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Saturday, Apr 12, 2014 - 21:12 SGT
Posted By: Gilbert

Wrestling With Doubts

Called It Again

The latest Mr. Fish sadly appears to have developed an issue with his right eye, but on the bright side, it doesn't seem too serious. Relieved, I caught up with their predecessors, who were hanging out at a diner.

Me: Righto, here I am. Where's Mr. Robo?

Mr. Ham: Shhhh! He doesn't know we're here. It's his first sales assignment, and I'm keeping tabs on his performance.

*motions with eyes, to a few tables across*

"I think it's a scam"
(Original source: flickr.com)

Mr. Robo: ...sir, I do not recommend that you buy Bitcoins now at all, and especially not with our firm. My boss is a moron who knows nothing about the technology. In fact, it is probably right to say that he has negative knowledge, given how misinformed he is. Please save your money... oh, you feel a connection with me because your boss is dumb too? Well, that's nice to hear, um, I mean... uh, you appreciate my brutal honesty too? Shucks, er, you want to short the market then? I wouldn't recommend it, but you can do it yourself at Bitfinex... you want me to do it as your representative? I really wouldn't... just take the money? Sir, I don't think you understand... alright, just put away the shotgun, I'll do it.

Mr. Ham: Yes! He did it! Score one for matching theory!

*we move to a morose Mr. Robo's table, after his client leaves*

Mr. Ham: I knew you would be able to do it! Like with Robotcoin, when you spliced an off-the-shelf kit together with a Transformers model, and then taped a physical Bitcoin to it!

Mr. Robo: ...It was not my finest engineering moment.

Me: What happened to the "does your dishes" part?

Mr. Ham: Sir! Optimus Prime in an apron? The customers all agreed with me, and I then sold them Taser home-defence add-on functionality, which was much simpler to add.

Mr. Robo: For the record, I had absolutely nothing to do with that.

Mr. Ham: And Mr. Robo, your pitch was top notch! I don't think that I could have closed this one, but you did it, my fine executive director of financial operations!

*pats Mr. Robo on back*

Mr. Robo: Oh. Uh, thanks? Uh, haha.

*patting increases in frequency*

Mr. Ham: But the bit about your moron boss was, maybe, a little over the top, don't you think, deputy executive director?

Mr. Robo: Aww.

Mr. Ham: But that's alright. I would say that you're in line for a promotion, for your latest prediction from last week:

[Click to enlarge]
(Source: bitcoinwisdom.com)

Several days after H.L. Ham recommended a US$350-450 buy-in target, the market has obliged on cue, to an absolute instantaneous bottom of US$340! The median low was about US$380, though, as you can see from the chart, which means that our US$350 floor guarantee has not been activated. Also, this means that I have just invested Mr. Robo's life savings and credit card max loans at a weighted average of marginally under US$400/coin, following our buying strategy!

Me: Huh? Didn't you enter at the peak?

Mr. Ham: *shuffles feet* This is a little embarassing, but I misplaced his wallet in my cheek pouch, and clean forgot about it. But, it turned out all for the best!

Mr. Robo: Yay! Given that the price as of now is about US$420, we can just cash out with a 5% profit, and put the entire sorry business behind us. Right, Mr. Ham?

*Mr. Ham glowers*

Mr. Robo: Uh, if it wouldn't be too much trouble. Maybe tomorrow? Erm, ok, I guess I'll just let it ride.

Mr. Ham: *sighs* Mr. Robo, I am disturbed by your lack of faith. Hold on to your balls, gents, we're going in!

Like, right *now*
"...I spent 20 plus years seekin' knowledge of self/
So for now Marc Predka's livin' life for wealth!

The Philosophy Of Investment

Mr. Ham: You've been mighty quiet thus far, human. Satoshi for your thoughts?

Me: Well, first of all, I'm pleased that the sub-US$400 arrived, if a week or so behind schedule, but what I want to know is - why are you so certain about a US$350 floor, instead of the US$200-400 range I originally suggested?

Mr. Ham: No guts, no glory, man. As I said last week, any old analyst can throw out vacuously correct predictions. Also, a precise figure is important in practice - had we stuck to a US$200 floor, we would not have been able to complete more than a fraction of our buying, that is if we do indeed not see prices lower than US$350 for the immediate future. As that's what my dear boffin Mr. Robo says, I believe him.

Me: In volatile markets such as this, I'd personally hold out a bit - say, ten percent - at ambitious lows, just in case there are huge dips. One thing you might want to consider. But yes, I stand with you on the "being bold" part. You do leave yourself open to ridicule by showing your paw like this, if it does crash and burn, but quoting Roosevelt's wall of text:

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

Mr. Robo: Uh, we seem to be in it for personal profit.

Me: Actually, I've been thinking about this too - is the whole cryptocurrency shebang defensible, or is it destined to be a pump-and-dump job? I suppose it comes down to whether they indeed add value. Some would say it doesn't have intrinsic value, while others would assert that it does - if enough other people agree.

Or: reality is subjective. DESTRUCITY!
[N.B. For all his... questionable politics, the Ultimate Warrior was always an in-ring favourite of mine. He cut insane promos, beat up Santa, and shook up the ropes more than anybody has done before or since. Was kinda sad that he died right after getting inducted into the WWE Hall of Fame, but he did at least bury most of his hatchets in time]

Mr. Robo: Like your average multi-level marketing scheme.

Mr. Ham: Or fiat money, for that matter.

Me: *shrugs* Truth is, no-one knows. It isn't quite a Ponzi by design because returns are not promised - in any case, not more than many commodities, such as precious metals, are. A kinda-ethical case for investment could be made from its utility in distributed fund transfers, theoretical advances in computer science and the like, but I gather that you probably don't care too much about that.

Mr. Ham: I don't.

Me: As long as we're clear about that. By the way, the fiat comparism has come up in Hartford's The Undercover Economist Strikes Back, right after Yapese stone money was mentioned; indeed, it is difficult not to see the parallel between those stones and Bitcoin - useless work for value.

But back to you. Then, you're left with quitting with the most toys, and if so you could do worse than to simply sock all your Bitcoin holdings away, forget about the entire enterprise, and check back in a few years, maybe try to catch the major bubbles - particularly if you're the sort who gets all affected by fearmongers whenever it drops 20%, or "choo choo, to da moon" trolls when it goes up the same. I suppose you could try to daytrade on the mini-cycles, but I doubt it would be worth the effort, especially as you're not that big a fish.

To expound on this, the sums currently involved in the market are terribly small, when compared to traditional stocks and commodities. If someone dropped a couple million bucks on some blue chip, its stock price would barely budge; do the same on a major Bitcoin exchange - say, Bitstamp - and the price would leap from US$420 to US$480 at a go. Dump ten thousand Bitcoins, and the price would plunge to US$345. Considering that a couple of million is spare change for most financial outfits, this is a good reminder of how miniscule the entire cryptocurrency industry is, in the grander scheme.

And if it doesn't pan out... well, you learnt a lesson. Wait, since it was Mr. Robo's money anyway, you don't learn anything.

Face it, if the Undertaker can lose his streak to Lesnar,
anything can happen

Mr. Ham: There's the sure-win method...

Me: Opening an exchange. As Mr. Robo would doubtless tell you, probably against his better judgment, it's not that hard. Really. Technically, you're golden once you work out how to send funds to, and receive funds from, wallets, since a decent fresh CS grad should be able to cook up the Web frontend, and a decent fresh business grad should be able to set up a corporate account, or at least find someone who can.

Thing is, it's not hard to piece together something that works - it's a lot harder to piece together something that continues working, when numerous determined hacker groups are bashing down the doors, wanting all that sweet, sweet currency. A good example would be the now-defunct Bitcoinica, put together by a 17 year-old whiz-kid right here in Singapore, back in 2011. He was, by all accounts, extremely well-versed in most of the tech, but as most of the feedback warned, it wasn't nearly enough. There are a number of possible damage-limitation measures, such as diligently storing as many assets offline as possible... but in short - please don't try this, you don't have the expertise.

...which means you're gonna do it, aren't you.

The Illusion Of Freedom

Mr. Ham: Actually, no. Not yet, at any rate. I'm more a rolled-up-sleeves trader-type, frankly.

Me: Great. Anyway, postscript to the Bitcoinica story, the guy's left Singapore, which is what tends to happen to our tech talents from observation, to try again Down Under. That said, another prominent local exchange was started by a guy from my batch, and they just had a presentation last week.

This is dragging a little, so I'll just conclude with the remark that Bitcoin may be many things, but - at least in practice - it is hardly distributed.

Mr. Ham: Which is because...

Me: On the generation side, three mining pools already possess the majority of the hashing power. On the transaction side, three exchanges similarly handle most of the market volume, and while this is not a comprehensive survey, I think it is fair to say that most of Bitcoin's usage - whether by individuals stocking up, or retailers looking to convert back into fiat - effectively passes through only a handful of entities.

Of course, this distribution was perhaps inevitable due to economies of scale on both ends, but the effective centralisation still appears to go against Bitcoin's original intent. Rephrased, this means that most transactions involving Bitcoin might well wind up outside the blockchain, and within proprietary records.

For example, consider a major exchange, which we call HamEx. Now, say it has a Customer A who sells one Bitcoin for US$420 to Customer B. If A and B had independently struck this deal, the only - and standard - way to lock it in would be to record the movement from A's address to B's address on the blockchain. However, recall that this transfer would then have to be broadcast to every other node, which as we can imagine, can quickly become untenable - and in fact, the entire Bitcoin ecosystem can currently handle only about ten transactions a second, which could theoretically be circumvented by clever pruning, but apparently nobody has gotten about to implementing it, like with the "Future Work" section of more academic papers than I care to mention.

However, since we are on HamEx, in practice nothing has to be put on the blockchain - HamEx simply records the transfer on their own database, updating their customers' HamEx Account Page correspondingly. The only time the blockchain has to be touched would be when their customers move Bitcoins into or out of HamEx, which does not happen that often. If retailers are members too, then it is conceivable that entire chains of transactions can take place within HamEx, without involving the blockchain at all, which is what full-service exchanges such as Coinbase seem to be intending.

But why stop there? If most Bitcoin users wind up signing up with a major exchange, then they could well develop their own clearing methods. Say that Mr. Fish keeps his Bitcoins on HamEx, and wants to buy a computer for five Bitcoins from Acme Electronics, who is with BitRobo, another exchange. Then, what happens would be that BitRobo simply contacts HamEx through their own secure channel, and informs them of the sale, with whatever accompanying confirmation code (analogous to credit card CCV numbers) that has evolved. If HamEx concurs, both exchanges simply update their own internal databases, again sidestepping the blockchain!

Mr. Ham: And the point is...?

Me: The thesis here is that, if Bitcoin ever becomes quasi-mainstream, i.e. goes beyond weed and naughty videos, there is little reason for the ten-minute blockchain confirmation time to be a concern, as long as one is willing to entrust working funds with an established exchange. Hardcore near-wacko libertarians aside, I don't see many having a problem with that, and let's face it, the number of people able and willing to monitor every step in a naked Bitcoin transaction is close to zero. Of course, those who want to buy weed can still meet up at dark corners with their smartphone wallet, if required. This then also reduces the prospects of altcoins with reduced confirmation times as a main selling point. Hmm, this could make a nice little e-commerce short paper.

Mr. Ham: Hah, so I was right when I said Mr. Robo could reduce the time needed from ten minutes to two!

Me: Ah, that's not quite... whoa! Mr. Robo! You're blue in the face! Are you sick?

Mr. Ham: *sighs* How many times do I have to tell him, not to take what I say so literally...

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