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January 22, 2018, 05:52:22 PM |
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By Abdurrahman Arum
Our world is a rational world. So every thing less rational or irrational will return to rational condition, or vanish.
This rational world will adjust current cryptocurrency boom (especially bitcoin), even softly or hard. As new thing, bringing new technology, easy transaction, with almost flawless security system, bitcoin is greeted by the market with extraordinary, even irrational acceptance.
FIRST, NON GOV CYPTO WILL NEVER REPLACE CONVENTIONAL CURRENCIES.
Will bitcoin be the future currency and replace the conventional currency (official currency issued by the government)? This is the first irrationality. Crypto that not be backed up by any government will never replace the government-backed currency, as long as the governmental system still exists on earth. It's been a lot of discussion so I will not discuss it again. My prediction in the near future, crypto built by government will be born. Bitcoin and other crypto will not be able to replace this government crypto.
But no need to worry. Crypto does not need to replace the official currency to exist in the world. Crypto has its own niche market. Currently, all countries in the world, is trying to register all the wealth of its citizens including urging the banks that had been a tax heaven to follow the rules of this registration. So the space of unregistered wealth is narrower in the modern financial system.
This is the main market of crypto, non registerred fund. Later, all crypto will compete tightly for this non registered fund market.
If today many registerred funds are coming into the crypto market, it's only a moment. They are not looking for storage of wealth, they are just looking for margins from the market bubble. They just sail in the tide. And once this tide stops, they'll leave. The only remaining are non-registered funds and a few registerred funds that still expecting ease and freedom of transaction with crypto.
For the convenience and ease of transaction, crypto still has to compete with the government currency, because in the near future, there are already some countries that will use block-chain technology for official currency, or we call it government crypto. Of course this would be a tight competitor in the market that seeks ease of transaction.
So stick to the main market share, non registerred fund. All crypto will compete very tightly for this market share. Security, freedom, confidentiality, and comfort will be a major factor. They've to start building the infrastructure from now.
SECOND, BITCOIN INTRINSIC COSTS IS TOO EXPENSIVE.
The currency principle law is “a currency whose low intrinsic costs will replace the expensive ones”. Gold was replaced by silver. Silver was replaced by bronze. Bronze was replaced by low price metal. Low price metal was replaced by paper. And paper was replaced by paperless. This currency law has taken place throughout the human history.
What about bitcoin? Bitcoin intrinic cost is zero, isn’t it? Bitcoin is actually zero cost. But the mining system makes the intrinsic cost of bitcoin very expensive, beyond paper, metal, bronze, silver, and even gold. The intrinsic cost of bitcoin surpasses all other types of currencies that have existed throughout human history.
Why is the current intrinsic cost of bitcoin exceeding the cost of gold? Because to get the new bitcoin people have to mine (hash). And everyone can do bitcoin mining with perfect competition system. This perfect competition makes the margin between cost and revenue very tight. Many miners only calculate the variable cost (electricity costs) to run the machine. When bitcoin gathered greater than the cost of electricity, proceed. And it happens to all miners. So there are no miners who enjoy high margins. Every miner enjoy tight margin because of this perfect competition.
While such perfect competition does not occur in gold mining. Miners with strategic locations will continue to enjoy high margins until their strategic reserves depleted.
So if we calculate the average cost of gold mining and bitcoin, bitcoin cost is much higher than gold, because there is no high margin in bitcoin mining, whereas in gold there is still a high margin. And the expensive cost of mining on the bitcoin is almost all the cost of energy, the resources that the world is currently struggling and fighting over, our most precious sources. The cost of gold mining is still distributed in many resources, energy, labor, equipment, and land. While the cost of bitcoin is all concentrated on one of the most expensive resources, namely energy.
Something hard to imagine is that energy, which is the most expensive resource in the planet today, is used for virtual currency extraction with a cost ratio of almost 1 in 1 at the best current price, which should be free. This is very irrational. And the irrational system will not stand for long.
Currently the total energy used for the Bitcoin mining process is equal to the energy of an averagel country. And this will continue to grow exponentially. Will the world let bitcoin spend that much energy just to "print" a new virtual currency? I do not think so.
What if we find a new algorithm that can make the mining system more efficient? For example it only takes 10% or even 1% of the energy required today?
The problem is not in efficiency. The problem is in the open competition system. If there is a more efficient mining system that consumes only 10% of current electricity, then the mining margin will rise multiply. People will build mining rig again or increase it’s capacity. Competition will be tighter until finally margin become tight again. At that time, mining tools that consume only 10% of energy, has increased in number to 10 times, so the amount of consumption is the same. There is no way to save energy and costs in an open mining system like this. The problem is the open mining system itself.
Back to the currency law. The law of a cheap currency will replace the expensive currency has been valid for thousands of years and this law will not change due to bitcoin. It is Bitcoin who will definitely change following this law.
For decades, there have been many activists who do not believe in the global financial system and trying to recover the gold that has real and non-corrupt base values to revive to the global currency. But no matter what their efforts, it never, and will never succeed, because it violates the currency princeple law. No one can reverse this law. Bitcoin and other crypto’s will follow this law as well.
THIRD, BLOCK CHAIN SYSTEMS IS TOO COMPLICATED AND EXPENSIVE.
Bitcoin uses an open-ended block chain system with software called cores. This core can be installed and run by everyone in the world. One of the bitcoin motto is “cut the bank”. We do not need a bank. Everyone can be a bank. So recording and controlling currency in the bank replaced by cores that can be run by anyone.
Block chain system with this core makes the bitcoin security almost flawless. No one can hack millions of computers at once.
But on the other hand the open core system also makes the whole system becomes heavy, very heavy and complicated. If there are one million cores in the world, then every transaction will be recorded on the one million cores. More and more people are installing cores, more computers are recording the same transaction. And all these cumputers consume energy.
Currently, every single bitcoin transaction consumes 335 kwh of energy. That much energy is enough to support a big house in a developing country for 10 days, or a mid house for a month. And this number will continue to increase along with the increasing number of people who install core. Currently, total energy use for bitcoin (2017) has reached 39 TWH or $ 3.9 billion (with average consumer-grade electricity prices at 10 cents USD per kwh). This consumption has exceeded the electricity consumption of almost all countries in Africa. If bitcoin is a country then its electricity consumption is on the rank 58 of 200 more all countries in the world. This huge consumption will continue to increase. With constant growth, by the year 2030 half of the world's electricity consumption is used by bitcoin.
Of course this is something irrational. There are no other types of products on earth that consume that much energy.
The same thing happen to transaction costs. At the beginning of 2017 the bitcoin cost per transaction is still 0.25 USD. It has now reached an average of 28 USD and once reached 50 USD per transaction. If we make a transaction vauled 50 USD then the transaction costs reach 56% of it’s value. This is much more expensive than any bank cost. If bank transactions are cheaper, why do we use bitcoin?
In terms of both mining and transaction energy consumption, the bitcoin will face dead end. Bitcoin from the side of energy consumption and system cost is not sustainable and will face dead end.
There are some dead end points in bitcoin and so do other crypto. We do not know where and how far the dead end point is. And once one of these dead end points is reached it will become a trigger of instability throughout the system.
HOPE ON HOPE
Keep in mind that what keeps the bitcoin price high and keeps rising is because people believe others will buy it later at a higher price. And people who buy at a higher price also hope to others again. And so on. Hope based on other hope like a vicious cycle. There is no real value on which this hope to base on. What will happen if there is a group of people with significant amounts of bitcoin starting to lose hope? The whole hope cycle system will collapse. And since there is no real value, the collapse can be very far away, close to zero may be. If a goods whose price soars and then falls, it will fall to its intrinsic value or base price. And bitcoin has no intrinsic value.
DO NOT LET BITCOIN FALL TO ASH
Although I do not believe in any type of ponzi scheme, I am one who still believe that bitcoin can be sustanable, and not just a ponzi scheme, or other type of zero-bubble. And the best time to make bitcoin sustainable is now, when it's at the top, when everyone still has hope. Because when the peak is over, nothing we can do. Just fall to ash.
How to save bitcoin?
FIRST, REMOVE THE MINING SYSTEM
The mining system may have been made to keep bitcoin alive until 2140. As long as this mining system exists, there will always be people who mine and make it live. The mining system can also attract new people to get bitcoin in an easy and open way.
But of course this is only effective if bitcoin is not as big as now. For the present size, this mining system has created a huge economic cost to the world. This mining system has made bitcoin the 'currency' with the most expensive procurement cost in history, even beating gold. And of course this violates the principle of currency, "currencies with cheaper intrinsic value will replace the more expensive". Bitcoin with a mining system reverses this principle. And this is irrational.
This mining system will make bitcoin likely to fall as other ponzi scheme or bubble. The bubble when collapsed will return everything at zero position. There will be thousands / millions of people who gain big profit. And thousands / millions of other who lose big loss. The amount of loss and profit will be zero sum. So there is no real loss or gain in ponzi scheme or any other bubble.
But bitcoin can get worse than just ordinary bubble, because there are huge mining costs during operation. Mining costs will still be total loss and no compensation at all. When this game ends, it will leave a net loss of multibillions of dollars in mining costs every year.
If the mining system is eliminated, how to issue a new currency efficiently, rationally, and remains open to public?
SECOND, OPEN AUCTION SYSTEM REPLACING MINING SYSTEM
To replace the mining system, bitcoin may use the auction system. The new bitcoin stays lauched as the previous schedule. It's just to get this new bitcoin, people does not need to mine, but join the auction. New coins can be auctioned by the community through a block chain.
What is the difference between mining and auction systems? The mining system makes the cost of getting bitcoin burn to ash. While the auction, the auction fee will be transferred to bitcoin community. So there is no real cost, because this cost is just a transfer of funds. Billions of dollars even later could reach tens of billions of dollars can be saved each year in this simple way.
The auction fund will be managed by the bitcoin community as the country manages the money. With this system, the cost of making bitcoins is almost zero or no cost, even more efficient than paper money issued by countries that still use the cost of printing. Bitcoin does not require it.
The use of bitcoin auction funds creates a lot of useful possibilities both for the bitcoin community particulary, and even for the world. What are the possibilities? I took two great examples.
First, the bitcoin reserve.
Auction fund can be used as bitcoin reserve. In the early stages, the function of bitcoin reserve may be more specific and simpler than the country's foreign exchange reserves, but it will be as complicated as the foreign exchange reserves as time goes by.
The simplest function of bitcoin reserve is to be the base price and guarantee of each outstanding bitcoin. This Reserve will be the minimum value or guarantee if something bad happens.
This is a simple calculation example. Bitcoin will issued in 2018 is 656,250 BTC. If the average price for one year is 15,000 USD (median between 10,000 USD and 20,000 USD) then 2018 bitcoin auctions could accumulate 9.8 billion USD. 9.8 billion dollars will be the guaranteed market value of all circulating bitcoins. With an outstanding number of bitcoin of 17 million end of 2018, the guaranteed value per BTC is 579 USD. If bad thing happens bitcoin value will not fall lower than this guaranteed value. In rush everyone can exchange bitcoin at bitcoin reserve with this minimum value.
With the auction system, bitcoin reserve will always increase. End of 2019, with the same price, this reserve will doubled, and so on.The reserve incremental will increase the minimum value and make it closer to its market value thus increasing security. This will increase the market value of bitcoin as a whole because it has a real underline asset.
To provide a sense of security, the reserve bank is open at any time with an unlimited number of transactions, with that minimum exchange rate. Any other safe and convenient ways always open. And of course, bitcoin community can make much simpler system than any state can make.
The existence of this reserve will significantly increase the confidence of bitcoin. Hope based circles of hope as described earlier, can make this reserve as the last resort of security. So no longer just based on empty expectations. There is really a real value. And in the principle of trust, this reserve can increase the trust that if nominated may be far greater than it’s nominal value.
Collecting a reserve for a new currency is not an easy thing. Even very difficult. But on current condition, bitcoin should be able to do it easily and quickly.
The current condition is a very rare. It has never happened in history before. If this very rare opportunity that we do not know how long to going on, bitcoin can utilize to collect the reserve, then this will determine which bitcoin may last forever.
Reserve is the first asset to sustain
Once bitcoin can build a reserve, then it already has the initial asset to sustain forever. Even in the worst conditions, for example, there is a rush and everyone sells its bitcoin, it’s still remain members of the community continuing to use bitcoin. They are safe and do not have to worry because there is a reserve that guarantees its value. They can still continue trading and transaction as usual, just like before bitcoin becomes a bubble. What to do next is improvements while surviving before finding an opportunity to stand again. The most important thing in such circumstances is, do not die. While still alive, there are still opportunities for improvement while waiting for a chance to bounce back. The reserve system provides assurance and cut the death. At some point, this guarantee is more valuable than anything else.
Second, public spending
As a community central bank, bitcoin banks actually can spend on public expenditure. Of course with a certain percentage. Because some of the incoming funds must be kept in the form of reserves as described above.
This public expenditure can be benefecial to bitcoin communities themselves such as building bitcoin infrastructure that no longer uses a personal name, but community / public. Public expenditure can be expanded for benefecial of mankind on earth such as clean energy development or other social activities. In this position the community actually performs as a public community oriented to the public interest.
Public expenditures for the public interest like this actually have an internal benefit to bitcoin itself. Public spending will expand the bitcoin market on real transaction systems. This will open up the possibility of using bitcoin more widely. Public expenditure on the other hand is a public campaing.
And there are still many examples of the use of other collected funds. As long as the management is done prudently and openly, then this will be a very strong milestone in the establishment of a new currency system. Slowly but sure, bitcoin will build its foundation fundamentally and firmly.
THIRD, MAKE AN EFFICIENT BLOCK CHAIN SYSTEM.
The main advantage of bitcoin with its blockchain system is security. With a public processing system that is open to the public and done by everyone, no one will be able to corrupt on millions of cores simultaneously. Until now there is no threat that can penetrate the security of millions of cores, except only minor thefts on cores individually. In terms of security, bitcoin is almost perfect.
Security is important. But millions of cores do are not necessary. Because these millions of cores on the other hand cause system inefficiency and costly. If thousands can provide security, then we do not need millions.
Bitcoin must reduce the number of cores from millions to thousands. This will not reduce the security system. But it will be much more efficient on the other hand. This reduction can be done with the quota system so it will not change its comunity principle or ‘currency of people’. For example cores can only be run by people who have a thousand or more bitcoins. So those who have bitcoin only hundreds or tens may make a group until the number becomes 1000 and runs the shared core. With this quota system, the maximum core is 17,000 units. It will be much more efficient and cheaper but still safe. Thus, transaction costs can be repressed as in the early days of circulating bitcoin. Even with a more advanced system the cost can be pressed further close to 0.
**
In principle, the modern currency system must meet the following conditions:
1. Inexpensive intrinsic cost, close to 0
2. Low transaction costs, close to 0
3. Ease of transaction, freedom of transaction, and open all possibilities
If all three elements are met, then the currency can compete for the open modern market.
Welcome the emergence of a new, more open, and efficient financial system. Let's make the public enthusiasm into positive energy to build sustainable and rational infrastructure and system. Do not just become a bubble, then erupts, and leave the sunk cost multibilion of dollars.
Let's make a better world
Abdurrahman Arum
Clean Energy Investment Expert – Indonesia
Blockchain Advisory Council - Member
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