Monday, April 1, 2013
Bitcoin's Easter Sunday
I think I've finally figured out Bitcoin (BTC). I've been looking for the attractor of the dynamic system that is the Bitcoin network as it has risen to ever irrationally exuberant levels. I assumed that it was like any other economic system, that it would be modelable in terms of scarcity and consumer psychology (perception of value) or social evolutionary dynamics. But maybe it isn't. Maybe it's driven by a new kind of mechanical growth, the growth of the brainpower in a thinking machine. Maybe Kurzweil's exponential thinking is right. Only the singularity isn't coming to us meat-space humans, it's coming to machines first. I now think that the value of a Bitcoin seems will increase in direct proportion to the energy efficiency that the Bitcoin "machine" (network) thinks with about a very specific problem. A machine that thinks about nothing but finding the "secret" to each and every SHA256 hash "problem" that ripples across the network. It's no coincidence that the advent of ASICS in bitcoin mining has spawned another burst of speculation in Bitcoin. I think that growth in value would have happened with or without human speculation and greed. The speculation may go away, and the pendulum of human opinion may swing the other way soon, but the the long term metoeric rise of Bitcoin is here to stay. And we've crossed an inflection point in confidence and value that will never evaporate... because it no longer depends on the scammers and speculators that have yanked the price around for the 4 short years of the Bitcoin "machine"'s life. Sure, we slow humans write the software (Bitcoin miners) and build the specialized machines (ASIC racks) that act as the neurons in this brain. But it really seems to grow organically, more like an epidemic or organism. Maybe it isn't a fad, a bubble. Maybe we're witnessing an inflection point in economics itself. The new currency is thought, and machines will be the arbiters of that currency, thinking faster and better than any Barron, banker, or entrepreneur could. Bitcoin recently crossed the $1B capitalization level (total "money" supply). This is more than 1% of the total supply of all the money in the United States--all the government debt, all the bad home loan debts held by your local savings and loan, all the "paper" money (derivatives contracts) printed by the huge Wall Street banks. And this Bitcion capitalization is 1% of all the value and all the promises of value held in the US--and it's contained in a currency that you've never heard of, and that no government or corporation controls or processes in any way. However, one company, Avalon, seems to have figured out a clever way to make money off of the Bitcoin craze, seemingly without conning it's customers or contributing to the irrational exuberance. They're making money the same way that thousands of geeky innovators have been making money off of Bitcoin for the past 4 years... by mining with ever-increasingly powerful and innovative machines, or selling that equipment to others. Only Avalon is clever about trickling out the supply of their hardware (and probably using the backlog of equipment to mine with themselves). Just fast enough to keep leapfrogging their competitors (FPGAs and GPUs and other less legitimate ASIC manufacturers) without flooding the market with valueless processing power. They have skin in the game, so they want the rise in value of Bitcoin to continue, or they cease being profitable. I'm going to spend the day exploring the "strange attractor" that governs the price and spread of Bitcoin. I'll let you know how it goes.