Bitcoin's Dilution from Alternate Cryptocurrencies

[altoidmintz]

The Mineforman website (http://mineforeman.com) was kind enough to allow me to write a blog using an experimental economic method. The article is called "Bitcoin Valuation as a Fiat Hedge With Information and Substitution Effects" and can be found below:

http://mineforeman.com/2013/05/14/bitcoin-valuation-as-a-fiat-hedge-with-information-and-substitution-effects/

For my calculations I did some new research that no one else has done on the rate of dilution of BTC value from competition. This dilution from competition, or more formally the substitution effect, is due to alternate cryptocurrencies slowly outpacing BTC.

I came up with a dilution rate of .7% per month. By December I am projecting an alternate cryptocurrency market cap (all of them combined, that is) of 24 Billion USD from a total crypto cap of about 290 B. What do yall think about that forecast? Plausible? I also assume that Mt Gox will implement Litecoin support before December. Reasonable or no at this point?

[xan_The_Dragon]

i agree

[GSnak]

Current market cap of all crypto is about $1.3billion. 223 fold increase by December? I'm thinking no.

[jj9guy]

It isnt diluted for anyone except the dumb people who calculate value based on hash rate and total coins.

[grobbes]

I applaud your efforts but traditional micro/macro and normal economic principles are hard to apply with cryptocurrencies and alts.

[Impaler]

Analysis based on "market capitalization" is worthless because it is a meaningless statistic, the price of a coin is determined over a monthly time-frame by the rate of new coin mining and the demand for those coins.  The demand can be purely speculative, or be the liquidation of coins involved in commerce, such as after a merchant accepts coins and needs to covert them back to Fiat.  Existing coins mean almost nothing because they never move. and most new coins get frozen shortly after creation.

Examine this graph to get an idea of ware total mining and purchasing is being allocated, http://www.coinchoose.com/charts.php

Their may be some crowding out and dilution effect but most of the alts are Scrypt and these are mined by miners with a very different set of hardware from whats clearly going to dominate SHA coins soon.  So their is no production-side crowding out, the crowding out will occur only on the demand side.  My opinion is that the BTC valuation is going to decline as the demand can not support $16,500 an hour liquidation rate as the hype generated during the bubble declines.

The far larger crowding out threat to BTC is Ripple, if it takes off you would see a drying up of the demand necessary to keep BTC price at current levels.

[altoidmintz]

I applaud your efforts but traditional micro/macro and normal economic principles are hard to apply with cryptocurrencies and alts.

Thanks and very much agreed! If nothing else then just an interesting read I hope. Some food for thought much more than investment advice, etc

[altoidmintz]

Analysis based on "market capitalization" is worthless because it is a meaningless statistic, the price of a coin is determined over a monthly time-frame by the rate of new coin mining and the demand for those coins.  The demand can be purely speculative, or be the liquidation of coins involved in commerce, such as after a merchant accepts coins and needs to covert them back to Fiat.  Existing coins mean almost nothing because they never move. and most new coins get frozen shortly after creation.

Examine this graph to get an idea of ware total mining and purchasing is being allocated, http://www.coinchoose.com/charts.php

Their may be some crowding out and dilution effect but most of the alts are Scrypt and these are mined by miners with a very different set of hardware from whats clearly going to dominate SHA coins soon.  So their is no production-side crowding out, the crowding out will occur only on the demand side.  My opinion is that the BTC valuation is going to decline as the demand can not support $16,500 an hour liquidation rate as the hype generated during the bubble declines.

The far larger crowding out threat to BTC is Ripple, if it takes off you would see a drying up of the demand necessary to keep BTC price at current levels.

Great comment! Thanks! My thoughts:

1) Market cap is a great indicator of demand. It is also a sort of GDP-equivalent and currencies are often priced of both of these.
2) Excellent graph I hadn't seen that before.
3) I'm skeptical of your crowding out analysis both based on fundamental theory and data.
4) BTC valuation is relatively useless without a time-frame. I agree it will fall in the short run but my data suggests that this hype bubble is not the last and that is the basis of calculating rate of information spread. This rate can be viewed as a combination measure both of how often these "info-bubbles" will occur as well as how large they are. I agree BTC will fall if no bubbles ever occur again but that is hardly a decent expectation. For example the Mt Gox and Dwolla fiascos may result in a Streisand Effect.
5) I agree that demand side effects are a superior driver to production side effects.
6) Where did you get 16,500 an hour liquidation rate? I don't disagree with that number but I can use that data for something I'm working on if I have a reliable source.
7) I looked at Ripple a couple times and thought it was a joke because it seems so flawed until Google threw money at it and now I'm intrigued. Why is Ripple a crowding out threat? I thought it was supposed to supplement BTC not substitute for it. Again, I don't disagree I'm just intrigued.

Thanks again for the comment it got me thinking as you can tell

[cdog]

I also assume that Mt Gox will implement Litecoin support before December. Reasonable or no at this point?

Maybe $10B, maybe. I think $3-5B is reasonable. LTC to Gox by end of summer for sure, its going to be insanely profitable for Gox to add it.

LTC doesnt dilute BTC, it strengthens it. Other alts are fairly worthless until we get Netcoin...

[Impaler]

In response to altoidmintz points:

1)  Your utterly wrong, the 'market cap' had even less to do with 'GDP' then it dose with the current valuation of a coin.  The amount of BTC commerce is hardly any different from what it was a few months ago when the coins were valued at a fraction of what they are now.  Note that I do not consider BTC<->Fiat exchange as part of BTC GDP, no GDP statistic on earth has ever included foreign currency exchange.  The BTC GDP is simply the sum of final goods and services in the currency.  In real economies Forign exchange volume is generally much larger then the real GDP and BTC may be even more heavily weighted towards exchange.

2) Thx

3) Explain why, your skepticism is not an argument.

4) Never said this hype bubble was the last and the time frame for the decline in exactly like that of 2011 bubble, so far my predictions on the general shape of the BTC markets movement have been flawless as I'm on record predicting a stabilization at ~120 USD.  In the following 3-6 months we will see a decline down to ~30 USD level.  Some scary news may trigger some wild swings in that period that will seem to be the cause of the drop, but they will not be the root cause.

5) Hardly an insight when supply from mining is completely known from now until the end of time.

6) $16,500 is simply the hourly mining rate times the current valuation, its the BTC portion of the pie graph.  Their are not enough new suckers buying BTC to support that kind of flow of funds.  Currently miners are not selling all their coins because they have good margins on their mining, but that will eventually come to an end and all coins will need to be liquidated every day to pay for mining overhead.

7) XRP the ripple currency is effectively another thing that people who want to get into 'coins' could buy instead of BTC so it can potentially pull off some of the flow of funds necessary to keep BTC prices up.  Ripple will likely take a year or more to get significant enough to start doing that so I do not believe it will have any effect on BTC in the time frame in which I expect BTC to settle down to ~30 USD and it's effect is not involved in that prediction.


We can see BTC hype volume by Google trends.  The graph clearly shows the 2013 bubble was 3 times 'louder' then the 2011 bubble.

http://www.google.com/trends/explore#q=bitcoin&date=1%2F2010%2041m&cmpt=q

We can see the effectiveness of the hype by looking at downloads on Sourceforge, here is the identical time frame.

http://sourceforge.net/projects/bitcoin/files/stats/timeline?dates=2010-01-01+to+2013-05-15

The graphs are strikingly similar, but note that while the hype was 3 times higher in 2013 compared to 2011, the download rate was less then twice as high.  This is a strong indicator that each subsequent bubble is becoming less efficient at bringing in new users (almost exactly half as effective as 2011 by my math).  This is naturally the result of exhausting the supply of potential new adopters, their are only so many crypto-anarchist-austrians out their on the internet who are interested in BTC as a concept.  So I have little faith in the notion that BTC is going to continue to grow indefinitely, and particularly not by this bubble-n-crash process.

[NWO]

I agree.

It should only be Bitcoin, Litecoin and Powercoin 

[altoidmintz]

In response to altoidmintz points:

1)  Your utterly wrong, the 'market cap' had even less to do with 'GDP' then it dose with the current valuation of a coin.  The amount of BTC commerce is hardly any different from what it was a few months ago when the coins were valued at a fraction of what they are now.  Note that I do not consider BTC<->Fiat exchange as part of BTC GDP, no GDP statistic on earth has ever included foreign currency exchange.  The BTC GDP is simply the sum of final goods and services in the currency.  In real economies Forign exchange volume is generally much larger then the real GDP and BTC may be even more heavily weighted towards exchange.

2) Thx

3) Explain why, your skepticism is not an argument.

4) Never said this hype bubble was the last and the time frame for the decline in exactly like that of 2011 bubble, so far my predictions on the general shape of the BTC markets movement have been flawless as I'm on record predicting a stabilization at ~120 USD.  In the following 3-6 months we will see a decline down to ~30 USD level.  Some scary news may trigger some wild swings in that period that will seem to be the cause of the drop, but they will not be the root cause.

5) Hardly an insight when supply from mining is completely known from now until the end of time.

6) $16,500 is simply the hourly mining rate times the current valuation, its the BTC portion of the pie graph.  Their are not enough new suckers buying BTC to support that kind of flow of funds.  Currently miners are not selling all their coins because they have good margins on their mining, but that will eventually come to an end and all coins will need to be liquidated every day to pay for mining overhead.

7) XRP the ripple currency is effectively another thing that people who want to get into 'coins' could buy instead of BTC so it can potentially pull off some of the flow of funds necessary to keep BTC prices up.  Ripple will likely take a year or more to get significant enough to start doing that so I do not believe it will have any effect on BTC in the time frame in which I expect BTC to settle down to ~30 USD and it's effect is not involved in that prediction.


We can see BTC hype volume by Google trends.  The graph clearly shows the 2013 bubble was 3 times 'louder' then the 2011 bubble.

http://www.google.com/trends/explore#q=bitcoin&date=1%2F2010%2041m&cmpt=q

We can see the effectiveness of the hype by looking at downloads on Sourceforge, here is the identical time frame.

http://sourceforge.net/projects/bitcoin/files/stats/timeline?dates=2010-01-01+to+2013-05-15

The graphs are strikingly similar, but note that while the hype was 3 times higher in 2013 compared to 2011, the download rate was less then twice as high.  This is a strong indicator that each subsequent bubble is becoming less efficient at bringing in new users (almost exactly half as effective as 2011 by my math).  This is naturally the result of exhausting the supply of potential new adopters, their are only so many crypto-anarchist-austrians out their on the internet who are interested in BTC as a concept.  So I have little faith in the notion that BTC is going to continue to grow indefinitely, and particularly not by this bubble-n-crash process.

1) Well we have identified our point of difference. My calculations include BTC to fiat as GDP because I consider BTC a good not a fiat currency. After all it is a commodity currency much more like if we were using cigarettes as currency then if we were using fiat. It involves a production structure called mining which is productive. I understand your point of objection though and you are using very consistent thinking however I was thinking differently. I am not ready to say you are wrong but I hope you understand my thinking.

2) First of all trusting any particular person's opinion over market data is a huge error that Hayek wrote about extensively and everyone knows. My projections are based on data modelling as documented in the article. Secondly in BTC production is not independent from demand and this is the theoretical error I was talking about. As all the miners begin to switch off of BTC they will be motivated to benefit the economy of whatever coin they are mining in order to attain a better utility via sale or strait use of that coin. We have already seen this with the LTC community and I expect it to only grow and diversify across coins as the miners do. As I admitted it is inferior to the demand effects from non-miners and other areas but it is still significant.

3) Glad your predictions are for the short-term and you acknowledge the significance of future hype. My predictions specifically avoided the chaos of the short term as mentioned in the article. I am projecting for the mid-term. I agree BTC will crash but it will easily bounce back afterwards.

4) Ah ok so you got it from that graph. Thx. I will probably be using that graph for future research. Your point is a good one it seems grounded in long-run economic theory but that theory would hold that speculation value = 0 and that transaction fees will be insignificant. Do you agree? Furthermore that economic theory would be based on opportunity cost of production not raw cost of production. By the time miners literally had to liquidate every coin just for overhead this would imply no accounting profit which would imply negative economic profit so I don't think that situation would ever occur. They would have moved on to other coins by then.

Thanks again!

[Impaler]

Ok we seem to be having a fruitful discussion here, lets keep it going.

1)  I think your confusion comes with how GDP is defined, as I said no nation on earth counts foreign exchange as GDP.  But even in a commodity money quasi-barter situation with cigarettes as money (say in a prison) not all exchanges are part of GDP.  Only FINAL purchases are part of GDP, effectively GDP is a measure of consumption of goods and services, not a measure of exchanges of goods and services.  When someone sells raw materials that's not included in GDP, only when the final product is sold to the person that will consume it is it part of GDP.  Even in a cigarette money economy you would only count the last trade in which the person smokes the cigarettes as GDP, if 100 packs a day are traded and only 10 are smoked the GDP was the value of 10 packs of cigarettes plus what ever final goods were being traded for the 100 packs.  Now obviously BTC and USD are unconsumable, so every exchange of them is excluded from GDP.  Even if you consider BTC an investment, that is likewise excluded from GDP, just as we exclude the trade volume of the NYSE from GDP.

2)  I offer analysis not opinion, opinions have no data behind them, analysis dose.  Your own article is analysis too, but I believe it is deeply flawed and you admit to a number of demonstrably false assumptions within it that seem to render it a mere thought experiment by your own admission.  You do note that BTC block generation has historically run closer to 9 minutes then 10 and this would raise the $16,500 figure sited earlier to $18,333.  That is the money that must NET flow into BTC purchases per hour to sustain the current price in the long term.  Still this variance in supply is very small compared to the variance in demand, the Austrian supply-side logic is firmly refuted, the supply of existing coins and the supply of newly mined coins are entirely known and highly stable, yet demand side fluctuations are what determine the price of BTC and in a sense they determine the supply as well if we define supply as what is actually placed onto the exchanges, not what COULD be.

3)  I'd actually call 3-6 months mid-term and your own analysis is for December 2013 if I read it correctly.  If you want me to make a long term prediction as in 5+ years in the future I'd say will not see another BTC bubble for at least a year but we are likely to see them ever year or two and they are particularly likely to happen after each block-reward halving because these events invariably ratchet up the price which is their intent.  But I am not confident of endless bounce-back potential in BTC because that is dependent on BTC being the only avenue available for speculators to return too, this was the case in 2011, is mostly the case in 2013 but will decidedly not be the case by the next bubble.  If a more promising coin exists then its possible that speculators and particularly merchants to to it instead and BTC withers much like one of the numerous alt-coins that have gone the way of the dodo.

4)  Not exactly sure what your asking here, I maintain that the key driver in BTC price is the ability of miners to liquidate coins to new users.  Actual commerce in BTC is minimal and not a driver of price because it is done by circulating a tiny fraction of existing coins.  If the user base was steady then mining would be inflationary because miners would be dumping huge numbers of coins onto the market, but if miners can find enough people to buy and hoard newly minted coins then prices can be maintained.  But miners invariably squeeze each others profit margins by increasing difficulty.  The liquidation rate from mining can in fact drive profitability negative, because a substantial part of costs are hardware and fixed rather then marginal electricity.  As liquidation increases price declines to the point that miners are covering their marginal costs but not their fixed costs.  For example the consumption of $1 electricity creates $1.05 worth of BTC but dose not cover the $0.15 depreciation of hardware (depreciation is from time not usage), the miner loses $0.10 by mining but would lose $0.15 by not mining.  We saw negative margins shortly after the block reward halving and we are likely to see it again at the market bottom I predict around $30 valuation, miners (GPU based) will go out of business or go to Scrypt coins as a result.

[crazy_rabbit]

The Mineforman website (http://mineforeman.com) was kind enough to allow me to write a blog using an experimental economic method. The article is called "Bitcoin Valuation as a Fiat Hedge With Information and Substitution Effects" and can be found below:

http://mineforeman.com/2013/05/14/bitcoin-valuation-as-a-fiat-hedge-with-information-and-substitution-effects/

For my calculations I did some new research that no one else has done on the rate of dilution of BTC value from competition. This dilution from competition, or more formally the substitution effect, is due to alternate cryptocurrencies slowly outpacing BTC.

I came up with a dilution rate of .7% per month. By December I am projecting an alternate cryptocurrency market cap (all of them combined, that is) of 24 Billion USD from a total crypto cap of about 290 B. What do yall think about that forecast? Plausible? I also assume that Mt Gox will implement Litecoin support before December. Reasonable or no at this point?

So MtGox implementing Litecoin before December looks less reasonable now then ever. Indeed even if they do implement Litecoin, it's quite possible that by December they will no longer be the behemouth that they are now. The influence is rapidly declining in favor of other exchanges, and new exchanges funded by the traditional institutions are on their way. There is a good chance that if and when (big if) LTC does come to GOX, it might not make any waves.

I think the real dilution is that of Alternate Cryptocurrencies by Alternate Cryptocurrencies. There are so many alt-coins now that all of them seem useless. Alt-Coin land is destroying itself.

[altoidmintz]

@Impaler:

I agree I think we are getting somewhere.

1) You are correct that only final goods and services are counted however the idea is that BTC is a final good in and of itself. Your analysis seems to imply a consumption based measurement but we need production side measurement. I agree that we shouldn't double-count non-new BTC but the idea was that I was measuring the entire trend from the beginning of all BTC so this would be a non-issue. Possibly a weak assumption. Let's think on how to measure the BTC GDP. I tried surveys measuring the LTC economy but that was rough.

2) The production side effects would be due to altcoins not production of BTC. Production of altcoins is related to demand of both altcoins and bitcoins this was my point.

3) I agree we are looking at a rate of about one hype per year but my data also showed that after each hype btc maintained sustained higher levels of attention then before. I also agree that bounce back potential is not limitless and frankly I think in 10 years, maybe 5, BTC will be gone. However I think it will easily bounce back from events this summer.

4) You answered my question. I was basically asking what you meant by liquidating coins and it turns out you were saying something other than what I thought you were.

[zerodrama]

In response to altoidmintz points:

1)  Your utterly wrong, the 'market cap' had even less to do with 'GDP' then it dose with the current valuation of a coin.  The amount of BTC commerce is hardly any different from what it was a few months ago when the coins were valued at a fraction of what they are now.  Note that I do not consider BTC<->Fiat exchange as part of BTC GDP, no GDP statistic on earth has ever included foreign currency exchange.  The BTC GDP is simply the sum of final goods and services in the currency.  In real economies Forign exchange volume is generally much larger then the real GDP and BTC may be even more heavily weighted towards exchange.

2) Thx

3) Explain why, your skepticism is not an argument.

4) Never said this hype bubble was the last and the time frame for the decline in exactly like that of 2011 bubble, so far my predictions on the general shape of the BTC markets movement have been flawless as I'm on record predicting a stabilization at ~120 USD.  In the following 3-6 months we will see a decline down to ~30 USD level.  Some scary news may trigger some wild swings in that period that will seem to be the cause of the drop, but they will not be the root cause.

5) Hardly an insight when supply from mining is completely known from now until the end of time.

6) $16,500 is simply the hourly mining rate times the current valuation, its the BTC portion of the pie graph.  Their are not enough new suckers buying BTC to support that kind of flow of funds.  Currently miners are not selling all their coins because they have good margins on their mining, but that will eventually come to an end and all coins will need to be liquidated every day to pay for mining overhead.

7) XRP the ripple currency is effectively another thing that people who want to get into 'coins' could buy instead of BTC so it can potentially pull off some of the flow of funds necessary to keep BTC prices up.  Ripple will likely take a year or more to get significant enough to start doing that so I do not believe it will have any effect on BTC in the time frame in which I expect BTC to settle down to ~30 USD and it's effect is not involved in that prediction.


We can see BTC hype volume by Google trends.  The graph clearly shows the 2013 bubble was 3 times 'louder' then the 2011 bubble.

http://www.google.com/trends/explore#q=bitcoin&date=1%2F2010%2041m&cmpt=q

We can see the effectiveness of the hype by looking at downloads on Sourceforge, here is the identical time frame.

http://sourceforge.net/projects/bitcoin/files/stats/timeline?dates=2010-01-01+to+2013-05-15

The graphs are strikingly similar, but note that while the hype was 3 times higher in 2013 compared to 2011, the download rate was less then twice as high.  This is a strong indicator that each subsequent bubble is becoming less efficient at bringing in new users (almost exactly half as effective as 2011 by my math).  This is naturally the result of exhausting the supply of potential new adopters, their are only so many crypto-anarchist-austrians out their on the internet who are interested in BTC as a concept.  So I have little faith in the notion that BTC is going to continue to grow indefinitely, and particularly not by this bubble-n-crash process.

I think I'm liking your research here. Of course, this assumes some bonehead in Congress doesn't make foreclosures easier for bankers.

[Impaler]

I think the real dilution is that of Alternate Cryptocurrencies by Alternate Cryptocurrencies. There are so many alt-coins now that all of them seem useless. Alt-Coin land is destroying itself.

I'd say more accurately a group of scamers and speculators are polluting alt-coin land in order to make a quick buck and are being aided and abetted by unscrupulous or naive exchanges that provide them the dumping grounds.  It's classic tragedy of the commons because no one is willing to enforce any kind of minimum standards even at a voluntary community level.

[yacoin]

I think litecoins got more dilluted than btc:)