (start of inflation 7%)
5: 7.02
6: 7.51
7: 8.04
8: 8.60
9: 9.20
10: 9.85 (30 million)

I've worked and thought about digital native stablecoins. I think we should use supply inflation. I'm skeptical about stable tokens building on top of a limited supply Store of Value.

Original Post: https://bitflate.org/post/2020/03/14/the-problem-with-dai.html

Bitflate is a cryptocurrency with constant inflation of 7% per year.

When you are involved long enough with crypto, you’ll see a lot of stupid ideas. DAI is one of them. Its ecosystem had a meltdown a few days ago during a crypto price crash. You can read about the story here: https://www.coindesk.com/defi-leader-makerdao-weighs-emergency-shutdown-following-eth-price-drop.

DAI - Digital Native Stablecoin

For those who don’t have time to get into the weeds, DAI is a “digital native” stablecoin. It wants to create a 1-1 peg to USD using an underlying volatile asset, Ethereum. If you want to use USD, it’s probably most efficient to go get USD. But for some ideological reasons (decentralization), DAI wants to be USD but also digital native. So they “lock” the underlying asset, Ethereum, and issue DAI coins. The premise is with intelligent computer algorithms, we can maintain 1-1 peg between a digital asset (Ethereum) and a real-world asset (USD).

The Problem

Digital assets are digital. Humans are the arbitrageurs. Humans are emotional. DAI is trying to create stability on top of Ethereum volatility. It’s kinda like building a stable house on a shaky foundation. Your building will collapse or you will spend so much money patching the flaws of your shaky foundation. This is a laughable idea for those who live in reality. But I guess some computer programmers/investors live in alternative realities too long. They forget about reality.

Whatever your algorithms are, you need to arbitrage risks. So you will always need to lock up more USD-ETH to account for risks. To be safe, maybe, you need 1.5 USD-ETH for a DAI USD. However, with digital scarce and volatile assets like Ethereum, there’s a chance that 1.5 USD-ETH will drop to 0.9 USD-ETH. At that point, you will be underwater. A couple of days ago, it did. If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It’s a dumb idea to use 1.5 USD to get 1 USD.

DAI has a lot of jargon and technology (more layers on top of the shaky foundation). These things make it look sophisticated and fool people. The basic problem is very simple. You only need elementary school arithmetic and logic to know its flaws and inefficiency. You can say it is interesting to develop technology to build stabilization technology on a shaky foundation. That is fine for a hobby project if you have a lot of time and money to waste. People who put money into DAI are exposing their money to a lot of unknown risks.

A potential fix for DAI will require the MakerDAO team to move to a centralized bank model. They are somewhat centralized already. With control, they’ll be able to manage the risks. They may even get USD reserve to reduce Ethereum volatility. In this case, the MakeDAO will become a kind of hybrid crypto and fiat bank. I don’t know how this would work. It could be an interesting model. But it’s going to be a centralized stablecoin.

Bitflate - Digital Native (Somewhat) Stablecoin

A potential prospect for digital native stablecoin is Bitflate. Bitflate is similar to Bitcoin but with a 7% inflation of supply. Bitcoin has proven to be a good model for creating decentralized money. By adding inflation to the supply, Bitflate creates incentives for people to spend. Its supply is still limited by the inflation rate. This is why it will retain some value. Even when Bitflate gains adoption, its price will not be completely stable. This is the tradeoff we have to live with for decentralization.

Thanks iegservers. We just passed 90k blocks!

This crypto and equity crash shows the need for a crypto for transactions. Existing blockchains with capped supply are very volatile. DAI stablecoin is failing under volatility. I believe that our best shot of making a digital native stablecoin is Bitflate.

Everything is crashing, Bitflate is marching forward.

Block: 90k
Supply: 4.5 million
Difficulty: 5M

90k block here:
https://explorer.bitflate.org/block/00000000000001b106a5ace1c4dc661fa8f0e775f591c4c54ab04898209fa76c

Reminder: Bitflate reward will halve from 50 to 25 at 210k blocks (10 million coins). It is designed to give more coins to early adopters. Still plenty of time to get coins before we reach 10 million coins.

0: 50 (10 million)
1: 25 (15 million)
2: 12.5
3: 6.25 (end of halving)
4: 6.56 (start of inflation 7%)
5: 7.02
6: 7.51
7: 8.04
8: 8.60
9: 9.20
10: 9.85 (30 million)

I think Litecoin added some value. They branched out to scrypt mining algorithm and spawned a lot of experiments in hashing and mining. Dogecoin is a fork of Litecoin that is still very active. All those experiments did not pan out. But they proved that hashing algorithms are not important differentiators. I think it'll help future forks to think about whether they really want to alter the hashing algorithm. When I designed my fork, I read about these hashing algorithm experiments. My fork only seeks to experiment with monetary policy. I decided to stick with SHA256.

I read people in Lightning Network are more willing to experiment with Litecoin. It has less value. This is a use case for digital silver.

This is a fun thread. I created a fork, Bitflate. It changes supply rule to 7% inflation. I suggest making a distinction between technology fork (Litecoin) and blockchain fork (BCH, BSV). I think we need more categorization and experiment with technology forks. I am interested experiments with monetary policies.

It is true that cryptocurrency cannot replace fiat. They are technically different (crypto is decentralized, fiat is centralized). There are design tradeoffs. It's like saying apple will replace orange. With fiat, we can control price. With crypto, that is not possible. You can design a system that fudge the line between fiat and crypto. For example, Ethereum has a minimum viable issuance schedule. It's difficult to interpret this monetary policy. But they can probably manipulate its supply to control price.

I think cryptocurrency will force fiat to become better. That will be a win for people. I came up with a diagram to illustrate different kinds of cryptocurrency.



Original Post: https://bitflate.org/post/2019/11/10/emerging-markets-of-cryptocurrencies.html

When we move between centralization and decentralization, we get different kinds of currencies. Cryptocurrencies don't compete directly. They'll compete in their categories. For example, cryptocurrencies with limited supply are competing for the Store of Value use-case. I think future currencies will strike good tradeoffs. They will offer people convenience and transparency.

I'm preparing a merge for Bitflate Core client 0.19. If anyone has C++ experience and interested in Bitflate, please help review the changes. In this patch, I fixed all of the failing tests.

https://github.com/bitflate/bitflate/pull/19/files

There's an opinion article on Bloomberg. It makes the case for adding inflation to cryptocurrency. Check out the Bitflate experiment. I think people will realize the usefulness of Bitflate.

https://www.bloomberg.com/opinion/articles/2020-02-21/bitcoin-s-future-as-real-currency-like-dollar-relies-on-inflation

There's an opinion article on Bloomberg. It makes the case for adding inflation to cryptocurrency. Check out the Bitflate experiment. I think people will realize the usefulness of Bitflate.

https://www.bloomberg.com/opinion/articles/2020-02-21/bitcoin-s-future-as-real-currency-like-dollar-relies-on-inflation

Bitcoin is a good long-term Store of Value. But it doesn't have the balance to make good money (Store of Value and transactions). Deflationary money creates parasitic/rent-seeking behaviors. People in feudal societies have to migrate to find new lands. Feudal lords, knights, and kings always end up controlling real estates. They were rent-seeking on people's labor. Gold rushes were brutal. But they offered people an escape from the tyrants.

When hyperbitcoinization happens, bitcoiners will become the new kings and lords whether they want it or not. They're certainly free and have servants until another ambitious tyrant decides to seize their bitcoins by violence.

I think Bitcoin would make a better form of long-term money if it has small inflation, like 1%. It'll truly compete with gold. But the ship has sailed. We cannot change. Gold can make a comeback. It always did.

I actually think having a fixed known supply is a disadvantage of BTC. Gold inflates at 1.5% per year. This low inflation allows gold to satisfy new demand, slowly. BTC's eventual zero supply will make BTC always volatile. There would be no BTC rush to find a new supply. While this could be good for your Store of Value, it creates volatility. Volatility will prevent BTC from being useful for transactions. It will remain a Store of Value and a very volatile speculative asset.