February 8, 2023

Bitcoin and the ghosts of the future

Something is happening ... The Bitcoin exchange rate rose again by 66% against April lows. Worldwide subdivisions of a public organization are createdBitcoin Foundation - its Ukrainian branch, Bitcoin Foundation Ukraine, was the last to be registered. In many cities, Satoshi Square events are regularly held (in the sense, meetings of bitcoiners in the park?), During which those who wish to exchange BTC for more familiar dollars, euros, rubles and hryvnia.

Everyone in the world has to determine theirvision of this process. Even the grandees can no longer hide behind the indistinct mumble of "no comment ..." Recently, for example, the report of J.P. Morgan “The audacity of bitcoin. Risks and opportunities for corporates and investors ”(PDF), is on the Web and its harsh criticism. Here is a surge of interest. Natural questions: “Why? And what shall we wait 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. Due to the growth of this rate and the interest it generates in cryptocurrencies, the monthly volume of transactions in the past six months has exceeded one billion US dollars, and the maximum daily turnover is $ 580 million per day (see chart). Of course, such a turn made me attract attention. For the year from May 2013 to May 2014, the rate soared from 60 to 1000-1200 dollars (on different exchanges), fell and grew again, the last month he hesitating, still growing sluggishly in the range from $ 421 to $ 652 (but sluggish in comparison with recent past, and not with the usual world currencies, of course). The speculative component caused by such fluctuations in the exchange rate is most often discussed on the pages of the press. This component, however, is more likely a consequence than a reason for the spread of cryptocurrencies, and although we will return to the question: “What can be the course?” For now, we postpone this hot topic.

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

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

But for those who are interested in ATMs, maybeIt’s interesting to listen to “BITCOIN 2014 - Panel: The Buzz Around Bitcoin ATMs”). Of course, exchanges are developing on which you can buy and sell cryptocurrencies, services that provide cryptocurrencies in retail, etc., etc., not to mention specialized blogs and even the media. Many of these areas have grown enough to create the temptation to describe, analyze or even develop them. However, I will refrain from this - otherwise we have no chance to get to the answers to the general questions: “there are no forests visible behind the trees,” says popular wisdom.

To further discuss the driving forces,determining 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 myths that have developed around Bitcoin, its clones and competitors).

First of all, you must not forget thatThe cryptocurrency systems that we are talking about are nothing more than well-protected transaction protocols between arbitrary anonymous (possibly) users. And nothing more! Absolutely nothing at all - all the phenomenal properties follow from the reliability of transactions in much the same way as the usual variety of Internet services to us - from the capabilities of TCP / IP data transfer protocols.

All reasoning about computing costspower, electricity, and other resources needed to “mine coins” and supposedly affect their value - this is just an artistic image that helps us put up with the fact of Bitcoin’s immateriality. The increase in the complexity of calculations (and with it the increase, for example, energy costs) is due simply 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 receiptThis million for the million tugriks represents for the creditor not because the sheet of paper or ink with which it is written is worth so much, but because there are tools to ensure trust in the written. Similarly, BTC is valuable only because the cryptographic algorithms used by everyone who entered the Bitcoin network guarantee us the reliability of the process of transferring “coins” from one owner to another, which means the recipient’s rights to this “coin”.

In other words, the protocol used providesrecognition by all network members of the ownership of a specific BTC product. Since the volume of “goods” is limited by the same protocol, excellent prerequisites arise for using it as money (not without reason Bitcoin is called the gold of the digital world).

The above seems so simple that it doesn’tI 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”. The principles that separate successful countries of the "golden billion" from developing countries. Since there are so many letters, I won’t go deep into political economy, I will limit myself to a key reference to the work Violence and Social Orders (A Conceptual Framework for Interpreting Recorded Human History), popular in recent years. Douglass C. North, John Joseph Wallis , and Barry R. Weingast).

But in order to evaluate correctly in the futurethe value and role of secure transactions, including anonymous (!), I will continue the analogy with the Internet and TCP / IP. Data transfer protocols between arbitrary computers connected to the network probably did not seem like a threat to the media or the traditional advertising market. Which 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, the development of cryptocurrencies today forms the basis for the financial world of the future, which we so far have very little idea of. Using this analogy, you can answer the question that arises a little later: "Is it possible to prohibit cryptocurrencies?" 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 price of this ban.

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

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

However, she has an important difference between her andbanking and other similar financial services. Bitcoin transactions are equally accessible to any Internet user anywhere in the world. If you look closely at the chart, we will see that they are not so cheap (fortunately, the larger the volume of transactions, the cheaper the transaction, which is clearly visible on the diagram) - well, in the end, we also have access to the Internet we pay, although we subconsciously believe that many used Internet resources are free.

By and large, the point is not the transaction price, butopen access to the process of transferring funds: neither a contract with banks, nor user identification, nor permission for cross-border transfers are needed. It is this openness that allows us to talk about future changes in the financial world (I note in passing that open access extends not only to users of the translation service, but also to those who provide it: everyone can join the ranks of miners and make money on the provision of these services). Of course, open access is valuable in conjunction with the absence of a control center that could be vulnerable (the analogy with the Internet and its difference from, for example, telephony, again apply to us).

From the aforementioned work of North, Wallis andWeingast is well-known: open access provides an advantage in the speed of development, the economics of open access systems are ahead of competitors using limited access. So there is an incentive for the use of cryptocurrencies by those who have already appreciated their capabilities (by the way, Bitcoin is not necessary at all, but more on that later). This is good news.

But there are some bad ones: The modern banking system, which can easily be classified as a system with limited access (why is it a topic for another discussion), does not intend, of course, to give up its positions without a fight (however, open access systems never came without a fierce struggle). The privileges of the modern financial sector (it is no coincidence that gave rise to Occupy Wall Street protests), of course, no one will give up just like that. But it’s very difficult to resist changes that bring economic benefits, and at the same time not turn into North Korea. Understanding this confrontation helps to evaluate the second important factor that affects, 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).

What can counter developmentcryptocurrencies existing system of national central banks and the financial world generated by it? In general, there are only two tools: legislative barriers and counter-propaganda. We will consider them in turn.

Bitcoin status in the legal system mayto be very, very different: from recognizing it as a legal means of payment (dreaming out!) and to prohibiting use (immortal Mikhail Evgrafovich: “America needs to be closed again” - but does this seem to depend on me? ”). I note that not only Wall Street lobbyists are not enthusiastic about the legalization of cryptocurrencies, but some Bitcoin supporters believe that it is more reliable not to seek 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 project Dark Wallet). The development of solutions such as Dark Wallet can more likely serve as a proof of the futility of attempts at a total ban than a prototype of the future (returning to our analogy with the Internet, you can look at Dark Wallet as an analogue of fidonet).

That it will not be possible to stop the useBitcoin, instead of establishing cooperation with those who use it, is becoming more and more obvious. A very typical example of this is the stability of the clones of the Silk Road project, despite the defeat of the Silk Road itself and the arrest of the project founder Ross Ulbricht in October last year.

As the volume of the Bitcoin economy growsincrease, pressure on lawmakers towards the legalization of this phenomenon will also increase (note that the volume of the Bitcoin economy is not limited to the volume of BTC transactions. It is necessary to take into account the turnover in traditional currencies, but related to the development 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 those who are far-sighted enough to see fiscal policy tools in legalizing the work of cryptocurrency users. Of course, lobbying in the first case will be strengthened for any problems of the traditional financial sector, such as last year’s crisis in Cyprus. If everything is clear with the first direction, then the second probably needs clarification.

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

In addition to lobbying prohibitions, the struggle of opponentschanges can go on the front of counter-propaganda, primarily reducing to emphasizing the possibility of using cryptocurrencies for obviously illegal activities. The already mentioned Silk Road is a typical example of such an argument. Returning to the analogy with the Internet, it is easy to recall attempts to brand new then technology for the dissemination of pornography. Yes, indeed, the anonymity of the payment allows you to make criminal transactions. However, just as the understanding has come that the Internet is by no means the reason for the existence of pornography, the realization will 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, did not become an insurmountable barrier to, say, arms dealers. After all, cryptocurrency transactions are far more open than cash payments.

Another common method of counter-propagandaThe focus is on the risks of using Bitcoin due to its significant volatility. A recent example is the recent speech by Yves Mersch, member of the Executive Board of the European Central Bank, at the Bundesbank Symposium in Frankfurt. Nevertheless, given that the freedom of exchange of opinions today is much greater than it was at the start of the Internet, one can look rather optimistically at the prospects of information support for the opportunities provided by new technologies.

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

Are all the factors affecting the rate of cryptocurrenciesare listed? Of course not. For example, we did not consider 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 be accompanied by some development of the original Bitcoin protocol like Colored coins, due to some added features (in the case of “colored coins”, an open access not only to payments / accumulation of funds, but also to the instruments of corporatization of property). Perhaps success will be on the side of more financially universal protocols 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 whose influence is not yet obvious. Therefore, truly long-term forecasts do not seem to deserve serious attention. Nevertheless, I want to foresee the near future.

However, before trying to make a forecast,one more myth should be dealt with. The absence of the Bitcoin central bank and the impossibility of changing the nature of the issue creates a misleading feeling that no one is able to affect the cryptocurrency rate. Before discussing this illusion, let us look at the dynamics of gold prices (after all, gold also cannot be “emitted” arbitrarily, moreover, its annual production is insignificant in comparison with reserves).

Dynamics of gold prices (according to Finam)

Why does the price of this asset fluctuate so much? The secret is that significant gold reserves are consolidated in a small circle of owners whose actions are opaque. In other words, it can be clearly seen from the example of gold that speculators who own large stocks of assets can quite effectively influence prices if they enter into a conspiracy (it is not without reason that the Gold Anti-Trust Action Committee exists).

What about Bitcoin? In the report already mentioned, Pavel Sidelev said: "60% of the mined coins have never been used." Of course, some of these coins are probably lost forever, because the miners who mined them before 2011, when they paid only a few cents for the “coin”, could not attach importance to the value concentrated in the Bitcoin wallet, which means they might not save their secret keys, without which no one will ever gain access to these coins. But it is unlikely that a very significant portion of the 60% of BTC that has never been used is lost. Most likely, Mr. Sidelev is right in his assumption, and a significant part of these coins is kept by someone who considers them to be an investment.

Note that the most significant daily turnoverBTC on one exchange was about half a million BTC (572185.69 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 “stock” is controlled by a certain “cartel”, then a conscious change in the Bitcoin exchange rate is quite possible. In other words, when we try to analyze the factors affecting the Bitcoin exchange rate, we will conditionally call it “conspiracy”, the factor should also be taken into account.

In the meantime, focus on analysisfactors (network growth; struggle for / against legalization; speculation) affecting the Bitcoin exchange rate, we will try to analyze its dynamics, build estimates of the near future. First, we’ll draw some major events on the cryptocurrency exchange rate chart that obviously characterize successes or losses on the fronts of legalization and / or propaganda of cryptocurrencies.

The dynamics of the Bitcoin to the US dollar

Links to descriptions of events marked on the chart:

  • Cyprus crisis: March 16, the maintenance of tax on bank deposits;
  • Bitcoin ATM in Cyprus;
  • Bitcoin viruses
  • Criticism of Bitcoin and the “bottleneck” of exchange trading;
  • The growing interest in Bitcoin in China (First decade of November: success of the strategy of Bobby Lee, CEO of BTC China);
  • November 18: hearings in the US Senate confirmed the legitimacy and usefulness of cryptocurrency as a financial instrument;
  • December 5: The Central Bank of China forbade financial institutions to conduct any operations with Bitcoin virtual currency;
  • December 16: “The People’s Bank of China, in unambiguous terms, has banned payment companies from conducting operations with Bitcoin exchanges in China”;
  • January 27: The Central Bank of Russia restricts Bitcoin circulation;
  • February 6: The beginning of the collapse of MT. Gox.

Of course, in addition to those indicated on the graph, there wasmany other events affecting the Bitcoin exchange rate. But to understand what is happening, it is important to see the relationship between the course and legalization / prohibitions / propaganda / counter-propaganda activities (what is described above as the second factor affecting the course). The influence of the speculative component is manifested as a positive feedback in the dynamics of growth or fall of the course. In other words, due to the significant amount of speculation, the growth and depreciation of the exchange rate is much faster than it would be under the influence of only the second factor. Nevertheless, in the absence of bright events, as it was, for example, in the second half of last summer, the rate continues to grow (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 appreciably (by more than 0.05%) grew is more than 60%, while growth at a rate of more than 5% was observed in only 12.8% of the days. Thus, it is obvious - there is some basic factor that ensures growth. Fortunately, the parameters of all transactions are available for Bitcoin, and we can easily make sure 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 indicates that the number of users is growing (there are no reasons why the number could exponentially addresses used by a single user).

For a social network (and Bitcoin is exactlyfinancial social network) the growth rate in areas far from saturated is proportional to the size (number of participants), since each new participant attracts about the same number of new participants as the one who attracted him. Of course, this process is not infinite 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 fairly adult computer users, this limit is still very, very far, so we can 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 pretty stable factor,ensuring the exponential nature of the growth in the popularity (and, accordingly, the rate) of Bitcoin, is the development of retail / service outlets accepting 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 exchange rate. Not surprisingly, publications and even entire sections, such as “Shopping” in the Top Bitcoin Sites project, are happy to devote such sales / service points today.

Of course, the coefficients of the exponential modellegalization / prohibitions / propaganda / counter-propaganda activities will influence. But nothing prevents us from trying to immediately find the final approximation. In order to make the construction more visual, we will move to the logarithmic scale along the vertical axis (the exponential approximation will turn into a straight line).

Bitcoin exchange rate dynamics and its approximation

Approximation prompted by Excel(dotted line), as we see, runs almost parallel to the almost linear section of last summer (highlighted). The trend line deviation appears to be caused by a significant surge due to the Bitcoin boom in China. Since we know that the Central Bank of China struggled quite successfully with this boom and achieved a certain stability, we can construct the adjusted approximation line so that it passes through the linear section of last summer (shown in green). Now we can return to the previous graph on a linear scale - it shows the same approximation curves. If bright events in the field of legalization / prohibitions of cryptocurrencies do not happen, then in a first approximation, the adjusted approximation (green line) can be considered the forecast for the course for the next month.

Longer-term forecasts will requireconsideration of many options for the possible development of the "second factor", and still we will not get 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 us look at one of the development options for Bitcoin described in an article by Brett Scott (@Suitpossum), which is called Bitcoin: Three Scenarios for the Future of Money.

Choose the most unusual: “Piracy of a desperate nation” suggests that in the event of a collapse of the national currency, a certain country (Brett chose Chile as an example) will make Bitcoin a national means of payment and require payment of the main export products in BTC (for Chile - copper, for Ukraine, it would probably be products agriculture and metallurgy). The consequences (except for the 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, as the usual control of bank accounts will be unavailable.

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

: CO

Author: Boris Obolikshto