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Bitcoin Is Artificial Money — and for Some That’s a Problem

Why do some people cite Bitcoin’s design strength as it’s weakness?

Republished by Plato



Why do some people cite Bitcoin’s design strength as its weakness?

Image: By Alexander Limbach, Licensed Adobe Stock

Occasionally, usually when speaking to new people about Bitcoin, I get comments along the lines of “The problem with it is that it’s entirely artificial.”

I’ll be honest — even when this comment, or a close approximation thereof, is raised as an an “objection” by someone, it’s never really registered with me. By that I mean I have literally skipped over it as if it was never stated in the first place because, well, of course it is.

However, having had the comment come up once again today, I finally — and quite unexpectedly — connected the dots about what this objection really means.

You see, this, as it turns out, is probably not a slight against Bitcoin itself. It’s more likely that this is an attempt to try and compare it to something like gold.

Bitcoin vs gold … yawn

We’ve been here before of course. I have written on this subject many times, endlessly comparing the two as a means of hedging against inflation, storing value and a medium of exchange.

My conclusion (spoiler alert) has always been that gold may be tried and tested over thousands of years, but Bitcoin is superior in almost every category in practical terms.

Of course, I am often accused of being biased, and while I do agree that it’s probably impossible for any human to write anything entirely unbiased no matter how hard you try, I still maintain that the world is ready and the time is right for Bitcoin to not only flourish, but to a be real, hard money alternative going forward. And, while there are still detractors and risks, I am certainly not alone in that school of thought.

However, now that I have fully acknowledged the statement and am dealing with it head on, it raises two interesting points:

  • Is it significantly relevant that Bitcoin is immediately compared to gold rather than fiat currency in these cases?
  • Since all modern money systems are entirely man-made and a product of the technology of the time of its creation, why is Bitcoin being singled out as being different because it is also “artificial?”

Of course it’s also possible that this is just a lazy objection thrown out randomly by people who haven’t really thought about it, but since it’s not uncommon, it’s surely worth a look.

Why gold and not fiat?

This really interested me, especially as this comment always comes from people very new to the concept or people who think they know what it is, but have not yet really grasped what they’re dealing with.

Bitcoin was, first and foremost, designed as a currency. At the moment and in its current form, the digital currency’s detractors gleefully point out that it doesn’t work terribly well in fulfilling that task, and it’s a point I concede, at least for now.

The fact is that when the Bitcoin network gets very busy, it simply can’t cope. Fees and confirmation times go through the roof and it just isn’t sustainable should more than, for example, a few tens of thousands of people try and use it simultaneously.

This, theoretically, will be solved by the Lightning Network in due course, but full deployment is still some time off and there a number of security concerns that need to be fixed, or at least mitigated, before that can happen.

Despite this element of Bitcoin being a work in progress, the store of value element of it is working very well, at least in my view. As “digital gold,” Bitcoin’s performance is nothing less than spectacular and carries all the advantages of a truly scarce asset without any of the disadvantages.

But it takes someone who has been in Bitcoin a while to understand this fully, so the fact that this objection about it being artificial is being compared to the supply of gold rather than the supply of fiat is curious. And yet it appears that this is the case.

But why? After all, gold’s dis-inflationary supply curve is actually very close to Bitcoin’s, but with one important difference: we don’t actually know how much gold there is, only that it’s a finite amount.

Why, therefore, would a “natural” asset like gold, with all the uncertainty that comes with that supply line, be seen as a preference over Bitcoin whose supply is fixed and known absolutely for the next 120 years? Why, in this case, is “non-artificial” perceived as better?

I’m guessing the answer is simply buried in human psychology somewhere. After all, Bitcoin is not usually something you “get” immediately, it takes a little time.

So, until that happens, your brain will try and associate it with something it knows that seems similar and, since money is too big a stretch to start with, gold seems a natural and logical compromise.

It’s just a theory, but it seems to fit the facts.

Artificial money?

Money, like society itself, is always evolving.

In fact, all the forms of money that have ever existed have been a product of the technology available at the time it was created.

So, for thousands of years, simple, but scarce, items were used as a medium of exchange, such as sea shells, some grains, beads and similar. All of these things, however, had significant limitations and, like everything that has a limitation, we humans find a way to make it better.

And we have always done it with technology.

As an example of this, consider the first minted coins. Once the process of how to do this was known, coins were minted in large numbers and became commonplace around the world.

Eventually, early forms of promissory notes emerged when it was understood that it was more convenient to store whatever backed the those notes (usually gold) in one place and transfer ownership without have to move it.

Technology also shaped the financial processes outside of physical money itself. For example, by the mid-to-late 1800s, the proliferation of the telegraph and the train network meant that communication between banks was much faster.

Therefore, it was possible for banks to speak to each other and debit or credit accounts with each other via paper records rather than physically moving coins, notes or bullion between them.

Later, when the gold standard ended fully in 1971 and all currencies became pure fiat currencies for good, technology made it easier to trade between them and increase levels of fractional banking.

In fact, when more money is required by governments (such as we have seen recently) it no longer even needs to be physically printed, instead having an entry on a computer screen amended to show a new number.

Make no mistake, all currencies used in the industrialized world today are definitely not natural — they are 100% artificial — and entirely backed by no more than the word of the government issuing them.

Every financial instrument we use is entirely artificial and there is no one alive (in an industrialized society) who has ever known anything different.

Bitcoin is simply the next logical application of the available technology. And, arguably for the first time since the original gold standard was in widespread use, it is a real, hard money alternative.

In that context and with that understanding, it seems odd that some people would reject Bitcoin purely on the basis it is “artificial,” and yet it happens. There must, therefore, be more to it.

Who says … ?

I believe this is fundamentally less about being “artificial” and more about “trust” and some of the follow up questions thrown out by the same objectors give us some clues along those lines:

  • Who says only 21,000,000 coins exist?
  • Who says that can’t be changed?
  • Who says I’ll definitely get my money if I send it to you?
  • Who says ….

The list goes on — but you get the picture.

In my view, the idea of being artificial is being confused with the idea of control. It’s clear who controls our fiat money and, as flawed as it is, it’s more or less working as it should, at least for now.

But it’s not immediately clear where these entirely —and apparently arbitrary — numbers and behind-the-scenes processes are coming from in terms of Bitcoin.

It’s almost as if someone made up the whole thing from scratch without a shred of reference to what already exists in the world … which is, of course, exactly what happened and exactly what it was designed to do.

That means Bitcoin is an entirely “designed” currency, thereby bringing us full circle back to the original objection. But does that help us in any way?

The Bottom Line

Now that I have properly acknowledged that the objection even exists and, hopefully, have some understanding why it’s here, I’m hopeful it’s one that can be easily dealt with.

Money evolves as we, technology and society evolve. It would be ludicrous, for example, for our modern society to still be using sea shells as a medium of exchange and such a thought is unfathomable.

But, at a time when we are already used to using money that primarily exists in digital form — Apple Pay, PayPal, even gift cards and online bill payments — using Bitcoin is hardly a stretch.

The subtle difference, I suppose, is that all these services evolved based around the money we used before and are just more efficient ways of moving the same stuff around.

But like anything that reaches a natural limit of efficiency, it is usually replaced by a step-change technology. Bitcoin provides the solution to both the systems required and the unit of currency itself.

In other words, Bitcoin is a complete solution for the modern, digital world.

And let’s face it, that was never going to happen “naturally.”



Buyer of Jack Dorsey’s ‘genesis tweet NFT’ reportedly detained in Iran

Republished by Plato



Iranian Cyber Police have reportedly arrested Bridge Oracle CEO Sina Estavi, according to a tweet pinned to Estavi’s Twitter account.

A rough translation of the tweet reads:

“The owner of this account was arrested on charges of disrupting the economic system by order of Special Court for Economic Crimes. Official judicial authorities will provide additional information.”

The same tweet is also pinned to the official account of Bridge Oracle, a Tron Network-based public oracle system. At the time of writing, the price of Bridge Oracle’s native token, BRG, has taken a sharp dive, crashing by more than 65%, according to data from TradingView.

Bridge Oracle is said to be a Malaysia-based blockchain company, but Estavi’s other venture, cryptocurrency exchange Cryptoland, was operating in Iran. Cryptoland’s Twitter account shares the same pinned tweet. No further information was shared publicly by the authorities.

Estavi is known for his heated bidding battle with tech entrepreneur and Tron CEO Justin Sun to buy Jack Dorsey’s first-ever tweet as an NFT. Twitter’s first tweet is dated March 2006 and reads, “Just setting up my twttr.”

In the end, Estavi successfully purchased the NFT for more than $2.9 million, or 1,630 Ether (ETH). Dorsey converted the proceeds to Bitcoin (BTC) and donated them to a charity organization in Africa.

Earlier this year, Estavi was sued by former CEO Mate Tokay for allegedly failing to pay him for his services. In his claim, Tokay also alleged that there’s an inconsistency between the purported and actual circulating supply of BRG.

Cointelegraph reached out to Bridge Oracle for comment. This article will be updated should they reply.

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Bank of America to Settle Stock Trades on Paxos Network

Republished by Plato



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Is Bitcoin nearing another Black Thursday crash? Here’s what BTC derivatives suggest

Republished by Plato



Bitcoin’s 51.4% crash in March 2020 was the most horrific 24-hour black swan event in the digital asset’s history. The recent price activity of the past week has probably resurrected similar emotions for investors who experienced the Black Thursday crash. 

Over the past week, Bitcoin’s (BTC) price dropped 29% to reach a three-month low at $42,150. $5.5 billion in long contracts were liquidated, which is undoubtedly a record-high in absolute terms. Still, the impact of the March 2020 crash on derivatives was orders of magnitude higher.

To understand why the current correction is less severe than the one in March 2020, we will start by analyzing the perpetual futures premium. These contracts, also known as inverse swaps, face an adjustment every eight hours, so any price gap with traditional spot markets can be easily arbitrated.

Sometimes, price discrepancies arise during moments of panic due to concerns about the derivatives exchange’s liquidity or market makers being unable to participate during times of extreme volatility.

Bitcoin perpetual premium/discount vs. spot price, March 2020. Source: TradingView

On March 12, 2020, the Bitcoin perpetual futures initiated a much larger descent than the price on spot exchanges. This move is partially explained by the cascading liquidations that took place, creating a backlog of large sell orders unable to find liquidity at reasonable prices.

The aftermath of the bloodbath resulted in futures perpetual contracts trading at a 12% discount versus regular spot exchanges. BitMEX, the largest derivatives market at the time, went offline for 25 minutes, causing havoc as investors became suspicious about its liquidity conditions.

By comparing this event with the most recent week, one will find that sustainable price discrepancies are very unusual. Even a temporary 12% gap doesn’t occur, even during the most volatile hours.

Bitcoin perpetual premium/discount vs. spot price, May 2021. Source: TradingView

Take notice of how the perpetual contracts reached a peak 4% discount versus regular spot exchanges on May 13, although it lasted less than five minutes. Market makers and arbitrage desks could have been caught off guard but quickly managed to recoup liquidity by buying the perpetual contracts at a discount.

To understand the impact of those crashes on professional traders, the 25% delta skew is the best metric, as it compares similar call (buy) and put (sell) options’ pricing. When market makers and whales fear that Bitcoin’s price could crash, they demand a higher premium for the neutral-to-bearish put options. This movement causes the 25% delta skew to shift positively.

Bitcoin options 25% delta skew, March 2020. Source: Skew

The above chart displays the mind-blowing 59% peak one-month Bitcoin options delta skew in March 2020. This data shows absolute fear and an incapacity to price the put (sell) options, causing the distortion. Even if one excludes the intraday peak, the 25% delta skew presented sustained periods above 20, indicating extreme “fear.”

Bitcoin options 25% delta skew, May 2021. Source: Laevitas

Over the past week, the skew indicator peaked at 14%, which isn’t very far from the “neutral” -10% to +10% range. It is indeed a striking difference from the previous months’ negative skew, indicating optimism, but nothing out of the ordinary.

Therefore, although the recent 29% price drop in seven days could have been devastating for traders using leverage, the overall impact on derivatives has been modest.

This data shows that the market has been incredibly resilient as of late, but this strength might be tested if Bitcoin’s price continues to drop.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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