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the joint
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October 05, 2014, 01:07:51 AM
 #1

http://en.wikipedia.org/wiki/Systems_theory
http://en.wikipedia.org/wiki/Homeostasis

When things start getting messy and emotions run high, I often find it's useful to remind myself of the basics.  Accordingly, this is a post aimed at those who, over the past few weeks, have become increasingly emotional and panicky about BTC price.

What should you do?  Should you sell?  Should you buy?  Should you HODL?  Should you diversify?  Ultimately, these are unknowns, and the more you focus on the unknown, the less you focus on what is knowable.

So, what is knowable?  Systems Theory is an *extremely* broad, overarching theory of systems in general.  Depending on what discipline Systems Theory is applied to, it will look slightly different and certain systemic aspects will be highlighted over others.  But, the core ideas behind Systems Theory are applicable to virtually everything.  Absolutely everything and anything is a system -- I'm a system, you're a system, and this community is a system.  Most relevant to this post is that the Bitcoin market is a small, economic system nested within much larger economic systems.

Why is this basic knowledge useful?  All systems have some basic properties that, at the very least, can help us to understand the context in which the Bitcoin market exists in relation to other economic markets.

Let's first address some characteristics of all systems:

1) Entropy -- All systems are prone to entropy or decay over time, and will continue to do so without outside influence.

2) Homeostasis -- Homeostasis is a state of balance within a system, and is often achieved when systemic input is delicately balanced by systemic output.   A system in a state of total or near-total homeostasis can be described as stable.  A system not in a state of homeostasis can be described as volatile.

3) Input -- energy flowing into a system from external systems.

4) Output -- energy flowing out of a system into other, external systems.

Example:
Imagine a human being.  From the moment you are born, you are subject to entropy.  You will decay and die without some additional source of energy in the form of received input from some external system (e.g. food, oxygen, etc).  But, simply receiving this input will not guarantee your continued existence.   This systemic input needs to be counterbalanced by systemic output (e.g. excretion, etc.).  The absence of one or the other will lead to a quick death, and extreme imbalances between systemic input and output will cause systemic volatility that can threaten systemic collapse.

Applying Systems Theory to Bitcoin:
This post isn't intended to give you a formula for determining the cause of every tiny movement, but rather to provide some general considerations so that you can place the current state of Bitcoin in a more reasonable context.  Accordingly, here are a few of those considerations, though this is by no means an exhaustive or even comprehensive list:

1) Bitcoin is still a tiny economic system nested among larger ones.  This implies that smaller amounts of systemic input/output will have a larger impact on Bitcoin than they would on some larger economic system.  This is obvious -- simply imagine how, for example, the influx of $1 billion in new money might affect the Bitcoin market vs. how it might affect Google stock.

2) Bitcoin has experienced several phases of enormous systemic input that was not counterbalanced by systemic output.  The rise to the $32 in June 2011 was the first example, the rise to $266 was a second example, and the rise to >$1000 was the third.   These are all examples of periods in which systemic input was grossly mismatched with systemic output.  The inevitable result of these scenarios is systemic imbalance or a lack of homeostasis, thereby increasing the chances of systemic collapse.

3) Bitcoin is not self-correcting.  It is inherently linked to external systems from and to which energy is transferred.  This dependence upon other systems is specifically what removes any guarantee whatsoever of recovery.  

For the dense, let me repeat and highlight that last sentence:  This dependence upon other systems is specifically what removes any guarantee whatsoever of recovery.

4) Volatility doesn't care which direction you're moving or whether you're making or losing money, it is simply a reflection of instability within a system.  Although I'm certainly generalizing a bit with this next example, it's equally 'bad' in terms of instability whether the price goes up $100 in a day or falls $100.  Accordingly, you shouldn't be looking to your trading success or lack thereof as an indicator of market health.

Again, this list is extremely short and by no means comprehensive, but I thought I'd get the ball rolling with some general advice (Note:  I am NOT a licensed professional).  I like people, which means that I generally like all of you, and I don't enjoy reading stories of people making investment decisions that end up ruining their lives.  So, here goes:

1)  To HODLers, there is absolutely 0% guarantee of a price recovery, and it is absolutely possible for this system to die.

2)  Systemic death can begin at any price.  Volatility and a lack of homeostasis lead to systemic death, not a low price.

3)  However, as Bitcoin grows, its resistance to systemic death increases.  Furthermore, as systemic output grows to match systemic input, the chances of re-establishing a homeostatic state increase.  Consequently, even this precipitous price drop from the ATH over the course of nearly a year is not conclusive evidence of a dying Bitcoin market, but possibly of one that is mending and healing itself.  This is directed towards the doomsday prophets on this forum.

4)  Avoid extreme positions.  Don't commit yourself to sinking with the ship, but also don't pretend icebergs can't or don't exist.

**Note: For the record, I released the majority of my holdings between $600-$850 but still have some stake in this market.

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October 05, 2014, 01:51:31 AM
 #2

I like your post and would like to add some other points.

Bitcoin price is purely speculative.  There are no fundamentals.  The only time we got near a bitcoin economy was silk road.  That is when goods are priced in bitcoin.  When goods are priced in bitcoin then you can estimate price by comparing the same basket of goods relative to other currencies.

Having a limited base supply means nothing.  You want to pay attention to velocity.  Whether 1 btc equals 300usd or 10usd it doesnt matter as long as velocity can keep up w transactions

Inelasticity actually inhibits economic growth.  Most if not practically all capital money exist as credit.  People borrow money to create business that generate future returns to pay off interest.  Inelasticity makes it difficult to build financial services.  Terrible for creating loans

Hoarding is like stuffing cash in a mattress.  It does nothing.  Theres no value creation.  

Thats why experienced investors don't hoard bitcoin.  They either invest in ventures or stay away totally.

The entire bitcoin investment thesis is based on false and ignorant understanding of economics

If you buy bitcoins you are just speculating.  Theres a real chance it goes to zero.  Personally i dont think itll go to zero cause theres a bunch of cultists who will keep HODLing.  But i think homeostasis will only be discovered once there is another real economy like silk road that comes along

Until then buying bitcoins are a gamble.  If you wanna use bitcoin then exchange your fiat money right before and spend the bitcoin.









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spiderbrain
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October 05, 2014, 01:59:56 AM
 #3

Bitcoin is still in its early stages. People are losing money at the moment, just like they did in 2011. This doesn't change the fact that the current market cap of $5 billion is tiny compared to what its potential is. It is technologically so much more advanced that the countless trillions in financial products which currently hold the world economy together.

The experiment may also fail, this has always been true, so don't stake your life on it.  But I am completely happy holding through this down trend.

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October 05, 2014, 02:15:50 AM
 #4

Bitcoin is still in its early stages. People are losing money at the moment, just like they did in 2011. This doesn't change the fact that the current market cap of $5 billion is tiny compared to what its potential is. It is technologically so much more advanced that the countless trillions in financial products which currently hold the world economy together.

The experiment may also fail, this has always been true, so don't stake your life on it.  But I am completely happy holding through this down trend.

This is the kind of economics & finance ignorance I'm talking about.  Market cap just means price times shares.  If dealing w money economics you don't use market cap as a measurement.  You use GDP or some other similar measure

Financial innovation comes from advances in financial products like CDS, MBS, CDO, etc..

Blockchain is a ledger.  Its a tool like checks/ ACH are a tool to transmit money.  Checks themselves arent commodities and unit of currency dont have to be of any particular price for checks to work.




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October 05, 2014, 02:25:00 AM
 #5

Financial innovation comes from advances in financial products like CDS, MBS, CDO, etc.
All these products have counterparty risk. Counterparty risk in an insolvent system is what nearly brought down global credit markets in 2008. Bitcoin has no counterparty risk, and in my opinion is superior to the current global financial system. Granted bitcoin will struggle to get mainstream adoption until there are long term future contracts so people can use it as a more traditional currency with a more stable value, but these innovations are on the way.

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October 05, 2014, 02:27:47 AM
 #6

I like your post and would like to add some other points.

Bitcoin price is purely speculative.  There are no fundamentals.  The only time we got near a bitcoin economy was silk road.  That is when goods are priced in bitcoin.  When goods are priced in bitcoin then you can estimate price by comparing the same basket of goods relative to other currencies.

Having a limited base supply means nothing.  You want to pay attention to velocity.  Whether 1 btc equals 300usd or 10usd it doesnt matter as long as velocity can keep up w transactions

Inelasticity actually inhibits economic growth.  Most if not practically all capital money exist as credit.  People borrow money to create business that generate future returns to pay off interest.  Inelasticity makes it difficult to build financial services.  Terrible for creating loans

Hoarding is like stuffing cash in a mattress.  It does nothing.  Theres no value creation.  

Thats why experienced investors don't hoard bitcoin.  They either invest in ventures or stay away totally.

The entire bitcoin investment thesis is based on false and ignorant understanding of economics

If you buy bitcoins you are just speculating.  Theres a real chance it goes to zero.  Personally i dont think itll go to zero cause theres a bunch of cultists who will keep HODLing.  But i think homeostasis will only be discovered once there is another real economy like silk road that comes along

Until then buying bitcoins are a gamble.  If you wanna use bitcoin then exchange your fiat money right before and spend the bitcoin.
The price determines how much the economy can support. No amount of velocity is going to let you keep 10 billion in a 5 billion market cap economy.

Loans allow profitable businesses to take off. It also allows unprofitable ones to get started. If loans were not available less successful businesses would start up, but so would less failed ones. It would bring some measure of stability to the economy, and would force people to be very sure they knew what they were doing. Net result likely to be positive.

Supply is super important. I do not have the patience to baby you through this one at the moment.

Saving money is generally something that people who can't or won't do complain about.

Everything involving money, or indeed resources of any kind, falls under speculation. Be more specific.

cul... ok i see. That kind of post. Alright.

There is no bubble.
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October 05, 2014, 02:32:45 AM
 #7

I like your post and would like to add some other points.

Bitcoin price is purely speculative.  There are no fundamentals.  The only time we got near a bitcoin economy was silk road.  That is when goods are priced in bitcoin.  When goods are priced in bitcoin then you can estimate price by comparing the same basket of goods relative to other currencies.

Having a limited base supply means nothing.  You want to pay attention to velocity.  Whether 1 btc equals 300usd or 10usd it doesnt matter as long as velocity can keep up w transactions

Inelasticity actually inhibits economic growth.  Most if not practically all capital money exist as credit.  People borrow money to create business that generate future returns to pay off interest.  Inelasticity makes it difficult to build financial services.  Terrible for creating loans

Hoarding is like stuffing cash in a mattress.  It does nothing.  Theres no value creation.  

Thats why experienced investors don't hoard bitcoin.  They either invest in ventures or stay away totally.

The entire bitcoin investment thesis is based on false and ignorant understanding of economics

If you buy bitcoins you are just speculating.  Theres a real chance it goes to zero.  Personally i dont think itll go to zero cause theres a bunch of cultists who will keep HODLing.  But i think homeostasis will only be discovered once there is another real economy like silk road that comes along

Until then buying bitcoins are a gamble.  If you wanna use bitcoin then exchange your fiat money right before and spend the bitcoin.
The price determines how much the economy can support. No amount of velocity is going to let you keep 10 billion in a 5 billion market cap economy.

Loans allow profitable businesses to take off. It also allows unprofitable ones to get started. If loans were not available less successful businesses would start up, but so would less failed ones. It would bring some measure of stability to the economy, and would force people to be very sure they knew what they were doing. Net result likely to be positive.

Supply is super important. I do not have the patience to baby you through this one at the moment.

Saving money is generally something that people who can't or won't do it complain about.

Everything involving money, or indeed resources of any kind, falls under speculation. Be more specific.

cul... ok i see. That kind of post. Alright.

There is not a $5 billion bitcoin economy.  You dont use market cap to measure economic output.


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October 05, 2014, 02:37:37 AM
 #8

Your B3 statement is most interesting to me. Yes more players decreases the odds of a systems collapse however a rather large, at this point, group of speculators does not constitute real global demand for Bitcoin. In other words...I feel Bitcoin is in a battle for its life as a generally accepted global currency.  

I agree.  Despite exponential growth over the past few years, Bitcoin is still at the complete mercy of substantially larger markets and market players.   Although, I would argue that it's hands-down remarkable the resiliency it's demonstrated while competing on a global playing field.  It didn't have the luxury of growing in some economic Petri dish until maturation.  It's amazing that something so small has persevered and made it this far when it's subject to the influence of virtually everyone in the industrialized world.

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October 05, 2014, 02:40:20 AM
 #9

Financial innovation comes from advances in financial products like CDS, MBS, CDO, etc.
All these products have counterparty risk. Counterparty risk in an insolvent system is what nearly brought down global credit markets in 2008. Bitcoin has no counterparty risk, and in my opinion is superior to the current global financial system. Granted bitcoin will struggle to get mainstream adoption until there are long term future contracts so people can use it as a more traditional currency with a more stable value, but these innovations are on the way.

You're missing the point.  Distributed ledger is not a financial innovation.  Its a technical innovation.

Just because everyone uses email doesnt mean email has a price.  A company that supports email service like Google has a priced stock though.  Why do you think VCs invest in ventures like Coinbase instead of just buying bitcoins


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October 05, 2014, 02:44:00 AM
 #10

Financial innovation comes from advances in financial products like CDS, MBS, CDO, etc.
All these products have counterparty risk. Counterparty risk in an insolvent system is what nearly brought down global credit markets in 2008. Bitcoin has no counterparty risk, and in my opinion is superior to the current global financial system. Granted bitcoin will struggle to get mainstream adoption until there are long term future contracts so people can use it as a more traditional currency with a more stable value, but these innovations are on the way.

You're missing the point.  Distributed ledger is not a financial innovation.  Its a technical innovation.

Just because everyone uses email doesnt mean email has a price.  A company that supports email service like Google has a priced stock though.  Why do you think VCs invest in ventures like Coinbase instead of just buying bitcoins



Tim Draper has taken a substantial position in BTC.

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October 05, 2014, 02:44:35 AM
 #11

There is not a $5 billion bitcoin economy.  You dont use market cap to measure economic output.
The $5 billion total value of all bitcoins represents the current perceived value of those bitcoins by the people who choose to hold them. Granted it doesn't represent the network or transmission value of the bitcoins in circulation, that's because part of the value is speculative or as a store of value. However, it does represent the net worth of the bitcoin economy.

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October 05, 2014, 02:49:55 AM
 #12

Distributed ledger is not a financial innovation.  Its a technical innovation.
It's a technical innovation which will have an effect on the economy and change the nature of financial exchanges. That sounds a lot like a financial innovation to me?
Just because everyone uses email doesnt mean email has a price.  
If there could only ever be 21 million email address there would be a price, and a high one
Why do you think VCs invest in ventures like Coinbase instead of just buying bitcoins
Second Market, GABI, Winklevoss: they are buying bitcoins. Not that too much speculation at this stage is good for the project, but it is happening.

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October 05, 2014, 02:52:58 AM
 #13

There is not a $5 billion bitcoin economy.  You dont use market cap to measure economic output.
The $5 billion total value of all bitcoins represents the current perceived value of those bitcoins by the people who choose to hold them. Granted it doesn't represent the network or transmission value of the bitcoins in circulation, that's because part of the value is speculative or as a store of value. However, it does represent the net worth of the bitcoin economy.


Thats not an economy.  The market cap of Apple is just the current share price times number of shares.

Doesnt mean Apple is an economy.

Silk Road was a little economy.  The goods were priced in bitcoin.  You can take a basket of goods from Silk Road priced in bitcoin and compare the same basket priced in usd and get your price discovery.

Every bitcoiner keep confusing asset vs currency vs technology (utility)

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twiifm
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October 05, 2014, 03:03:29 AM
 #14

Distributed ledger is not a financial innovation.  Its a technical innovation.
It's a technical innovation which will have an effect on the economy and change the nature of financial exchanges. That sounds a lot like a financial innovation to me?
Just because everyone uses email doesnt mean email has a price.  
If there could only ever be 21 million email address there would be a price, and a high one
Why do you think VCs invest in ventures like Coinbase instead of just buying bitcoins
Second Market, GABI, Winklevoss: they are buying bitcoins. Not that too much speculation at this stage is good for the project, but it is happening.

Is high frequency trading a financial innovation? No its not.  It changed trading in the world of finance.  HFT is a technological innovation within the world of finance but its not a financial product.

Anyways, private money has always existed.  Bitcoin is just another form of "outside money" like Chuckee Cheese tokens, airline miles, casino chips, WoW gold, etc..

But it was "inside money" inside of Silk Road. 

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October 05, 2014, 03:14:57 AM
 #15

Anyways, private money has always existed.  Bitcoin is just another form of "outside money" like Chuckee Cheese tokens, airline miles, casino chips, WoW gold, etc..
All these require trust in the issuer to limit the supply to maintain the value, and as the single holder of the ledger. Both of these require trust, which is often broken. Bitcoin is the first trustless, open source, public ledger system. It is not the same as things which have happened before.

twiifm
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October 05, 2014, 03:41:50 AM
 #16

Anyways, private money has always existed.  Bitcoin is just another form of "outside money" like Chuckee Cheese tokens, airline miles, casino chips, WoW gold, etc..
All these require trust in the issuer to limit the supply to maintain the value, and as the single holder of the ledger. Both of these require trust, which is often broken. Bitcoin is the first trustless, open source, public ledger system. It is not the same as things which have happened before.

Its still outside money.  Trust has nothing to do utility aspect of money.  Stability is most important factor.  

The trustless aspect of bitcoin only matters in the transmission part.  So blockchain replaces ACH and checks.  Bitcoin does not replace USD

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October 05, 2014, 04:32:35 AM
 #17

Bitcoin does not replace USD
Who trusts the US Dollar anymore? I'm talking about fiat money in general. Trustless also means trustless as a store of value. You don't need to trust an insolvent bank to store your money digitally, you can do it yourself. This appeals to me. It may not appeal to you, fine, you don't have to own any bitcoins.

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October 05, 2014, 04:45:33 AM
 #18

I will make it simpler:
Just invest in MaidSafeCoins.
And hold your position in Bitcoins.
Thats it.

If bitcoins fails, all Cryptos are gonna fail.
MaidSafe is another story, a completely different animal.
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October 05, 2014, 05:08:37 AM
 #19

**Note: For the record, I released the majority of my holdings between $600-$850 but still have some stake in this market.


When did you get in?


Good post, glad I read it




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twiifm
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October 05, 2014, 05:08:44 AM
 #20

Bitcoin does not replace USD
Who trusts the US Dollar anymore? I'm talking about fiat money in general. Trustless also means trustless as a store of value. You don't need to trust an insolvent bank to store your money digitally, you can do it yourself. This appeals to me. It may not appeal to you, fine, you don't have to own any bitcoins.


Trustless means you dont need clearing.  Thats the whole point of crypto.  Clearing is why it takes days to move money from one place to another.  All banks use a ledger and double entry accounting.  What blockchain proposes is that theres one universal ledger.  That is an interesting proposal but it doesn't explain why a currency called Bitcoin should exist and why it should have any price.  A worthless token can achieve the same utility since its all outside money anyways

Doesnt matter what you like or prefer.  The US economy uses USD.  Japans economy uses YEN, etc..  You have to use the currency inside that economy because theres no choice.  And Im not talking about freedom or ridiculous notion of politics.  Its like if you want to write English you use roman letters.  But you can write the same word in Katakana if you want Japanese person to read.  Its a systemic issue

Like I said.  You just dont understand banking or economics.  Currency vs asset vs transmission tech

I don't care what you do w your money.  But do yourself a favor and do some due diligence on your investments.  

Get your info from non biased sources and not bulltards or beartards

Disclosure.  Ive never had any bitcoin position long or short.  I just hate bitcoin because someone tried to get my retired father to invest in bitcoin.  He was about to throw $50K at it til I stopped him.  I keep seeing idiots like Andreas A, Stefan Molyneux and bitcoin pumpers talk crap that are wrong wrong wrong.  Their understanding of banking, finance and econ is like high school level





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