Last week I wrote the first part of 6 Ideas that I think the crypto community needs to embrace, and this week I will finish that list. Previously we discussed the relationship between energy and crypto and the number of crypto units related to price. That’s where we continue this week.
4. Scarcity Does Not Equal Value 42 Coin was not the only crypto to make the mistake of thinking that scarcity automatically equalled value. Ron Paul Coin decided to cap their creation at 2.1 million units, a mere 10% of the total bitcoin supply. Below you will find an excerpt from their website. (Emphasis mine)
There are a number of crypto-coins out that have a very high total coin count (hundreds of millions or even billions). Scarcity creates value– not abundance. RonPaulCoin is built on this quality of scarcity, like gold, which Ron Paul so commonly speaks in support of. Because of this, RPC has 1/10th of the total coin supply that Bitcoin will ever have. Notice the correlation between total coin supply and price per coin:
|COIN||TOTAL COIN SUPPLY||CURRENT PRICE|
|RonPaulCoin||2,100,000||$0.4121 per coin*|
|Bitcoin||21,000,000||$730 per coin|
|Litecoin||82,000,000||$23 per coin|
|Feathercoin||336,000,000||$0.34 per coin|
*RonPaulCoin’s value will officially be determined on exchanges. Currently you can acquire RPC by buying it or by mining it. See the “Getting Started” Section
Do you see the mistake they made? There are two actually, and each will be discussed in turn. First, they DIRECTLY equated correlation with causation which is the kind of sloppy thinking you are warned about in science, medicine, finance, etc. Those terms are not synonyms and should not be treated as such. This is probably why RPC has seen such a calamitous fall from $37 each and a market cap of $400,000 in January to $.41 and a market cap of $31,000 in May with no sign of recovery in sight. The second mistake, closely tied to the first, is the hilarious misunderstanding about why gold is valuable in the first place.
Gold is kind of useless by itself since it’s too soft to be used to make tools or weapons. And until your civilization develops electricity, gold (an EXCELLENT conductor) doesn’t really do much except look pretty. It does, however, have a rather special property: it doesn’t rust, tarnish, or decay. That property, combined with it’s ease of purification, makes it very attractive for cosmetic purposes.
Thousands of years ago it was discovered that when you drag gold across a piece of slate it leaves a mark. And if you debase gold by mixing it with anything else, you change the type of mark that gold leaves behind. This is where the term “touchstone” comes from, and that discovery completely changed the world. Once people had a way of ensuring the quality of the gold it became the perfect medium of exchange. A substance that would never degrade could be exchanged endlessly, passed from hand to hand across generations, and it was soft enough to be easily worked and divided. People decided that X amount of gold was worth a set amount of goods and that is why gold became the primary form of currency. The fact that gold was also rare greatly elevated its status, but rarity by itself was not the reason for value. It is utility, not scarcity, that gives gold value. The scarcity was just the cherry on the sundae, not the ice cream. This is a simplistic explanation of an extremely complicated subject, but it does give you a good idea of what I’m talking about, I hope.
5. “New” And “Good” Are Not Synonyms Either As I stated earlier, people have a tendency to confuse causation and correlation, or to believe they are synonymous. Another common mistake is to confuse new and good. This is a problem that is not confined to the crypto community by any means, but is the cause of endless hype, as the ‘Next Big Thing’ in cryptocurrency is released pretty much every day. Charlie Lee developed the Scrypt algorithm to fix some of the flaws he found in Bitcoin’s SHA-256 algorithm, and it worked out well. Today Litecoin has a market cap of $300 million dollars, down from a high of $1 billion and is widely seen as a pretty safe investment for the long haul. Unfortunately, as we have already seen, success inspires imitation, without actual understanding, and so the world was rapidly flooded with Scrypt coins. Most of these provided absolutely nothing, aside from having a clever name. My personal favorite example of this was BBQ Coin which, aside from a cute name, had absolutely nothing going for it.
6. Power Concentrates As Bitcoin has grown in popularity over the past five years, more people jumped into the mining business. This, in turn, led to an increase in the difficulty of finding the next block which is how the program works. As the difficulty rose, it needed an ever-increasing amount of processing power to solve the puzzle. Thus Application Specific Integrated Circuit (ASIC) machines were developed to do the mining of Bitcoin. An ASIC machine only runs one application, but it runs it really, really well. ASIC machines have been around since 1980, so it is quite likely that Satoshi Nakamoto knew that, eventually, they would be developed for Bitcoin mining (Although I freely admit this is mere speculation on my part). As ASICs have become faster and cheaper, Bitcoin mining has become more centralized, which is the opposite of what Nakamoto said he wanted. It is a situation that will only continue. The (justifiable) fear of ASIC mining taking over the Bitcoin network has led many coin developers to eschew SHA-256 for Scrypt. The potential profit of Scrypt-ASIC machinery, however, has led more than a few engineers to attempt to design such machines, which in turn led programmers to develop the X11, and now X13 algorithms. This new approach includes multiple algorithms in an attempt to be ASIC-proof. It’s a nod to the crypto anarchist roots of Bitcoin, an attempt to escape network centralization and return things to the decentralized model that Nakamoto promoted.
It’s a noble ambition, but one that I fear is ultimately doomed to failure. The scientific definition of work is energy expended over time. Energy tends to concentrate, flowing from a high concentration to a low concentration. The reason I bring it up is that money is either compensation for work performed, or it is incentive to produce work. Therefore, money is energy. Oil, coal, and wood are all potential energy sources, and to a certain extent, so are bricks of gold. You just need to figure out how to turn them into energy. What sets gold apart from the others is that it is a non-perishable resource, as I stated earlier.
This brings us back to where we started with the Laws of Thermodynamics. Nothing grows forever…nothing. Cancer grows just for the sake of growing, and ultimately it kills the host. Empires grow to the point that they collapse under their own weight as supply lines stretch too thin. Economies grow until they exhaust the resources around them leading to recession. The universe in which we live will eventually stretch to its limits, then it will collapse into the Big Crunch, the polar opposite of the Big Bang that started it all, or some other potential nightmare of physics. Cryptocurrencies are no different. Bitcoin expanded rapidly, but as the difficulty rate rose, ASICs became necessary to be competitive. As the difficulty continues to rise, more hashing power will be needed, essentially running just to stay in place. In turn, this will lead to a further concentration of the Bitcoin network into a smaller circle of people who can afford the ASIC rigs necessary to keep the network alive. And the network is reliant on the Internet remaining alive and functioning. The Internet, in turn, is reliant on cheap, reliable sources of energy and a highly intricate series of connections.
Of course, this event is not necessarily in the near future. It could be a month from now, or it could be 30 years from now. It all depends on balance, and innovation.
I don’t pretend to know how long bitcoin will be around, or where it is headed. What I do know is that too many people are forgetting that everything is connected to everything else. That is a truism that has been expressed by the greatest minds in history from Aristotle to Einstein, and cryptocurrency is not immune. Thinking otherwise is a fool’s dream. And a fool and their money are soon parted.