Bitscam And Other Extraordinary Insanities
The Market Ticker - Commentary on The Capital Markets
2017-12-06 11:59 by Karl Denninger
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Bitscam And Other Extraordinary Insanities
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If you're too short in attention span to listen to my interview from Monday I guess I can lay it out in text for you.

Not that anyone will read more than the first two sentences that's in the first category.....

Any scheme that shares the following single essential element is a ponzi scheme whether recognized formally in the law at any given moment or not.

That is, the first people who perform some action get a given reward.  The scheme is designed, intentionally, so that the amount of effort for that same unit of reward rises, usually exponentially.  In addition it is usually the case (but not required) that the original effort's starting point is extremely small relative to the reward.

Let me remind you of the mathematical facts surrounding two exponential curves where one exponent is larger than the other.  I will use an extreme example; a "spend" in effort that starts at $1 and goes up at 5% for each iteration and a fixed reward of $100.

If you're one of the first to participate this sounds great!  You spend $1 worth of effort and get $100 in reward.  This scheme is an illegal Ponzi scheme because by the time the 100th iteration takes place each further iteration must produce an inevitable -- and ever-larger from that point forward -- loss.

Note that it does not matter what the compound growth rate of the "spend" portion is nor how far apart the "spend" and "reward" are at the beginning, so long as the "spend" growth exceeds the growth in "reward" value.

The only difference is how long it takes before you get screwed, not whether you get screwed.

Every scheme that has this characteristic is a Ponzi scheme because it is inevitable that the two lines will cross and that later people who participate will inevitably lose money to the founders (and early adopters.)

It is a mathematical certainty that this outcome will occur.

If you have read Leverage (look to the right) you know that I made quite a big deal out of this mathematical relationship early on in the book, because it features in what our politicians have done since roughly 1980 when it comes to revenue, spending and the trajectory of deficits.  The reason governments undertake this, and people design schemes like this, lies in this graph; a very similar graph appears in the book:

 

This represents a "spend" of $1.00, a "reward" of $10.00, and a growth in "spend" of 5% while "reward" growth (e.g. GDP and thus taxable funds, etc) is 2%.

Notice the "belly" in the early periods.  That is, while cost and reward both go up it looks like you're getting a free lunch.  That is, the "gap" (reward less spend) starts at $9.00 and starts to expand immediately; the second period it's $9.15, then $9.30, etc.  In the 9th period it costs $10.00 which exceeds the original reward entirely, so the idiots in the public (that's you, by the way) believe all the talking heads on TeeVee that tell you "the tax cuts paid for themselves", "the economy will grow its way out of this" and similar.

Every single one of these people is peddling an intentional fraud that has been designed to screw you and deserves to be fed to feral pigs.

In fact the fraud and your willingness to buy it goes on for a long time; the maximum spread is not reached until the 50th iteration, when it has become $15.47!  You believe these people are damned geniuses {Reagan, Trump, Greedscam, Yellen, Cramer, etc}.

Unfortunately on the 52'd period, just after you proclaim that these people have achieved the state of Godhood the reward ratio starts to fall.  You still feel good; after all, $15 is MUCH more than the original $9, right?

Alas, by the 73rd period the spread is now under $9 and falling rapidly; in just nine more periods it goes negative and is continuing to accelerate.  About this time you realize that while the "spread" is still close to the original level your cost has gone from $1 to $32; in other words your expenses have expanded by thirty-two times!

By the 100th period the reward is a full $49.64 cents less than the cost and will continue to accelerate until it bankrupts you and everyone else.

Every scheme that has these features is a fraud.

There are no exceptions because the laws of mathematics do not contain exceptions.  An exponentially-increasing difficulty with a fixed reward, or one that increases at a lower rate of growth than the difficulty, where there is no fixed terminus, is by definition a mathematically-proved fraud and everyone involved in creating or promoting such has committed a crime in each and every case.

That we no longer have a Rule of Law allows these people to walk free instead of being imprisoned but that their actions were mathematically-provable frauds is not open to question.

In the case where there is a fixed terminus (e.g. some maximum number of "coins") there is a further consideration.  If the costs rise beyond the reward by design (that is, the exponent makes "reaching the terminal point" impossible) then the above applies unaltered.  If, however, this is not the case (usually by accident, incidentally) but some cost is born by those continuing to participate that is essential to the scheme then you also have a fraud because there is no way to pay for that essential element beyond the terminal point.  As such the viability of the scheme will, as a matter of mathematical fact, collapse when that essential component disappears.

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Nevertoolate
Posts: 1392
Incept: 2007-08-26
A True American Patriot!
San Antonio de Bexar de runover with illegals, Texas
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Reminds me of a chain letter scam that someone was running while I was in college in the early 70's. They were making a killing and everyone was getting in on it. I had one of the very first TI calculators and I "did the math". In order for anyone on my dorm floor to come out, we would never see any $ until most of the population of China was in on it. Needless to say, it stopped right there in it's tracks. People want to believe in Santa and not in themselves.

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Democracy is a conversation between 2 wolves & a sheep discussing what's for dinner. A Constitutional Republic is found when the sheep pulls out a gun & makes clear that his 2nd Amendment Right will be exercised should the wolves attempt to hold such a "vote."-KD 9-29-15
Flash3200
Posts: 4
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Dallas, TX
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I agree...the "proof of work" algorithm is doomed to this end state. Eventually, incremental coin awards will not be sufficient to support the mining infrastructure (currently consumes almost 2GW of energy around the clock) and the entire BTC economy will likely shrivel up once this inflection point is reached. BTC lifers will say that transaction fees will cover the gap, but the BTC economy has gone so parabolic that it is hard to see transaction fees as a viable long term solution.

Cryptos in general remind me of housing in 2005...the new rich are flaunting their money and everyone on the sidelines finally decides to get involved. We are still probably a couple of years from the top.

In general, I think cryptos are related to the general financial bubble...it is hard to name a financial asset where prudent risk management has outweighed just being stupid long for the past 40 years. Until the bigger bubble deflates, it is hard to have a bearish stance on cryptos.
Tickerguy
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Quote:
BTC lifers will say that transaction fees will cover the gap,

Who's going to pay the fees and via what mechanism? Bitcoin is designed so the miners do it as an embedded cost of operation. Well, when there are no more miners either because (1) the energy cost exceeds the value of the coin or (2) you run out of coins (the sequence ends) THEN WHAT?

SOMEONE has to perform that function or there is no verification and as such all Bitcoin becomes worthless instantly (since I can trivially counterfeit one without verification being both robust and distributed.) Worse, "robust and distributed" (on which verification relies) means there have to be multiple SOMEONES, and the more transactions that must be verified to reach the root of a coin the more expensive that gets. There's no mechanism for that to be done at a rational profit built into the system.

Some of the other coin designs have built in "checkpoints" to try to reduce this issue but it's not that simple. If you checkpoint and assume everything is valid to the checkpoint to try to reduce the computational reduction cost to verify a transaction then you've created an intentional point of attack for someone who wants to corrupt the chain. God help you if they succeed, and since you created a focused point of attack there's suddenly a huge benefit to trying that didn't exist before (in other words I don't just corrupt one coin at a time and its subdivisions, I corrupt EVERYTHING to the checkpoint, beyond it, or worse, BOTH!)

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Winding it down.
Jdough
Posts: 89
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The Lone Star State
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Curious on the opinions of everyone here on the impact of BTC futures starting to trade on the CFE this Sunday? My personal take is that these kind of developments don't happen at market bottoms. The level of "chatter" about BTC by non-traders is also at super high levels; reminds me of acquaintances asking me how to buy oil futures in early 2008.

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If you are still in possession of your life, all avenues are open.
Flash3200
Posts: 4
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Dallas, TX
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https://bitinfocharts.com/comparison/bit....

BTC does have a voluntary transaction fee built into the transaction logic. The way I understand it, miners can set a minimum transaction fee for which they are willing to work for in addition to being awarded BTC for confirming a block. Recently, people have had to start adding a nominal fee to their transactions or risk not being picked up by a miner for several hours as several of the bigger miners are upping their minimum transaction fees from zero. Transaction fees are still a small part of the revenue to miners, but each time the BTC award is ratcheted down as the coin limit is approached, the transaction fee dynamic (aka ponzi scheme dynamic) will become more apparent. The creators of BTC added in transaction fees because even they knew that eventually the mining of new coins would not be sufficient incentive to operate the network.

BTC advocates claim they are competing against the likes of Visa and other financial institutions and have lauded the (artificially low) transaction fees as a sign of success. Obviously once you add in the cost of incremental BTC awarded to each confirmed block, the transaction fees for BTC are much higher than any other payment system. Other BTC advocates claim BTC is merely the "wealth layer" of cryptos and high frequency transactions will be consummated by other coins in the "transaction layer"; as such, "wealth layer" transactions have little need for low fees and quick confirmation and so therefore the current system is fine. I still think this will all catch up with BTC eventually (other coins might make this work, but I don't think it will be BTC).

The last subject that I would like to bring up is the increasing size of the blockchain. Eventually, it will be several TB large and will encourage the consolidation of miners into a location that is geographically small as to facilitate the constant re-downloading of a multi-TB sized block chain among the miners. This location will most likely be in China, and will contribute to BTC getting close to the 51% problem (if a single miner controls 51% of mining capacity, they can unilaterally control the market).
Flyanddive
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Detroit
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It's simple, when the hardware miners no longer get a reward, they move on to the next coin(Ponzi scheme). These coins naturally hyperinflate, yet they are sold primarily as not being able too.

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"I've seen people go into real poverty trying to pretend to be rich."
Tickerguy
Posts: 150661
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Quote:
BTC advocates claim they are competing against the likes of Visa and other financial institutions and have lauded the (artificially low) transaction fees as a sign of success.

Except it's not. Visa and M/C's interbank fees (the actual base cost of clearing, not what the bank charges a merchant) is measured in basis points. Let me know when BTC clearing costs end-to-end (including exchange back to dollars, euros or whatever) gets anywhere near that.

Incidentally that's one of the "foldback" risks -- the embedded costs in transactions through the entire system, including the fees at places like Coinbase for exchange, only "work" so long as the price is going up at a parabolic rate. When that stops suddenly the "medium of exchange" element disappears since there's a ~4% per-transaction cost that magically eats all your capital.....

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Winding it down.
Flash3200
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Dallas, TX
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https://techcrunch.com/2017/12/03/people....

So I am guessing you aren't a fan of spending $10k+ on virtual pets? You could make quite the cottage industry marketing to these newly wealthy people (much like operating the 200% markup jewelry stores right outside of the casino).

It doesn't help that most of these wallet sites have terrible security and keep getting "hacked" like CoinHash ($50 million of customer funds vaporized today).
Thelazer
Posts: 136
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The New "Gold"Rush for Millennials.

The amount of people I know, who have no idea what the tech behind BitCoin is or requires. Have no idea how it works, or really anything is amazing! Just today, a guy I've known him for years. Never touches the stock market, hardly can save his money thru the year, mostly drinks it away. Just today he's like "I'm making TONS of money with this bitcoin man! I don't even really know, I just you know put some money in..."


That tells me all I need to know.


Lanny
Posts: 71
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Canada
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It's amazing me more these days how this parabolic stuff all finds it's (temporal) rise in human psychology (ie: not learning from the past, general idiocy, hoping for temporal gain, or "people want to believe in Santa and not in themselves"). Such simply idiocy, yet compounded idiocy.
Squeak
Posts: 637
Incept: 2008-03-15

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And $64M of coins stolen, just like that, today:

https://www.reddit.com/r/NiceHash/commen....

And here is the supposed wallet that contains them:

https://bitinfocharts.com/bitcoin/addres....
Idiom
Posts: 111
Incept: 2015-02-20

New Zealand
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https://steamcommunity.com/games/593110/....

"Steam is no longer supporting Bitcoin"

"but the degree of volatility has become extreme in the last few months, losing as much as 25% in value over a period of days"

"For example, transaction fees that are charged to the customer by the Bitcoin network have skyrocketed this year, topping out at close to $20 a transaction last week"
Supertruckertom
Posts: 1548
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Online
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I was looking at
https://coinmarketcap.com/currencies/bit....
and came here and poof , you have already written about it.

There are hundreds of other schemes going.
All are trying to be the next one.
Some Are outright malware if you download a miner.
It will mine alright, your personal log in to your bank accounts.
Some miners are different, they devote a time slice to mining on behalf of the code writers.

Pyramid scheme right in the code.






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Preparing to go Hunting.
Tsherry
Posts: 957
Incept: 2008-12-09

Spokane WA
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We're watching an aircraft moments before impact.

No one aboard makes it out. Unbelievable, and it's unfolding right in front of you, five hundred feet away. Nowhere to run.

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Omne mendacium est.
Niktesla
Posts: 58
Incept: 2009-06-02

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Hi Karl,

I listened to your podcast and read the ticker. You said that the cost to mine the reward just keeps going up regardless, however, the difficulty is based upon a block being mined every 10 minutes. If a block is mined faster over a period of time the difficulty goes up. If it takes longer the difficulty goes down. At the point new coins aren't awarded anymore the fees will have to justify the cost of mining. If it doesn't less miners and the difficulty goes down until the cost to mine is less than the fees.

I've been a long time reader (also loved your book Leverage) and I'm not sold on Bitcoin in it's current iteration, however, I'm trying to figure out what I've got wrong here.

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"The inventories index rose sharply, to 0.0, its highest reading in more than a year." - cnbc.com
Supertruckertom
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So which one is next?
Is Microsoft or Alphabet or Facebook pushing their own crypto currency?

Ehtherium?

Having a high compute effort to begin with would protect some market share but also deter the lemmings.

I was playing with some online mining calculators and at 9 cents per kilowatt hour, I am just burning up electricity to heat my office on the hope that one of the hundreds of emerging CC$ will appreciate in value 10X or more.

You have no control over the mob.

Lottery tickets or buy a Tesla Card for my unused PCIE Slot?

Same odds it seems.

My pessimism led me to spend extra $$$$ on lead delivery systems this past year.

Logical and trying to be honest keeps you away from the schemes.

Makes for a relatively peaceful life though.









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Preparing to go Hunting.
Tickerguy
Posts: 150661
Incept: 2007-06-26
A True American Patriot!
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Quote:
At the point new coins aren't awarded anymore the fees will have to justify the cost of mining. If it doesn't less miners and the difficulty goes down until the cost to mine is less than the fees.

You seem to miss the point: (1) the "mining cost" has no relationship to the reward earned (the reward is the same) and (2) at "some point" either (a) the mining cost (power, hardware amort, etc) exceeds the reward's value OR the rewards run out entirely.

In either (2) case you're fooked because as things stand right now there's no infrastructure support for paying for verification, and the (likely terabytes) of blockchain that have to be maintained and verified make transaction costs ridiculously high if they become exposed (rather than part of the "mining job".) Worse, the more transactions (ever, not on a rate basis) the higher that cost goes. The STRUCTURE is a snake that ultimately eats its own tail.

There are other cryptos that have tried to address this, but IMHO none of them can or will do so successfully without some sort of centralization, which is the entire thing they're ALL trying to avoid!

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Winding it down.

Lanny
Posts: 71
Incept: 2010-12-21

Canada
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If they ever end up creating a BTC futures contract, it would be quite the short if it fell. Although 1) it would be difficult to time it, and 2) in case (2) above they'd likely halt trading due to the underlying uncertainty from their inability to verify a massive (many terabytes) blockchain.

Imagine if every paper bank note in the country was found to have accidentally been made with invisible ink that only starts disappearing a decade after production... And imagine the cost to organize and individually verify every fading note and re-issue them all with new reliable notes. To every person? In a short time span?

Man what a mess.

Reason: Formatting
Ckaminski
Posts: 4311
Incept: 2011-04-08

Mass-Hole!
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Quote:
Ehtherium?


Ethereum as a distributed compute platform, may have some value, especially since you can run it using your own comm nodes.

But as a "currency" it has all the problems of Bitcoin.
Thelazer
Posts: 136
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Davenport, Fl
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Anyone know how much bandwidth is used up daily by the block-chain shuffling around the net? At what point does that go exponential to the moon and ISP's and such decide to take action?
Ckaminski
Posts: 4311
Incept: 2011-04-08

Mass-Hole!
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https://www.coindesk.com/15000-and-count....

December 10th, they're launching futures contracts.

Quote:

Both CBOE Global Markets and CME Group are set to launch the new futures contracts on Dec. 10 and Dec. 17, respectively. With the notable shift in the industry, bitcoin may remain well bid at least until Sunday's listing of BTC futures on the CBOE.


Edit, today's high is well north of $17000/btc.

Reason: $17500+ today's price
Mpinco
Posts: 38
Incept: 2009-03-12

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@TheLazer - Blockchain size - https://blockchain.info/charts/blocks-si....

Size is going exponential so bandwidth needs to maintain same latency also must rise. Given the limits of bandwidth it appears there is an opportunity for competitive advantage and location selection. Eventually collapses to a singular?
Lanny
Posts: 71
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Canada
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Thelazer -- If large, that would be similar to Karl's Netflix argument, essentially they'd be putting the burden on others to carry the load that the the currency relies on for function. I don't know enough about it to know how much traffic would result from a large (say terabyte) blockchain, maybe someone else would hazard a guess?
Lenguado
Posts: 2167
Incept: 2010-01-12
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Orlando, FL
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Ha Ha Ha!

A (quote)"currency"(unquote) that fluctuates 30% up and then 23% down within hours?!?!?!?! How about Tulip Bulbs?

America's Biggest Bitcoin Exchange Just Broke As Prices Tumbled $4,500 From Highs
http://www.zerohedge.com/news/2017-12-07....
Quote:
As Bitcoin tumbled $4,500 from its highs...

And now the giveback...Bitcoin is down $3000 from its $19,600 highs...but is still up 30% on the day

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I just realized... they aren't saying, "Keynesian Economics"
they're saying "Kenyansian Economics". Grass Huts for everyone!
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