June 18, 2024

Bitcoin and the ghosts of the future

Something is happening... Bitcoin is up again by 66% from its April lows. All over the worlddivisions of a public organization are createdBitcoin Foundation — its Ukrainian branch was the last to be registered — Bitcoin Foundation Ukraine. Many cities regularly host Satoshi Square events (meaning, meetings of bitcoiners in the square?), during which those wishing to exchange BTC for more familiar dollars, euros, rubles and hryvnia.

Everyone in the world has to decide on theirvision of this process. Even the grandees can no longer hide behind the indistinct muttering of “no comments…” For example, J.P.’s report was recently released. Morgan “The audacity of bitcoin. Risks and opportunities for corporates and investors” (PDF), is available on the Internet and has sharp criticism. This is such a surge of interest. Natural questions: “Why? And what should we expect next?”


Dynamics of transaction volume in BTC (according to blockchain.info)

Of course, the main factor attractingattention to the phenomenon is the dynamics of the Bitcoin exchange rate relative to world currencies. Thanks to the growth of this rate and the interest it generates in cryptocurrencies, the monthly transaction volume in the last six months exceeds a billion US dollars, and the maximum daily turnover is $580 million per day (see chart). Of course, this turn of events attracted attention. Over the year from May 2013 to May 2014, the rate soared from 60 to 1000-1200 dollars (on different exchanges), fell and grew again; in the last month it, fluctuating, is still growing sluggishly in the range from $421 to $652 (but sluggishly compared to the recent past, and not with the rates of familiar world currencies, of course). The speculative component caused by such exchange rate fluctuations is most often discussed on the pages of the press. This component, however, is more a consequence than a cause of the spread of cryptocurrencies, and although we will return to the question: “What could the rate be?” — Let’s put this hot topic aside for now.


Dynamics of the BTC to dollar rate on the Bitstamp exchange (according to bitcoincharts.com)

It would seem that Bitcoin is a completelyintangible - a configuration of zeros and ones that exists only on the computers of fans of the new technology. But no: wherever such powerful cash flows exist, related products and services are developed, quite material and accessible “by touch.” Likewise, entire areas of production are developing around cryptocurrencies: from specialized computers to ATMs that support transactions in BTC.

But for those who are interested in ATMs, maybeIt might be interesting to listen to “BITCOIN 2014 &#8212; Panel: The Buzz Around Bitcoin ATMs"). Of course, exchanges are being developed where you can buy and sell cryptocurrencies, services that provide acceptance of cryptocurrencies in retail trade, etc., etc., not to mention specialized blogs and even the media. Many such trends have grown sufficiently to give rise to the temptation to describe, analyze, or even develop them. However, I will refrain from this - otherwise we have no chance of getting to the answers to general questions: “you can’t see the forest for the trees,” says popular wisdom.

For further discussion of the driving forces,defining the future of cryptocurrencies, did not require constant reservations, I will formulate several basic provisions (and at the same time, perhaps, I will destroy some of the myths that have developed around Bitcoin, its clones and competitors).

First of all, it is necessary not to forget thatThe cryptocurrency systems we are talking about are nothing more than highly secure transaction protocols between arbitrary anonymous (possibly) users. And nothing more! Nothing at all - all phenomenal properties follow from the reliability of transactions in much the same way as the variety of Internet services familiar to us - from the capabilities of the TCP/IP data transfer protocols.

All discussions about computational costspower, electricity, and other resources needed to “mine coins” and supposedly influence their value—this is just an artistic image to help us come to terms with the fact that Bitcoin is intangible. The increase in computational complexity (and with it an increase in, for example, energy costs) is simply due to an increase in the number of participants involved in confirming transactions, as well as an increase in the computing power of their tools.

We understand that a notarized receiptper million tugrik represents this million to the creditor not because the piece of paper or ink with which it is written costs so much, but because there are tools to ensure confidence in what is written. Similarly, BTC has value only because crypto-algorithms, consistently applied by everyone who has entered the Bitcoin network, guarantee us the reliability of the process of transferring a “coin” from one owner to another, and therefore the recipient’s rights to this “coin”.

In other words, the protocol used providesrecognition by all members of the network of ownership of a specific product “BTC”. Since the volume of “goods” is limited by the same protocol, there are excellent prerequisites for using it as money (it’s not for nothing that Bitcoin is called the gold of the digital world).

The above seems so simple thatI can’t believe that this is enough to create a sensational phenomenon. But in vain: this is a technological implementation of the fundamental principles of the inviolability of property rights and the so-called “open access”. Principles that separate successful countries of the “golden billion” from developing countries. Since there are so many letters, I will not delve into political economy, I will limit myself to a key reference to the work “Violence and Social Orders” (Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. Douglass C. North, John Joseph Wallis), popular in recent years , and Barry R. Weingast).

But in order to correctly evaluate in the futurethe meaning and role of secure transactions, including anonymous ones (!), I will continue the analogy with the Internet and TCP/IP. Protocols for transferring data between arbitrary computers connected to a network probably did not seem to anyone to be a threat to the media or the traditional advertising market. Who of those who developed computer networks in the mid-70s could have imagined that they would cause the bankruptcy of major newspapers and transfer information wars to the network? In the same way, today the development of cryptocurrencies is building the foundation for the financial world of the future, which we still very poorly imagine. Using this analogy, you can answer the question that will arise a little later: “Can cryptocurrencies be banned?” The experience of North Korea shows that life without the Internet (or almost without the Internet) is also possible. At the same time, we see the cost of this ban.


Transaction cost: ratio of the emission volume to the volume of transferred funds (according to blockchain.info)

But back to the basics of cryptocurrencies.A very popular misconception (or, perhaps, it would be more accurate to say, a popular approach) is the thesis that transactions are free. In tandem with this thesis, there is another one: BTC is “mined” by miners, investing considerable computing and energy resources in this process. Of course, this is a very convenient model for explaining the operation of the system to beginners. But from a financial point of view, a more correct model would be one that states that Bitcoin is continuously issued, and all emission is used to pay for confirmation (protection) of transactions (that is, payment for the work of miners). Thus, today the transfer process seems free for transaction participants (in fact, we understand that emission always reduces the value of previously issued money). Considering the issued “coins” as a fee for confirming transactions, we get a completely familiar paid service for transferring funds (see diagram).

However, she has an important difference:from banking and other similar financial services. Bitcoin transactions are equally accessible to any internet user anywhere in the world. If we take a closer look at the graph, we will see that they are not that cheap (fortunately, the greater the volume of transactions, the cheaper the transaction, which is clearly visible in the diagram) - well, after all, we are also for access to the Internet We pay, although we subconsciously believe that many of the Internet resources we use are free.

By and large, it’s not about the transaction price,and open access to the process of transferring funds: no agreements with banks, no user identification, or permissions for cross-border transfers are needed. It is this openness that allows us to talk about upcoming changes in the financial world (I will note in passing that open access extends not only to users of the translation service, but also to those who provide it: anyone can join the ranks of miners and earn money by providing these services). Of course, openness of access is valuable in combination with the absence of a control center that could be vulnerable (the analogy with the Internet and its difference from, for example, telephony is again suitable for us).

From the above-mentioned work of North, Wallisand Weingast know: open access provides an advantage in the speed of development, the economics of systems with open access are ahead of competitors using limited access. This creates an incentive for the use of cryptocurrencies by those who have already appreciated their capabilities (by the way, it is not necessarily Bitcoin, but more on that later). This is good news.

But there are also bad ones:the modern banking system, which can be classified as a system with limited access (why this is a topic for a separate discussion), does not intend, of course, to give up its positions without a fight (however, systems with open access have never arrived without a fierce struggle). The privileges of the modern financial sector (which not coincidentally gave rise to the Occupy Wall Street protests), of course, no one will give up easily. But it is very difficult to resist changes that bring economic advantages without becoming North Korea. Understanding this confrontation helps to evaluate the second important factor influencing, in particular, the Bitcoin exchange rate (the first factor is the advantages of open access, which ensures the attractiveness of cryptocurrencies and, as a result, the growth in the number of users of this technology).

By what means can it resist development?cryptocurrencies, the existing system of national central banks and the financial world it generates? In general, there are only two tools: legislative barriers and counter-propaganda. Let's look at them one by one.

Bitcoin's status in the legal system maybe very, very different: from recognizing it as a legal means of payment (we were daydreaming!) and to banning its use (the immortal Mikhail Evgrafovich: “America needs to be closed again” - but, it seems, this doesn’t depend on me?) . I note that not only Wall Street lobbyists are not enthusiastic about the legalization of cryptocurrencies, but also some Bitcoin supporters believe that it is safer not to achieve recognition, but to build technological solutions that will not allow anyone to identify the owners of “coins” and make claims against them (see ., for example, the Dark Wallet project). The development of solutions like Dark Wallet can rather serve as proof of the futility of attempts at a total ban than as a prototype of the future (returning to our analogy with the Internet, we can look at Dark Wallet as an analogue of fidonet).

Something that cannot be stopped from being usedBitcoin, instead of establishing cooperation with those who use it, is becoming increasingly obvious. A very typical example of this is the stability of the clones of the Silk Road project, despite the defeat of Silk Road itself and the arrest of the project founder Ross Ulbricht in October last year.

As the Bitcoin economy grows in sizegrow, the pressure on legislators to legalize this phenomenon will also increase (note that the volume of the Bitcoin economy is not limited to the volume of BTC transactions. It is also necessary to take into account the turnover in traditional currencies, but associated with the development of the production of goods and services generated by this phenomenon). This lobbying will be generated by two categories of entrepreneurs: those who are already passionate about the Bitcoin economy in one way or another, and also those who are far-sighted enough to see the legalization of cryptocurrency users as tools for conducting fiscal policy. Of course, lobbying in the first case will intensify in the event of any problems in the traditional financial sector, such as last year’s crisis in Cyprus. If everything is clear with the first direction, then the second probably requires clarification.

The fact is that the development of modern bankingpractice has quite strongly linked the successful activities of fiscal authorities with the analysis of data on the movement of funds in bank accounts. But it only seems at first glance that taxation systems are impossible without analysis of bank accounts. In fact, taxes were collected well in Ancient Egypt. True, to collect them it was necessary to use measurements of the Nile flood, which is more difficult than monitoring payments in a bank. Likewise, when legalizing the use of Bitcoin, it will be possible to build procedures to ensure fiscal control. Of course, it’s easier not to change anything, but to try to ban the new tool. Bans, however, are not only ineffective, which has already been proven by practice, but will ultimately interfere with any actions of the fiscal authorities, since they will force users to hide their transactions instead of openly declaring them.

In addition to lobbying for bans, the struggle of opponentschanges can come on the front of counter-propaganda, which primarily boils down to emphasizing the possibilities of using cryptocurrencies for obviously illegal activities. The already mentioned Silk Road is a typical example of such argumentation. Returning to the analogy with the Internet, it is easy to recall attempts to stigmatize the then new technology for distributing pornography. Yes, indeed, the anonymity of payment allows criminal transactions to be carried out. However, just as the understanding has come that the Internet is in no way the reason for the existence of pornography, so will the realization come that Bitcoin is not the main obstacle in the fight against crime. After all, the existence of the FATF, created a quarter of a century ago, has not become an insurmountable barrier to, say, arms dealers. After all, cryptocurrency transactions are much more transparent than cash payments.

Another common method of counter-propagandais to focus on the risks of using Bitcoin due to its significant volatility. A typical example is the recent speech by Yves Mersch, a member of the executive board of the European Central Bank, at the Bundesbank symposium in Frankfurt. However, given that the freedom of exchange of opinions today is much greater than it was at the start of the Internet, one can be quite optimistic about the prospects for information support of the opportunities provided by new technologies.

In third place in terms of influence on the cryptocurrency ratethere is probably the possibility of speculation with them. Like any commodity with significant volatility (that is, a value that varies significantly over time), Bitcoin can and does serve, of course, as a tool for speculation. Testing their ability to predict the future, anyone can try to make money by investing in speculation in the cryptocurrency market. And, of course, the more such enthusiasts there are, the less stable the exchange rate. Speculators create some positive feedback in the system of setting the exchange rate: when the rate decreases, they rush to sell “coins”, causing an even greater decline in the rate, and when they rise, they rush to buy, causing the rate to rise faster. Most likely, it is the speculative component that determines such a broken nature of the rate line (see above figure “BTC rate dynamics...”).

Are all the factors influencing the cryptocurrency ratelisted? Of course not. For example, we did not look at Bitcoin's competitors. And today there are already more than 300 cryptocurrencies, and the total capitalization of Bitcoin’s competitors is approaching 8% of the entire market (according to coinmarketcap.com). At the same time, competitors have a lot of different features and it is possible that, in the end, success will accompany some kind of development of the original Bitcoin protocol like Colored coins, due to some built-in capabilities (in the case of “colored coins” an open access not only to payments/accumulation of funds, but also to property corporatization tools). Perhaps success will be on the side of protocols that are more universal in the financial aspect, like Ripple (PDF), and at some point they will become more popular, which will significantly affect the development of the cryptocurrency market. There are, of course, other factors, the influence of which is not yet obvious. That is why truly long-term forecasts do not seem worthy of serious attention. Nevertheless, I would like to anticipate the near future.

However, before attempting to make a forecast,There is another myth to be dealt with. The absence of a Bitcoin central bank and the impossibility of changing the nature of the issue creates a deceptive feeling that no one is able to influence the rate of the cryptocurrency. Before discussing this illusion, let’s look at the dynamics of gold prices (after all, gold also cannot be “issued” arbitrarily; moreover, its annual production is negligible compared to reserves).


Dynamics of gold prices (according to Finam data)

Why does the price of this asset fluctuate so much?The secret is that significant gold reserves are consolidated among a small circle of owners whose actions are not transparent. In other words, the example of gold clearly shows that speculators who own large reserves of assets can quite effectively influence prices if they collude (it’s not for nothing that there is a Gold Anti-Trust Action Committee).

What's the deal with Bitcoin?In the already mentioned report, Pavel Sidelev noted: “60% of the mined coins were never used.” Of course, some of these coins are probably lost forever, because miners who mined them before 2011, when only a few cents were given for a “coin,” may not have attached importance to the value concentrated in the Bitcoin wallet, and therefore may not have kept theirs. secret keys, without which no one will ever gain access to these coins. But it is unlikely that a very significant part of the never-used 60% of BTC was lost. Most likely, Mr. Sidelev is right in his assumption, and a significant part of these coins is kept by someone who regards them as an investment.

Note that the most significant daily turnoverBTC on one exchange was around half a million BTC (572,185.69 on Mt. Gox on April 16 last year, according to bitcoincharts.com). And 60% of the issued coins is more than 7.5 million BTC. If a significant part of this “reserve” is controlled by some kind of “cartel,” then a deliberate change in the Bitcoin rate is quite possible. In other words, when we try to analyze the factors influencing the Bitcoin rate, this, let’s call it “conspiracy” factor, should also be taken into account.

For now, let’s focus on those available for analysis.factors (network growth; the fight for/against legalization; speculation) influencing the Bitcoin exchange rate, we will try to analyze its dynamics and build estimates of the near future. To begin with, let’s plot some major events on the cryptocurrency exchange rate chart, which obviously characterize successes or losses on the fronts of legalization and/or propaganda of cryptocurrencies.


Bitcoin to US dollar exchange rate dynamics

Links to descriptions of events marked on the chart:

  • Cyprus crisis: March 16 introduction of tax on bank deposits;
  • Bitcoin ATM in Cyprus;
  • Bitcoin viruses
  • Criticism of Bitcoin and the “bottleneck” of exchange trading;
  • Growing interest in Bitcoin in China (First ten days of November: success of the strategy of Bobby Lee, CEO of BTC China);
  • November 18: Hearings in the US Senate confirmed the legality and usefulness of cryptocurrency as a financial instrument;
  • December 5: The Central Bank of China prohibits financial institutions from conducting any transactions with the virtual currency Bitcoin;
  • December 16: “The People's Bank of China has, in no uncertain terms, prohibited payment companies from conducting transactions with Bitcoin exchanges in China”;
  • January 27: The Central Bank of Russia limits the circulation of Bitcoin;
  • February 6: MT collapse begins. Gox.

Of course, in addition to those indicated on the graph, there were alsomany other events affecting the Bitcoin price. But to understand what is happening, it is important to see the connection between the course and activities on legalization/prohibitions/propaganda/counter-propaganda (what is called above the second factor influencing the course). The influence of the speculative component manifests itself as positive feedback in the dynamics of growth or decline of the exchange rate. In other words, thanks to a significant amount of speculation, the growth and fall of the exchange rate occurs much more rapidly than would be the case under the influence of only the second factor. However, and in the absence of bright events, as was the case, for example, in the second half of last summer, the rate continues to rise (which is clearly visible on the chart).

If we analyze the last two years, thenWe will see that the number of days during which the rate grew noticeably (by more than 0.05%) was more than 60%, while growth at a rate of more than 5% was observed in only 12.8% of days. Thus, it is obvious that there is some basic factor that ensures growth. Fortunately, all transaction parameters are available for Bitcoin, and we can easily verify that the trend in the number of unique addresses used daily is increasing. Of course, the number of addresses is not equal to the number of users of the Bitcoin network (nothing prevents users from generating new addresses for new transactions), but the exponential growth rate of the number of addresses suggests that the number of users is also growing (there is no reason why the number could grow exponentially addresses used by a single user).

For a social network (and Bitcoin isnamely, a financial social network) the growth rate in areas far from saturation is proportional to the size (number of participants), since each new participant attracts approximately the same number of new participants as the one who attracted it. Of course, this process is not endless and the growth rate will drop as soon as the number of participants begins to approach the potential limit. But for cryptocurrencies, the potential users of which can be all sufficiently adult computer users, such a limit is still very, very far away, so we may not think about it. As long as the growth rate is proportional to the size of the network, the growth law will be exponential.

Also a fairly stable factor,What ensures the exponential growth of the popularity (and, accordingly, the exchange rate) of Bitcoin is the development of retail/service points that accept cryptocurrency. The growth in sales of goods and services for Bitcoin not only contributes to popularity, but also constitutes a kind of counterbalance to speculative demand, that is, it has a stabilizing effect on the rate. It is not surprising that publications and even entire sections, such as “Shopping” in the Top Bitcoin Sites project, are now happily dedicated to such retail/service outlets.

Of course, on the coefficients of the exponential modelwill be influenced by the results of legalization/bans/propaganda/counter-propaganda activities. But nothing prevents us from trying to immediately find the final approximation. To make the construction more visual, let's move to a logarithmic scale along the vertical axis (the exponential approximation will turn into a straight line).


Dynamics of Bitcoin exchange rate growth and its approximation

The approximation that Excel suggests(dotted line), as we see, runs almost parallel to the almost linear section of last summer (highlighted). The deviation in the trend line appears to be caused by a significant outlier associated with the Bitcoin boom in China. Since we know that China's central bank has been quite successful in combating this boom and achieving some stability, we can plot the adjusted fit line so that it passes through the linear portion of last year's summer (shown in green). Now we can return to the previous graph on a linear scale - it shows the same approximation curves. If no significant events occur in the area of ​​legalization/bans of cryptocurrencies, then, as a first approximation, the rate forecast for the next month can be considered an adjusted approximation (green line).

For longer-term forecasts it will be necessaryconsideration of many options for the possible development of the “second factor”, and still we will not receive at least any definite forecasts. There are many scenarios: from going underground following the already mentioned Dark Wallet to legalization as a means of payment. To show how far such considerations can go, let’s look at one of the options for the development of Bitcoin, described in the article by Brett Scott (@Suitpossum), which is called “Bitcoin: Three Scenarios for the Future of Money.”

Let's choose the most unusual one:“Piracy of a Desperate Nation” suggests that in the event of a national currency collapse, some country (Brett chose Chile as an example) will make Bitcoin a national means of payment and require payment in BTC for major export products (for Chile - copper, for Ukraine, it would probably be products agriculture and metallurgy). The consequences (besides the actual stabilization of the exchange rate by linking it to a tangible asset) are extremely interesting: on the one hand, the country will be forced to abandon the traditional role of the Central Bank and significantly liberalize the financial system, as well as rebuild the entire fiscal system, since the usual control of bank accounts will be unavailable.

On the other hand, the country will be able to claimto its incredible attractiveness for innovative businesses. Of course, not only innovative, but also illegal, causing hysteria from FATF and similar structures. And of course, condemnation of all official financial institutions. Such a scenario is almost impossible today, when the Bitcoin economy is quite weak (it’s not for nothing that US Federal Reserve experts recently called it an interesting innovation rather than a threat to the banking system). But if the influence of Bitcoin businesses grows to a level where confronting, say, the IMF does not seem like absolute madness, then who knows, perhaps such brave souls will be able to become a catalyst for change in the financial world, thus earning themselves the privileges of a change leader. Which country will be the leader in this emerging market? Only time will tell...

: CO

Author: Boris Obolikshto