Bitcoin value and small probability / high impact arguments

post by vbuterin · 2015-03-31T16:48:23.910Z · score: 4 (6 votes) · LW · GW · Legacy · 50 comments

I had a rather fun debate with people from the always cynical r/buttcoin reddit community, discussing my estimation of the expected value of Bitcoin in the future, which was predicated on what I estimated as a 5% probability that it will displace part of gold due to its superior properties in the store-of-value realm:

http://np.reddit.com/r/Buttcoin/comments/30tqud/ceo_of_ethereum_spreading_quality_fud_can_we_get/

Note that I am certainly not a Bitcoin maximalist or ideologue; I've become quite a bit more skeptical lately and am actually much closer to the "currency meh, blockchain cool" perspective that is becoming pretty mainstream in the parts of the broader IT and finance community that I've spent the most time interacting with. Here I ended up articulating and defending a position I actually disagree with in any reasonable sense of the term "disagree"; the debate is entirely on whether the probability of the position being correct is 5% (my view) or 0.0000000005% (what seems like their view).

I'd like to ask this community, to what extent are my position and my arguments correct? I'm interested first in a few object-level issues:

1. Gold is a Veblen good both in its store-of-value and its aesthetic use cases. If gold was not rare, people would not care about it for jewellery purposes, as plenty of other forms of jewellery exist with a better aesthetics-to-cost ratio. Gold's premium over other pretty things is purely a result of status/prestige considerations. Hence, the "floor" to which gold could fall due to a simple equilibrium flip is very low (perhaps $50 from industrial use). So Bitcoin's lack of a "fundamental use value" floor is not a serious disadvantage of Bitcoin against gold.

2. A $100 price floor is 90% as bad as a $0 floor. To see why, note that you can make the custom asset of { 9 parts BTC, 1 part oil } which has a pretty identical ratio of current price to price-floor-from-fundamental-use-value.

3. The probabilities of the various events required for BTC to receive this status are roughly within an order of magnitude of the 5% mark.

4. There is a long-term risk to black swan supply increases in gold due to any of { space mining, nanotech-enabled ultracheap earth mining, nuclear transmutation }; this does not exist for BTC

And also particularly in one very important meta-level issue: is my expected-value estimation (10% of gold market cap = $700b = $34000 per BTC * 0.05 chance = $1700 per BTC EV; the fact that the BTC price probability distribution is a power law and not a square increases this in practice but I do not count that in order to give myself a safety factor) a good way of making estimates in these kinds of scenarios? Many commenters argued that 5% is far too high, and offered the justification that I was putting BTC in a much more privileged reference class than would be rational, and so I offered some counter-arguments for why it deserved a privileged position from an outside view in a much more significant way than Random Joe walking up to you saying "invest $10000 in my company! Look at the $700b market and if I only get as little as 1% you'll be rich!" would not (namely, because there are a million entities at least as salient as Random Joe in the world making similar claims, Random Joe would deserve a prior of at most 1/1000000, whereas BTC's reference class is much smaller).

Is my general line of reasoning correct here, and is the style of reasoning a good style in the general case? I am aware that Eliezer raises points against "small probability multiplied by high impact" reasoning, but the fact is that a rational agent has to have a belief  about the probability of any event, and inaction is itself a form of action that could be costly due to missing out on everything; privileging inaction is a good heuristic but only a moderately strong one. Is "take the inverse of the size of the best-fitting reference class" a decent way of getting a first-order approximation? If not, why not? If yes, what are some heuristics for optimizing it?

In other news, I discovered another (possibly already known, but I have not seen it before) argument against complying with Pascal's mugger: there is a strong economic argument that cooperating with muggings is anti-utilitarian because it incentivizes the perpetrator to commit more of them, and in those worlds where someone actually can torture 3^^^3 people for fun they will likely be able and willing to do it again, so my cooperation may end up leading to the torture of more than 3^^^3 people from the result of future muggings carried out by the now-encouraged perpetrator; therefore since I don't even know the sign of the EV of the result it's better not to cooperate. Because this double-sidedness property is also one of the standard knockdowns against Pascal's Wager ("for every god G who would put you into heaven for worshipping him, there exists a god G' who would put you in hell for worshipping G, so why privilege G over G'?"), I am starting to think that it might form the basis of a more fundamental case against wagers/muggings of that class. Is this a good line of reasoning, or am I treading too dangerously close to how Rothbardians sometimes defend deontological libertarianism by trying to take every individual knockdown scenario that opponents provide and finding some pedantic non-central feature that invalidates that particular example?

My thinking is that if double-sidedness is the correct knockdown to Pascalian scenarios, then the standard prejudice against low-probability/high-impact scenarios would apply less here because there very clearly is only the upside and not the downside (BTC cannot be worth less than $0).

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comment by ChristianKl · 2015-03-31T22:48:39.898Z · score: 6 (6 votes) · LW · GW
  1. There is a long-term risk to black swan supply increases in gold due to any of { space mining, nanotech-enabled ultracheap earth mining, nuclear transmutation }; this does not exist for BTC

Saying that there no long-term black swan risk for BTC seems to be strange.

comment by benkuhn · 2015-04-01T01:56:15.945Z · score: 3 (3 votes) · LW · GW

Is my general line of reasoning correct here, and is the style of reasoning a good style in the general case? I am aware that Eliezer raises points against "small probability multiplied by high impact" reasoning, but the fact is that a rational agent has to have a belief about the probability of any event, and inaction is itself a form of action that could be costly due to missing out on everything; privileging inaction is a good heuristic but only a moderately strong one.

Sometimes, especially in markets and other adversarial situations, inaction is secretly a way to avoid adverse selection.

Even if you're a well-calibrated agent--so that if you randomly pick 20 events with a 5% subjective probability, one of them will happen--the set "all events where someone else is willing to trade on odds more favorable than 5%" is not a random selection of events.

Whether the Bitcoin markets are efficient enough to worry about this is an open question, but it should at least be a signal for you to make your case more robust than pulling a 5% number out of thin air, before you invest. I think the Reddit commenters were reasonable (a sentence I did not expect to type) for pointing this out, albeit uncharitably.

Is "take the inverse of the size of the best-fitting reference class" a decent way of getting a first-order approximation? If not, why not? If yes, what are some heuristics for optimizing it?

In my experience, this simply shifts the debate to which reference class is the best-fitting one, aka reference-class tennis. For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.

comment by vbuterin · 2015-04-01T05:45:59.878Z · score: 1 (1 votes) · LW · GW

Thanks, I think this might actually be the argument I was looking for.

Whether the Bitcoin markets are efficient enough to worry about this is an open question

Right, so now the question is one of, does this idea of adverse selection actually apply?

I suppose one reformulation of the point made in the article is: if I believe X will happen with probability 5%, then I do not necessarily want to bet on X at 4.99% and bet against X at 5.01%, because it could be that my confidence is low enough that the very fact that someone wants to bet for or against me will shift my estimation of X in either direction outside that range.

So a safety factor is necessary. Question is, how large? The current markets are willing to bet on the proposition at 0.7% (as a first approximation; in reality the rectangle of $34000 * 5% is only part of the probability distribution so it's probably more like 0.2%). I'm not sure that many people are willing to bet against it at 0.7%; my hunch is that the people shorting it now would disappear once some threshold is passed (eg. the old $1242 all-time high) and are merely going on short and medium-term technicals.

In general, I'm hypothesizing that the Bitcoin markets have an inefficiency in that many people who are in them are already in them deeply, and so marginal additional investment even at positive expected value is a bad idea for them because in those worlds where BTC goes up a lot they would already be very rich and so they would rather optimize the remainder of their portfolio for the worlds where that doesn't happen; essentially limitations due to risk.

A claim that would significantly work against my hypothesis is the BTC price not going up by much or at all over the next year, as Bitcoin ETFs for mainstream investors are now available.

For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.

True, I hadn't thought of those. Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to "Legal Changes"). But then I suppose the reference class of "highly unique things" will necessarily include things each of which has unique properties... :)

comment by benkuhn · 2015-04-01T17:59:50.758Z · score: 1 (1 votes) · LW · GW

Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to "Legal Changes"). But then I suppose the reference class of "highly unique things" will necessarily include things each of which has unique properties... :)

I think the way to go here is to assemble a larger set of potentially comparable cases. If you keep finding yourself citing different idiosyncratic distinctions (e.g. Bitcoin was the only member to be not-overblown AND have a hard cap on its supply AND get over 3B market cap AND ...), this suggests that you need to be more inclusive about your reference class in order to get a good estimate.

comment by seer · 2015-04-01T05:29:36.939Z · score: 1 (1 votes) · LW · GW

For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.

The difference is that it's easy to make more tulips or Beanie Babies, but the maximum number of Bitcoins is fixed.

comment by V_V · 2015-04-01T14:41:10.758Z · score: 3 (3 votes) · LW · GW

There are other collectible items whose supply can't be easily increased, Elvis Presley's original records, for instance, or artworks in general.

Sure, new popular artists arise and increase the supply of collectible artworks, but this is like new popular altcoins arising and increasing the supply of digital currency.

comment by benkuhn · 2015-04-01T16:43:45.678Z · score: 2 (2 votes) · LW · GW

The difference is that it's easy to make more tulips or Beanie Babies, but the maximum number of Bitcoins is fixed.

Yes, this is what I mean by reference class tennis :)

Actually, according to Wikipedia, it's hypothesized that part of the reason that tulip prices rose as quickly as they did was that it took 7-12 years to grow new tulip bulbs (and many new bulb varieties had only a few bulbs in existence). And the Beanie Baby supply was controlled by a single company. So the lines are not that sharp here, though I agree they exist.

comment by gwern · 2015-04-01T18:58:14.230Z · score: 6 (6 votes) · LW · GW

it's hypothesized that part of the reason that tulip prices rose as quickly as they did was that it took 7-12 years to grow new tulip bulbs

Also, one of the curious aspects of the tulip-breaking virus is that the patterns only temporarily breed true; so the supply of particular tulips is inherently limited both by how long it takes to grow them and by how many generations you'll get before the coloring disappears from offspring. (This is why when you read about Tulipomania, you'll usually see old illustrations of specific tulip varieties and not photos of modern plants - because they're all gone, they no longer exist.)

comment by Douglas_Knight · 2015-03-31T19:41:10.145Z · score: 1 (1 votes) · LW · GW

There is a long-term risk to black swan supply increases in gold due to any of { space mining, nanotech-enabled ultracheap earth mining, nuclear transmutation }; this does not exist for BTC

In the much shorter term than those threats there is the very white swan that quantum computers will completely destroy the bitcoin protocol.

comment by vbuterin · 2015-04-01T09:10:29.636Z · score: 0 (0 votes) · LW · GW

Quantum computers actually will not kill bitcoin. It'll take a significant coordination, but it'll survive:

https://bitcoinmagazine.com/6021/bitcoin-is-not-quantum-safe-and-how-we-can-fix/

Now, P = NP will kill bitcoin. But I rate that risk as being much lower than scifi gold mining techniques.

comment by Douglas_Knight · 2015-04-01T17:53:30.863Z · score: 0 (0 votes) · LW · GW

Yes, post-quantum cryptocurrency can be built using Lamport signatures or, I think more likely, a full-fledged post-quantum public key system. But would such a hard fork still be "bitcoin"? Will there be enough coordination to make the jump? Why bet on it? Added: in other words, you have now switched to an argument of the form: this community will respect property rights, which is exactly opposite to the technical argument you started with.

Also, it's not just about Shor's algorithm. Grover's algorithm is a big deal. The advent of quantum computers will dramatically concentrate the pool of hashing power into few hands. I'm not sure what will happen, but I think that there is a good chance that the value of existing cryptocoins will be wiped out, even though the technology will be resurrected after quantum computers become widespread.

comment by Douglas_Knight · 2015-03-31T18:33:48.427Z · score: 1 (1 votes) · LW · GW

Gold actually was hit with a black swan supply event a few hundred years ago.

Gold is quite rare in Europe and historically the cost of gold in silver was much lower everywhere else on Earth. This is part of why the Spanish were so excited to discover gold in the Americas. And this is why Europe shipped silver to China for centuries. But, in the end, Europe conquered the world and imposed its price ratio.

comment by vbuterin · 2015-03-31T19:01:11.975Z · score: 1 (1 votes) · LW · GW

Indeed, I am aware. Though now a black swan supply event of that kind is rare, since we've already explored all the low-hanging fruit on earth, hence why exotic stuff like space mining, nanotech mining or nuclear transmutation may need to be involved. But I suppose something similar to this oil event: http://www.nextenergynews.com/news1/next-energy-news2.13s.html could also happen right here on our own planet.

comment by Lumifer · 2015-03-31T19:51:13.397Z · score: 0 (2 votes) · LW · GW

A comparison to precious gems might be instructive. It used to be that sapphires and rubies were treasure and now they are just a kind of transparent stuff to put over your watch face or an LCD...

comment by Douglas_Knight · 2015-03-31T22:46:02.425Z · score: 0 (0 votes) · LW · GW

The effect on synthetic gems on the market is a good example, but the effect is zero. They haven't stopped being treasure. But they haven't yet gotten to the point of indistinguishable at gem sizes. Synthetic gems have displaced mined gems for some industrial uses, but mainly they have greatly expanded industrial applications.

comment by Vaniver · 2015-04-01T18:48:09.898Z · score: 0 (0 votes) · LW · GW

But they haven't yet gotten to the point of indistinguishable at gem sizes.

Synthetic diamonds maybe, but synthetic rubies were around a hundred years ago, and even with diamonds it seems clear that it's only a matter of time (if we're not already there). I hear that synthetic emeralds are actually preferred to natural emeralds for jewelry because they're significantly prettier.

comment by Douglas_Knight · 2015-04-02T06:05:59.343Z · score: 0 (0 votes) · LW · GW

Big nice rubies were produced a hundred years ago, but I'm pretty sure that even today they are distinguishable. It's just a matter of time, yet the prices do not seem to reflect that. And that's not just an illusion of jeweler's markup, but resale value.

comment by Lumifer · 2015-04-01T16:05:08.165Z · score: 0 (0 votes) · LW · GW

They haven't stopped being treasure.

I am not sure. They haven't stopped being high-status jewelry, but I don't know if they're still a store-of-value.

comment by Douglas_Knight · 2015-04-01T17:54:10.375Z · score: 1 (1 votes) · LW · GW

If you don't know, don't make shit up.

comment by Lumifer · 2015-04-01T18:00:34.621Z · score: 0 (0 votes) · LW · GW

Do you happen to know? People still buy gold as an investment / store-of-value. Does anyone buy rubies and sapphires as an investment / store-of-value nowadays?

comment by Douglas_Knight · 2015-04-01T18:33:12.060Z · score: 0 (0 votes) · LW · GW

I don't know what people do or what they ever did, but I do know what I said: the effect on the market price of high-end gems has been zero.

comment by Douglas_Knight · 2015-03-31T19:34:31.550Z · score: 0 (0 votes) · LW · GW

The point is that a black swan supply shock need not have any effect on the price.

comment by Ander · 2015-03-31T18:29:49.597Z · score: 1 (1 votes) · LW · GW

I don't think that the probability of Bitcoin's success is so low as to qualify for Pascal's Mugging status. While it is difficult to value the worth of a 5% or 1% chance of success, or whatever value one assigns, its still nothing like 1/3^^^3. It simply isn't low enough probability, or high enough payoff to qualify as a Pascals Mugging.

If you want to actually approach Pascal's Mugging territory with Bitcoin, then you need to change from the question "What is the chance that Bitcoin will capture 10% of the Gold market", to something much less likely such as "What is the chance that (a future version of Bitcoin which uses its current blockchain ledger) will eventually become the main currency of a future post-singularity human civilization expanding outward at some fraction of the speed of light".

When you imagine a scenario such as Nick Bostrom's astronomical waste: http://www.nickbostrom.com/astronomical/waste.html and you ask the question "what is the probability that buying Bitcoin now would give me the resources needed in the future to allow us to colonize the Virgo Supercluster one second faster, thus saving the equivalent of 10^29 potential human lives", THEN you can say that you are getting Pascal's Mugged.

Or you could imagine other questions, such as "what is the probability that my buying Bitcoin now would enable me to secure life for humanity in a future run by an AI that is unfriendly but can be negotiated with, and has been programmed to desire Bitcoins?" Now you are actually being Pascal's Mugged.

(Obviously these are incredibly low probability scenarios, not things that I think will occur. That is why I am using them as Pascal's Mugging examples).

comment by vbuterin · 2015-03-31T18:59:39.270Z · score: 0 (0 votes) · LW · GW

Right, I agree, my 5% $34000 is only slightly Pascalian. I'm only using the Pascal reference because it is the best representative example I know of the general class of such scenarios (note that other "Pascalian" scenarios of this type are fairly common in the investment world; every startup crank loves throwing out the whole "if you think there's only a 0.1% chance I'm right, you'll get an EV of $100b 0.001 = $100m" line). If you know of a better name for the category, please share. I also used the Drake Equation as an analogy elsewhere in that r/buttcoin thread; perhaps that might be a better fit.

comment by Ander · 2015-03-31T19:07:40.535Z · score: 0 (0 votes) · LW · GW

I'm not sure what a better term would be. Maybe 'lottery tickets', but that is still too low probability/high reward for what we are talking about.

comment by skilesare · 2015-04-07T17:20:02.215Z · score: 0 (0 votes) · LW · GW

Have you considered that one of your base assumptions that you can 'store value' is false?

All value us future value. You can't store it. You can make a bet on a piece of capital. Gold has been a decent bet, but far from stable. Bitcoin is just another bet.

Also, btc has a significant long term risk as well. The system is terrible for an interstellar economy. You can't have a blockchain when you have to wait light years for payment confirmations. Maybe this isn't a big deal in the short run, but if you're looking really long term, it is an issue.

A couple of other things to consider in your favor, bitcoin is going to have significant uses in the short term that don't involve holding it. It is a transfer medium and a protocol. Having a stake in the protocol will be very valuable.

comment by Lumifer · 2015-03-31T17:54:27.834Z · score: 0 (0 votes) · LW · GW

Some random comments:

So Bitcoin's lack of a "fundamental use value" floor is not a serious disadvantage of Bitcoin against gold.

Theoretically, no, practically, it still is. Humans are humans and the whole history and, um, aura of gold makes a "simple equilibrium flip" not very likely in the near future.

Measuring Bitcoin against "gold market cap" is dangerous because gold has uses which Bitcoin cannot replace. For example, traditionally most of the wealth of Indian families (those who have wealth, of course) have been kept as gold, specifically golden jewelry. Bitcoin will not replace that use. Another big advantage of gold is anonymity which Bitcoin will not be able to replicate either.

The probabilities of the various events required for BTC to receive this status are roughly within an order of magnitude of the 5% mark.

Why do you think so?

And what exactly is the reference class that you put Bitcoin into?

my expected-value estimation (10% of gold market cap = $700b = $34000 per BTC * 0.05 chance = $1700 per BTC EV

Don't think in terms of point estimates, think it terms of full distributions (which here will not be symmetric).

in those worlds where someone actually can torture 3^^^3 people for fun they will likely be able and willing to do it again, so my cooperation may end up leading to the torture of more than 3^^^3 people

We are entering nonsense territory here, as the set up implies that someone who can torture ^^^3^^^ people for fun still need something from you and, moreover, needs your free and willing consent. Recall that the original Pascal Mugger is Omega and I doubt that you can incentivize Omega by cooperating or not.

comment by vbuterin · 2015-03-31T18:03:00.372Z · score: 1 (1 votes) · LW · GW

And what exactly is the reference class that you put Bitcoin into?

Roughly speaking, assets which have received a major amount of public attention and whose store-of-value functionality is the dominant factor in their price. Gold, silver, land and internet domain names are the only others I can think of that vaguely fit there.

So your argument is that gold has a very very large network effect? Reasonable I suppose, but technology has disrupted similarly entrenched things over the past two decades, so you have to add a lot of fundamental uncertainty.

Another big advantage of gold is anonymity which Bitcoin will not be able to replicate either.

It's quite possible to be anonymous with BTC; the $400m MtGox theft at least is pretty good evidence of that. It just takes a lot of skill. Also, with the growth of meatspace surveillance, I would not be surprised if gold became easier to track than BTC over the next few years.

Recall that the original Pascal Mugger is Omega and I doubt that you can incentivize Omega by cooperating or not.

So for every world where the mugger is Omega, there is a world where the mugger is someone incentivizeable. And I have no idea how to weigh the relative probability of those worlds.

We are entering nonsense territory here, as the set up implies that someone who can torture ^^^3^^^ people for fun still need something from you and, moreover, needs your free and willing consent.

He clearly very likely wants something from me: the subjective experience of seeing my submissive reaction. Bully psychology 101.

Don't think in terms of point estimates, think it terms of full distributions (which here will not be symmetric).

I fully agree. However, the full distribution is at least the size of the rectangle defined by my point estimate, so that's actually a point in my favor.

comment by Lumifer · 2015-03-31T18:28:12.587Z · score: 1 (1 votes) · LW · GW

whose store-of-value functionality is the dominant factor in their price. Gold, silver, land and internet domain names are the only others I can think of that vaguely fit there.

Don't think land (which is productive and "consumable" -- in the sense that you can live on it) fits in here. I am also not sure that silver has much store-of-value role nowadays.

In different times in different societies the store-of-value function was fulfilled by different things. For example, right now empty housing is a major store-of-value in China. US dollar banknotes are a notable store-of-value around the world, e.g. in Russia. Government bonds, especially of reputable governments, are often used as store-of-value.

All in all it's fairly complicated and context-dependant :-) In the West the predominant store-of-value right now is financial securities (stocks and bonds).

But I wonder why are you focusing solely on the store-of-value function, you don't think Bitcoin will be valuable as a medium of exchange?

It's quite possible to be anonymous with BTC

Depends on the resources brought against you, threat model still matters.

the full distribution is at least the size of the rectangle defined by my point estimate

Huh? I don't understand that. And, by the way, what is your point estimate? A mean? A median? Mode, maybe? :-)

comment by vbuterin · 2015-03-31T18:56:40.563Z · score: 1 (1 votes) · LW · GW

In the West the predominant store-of-value right now is financial securities (stocks and bonds).

Mostly, yes. But gold still has a $7t market cap. But this does open up an interesting argument: that gold is on the whole dying as a store of value and it's being propped up almost entirely by tradition; in this case central bank gold holdings will probably decline 90%+ over the next century. In this scenario, BTC has no chance to replace gold because there's no new interest in gold anyway.

However, I would still argue that there is diversification value in BTC if it simultaneously manages to (i) have value increase proportionately to economic growth in the long term (that basically requires maintaining constant salience in a growing society), and (ii) be countercyclical to stocks; if that pattern repeats over two or three business cycles then I could see investment specialists advocating it in place of gold as part of an "all seasons" portfolio (essentially replacing gold here: http://mebfaber.com/2014/10/24/the-all-seasons-portfolio-aka-the-tony-robbins-portfolio/ ).

But I wonder why are you focusing solely on the store-of-value function, you don't think Bitcoin will be valuable as a medium of exchange?

A couple of reasons:

  1. MoE usage brings much lower valuation prospects. You can see a currency getting to $10 billion simply from people trading it, but the serious $1t+ valuations come from people actually holding it in huge quantities. MV = PQ (where currency value is P^-1); M is constant, so the use cases that push P^-1 high are the ones where V is very low.
  2. With MoE you can make a credible case that it will simply be continually replaced by superior technologies that improve on block time, scalability, anonymity, transaction cost, functionality, etc. Blockstream's sidechains project potentially allows protocol upgrades to come together with continued BTC use, but that itself is a bet. Also, for MoE people desire price stability much more, so my bets as far as cryptocurrency goes have been on stablecoins ( https://blog.ethereum.org/2014/11/11/search-stable-cryptocurrency/ ). So because of that last point particularly I would place MoE dominance probability at under 5%.

Depends on the resources brought against you, threat model still matters.

Agree. Anonymity depends pretty much completely on threat model in our high-info-inequality society.

Huh? I don't understand that. And, by the way, what is your point estimate? A mean? A median? Mode, maybe? :-)

$34000 is my "5% chance it will be above this" target (though my discussions here and in that debate have revised me a bit down to 2.5-4%). My mean is around $5000 I suppose, though I include only the 34000 * 0.05 rectangle in my final answer of $1700 as a sort of way of giving myself a safety margin. Median is under $200, mode is $0 :-)

comment by Lumifer · 2015-03-31T19:35:07.557Z · score: 1 (1 votes) · LW · GW

that gold is on the whole dying as a store of value and it's being propped up almost entirely by tradition

I think this is a reasonable assumption to work under.

there is diversification value in BTC

Maybe -- that entirely depends on whether BTC actually has value and that hinges on, as you put it, "maintaining constant salience" which is the real issue.

$34000 is my "5% chance it will be above this" target

Ah, so $34K is your 5% (or 3%) quantile for the distribution, right?

comment by vbuterin · 2015-04-01T09:24:33.827Z · score: 0 (0 votes) · LW · GW

Maybe -- that entirely depends on whether BTC actually has value and that hinges on, as you put it, "maintaining constant salience" which is the real issue.

Okay, this helps. So "will BTC be able to (i) maintain constant salience, and (ii) be countercyclical in the long term, and if it does what value will it have?" seems like the object level issue; definitely makes things clearer than some abstract notion of replacing gold.

Ah I think I've been misunderstanding you. I was thinking in terms of the probability distribution over BTC's long-term value, but I think you're referring to about my probability distribution over the probability that BTC will get to the $34k (or more precisely, my probability distribution over what probability estimate I would have on the topic if I knew more and was wiser). Is that closer to correct?

comment by Lumifer · 2015-04-01T16:20:00.355Z · score: 0 (0 votes) · LW · GW

Well, most any kind of asset has some diversification value. I see no particular reason for BTC to be countercyclical (not to mention that the traditional business cycle of the late XX century seems to be dead at the moment, or at least much transformed) and in any case there's too little data to tell.

And if you think BTC has some extra special value because it will be {un|low|negatively} correlated to the S&P then you need to compare it to a different reference class.

With respect to the probability distribution, no, you were right the first time -- we're both talking about the probability distribution of the value of 1BTC at some long-term point (and you really should define what does "long-term" mean here, in years, for obvious reasons). I'm not talking about hyper- or meta- distribution of your credence.

comment by Ander · 2015-03-31T18:59:05.675Z · score: 0 (0 votes) · LW · GW

Also, Bitcoin has an advantage over gold in terms of security. Guarding a lot of gold in a vault is expensive, but keeping a Brainwallet is not.

Which brings up another hilarious Bitcoin Pascal's Mugging scenario: "What is the probability that you die, are cryopreserved, and are resurrected at some point in the future. But this future world is a dystopia, and cryoresurrected people are indentured servants of the company that revived them until they are able to pay back their debt. Since most jobs have been automated it is extremely difficult for you to get the money to ever earn your freedom. However, if you had created a Bitcoin brain wallet, you would be able to access it (because the cryoresurrection process is very good), and you would have something of value with which to pay off your debt and live comfortably in the new world".

Good luck trying to come up with numbers for the probability and value of that scenario. :)

comment by V_V · 2015-04-01T14:52:18.034Z · score: 2 (2 votes) · LW · GW

Also, Bitcoin has an advantage over gold in terms of security. Guarding a lot of gold in a vault is expensive, but keeping a Brainwallet is not.

Really?
There is a reason why bank valuts have timed emergency locks.

Which brings up another hilarious Bitcoin Pascal's Mugging scenario: "What is the probability that you die, are cryopreserved, and are resurrected at some point in the future. But this future world is a dystopia, and cryoresurrected people are indentured servants of the company that revived them until they are able to pay back their debt. Since most jobs have been automated it is extremely difficult for you to get the money to ever earn your freedom. However, if you had created a Bitcoin brain wallet, you would be able to access it (because the cryoresurrection process is very good), and you would have something of value with which to pay off your debt and live comfortably in the new world".

They'll just extract the brainwallet from your memories using their advanced brain scan technology. Or a rubber hose.

comment by Douglas_Knight · 2015-03-31T19:47:15.622Z · score: 1 (1 votes) · LW · GW

The odds for that scenario are approximately equal to the odds that quantum computers are impossible.

comment by Ander · 2015-03-31T19:55:47.000Z · score: 0 (0 votes) · LW · GW

Good answer. :)

comment by Epictetus · 2015-04-01T16:07:06.334Z · score: 0 (0 votes) · LW · GW

Also, Bitcoin has an advantage over gold in terms of security. Guarding a lot of gold in a vault is expensive, but keeping a Brainwallet is not.

Bitcoin security is much cheaper to implement, but the drawback is that it's a lot more susceptible to fraud and large-scale theft. Such thefts have occurred in the last few years.

Which brings up another hilarious Bitcoin Pascal's Mugging scenario: "What is the probability that you die, are cryopreserved, and are resurrected at some point in the future. But this future world is a dystopia, and cryoresurrected people are indentured servants of the company that revived them until they are able to pay back their debt. Since most jobs have been automated it is extremely difficult for you to get the money to ever earn your freedom. However, if you had created a Bitcoin brain wallet, you would be able to access it (because the cryoresurrection process is very good), and you would have something of value with which to pay off your debt and live comfortably in the new world".

This assumes the future world still values Bitcoin. I'm reminded of a Twilight Zone episode (The Rip Van Winkle Caper) where a group of thieves steal a large amount of gold, then use a form of suspended animation to sleep for 100 years, intending to wake up in a future where no one remembers their crime and they can live in wealth.

comment by ChristianKl · 2015-04-01T15:23:21.080Z · score: 0 (0 votes) · LW · GW

Also, Bitcoin has an advantage over gold in terms of security.

Given how often Bitcoins get stolen I don't think the practical security of bitcoin is that high.

Guarding a lot of gold in a vault is expensive, but keeping a Brainwallet is not.

A brainwallet has the problem that you risk forgetting it.

comment by Ander · 2015-03-31T18:58:09.467Z · score: 0 (0 votes) · LW · GW

Measuring Bitcoin against "gold market cap" is dangerous because gold has uses which Bitcoin cannot replace. For example, traditionally most of the wealth of Indian families (those who have wealth, of course) have been kept as gold, specifically golden jewelry. Bitcoin will not replace that use. Another big advantage of gold is anonymity which Bitcoin will not be able to replicate either.

I don't think its unreasonable. Bitcoin competes for best-store-of-value status with Gold. Indian families and many others store wealth in Gold, which indicates that Gold has a strong network effect: a large network of people who highly value it as a store of value. For Bitcoin to capture X% of the market of Gold, it would mean that it captured some fraction of that network size.

Bitcoin has one massive advantage over Gold, which is its capacity to be transported quickly anywhere in the world, which makes it possible to use as a convenient means of payment.

Anonymity is debatable, and its also debatable whether it is a positive or negative, but it is quite possible that other blockchain technologies will develop or have already developed better anonymity features, which means that potentially these could be incorporated into Bitcoin.

comment by Lumifer · 2015-03-31T19:47:52.453Z · score: 0 (0 votes) · LW · GW

which indicates that Gold has a strong network effect

Not just that. Being only a store-of-value is a poor functionality set. The Indian gold jewelry doesn't just sit in a vault -- it is worn on big occasions and serves a major status display.

comment by Ander · 2015-03-31T20:02:49.194Z · score: 0 (0 votes) · LW · GW

Not just that. Being only a store-of-value is a poor functionality set. The Indian gold jewelry doesn't just sit in a vault -- it is worn on big occasions and serves a major status display.

I would say the property of Bitcoin to be both a store of value and easily transferable anywhere in the world extremely quickly far exceeds the value of Gold to "look pretty when you wear it".

Also, if by "Bitcoin", we mean "Bitcoin and/or any future blockchain technology that replaces it" (such as Ethereum or others), then features can be developed using the blockchain technology which would have immense value, such as prediction markets, assets (stocks, etc) tradeable in the blockchain, voting, website naming, smart contracts, escrow, and many others. While also being a store of value, these features would have immensely more value than Gold's "looks pretty when you wear it".

comment by Lumifer · 2015-03-31T21:06:17.361Z · score: 3 (3 votes) · LW · GW

far exceeds the value of Gold

To you, maybe, to an Indian family, not likely.

Also, if by "Bitcoin", we mean "Bitcoin and/or any future blockchain technology that replaces it"

No, we do not, because at issue is the future value of the current investment in Bitcoin.

comment by Ander · 2015-03-31T21:38:02.943Z · score: 0 (0 votes) · LW · GW

You still have to account for the probability of Bitcoin holders seeing the change coming and deciding to modify the Bitcoin codebase to adapt the new desirable features, but still use the Bitcoin ledger (aka current ownership of Bitcoins).

I don't know how to evaluate the probabilities of these various outcomes happening, however it only costs about 10-20% more to go from 'buy X bitcoins' to 'buy X bitcoins, and also diversify by buying an equivalent percentage stake in all other promising blockchain technologies'.

If you do that you can change the equation from Bitcoin winning and continuing to have value, versus the blockchain technology succeeding and some instance of it continuing to have value.

comment by vbuterin · 2015-04-01T09:29:14.704Z · score: 0 (0 votes) · LW · GW

I'm referring to bitcoin specifically, as I was specifically trying to determine whether or not it's a good idea to hold BTC right now. I'm obviously more bullish than 5% on "future blockchain technology that replaces it" (such as Ethereum or others)"; if I wasn't I would not be a full-time member of the industry :)

If you do that you can change the equation from Bitcoin winning and continuing to have value, versus the blockchain technology succeeding and some instance of it continuing to have value.

But then, the question becomes: if you're bullish in blockchain tech, but not bitcoin, then why not invest exclusively in the other blockchain tech and not bitcoin?

comment by taygetea · 2015-03-31T17:18:22.525Z · score: 0 (2 votes) · LW · GW

Nitpick: BTC can be worth effectively less than $0 if you buy some then the price drops. But in a Pascalian scenario, that's a rounding error.

More generally, the difference between a Mugging and a Wager is that the wager has low opportunity cost for a low chance of a large positive outcome, and the Mugging is avoiding a negative outcome. So, unless you've bet all the money you have on Bitcoin, it maps much better to a Wager scenario than a Mugging. This is played out in the common reasoning of "There's a low chance of this becoming extremely valuable. I will buy a small amount corresponding to the EV of that chance, just in case".

Edit: I may have misread, but just to make sure, you were making the gold comparison as a way to determine the scale of the mentioned large positive outcome, correct? And my jump to individual investing wasn't a misinterpretation?

comment by Ander · 2015-03-31T18:04:10.907Z · score: 1 (1 votes) · LW · GW

Nitpick: BTC can be worth effectively less than $0 if you buy some then the price drops. But in a Pascalian scenario, that's a rounding error.

No, that would mean that you have an investment loss. Bitcoin is still worth $X each, whatever the new market price is. When you buy something and it goes down in value, its not worth less than $0, its just worth less than you paid for it.

comment by Slider · 2015-03-31T23:35:57.205Z · score: 0 (0 votes) · LW · GW

There are some events where bitcoins might form a negative value. For example if somebody stole a big amont of hardware illegimately and because of inability to identify to which bitcoins the illegit benefit where the whole pool of bitcoin might be fined with a ticket in conventional currency (that would be like the equivalent of saying that german franks are nazi money and anybody that is found in posession of it will be fined to have it confiscated). There is a high resistance to do that but since the analysis contains other portions with comparable uncertainty it starts to become relevant.

comment by vbuterin · 2015-03-31T17:32:42.766Z · score: 0 (0 votes) · LW · GW

So a wager is about a positive outcome, but there is a standard knockdown argument saying that the wager argument is incorrect precisely because of the possibility of negative outcomes, ie. G' sending you to hell for worshipping G, if it turns out the G' and not G is real. A mugging is about avoiding a negative outcome, but my proposed argument shows how not cooperating with the mugging can also avoid a negative outcome. Bitcoin is actually a third category: investing in BTC has a probability of a very positive outcome, but it is not the case that either (i) investing in BTC has a probability of a very negative outcome (well ok some future government may do a witch hunt of BTC holders, but everyone agrees that's 5 orders of magnitude less likely than BTC taking over), or (ii) not investing in BTC has a probability of a very positive outcome. It's very specifically a question of how to weigh a small probability of a large gain ($34k per coin) versus a very high probability of a small loss (-$245 per coin from BTC dropping to zero).

you were making the gold comparison as a way to determine the scale of the mentioned large positive outcome, correct?

Precisely.

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