I think the real scarce resource in Bitcoin isn’t created by the the 21 million coin limit, but by the 7 transactions per second limit.

The real money will be in controlling that resource.

A thought experiment...
Let’s assume Bitcoin is successful from a store value/digital gold perspective. People will use it like a savings account or investment account.

Suppose there are a billion wallets, a touch more than 10% of the global population (of course organizations will have wallets to).
Since bitcoin is for savings, imagine people only need to make a transaction once a month.

Invest new savings or pull out past savings to purchase something. Similar to what people use long term savings/investing accounts today.
So the demand for transactions with the block chain network is 1 billion transactions per month. However, BTC can only support about 18 million transactions a month.

This is a big supply and demand discrepancy (each wallet gets an average of 1 BTC transaction every 4.5 years).
Transactions on the blockchain essentially go to the highest bidder. Paying a higher transaction fee jumps you up in the line.

So if the supply and demand is deeply unbalanced, transactions will only be completed for the highest bidders. In this case, only to the top 2%.
If you want to transfer $1000 in savings each month, a fee of $100 makes this prohibitive. You are giving away 10% of your wealth. But if you want to transfer $10 million, a $100 fee isn’t a big deal.
Big transactions can afford higher fees, so they will dominate and become the only ones traded. The little player won’t be able to access the blockchain cost effectively, and therefore they wont.

In order to ensure size, transactions will need to be aggregated off the blockchain
This is part of what the lightning network tries to do. But little transactions will still never “get in”.

It would only take 1000 wallets trading in size with each other each day to crowd out everyone else and control the market in transactions entirely.
So the winning aggregation model is to form a group(s) which settles up peoples account outside BTC and then trades them from a unified wallet in size.

Individuals in this world don’t own actual bitcoin, they own shares or notes in other organizations which own bitcoin.
The “big aggregators” will charge fees to the little guys to trade their own shares or notes, and use those fees to cover their Bitcoin fees and make a profit. They will essentially sell access to the BTC blockchain, and keep everyone else out by holding the BTC fees high.
This of course goes totally against the original concept of bitcoin providing direct, democratized, access to the ledger and source of monetary value itself. But because of the scarcity in the number of transactions, it’s the only logical equilibrium point.
This structure is also nearly identical to our historical banking system.

There is some form of high powered money or base money which only banks deal in. They settle this money with each other on a routine basis,
and then give their customers credit or notes to represent their share of that high powered money, but the common people don’t ever really hold the high powered money, they just hold claims on it.

The banks though hold a monopoly on access to true money.
The next logical step is these Bitcoin Banks realize they can lend out more bitcoin credit notes than they actually have, and now they’ve just re-created fractional reserve banking.

The end point is similar to what we have today and even more so to what we had before 1971.
Back to the original assumption that bitcoin IS successful as a store of value. First, if there isn’t enough transaction capacity to allow everyone to hold the SOV personally, then its never going to be currency.

Second, at some point, the ultimate outcome will become obvious.
And when it does, doesn’t it jeopardize the entire usefulness of Bitcoin as a personally owned, no counterparty, store of value? Only a select group have large enough transaction sizes to afford the large transaction fees.
Therefore average people won’t be able to successfully own BTC, only institutions and the very rich could.

Bitcoin would cease to be a good store of value for a common person, and only provide this function for a smaller few.
I think the only way BTC works as envisioned if the transactions can’t be cornered. You need plentiful capacity in the transaction network to bring bitcoin’s vision of a free and open store of value/monetary system with no counterparty to reality at meaningful scale.

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More from @breakingthemark

31 Jan
Some of the takes lately on short sellers have been exaggerations of reality in my opinion.

Short sellers serve an important roll in the markets. They dampen out volatility because they often cover when prices fall rapidly to cover their positions, and sell on rapid...
.., unusual price increases on the way up. Usually this improves market stability.

Others have pointed out they also ferret out fraudulent companies like Enron and Worldcom. All true.

Lately, I have seen the following companies being short squeezed described as frauds:

Read 11 tweets
17 Dec 20
I just re-read Bernoulli’s 1738 paper “Exposition of a New Theory on the Measurement of Risk” which is the foundational paper of Expected Utility Theory.

It’s Amazing

It’s so wildly different than EUT that its hard to believe this was its beginning.

Let’s see if you agree.
The paper isn't about utility. It’s about expected value.

Bernoulli used the utility concept to get the reader to abandon the traditional view of expected value(arithmetic average), and then used it to derive the equation for valuing risk.

The final equation doesn’t use utility
He starts out the paper identifying that tradition evaluation of risk come from expected values, which are calculated with the arithmetic average.

Notice the rule here in italics is about expected values.
Read 30 tweets
14 Dec 20
If everyone is society optimized for arithmetic return, or linear utility, then society would grow wonderfully at first. Society's geometric return would be high. Some people would win big, some would lose big, and the average would be good because many are involved.
Through time though, many people would get unlucky by losing a few times in row and would fall out of contributing because they don’t have much capital/resources/access any longer to help. So now the number of contributors to society’s growth is smaller.
If people keep basing decisions on linear utility, with fewer and fewer winners each round and more and more losers, a funny thing starts to happen. Probability says society stops growing as more people fall out of the game, leaving fewer people capable of creating growth.
Read 7 tweets
4 Jul 20
There are two side to the Kelly Criterion which I think often get equated as the same when they really are not.

Traditional Kelly betting is about limiting your exposure to a risky bet. The bet in question is usually a "bet" in that when you lose, you lose everything you expose.
So you scale back and don't risk everything. Most casino games fit this description as do some financial instruments like options.

The optimal leverage here is less than 1. You want to hold cash on the side to buffer the future losses.
But standard investment assets, don't work this way.

I showed here, that individual stocks are effectively full Kelly bets.

Just buying one stock is the appropriate "size", as they have an optimal leverage of 1.

Read 7 tweets
1 Jun 20
Lots of tail hedge articles these days. I feel many miss the point. They keep studying returns as if they add with each other through time. They don’t. The math of lose 3% in 9 calm years, make 25% in the one volatile year = -5% return is meaningless.
The average through time is meaningless because investment returns don’t ADD. They COMPOUND.

A tail hedge that reduce the average return of a portfolio (as a tail hedge often does) but reduces the portfolio variance by more than twice as much, leads to higher geometric returns.
Now is this really complicated and difficult to get right with options based tail risk hedges? Yes. There are so many ways to implement it and returns are skewed and convex. And if you don’t understand why tail hedges are useful, you could easily butcher the implementation.
Read 8 tweets
21 May 20
I’ve really enjoyed the Asness-Taleb feud. Some of the best parts are the comments by the people supporting their “guy”. I’m drawn to the similarity of their views:

-Both sides think they are the counterpuncher. Both sides think they were attacked first.
-Both sides think the other’s intellectual prowess is overrated.

-Both sides think their investment strategy is superior.

-Both sides think the other often acts like a bully.

-Both sides think the other is acting unhinged and triggered in their response.
-Both sides think the other often gets very angry and blocks people.

-Both sides think their “guy” is making clear obvious points.

-Both sides think the followers of the other are brainwashed, but are slowly coming around to the truth.
Read 4 tweets

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