Thread by @smdiehl

When we do diligence on investment schemes, it's not all that different then when we analyze functions in computer programming. We're interested in the cash inputs, cash outputs, and the expected return on investment. 🧵

When you invest in a burrito company, they make burritos. They sell the burritos to the public for more than it costs to produce the burrito and that makes a profit. The profits go back into the business to expand the business or pay back shareholders.

If you run a good business, the public gets fed, the employees get paid, and the shareholders see a return. This is a very vanilla investment that forms the basis of our market economy.

What makes bitcoin pathological as an investment "function" is that it has a single input and a single output.

People buy tokens for real money, that money goes into a pool, money is withdrawn from that pool to pay out other investors. The money in that pool can never increase.

Now how money gets redistributed in that pool is described by some function, call it f.

f : InputValue -> OutputValue

This function prescribes winners and losers according to nature of the investment.

However the invariant on this function is that all winners must necessarily be paid out from the pool of losers, because that's the only source of cash to pay from.

In other words the sum of f over all inputs must be equal to zero.

In a zero-sum game like this every amount won is necessarily paid out by an equal amount loss. There are an equal number of winners and losers.

However bitcoin is even more pathological as an investment. There participants in this scheme which by the design of f, have a strictly positive cashflow independent of others investors. These are miners and market makers which extract about $12,000,000/day from the pool.

This cash outflow changes the dynamics of investing in bitcoin from being a zero sum game, into a negative sum game.

There are strictly more losers than winners, and if you sum over all participants the entire scheme *destroys wealth* rather than creating it.

Every single bitcoin winner is necessarily paid out by *multiple* losers. The expected return of an average single investor is negative.

Other investments that have this property are things like lotteries, ponzi schemes, and gambling on games on chance.

The nature of bitcoin is a wealth redistribution scheme that makes implicit promises of returns that are statistically impossible. For every winner you hear about, there are necessarily multiple losers you don't hear about.

The nature of bitcoin depends on this predatory information asymmetry to extract wealth from the public into the hands of a very few insiders.

Bitcoin is a symptom of a sick economy and a phenomenon that preys on mostly young, male, unsophisticated investors and convinces them to pour money into this negative-sum wealth redistribution scheme that ultimately hurts most of them and our society.

This is not a good trend.