POBC says China no longer stockpiling USD [Nov. 20, 2013]

[FenixRD]

Amid all the Bitcoin crash wailing, I heard something about this. In the context of,

China officially legitimizes Bitcoin and declares banks must stay out of it entirely; Bitcoin crashes in Western world due to media mishandling. Meanwhile, China declared something potentially truly catastrophic long-term for the USD; no Western headlines.

Interestingly, standard search terms for it do not yield a page 1 result on google from any MSM. It's all wackjob end-of-the-world blogs. Naturally, I was skeptical. But they provided a Bloomberg source, so here it is:

http://www.bloomberg.com/news/2013-11-20/pboc-says-no-longer-in-china-s-favor-to-boost-record-reserves.html

Until '05 the RMB (Chinese Yuan aka CNY) was backed by USD at a fixed rate. I recently was reading that a few years ago, it was regarded by economists that the RMB as undervalued by 35%, held there by the Chinese government. Evidently in order to accomplish our QE, the Chinese have bought all the USD they care to handle, and the RMB is now within 8% of its true purchasing power, and is now beginning to trade, with intentions by the Chinese government to let it float even more on its own.

When the JPY ceased direct link with the USD, they also held primarily USD for a long time to back the currency. The JPY appreciated vs. the USD from something like 380 JPY per dollar, to eventually peaking at 77 JPY per dollar, before last year agreeing to change their currency scheme (it had previously been truly non-inflationary), and now sits around 102.

If anything remotely similar happens with the RMB, I don't see any way these combinations of facts results in anything other than: While you might say the RMB will appreciate rapidly against the USD, China is huge and owns massive amounts of USD itself, and with their traditional role as manufacturers, I don't see anywhere to shift this role to. Unlike with the JPY's period of appreciation, the USD will rapidly appear to depreciate (indeed, it is) in far more areas than can be tucked away.

With the JPY, we are the larger trade partner, so they fiddled with things to accomplish trade -- it had gotten to where they could not export goods made in Japan to the world, US included, because they effectively cost too much due to the JPY's strength. So they agreed to devalue the JPY.

With the RMB, I can't say I see a path anywhere close. I guess we're going to have to figure out how to manufacture some things again? Our leaders have sold us into economic slavery in order to keep their offices for 4 years at a time. I already knew this was basically true, but I hadn't run across such a clear-cut implication of it. I can't see them doing this without mostly knowing what it causes, like a guy taking his 5th payday loan -- eventually you have to know you're just delaying bankruptcy. If the first and second payday loans couldn't save your ass...

[katie1348]

OK, I understand what you have said, but how does this affect BitCoin?

K

[FenixRD]

OK, I understand what you have said, but how does this affect BitCoin?

K

Well, Bitcoin users who would have previously held USD will benefit even more by holding BTC instead, compared to the less-compromised currencies.

Since Bitcoin is at its most fundamental a solution to economic situations like this -- it's pretty much what it was created for; re: Satoshi's embedded quote in the Genesis block. It's pretty typical for us to discuss a lot of things that are related to Bitcoin, around here... not necessarily just things that directly impact Bitcoin today or something.

I find it particularly ironic and typical, the media's illogical and hysterical treatment of a clearly temporary dip in Bitcoin, when major world currencies 2, 3, and 4 orders of magnitude larger in circulated value, fluctuate by 10 and 20% within a month at times. And this in particular, where there has been zero talk about genuinely bad news regarding the dollar. No hysterics, not even a passing mention.

[NUFCrichard]

I see the connection, but I think that this time we will back the failed currencies (when the dollar collapses) with a commodities basket.
Once someone leaves that behind and prints like crazy again (inevitable) then we will move to a world cryptocurrency.  Right now Bitcoin is far too small to have a meaningful impact on the dollar, but soon enough it, or a sucessor, will be.

[katie1348]

OK, that is a fair point. I see where you are coming from now.

I think that the media in general don't really understand what bitcoin is or why your might want some. In that vein, they simply look for a sensational story and try to drive some attention to their properties to generate ad revenue.

I am currently thinking ignorance rather than anything else, unless they were part of bitcoin, they will not really understand and if they are part of it, then they would not publish such pieces.

I am not sure I have all that much to add, except to say:

If we end up in a situation where the dollar looses its reserve currency status, I am not sure that BTC will be all that useful, as I am sure there will be all kind of other fallout.

[pjviitas]

I have heard people say that Bitcoin is too small and kind of wonder exactly what they are getting at.

The  two main issues regarding "smallness" I find is network hashing power and bitcoin availability.

Regarding network hashing power we are currently at about 7.4E+15...we need to get to 1.93E+74 to approve a transaction in 10 minutes once all the bitcoins are mined.  This kind of hashing power is equivalent to 96,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 of these things: http://cointerra.com/product/terraminer-iv-2ths-networked-miner-january-soldout/.  Even if we could produce a trillion of these units a second, the earth will be long gone...destroyed by an ever expanding sun.

Regarding bitcoin availability, it needs to be convenient to get your hands on it.  Currently the wire transfer fees at the exchanges are a killer.  Bitcoin ATM's are a solution since there are no wire transfer fees to get bitcoin (getting 1 bitcoin 10 times costs the same as getting 10 bitcoins once).  However, there are simply not enough of these ATM's around.

Just my 2 cents

[Impaler]

So let me get this strait, the Chinese kept their currency artificially low and simultaneously bought a lot of our debt as we bought their cheap exports.  Now they are going to end this policy and their currency will appreciate and ours depreciate.  The weakening dollar will bring manufacturing back to the US AND make our debt to China shrink.

How exactly dose a shrinking debt enslave us?  And how are our leaders responsible for the Chinese history of currency manipulation?  It sounds like your just regurgitating right-wing hyperbolic propaganda which has been trotting out the 'enslaved to yellow hoards' tripe for years.

[knarzo]

The weakening dollar will bring manufacturing back to the US AND make our debt to China shrink.

We'll see what the U.S. will be manufacturing. Or do you think the U.S. will supply Chinese Walmart then?

[kjj]

http://www.zerohedge.com/news/2013-12-06/hugh-hendry-throws-bearish-towel-his-full-must-read-letter

The US has been weakening the dollar intentionally for several years, and against China's wishes.  The last thing China wants is a weak dollar.

[FenixRD]

So let me get this strait, the Chinese kept their currency artificially low and simultaneously bought a lot of our debt as we bought their cheap exports.  Now they are going to end this policy and their currency will appreciate and ours depreciate.  The weakening dollar will bring manufacturing back to the US AND make our debt to China shrink.

How exactly dose a shrinking debt enslave us?  And how are our leaders responsible for the Chinese history of currency manipulation?  It sounds like your just regurgitating right-wing hyperbolic propaganda which has been trotting out the 'enslaved to yellow hoards' tripe for years.

If this came off as a "SEVERE NEWS FLASH" sort of post, I apologize, because it wasn't meant to be. This isn't anything that we haven't all been expecting for years, the entry into a transitional period. All I meant was, oh look, it happened officially a couple weeks back, with zero fanfare. I found it ironic, amid all the crazy news reports on Bitcoin, that it wasn't mentioned in the slightest -- but that just further proves what we already know, which is that the MSM is a very bad place to get accurate financial news and advice. Either they are 100% clueless about economics and financial markets, or some % of that is deliberate. Either way, you should disregard them almost completely. Instead, nearly everyone uses it as their main or even sole reference point.  

I guess writing "economic slavery" does come across a bit hyperbolic, without knowing my personality and belief system (which ya can't, cuz internet).

All this means is that we will continue to experience the trend where the "overseas manufacturing cost" continues to rise (though there are more very-poor countries to shift labor toward for a while, though not nearly as population-dense as China).

To answer your question about how or if this is bad -- that depends on what your expectations already were. If you hadn't realized this was coming, you might expect the US to continue to produce big booms, like the industrial revolution, the oil boom, and the tech boom of the 90s. We aren't going to shrivel up or something, of course! But we are mostly out of ways to easily outpace our closest "rivals" countries (I dislike calling it this). Most critically, a nation with a population of 1.35 bn is now more or less officially on the list of countries that economists watch, the ones which must compete almost entirely by achieving a higher relative per-worker productivity.

It's a very good thing, for humanity as a whole. Anyone who reports on things with that (as you called it) "hyperbolic propaganda [regarding being] 'enslaved to yellow hoards' tripe" is just a xenophobic statist. (They'll feel that this sentiment is patriotism, however, and you'll never convince them otherwise.)

Regarding a currency itself, it does certainly signify that the dollar (or more correctly, dollar bonds, since the dollar is, of course, deflationary itself) is not likely to return as a good one-stop method for storing value long-term, which it has enjoyed for a good 100 or more years. Which naturally means that you'll want to hold it as well as probably JPY, CNY, CAD, and AUD at least.

That's the traditional finance advice. Obviously around these parts we believe in Bitcoin too, so we will all probably maintain a larger percentage of our value as BTC than the general public for the forseeable future, even as they continue to join the party.

What people probably will do that they definitely shouldn't is rely on holding it as gold. The price is plainly manipulated and there is no way to estimate the existing gold to a figure within about a full order of magnitude. I personally believe the price has been shifted to a point where the market makers have prepared themselves to make a hearty profit by betting that people will be reaching for gold. It's not the worst place to store it (that's always as fiat under a mattress, or in any savings vehicle that isn't earning 6 - 8% APY).

[deed02392]

I have heard people say that Bitcoin is too small and kind of wonder exactly what they are getting at.

The  two main issues regarding "smallness" I find is network hashing power and bitcoin availability.

Regarding network hashing power we are currently at about 7.4E+15...we need to get to 1.93E+74 to approve a transaction in 10 minutes once all the bitcoins are mined.  This kind of hashing power is equivalent to 96,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 of these things: http://cointerra.com/product/terraminer-iv-2ths-networked-miner-january-soldout/

Wow, that is a scary fact, have you any source on the maths? This would make Bitcoin totally impractical as I presume this implies an exponential rise in time taken to process a transaction - have we got a graph which could illustrate transaction confirmation timings as they increase over time?

[pjviitas]

There is no need to mine that last Bitcoin for it to be viable.

It is also assumed that in the next 25-50 years there will be technology improvements.

I think the most important thing here is though that more people need to mine to increase network hashing power.

[kjj]

Regarding network hashing power we are currently at about 7.4E+15...we need to get to 1.93E+74 to approve a transaction in 10 minutes once all the bitcoins are mined.  This kind of hashing power is equivalent to 96,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 of these things: http://cointerra.com/product/terraminer-iv-2ths-networked-miner-january-soldout/.  Even if we could produce a trillion of these units a second, the earth will be long gone...destroyed by an ever expanding sun.

Just out of curiosity, what on earth makes you think that there is a relationship between the number of bitcoins already produced and the hash rate of the network?

[pjviitas]

Regarding network hashing power we are currently at about 7.4E+15...we need to get to 1.93E+74 to approve a transaction in 10 minutes once all the bitcoins are mined.  This kind of hashing power is equivalent to 96,500,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 of these things: http://cointerra.com/product/terraminer-iv-2ths-networked-miner-january-soldout/.  Even if we could produce a trillion of these units a second, the earth will be long gone...destroyed by an ever expanding sun.

Just out of curiosity, what on earth makes you think that there is a relationship between the number of bitcoins already produced and the hash rate of the network?

That is a great question...I just assumed that the network hashing power required to approve a transaction in 10 minutes would remain constant once all the bitcoins have been mined.

This may be a bad assumption...please advise.

The other assumption I may have derived from here: https://en.bitcoin.it/wiki/Difficulty is that the maximum difficulty will be reached when the last bitcoin was mined.

Math:
Maximum Difficulty  = 2^224
Required network hash rate at maximum difficulty = 2^224 * 2^32 / 600 = 1.93E+74 (In order to approve a transaction in 10 minutes)

Even if some of my assumptions are incorrect, the shear size of 1.93E+74 is fascinating.  I mean the numbers of atoms in the known universe is between 10E+78 - 10E+82.

Anyway...please correct me if I got something wrong.

[kjj]

That is a great question...I just assumed that the network hashing power required to approve a transaction in 10 minutes would remain constant once all the bitcoins have been mined.

This may be a bad assumption...please advise.

The other assumption I may have derived from here: https://en.bitcoin.it/wiki/Difficulty is that the maximum difficulty will be reached when the last bitcoin was mined.

Math:
Maximum Difficulty  = 2^224
Required network hash rate at maximum difficulty = 2^224 * 2^32 / 600 = 1.93E+74 (In order to approve a transaction in 10 minutes)

Even if some of my assumptions are incorrect, the shear size of 1.93E+74 is fascinating.  I mean the numbers of atoms in the known universe is between 10E+78 - 10E+82.

Anyway...please correct me if I got something wrong.

Pretty much all of it is wrong, sorry.

Difficulty scales to keep the block rate around 10 minutes.  It has nothing to do with how many blocks have already been mined, nor how many coins exist.  The maximum difficulty shows on that page just comes from the range of the sha256 hash function.  It isn't something we need to meet, nor that we are expected to meet.

[pjviitas]

That is a great question...I just assumed that the network hashing power required to approve a transaction in 10 minutes would remain constant once all the bitcoins have been mined.

This may be a bad assumption...please advise.

The other assumption I may have derived from here: https://en.bitcoin.it/wiki/Difficulty is that the maximum difficulty will be reached when the last bitcoin was mined.

Math:
Maximum Difficulty  = 2^224
Required network hash rate at maximum difficulty = 2^224 * 2^32 / 600 = 1.93E+74 (In order to approve a transaction in 10 minutes)

Even if some of my assumptions are incorrect, the shear size of 1.93E+74 is fascinating.  I mean the numbers of atoms in the known universe is between 10E+78 - 10E+82.

Anyway...please correct me if I got something wrong.

Pretty much all of it is wrong, sorry.

Difficulty scales to keep the block rate around 10 minutes.  It has nothing to do with how many blocks have already been mined, nor how many coins exist.  The maximum difficulty shows on that page just comes from the range of the sha256 hash function.  It isn't something we need to meet, nor that we are expected to meet.

Interesting...so what does the nominal network hashing power need to be then?

[kjj]

If the network hashrate were steady at say, 1 quadrillion hashes per second*, the difficulty would adjust so that exactly 2 weeks pass per 2016 blocks.  If the hashrate then grows by 10%, blocks will start coming (on average) every 9 minutes, and it will only take 12.6 days to reach 2016 blocks, so the difficulty will go up, by about 10%.

Right now, the network is always growing, so the difficulty is always adjusting up to balance that out.  The more power we add, the higher the difficulty gets.  It is a feedback system fighting to keep the block rate as close to 1 per 10 minutes as possible.

New coin generation comes from blocks.  Because we can't fool the difficulty, the blocks come out on schedule, and thus the new coins come into existence on schedule.  Well, we can fool the difficulty a little.  It doesn't overshoot us, so if we grow really fast on the right day of the cycle, we can bang out a bunch of blocks really quickly before it catches up, which brings future blocks forward in time, more or less permanently, by a bit.

* We are really closer to 5 or 6 quadrillion hashes per second, right now.

[FenixRD]

If the network hashrate were steady at say, 1 quadrillion hashes per second*, the difficulty would adjust so that exactly 2 weeks pass per 2016 blocks.  If the hashrate then grows by 10%, blocks will start coming (on average) every 9 minutes, and it will only take 12.6 days to reach 2016 blocks, so the difficulty will go up, by about 10%.

Right now, the network is always growing, so the difficulty is always adjusting up to balance that out.  The more power we add, the higher the difficulty gets.  It is a feedback system fighting to keep the block rate as close to 1 per 10 minutes as possible.

New coin generation comes from blocks.  Because we can't fool the difficulty, the blocks come out on schedule, and thus the new coins come into existence on schedule.  Well, we can fool the difficulty a little.  It doesn't overshoot us, so if we grow really fast on the right day of the cycle, we can bang out a bunch of blocks really quickly before it catches up, which brings future blocks forward in time, more or less permanently, by a bit.

* We are really closer to 5 or 6 quadrillion hashes per second, right now.

And to put into context how effective that is, we've already experienced it at a time when there mas maximum incentive to exploit this. Last fall, right before the block reward halved to 25, with the first ASICs. I haven't looked recently but at the time there was panic that there'd be a 10-day period where blocks were coming every couple hours at 50BTC each. This didn't happen despite maximum reward opportunity for collusion. And likely there WAS collusion, but it wasn't feasible to do more than they did. IIRC, faster than about 7 minutes/block has never been the average for a given set of 2016.

Economically this is also of only worth spending time on, if you mine for a living. For users, the effect on supply and demand for BTC is completely independent of hashrate, and a 2016 block period of overproduction cannot create more than 50,400 BTC, regardless of how fast or slow. That many could be dumped into circulation in an instant with only a blip of effect on exchange rate, and IRL a mining effort would want to maximize profits off that set, so they'd never sell all at once.

If the trendline was for BTC's 3-month appreciation vs. USD was 12%, regardless of instantaneous effect (within the duration of the selloff), that would only depress the RoA by a max of 0.42%, ignoring some short-term psychological effects if that instantaneous window is small enough for the sale to be anomalous. If no news, community assumes an old hand retired or died leaving his BTC to heirs who claimed cash. If accompanied by bad news there may be amplification f the suppression, but not much within a 3-month interval, and less when even longer periods are used.

Interesting...so what does the nominal network hashing power need to be then?

Just as the above hashrate is the maximum difficulty the current mechanism can adjust to (and we'll have switched to another one already should advances ever take us near that, which certainly seems unlikely to happen within many, many lifetimes), the minimum difficulty that is permitted is one in which the probability of winning is 1 guess out of 23,282,709,094 (rounded to a whole number in decimal after conversion from the 12-character floating point hex value).

Thus, the minimum global hashrate to maintain a 10-minute block discovery average is approximately a guess every 0. 0000 5195 2717 seconds, which is 19,248.2714071 hashes/second. Factor for maybe a 1% orphaned block probability to be safe and you get something around, lets say 19.5 khash/sec for a pretty human-readable minimum. Again, if we ever approach this, something very unexpected has happened, in this case presumably the cost of acquiring electricity went up by an unimaginable amount in a few days, and we'll have switched to something else as we try to get a grip on such a sudden change of events in the course of human history.

Just as the current system of value exchange and transmittance is inefficient in light if current technology, thus bitcoin, an uncorrectable loss of widespread and cheap Internet-like systems would create a similar situation for bitcoin, but it would be possible to adjust the system for post-apocalypse operation in the interim. A few changes to the protocol and humans could manually operate the system. We'd be quickly trying to split the blockchain into geographic regions, and would ultimately wind up with a system not completely unlike what we had before bitcoin.