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Author Topic: Optimal Coin Distribution and the Social Role of Investors  (Read 3613 times)
Zangelbert Bingledack (OP)
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July 06, 2014, 01:59:01 AM
Last edit: May 17, 2015, 09:40:27 PM by Zangelbert Bingledack
 #1

  • Are speculators hurting Bitcoin?
  • Is the money distribution optimal?
    • Is the wealth held in the hands of those who will use it to most benefit the community?
    • Or is it better to start with a clean slate (alt-ledger, a.k.a. altcoin) where everyone begins with equal cash balances?

I think the answer to these kinds of questions requires a clear understanding of the crucial role investors play in society, so here I will attempt to explain that for those who've never considered it:

Simply put, a good investor can predict the future better than other people can. If, for example, you're a good investor and you predict a water shortage in a few years you can buy water rights now and have a good chance of selling them later for a profit. However, as a side effect, you bid up the price of water for everyone else, which incentivizes people to conserve water, incentivizes water producers to invest more into water production, motivates new companies to get into the water business, prompts more people to major in related fields in college, etc. The water shortage you correctly predicted will be mitigated by these actions. In this way, "greedy speculators" can even save lives. Shocked

As a good investor, you would likely sell when the water production infrastructure has become too big and society would benefit more from some of the resources/manpower being diverted elsewhere, and by pushing down the price you create exactly the right incentive structure for that. Being as most people aren't good at predicting the future and you are, you help society manage resources more efficiently than it would without you.

Not only do you help society manage resources more efficiently, even to the point of saving lives, but the better you are at that the more power you will gain to do it on a larger and larger scale since you keep getting wealthier and have more power to move markets. Think of how many lives Jim Rogers has probably saved in Africa by being such a successful and large-scale commodities investor! Conversely, if you're bad at predicting the future like most people are, you will tend to lose money and damage society - in the case of water by aggravating the shortages and bankrolling the oversupply gluts - but your ability to affect society will diminish as you lose your wealth and thereby effectively lose the "right" to divert resources in society.

In this way, the freer the market, the more it optimizes toward moving the ability to direct resources into the most capable hands: the most highly skilled investors (future prediction specialists) and the best entrepreneurs - and these people are exactly the people we want getting rich. Without them, we'd all be a lot less rich ourselves, or maybe even dead or never born because the resources for our parents to raise us weren't sufficient due to systemic mismanagement. Notice this is not centralized government management; every argument for "why we need central planners" is answered in the concepts touched on above: there is a huge distributed network of specialists at predicting the future and putting resources to the most efficient known uses. These are your planners, bringing all the benefits of having experts plan stuff, but not central planners in government offices.

Over time (not immediately), this process vests greater control over the societal ledger with those people who benefit society the most with their skills, and of course these skilled people are also motivated to do this because it directly benefits them by making them rich.  

Note that even short-term speculators and day traders - if they are good - also play a valuable role: they dampen short-term and even intraday volatility by buying the dips and selling the peaks. It's the unskilled speculators that create the volatility, but those people tend to lose their shirts pretty fast. That's a major reason why there's less volatility as a market matures, with the unskilled and therefore volatility-increasing speculators getting smaller and smaller while the skilled and therefore volatility-reducing speculators get bigger and bigger, thereby making the market ever smoother. (Note, however, that even though the Bitcoin market is maturing, it is not getting that much less volatile, simply because the market expands exponentially, so that the immature portion of it is always way bigger than the older mature portion.)

Now Bitcoin investment is a little more abstract than water investments. We cannot say that investing in Bitcoin before it got scarce helped society avert a water shortage. However, it incentivized miners to get in and secure the network to a level commensurate with the market cap, it motivated people like Tony Gallippi to divert his talents and time toward starting BitPay, and it generally created the incentive structure to support many other similar infrastructural buildouts. Of course it also attracted media and other much-needed public attention, as well as that of academics and of course investors.

It is obvious from reading this forum (and reddit) that only those with the conviction to hodl actually hodl, and those strongly tend to be people who both understand Bitcoin at a deep level (aren't spooked by FUD) and understand the necessary aspects of investing (aren't spooked by volatility because they understand the dynamics of the binary bet and exponential growth). When bitcoin went from under a dollar to over $30, then down to $2 over the course of a single year, the market was shaking out the weak hands - the poor speculators - in a spectacularly violent fashion. But what is this volatility optimizing for - that is, who's this market making rich? Here are some obvious ones:

1) Good hodlers, people who deeply grok Bitcoin and its investment aspects, who will likely dishoard in an organized fashion at peaks, dampening the bubbles and not contributing to the panic knifedowns nor to the FUD-based selloffs

2) Good traders who see the big picture, thereby decreasing the volatility

3) Perhaps warranting their own category are the people who have extremely deep or highly technical understanding of Bitcoin, to the level of what would almost seem to others like "insider information" (though there's nothing bad about this; in fact it's a good thing, if you follow the reasoning outlined above)

The main point is, besides some people who got lucky, the Bitcoin ledger is held mainly by people who most strongly believe in and most intimately understand Bitcoin (and understood it early!) and the relevant investing principles, or those who have actually contributed materially to the ecosystem. These people are far more likely than others to know where resources should be diverted to in the economy for maximum benefit to the community, and the maturity of the Bitcoin ledger ensures that they actually have the ability to command such resources (i.e., they have accumulated a lot of bitcoins to invest in infrastructure, and they have relatively little competition from unskilled investors who fund dead-end projects that waste dev time, etc.).

TL;DR: While the debate over whether the Bitcoin ledger is more or less "fair" than some other distribution may never be settled to everyone's satisfaction, we can clearly see that it is in a very useful sense the most efficient distribution for the general benefit of the community, thanks to the eminently helpful role that skilled investors play in society and how the extreme volatility over the years has continually shaken out the unskilled investors who would waste the community's resources.

If we imagine even a new amazing coin that is magically perfectly distributed to everyone, 100 coins for every person in the world, we can easily see that the initial investment decisions will be terribly skewed since all sorts of unskilled people will be throwing their coins at things and diverting resources and labor into useless, go-nowhere projects. Also, volatility would be way worse, and panic sell-offs due to FUD/misunderstandings would be horrendous. A ledger needs to grow organically through a market process, or else it will face challenges that it would only be ready to face some years later when the market is more solidified in strong hands by the above process.

By the way, are there any other things the Bitcoin ledger has optimized for (any other type of person the history of Bitcoin price movements has made especially rich (or especially shaken out))?
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aminorex
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July 06, 2014, 02:50:24 AM
 #2

paranoid apocalyptic antifederalists like me.  economic austrians/ minskyites like me.

Another good place to mention Coase's theorem, perhaps.

http://en.wikipedia.org/wiki/Coase_theorem

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
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July 06, 2014, 03:06:46 AM
Last edit: July 06, 2014, 03:21:58 AM by twiifm
 #3

paranoid apocalyptic antifederalists like me.  economic austrians/ minskyites like me.

Another good place to mention Coase's theorem, perhaps.

http://en.wikipedia.org/wiki/Coase_theorem

Minksy is not Austrian.  Hes a post-Keynesian

Heres a paper he wrote about Post-Keynsianism

http://digitalcommons.bard.edu/hm_archive/19/
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July 06, 2014, 03:41:11 AM
 #4

paranoid apocalyptic antifederalists like me.  economic austrians/ minskyites like me.

Another good place to mention Coase's theorem, perhaps.

http://en.wikipedia.org/wiki/Coase_theorem

Minksy is not Austrian.  Hes a post-Keynesian

Heres a paper he wrote about Post-Keynsianism

http://digitalcommons.bard.edu/hm_archive/19/
understood.  the aggregation defines a centroid around which I hypothesize one fraction of the demographic to cluster

Give a man a fish and he eats for a day.  Give a man a Poisson distribution and he eats at random times independent of one another, at a constant known rate.
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July 06, 2014, 04:21:19 AM
 #5

Triying to make an alt coin to redistribute the wealth is absurd, did you know that if all the money gets distributed in equal parts, in some years there will be again the 5 percent holding all the 90 percent? So its not the system, its the people.
And the greed and fear is making bitcoin to be distributed in a fair way, most of holders sell their stash in the first bubble.. that means there are almost nobody who have held it for 2 bubbles or more, like since january 2013 or so.
At the end it will accomplish his purpose as a currency and you can expect in the future people who sold larger amounts like 5 or more and then they will be buying some mbtcs to pay the daily things,
Zangelbert Bingledack (OP)
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July 06, 2014, 07:20:12 AM
 #6

That's true and it's a good thing. You don't want equal wealth distribution in society or else everyone would be poorer, because resources wouldn't be allocated efficiently. At least not until the wealthy investors and entrepreneurs emerged as the market matured.

However, this doesn't take away from the fact that today's more extreme concentrations of wealth in the ultra-rich is more a result of government rent-seeking than of natural ability of some to manage resources efficiently and predict the future. In Bitcoin, though, there is no government so there is no worry of artificial wealth concentration.
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July 06, 2014, 11:05:43 AM
 #7

Great post, unfortunately too long for most trolls here to read. I'll sum it up for the wider audience if you'll excuse me for doing so Smiley

HODL good, panic bad.

i am satoshi
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July 06, 2014, 11:36:29 AM
 #8

Very interesting. And bonus points for using grok.

Look inside yourself, and you will see that you are the bubble.
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July 07, 2014, 02:49:24 AM
 #9

Great stuff, Zang! Love your posts over the years. You have been a major inspiration toward my crypto/econ education. Keep them coming, for those remaining few that have the mind to understand and ears to hear.  Wink
Zangelbert Bingledack (OP)
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July 10, 2014, 02:37:54 PM
Last edit: July 10, 2014, 04:19:20 PM by Zangelbert Bingledack
 #10

Thanks! I have a lot more I could write, but it seems I need inspiration to get it out of me.

This one was born out of hearing too many people misunderstand basic economics and how Bitcoin fits into that. Bitcoin requires a DEEP understanding of economics, yet even among the highest ranks of the Bitcoin intelligentsia almost no one has all the basics down. Someone might get how the price system is supposed to work but think "speculators" are bad, or someone might understand anti-fragility but think the deflationary spiral is a worry, or someone might understand Austrian-style economic points completely but make systematic errors (placing too much weight on alt-coins; missing the significance of the spin-off idea) because they fundamentally look at Bitcoin as a collection of coins rather than as a ledger.

A theme I'm considering pushing is, "If you're in Bitcoin right now you're an investor...and within a year or two you will be a big investor. But how much time have you spent learning about investing principles, considering the implications of Bitcoin being an exponentially growing investment instrument now based on the promise of primarily being a currency and payment system in the future, and generally understanding what investors do to and for the world?" Everyone in Bitcoin is first and foremost an investor, but since that's not something people usually fully internalize, they don't learn much about investing - and if they learn anything it's just about trading, not the function investing serves in the big picture of the ecosystem.
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July 10, 2014, 05:03:33 PM
 #11

Thanks! I have a lot more I could write, but it seems I need inspiration to get it out of me.

This one was born out of hearing too many people misunderstand basic economics and how Bitcoin fits into that. Bitcoin requires a DEEP understanding of economics, yet even among the highest ranks of the Bitcoin intelligentsia almost no one has all the basics down. Someone might get how the price system is supposed to work but think "speculators" are bad, or someone might understand anti-fragility but think the deflationary spiral is a worry, or someone might understand Austrian-style economic points completely but make systematic errors (placing too much weight on alt-coins; missing the significance of the spin-off idea) because they fundamentally look at Bitcoin as a collection of coins rather than as a ledger.

A theme I'm considering pushing is, "If you're in Bitcoin right now you're an investor...and within a year or two you will be a big investor. But how much time have you spent learning about investing principles, considering the implications of Bitcoin being an exponentially growing investment instrument now based on the promise of primarily being a currency and payment system in the future, and generally understanding what investors do to and for the world?" Everyone in Bitcoin is first and foremost an investor, but since that's not something people usually fully internalize, they don't learn much about investing - and if they learn anything it's just about trading, not the function investing serves in the big picture of the ecosystem.

Yes, I read your posts religiously. I even read the one about the basic function/role of the investor to my wife, and she also thought it was great!

I've been reluctant to travel to any Bitcoin conferences despite being into Bitcoin since 2011... but if I knew you were going, I'd definitely want to meet up!
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July 10, 2014, 05:35:48 PM
 #12

optimal distribution - free.
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July 10, 2014, 06:19:21 PM
 #13

In the free market, distribution is always optimal.
 Smiley
bitrider
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July 10, 2014, 10:39:02 PM
 #14

Thanks! I have a lot more I could write, but it seems I need inspiration to get it out of me.

This one was born out of hearing too many people misunderstand basic economics and how Bitcoin fits into that. Bitcoin requires a DEEP understanding of economics, yet even among the highest ranks of the Bitcoin intelligentsia almost no one has all the basics down. Someone might get how the price system is supposed to work but think "speculators" are bad, or someone might understand anti-fragility but think the deflationary spiral is a worry, or someone might understand Austrian-style economic points completely but make systematic errors (placing too much weight on alt-coins; missing the significance of the spin-off idea) because they fundamentally look at Bitcoin as a collection of coins rather than as a ledger.

A theme I'm considering pushing is, "If you're in Bitcoin right now you're an investor...and within a year or two you will be a big investor. But how much time have you spent learning about investing principles, considering the implications of Bitcoin being an exponentially growing investment instrument now based on the promise of primarily being a currency and payment system in the future, and generally understanding what investors do to and for the world?" Everyone in Bitcoin is first and foremost an investor, but since that's not something people usually fully internalize, they don't learn much about investing - and if they learn anything it's just about trading, not the function investing serves in the big picture of the ecosystem.

Yup. That theme was quite apparent and explicit in OP. Like most, I have much more experience and education as a trader (for many years) - rather than investor. Not surprisingly because up until recently my "investment" capacity has been pretty small. Wink More wisdom on investing functions and purpose/mindset would be welcome as would any area you felt inclined to explore on the econ front.

I mostly wanted you to know that I (and I suspect others- confirmed above  Grin) are paying attention and looking forward what you write next.

In a more bitcoin specific direction re: good money vs bad -  If you have not seen this, I thought worth reading.

http://nakamotoinstitute.org/mempool/speculative-attack/

And it looks like it is moving quickly in that direction...

http://www.coindesk.com/argentinian-money-regulator-mandates-reporting-bitcoin-activity/
Zangelbert Bingledack (OP)
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July 14, 2014, 04:00:38 AM
Last edit: July 14, 2014, 04:24:45 AM by Zangelbert Bingledack
 #15

Yes, I read your posts religiously. I even read the one about the basic function/role of the investor to my wife, and she also thought it was great!

I've been reluctant to travel to any Bitcoin conferences despite being into Bitcoin since 2011... but if I knew you were going, I'd definitely want to meet up!

Good to hear. Being located where I am it's a little out of the way for me to get to most conferences, but if you're ever in Japan PM me Smiley

I've been giving some thought to building the "deep Bitcoin scholarship" type concepts and explanations into a more permanent and connected resource in a zoomable visual wiki format with inline images, video, links to longer essays, etc. Not only would this provide a ready set of links to answer all manner of common objections and misconceptions (especially ones not covered elsewhere, or that are controversial even among long-timers), but everyone who is referred to the wiki would be able to explore it further on their own. It also helps keep things in context because of how deeper concepts are accessed simply by zooming in (e.g., with the mouse wheel) on more surface-level concepts.

For example, in a diagram showing feedback loops in the Bitcoin economy, zooming in on "investment" might reveal an explanation like the one above, hopefully in a more visual format and connected to a lot of other optional deeper content and refutations of anticipated objections. Viewers would only zoom in on those things that interested them; like if they had a specific objection to an argument made, they could zoom in on that and get more detail, but if they were already on board with it they could save the reading time it would have normally taken them if it were presented in a linear/text format. It would also be easy to create little videos narrating sections of the visual wiki using simple screen capture software.

Prezi.com would probably be the platform. Although no one's ever used that presentation software as a wiki as far as I know, I think I see an easy way to do it.
Zangelbert Bingledack (OP)
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July 14, 2014, 04:06:55 AM
 #16

Yup. That theme was quite apparent and explicit in OP. Like most, I have much more experience and education as a trader (for many years) - rather than investor. Not surprisingly because up until recently my "investment" capacity has been pretty small. Wink More wisdom on investing functions and purpose/mindset would be welcome as would any area you felt inclined to explore on the econ front.

I mostly wanted you to know that I (and I suspect others- confirmed above  Grin) are paying attention and looking forward what you write next.

In a more bitcoin specific direction re: good money vs bad -  If you have not seen this, I thought worth reading.

http://nakamotoinstitute.org/mempool/speculative-attack/

And it looks like it is moving quickly in that direction...

http://www.coindesk.com/argentinian-money-regulator-mandates-reporting-bitcoin-activity/

Cool, thanks. I'm always caught between socializing and writing/thinking, and recently socializing has been winning so I haven't written as much. The Nakamoto Institute seems to be putting out some interesting content, judging from the few articles I've seen. I'd almost consider writing for them, but then again - despite the OP - single articles is not my end goal as it is a little too slow:

As elaborated in my post immediately before this one, I'm really interested in "raising the overall clarity waterline" in the community by setting straight a lot of things that are widely misunderstood. The more people who understand the critical aspects the better quality of scholarship we'll see, and naturally the more rational the investments and other decisions made by devs, miners, users, entrepreneurs, etc.
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July 14, 2014, 05:12:29 AM
 #17

The early adopters will have more room to get more coins at a lower price. Its impossible make things equals this way.

Also is impossible track and give everyone of the world the same ammount of coins, some are unreachable, many have no internet aces, and the vast majority won't give a damn, and people will try to scam the system with multiple identities.
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