BitCoin cheerleader Max Keiser recently “debated” gold bug Peter Schiff at the Nexus Conference. It wasn’t a debate. It was a comedy show.
Just to clarify right away, I am not making a case for gold over cryptocurrencies. My position is that both are overinflated by the debt bubble (see There’s no use arguing BitCoin vs. gold). I am stating that cryptocurrencies are experiencing highs in hysteria and its current valuation is well above its fundamental value (see When non-tech savvy people talk about BitCoin, is it a sign of a bubble?).
In my opinion, Max Keiser’s most unemotional, well-thought out, but faulty argument comes at 16:50. It revolves around what I call the “scarcity paradox” with cryptocurrencies:
As far as the other coins that have come along that are mimicking attributes of BitCoin, you have other competitors for gold. You have silver, platinum. You have other precious metals. You have other collectibles. There is a huge market around the world for so-called scarce commodities, or scarce commodities that represent value.
In the case of BitCoin, it is the one that is attracting the most fervent interest at this time and it’s not something that can be replicated easily in the way you can’t replicate the HTTP protocol that runs the Internet. This is an established protocol. It is an entrenched protocol. You can come up with a competitor in 5 minutes but you already have the network effect that built this out over years. It’s something that cannot be replicated and you wouldn’t see a user base for it.
It is possible that in the extreme case you would have something coming along and competing with BitCoin but that risk also represents itself in precious metals, the probability of it.
September 22, 2017
As a software engineer, I have always thought that software’s most valuable strength is its ability to scale at low cost. You can duplicate software into an infinite number of branches and freely modify it. You can iterate, test and compare different sets of changes for rapid improvement. Software’s replicability is what leads to the scarcity paradox with cryptocurrencies. You can’t produce scarcity with software, but you can make things plentiful.
I don’t expect Peter Schiff, an economist, to address the technical flaw in Keiser’s “BitCoin is like the HTTP protocol” argument. However, it should be evident to engineers that BitCoin is nothing like a network protocol.
HTTP is a protocol that was standardized to enable different combinations of software products to predictably interact with each other. Simply put, BitCoin is to Google Chrome and Apache as blockchain is to HTTP. There are many different protocols for software to communicate with one another, but the majority use HTTP for transferring Internet content, just as the majority of cryptocurrencies use blockchain to communicate financial transactions.
Other examples of HTTP front end applications are Firefox and Internet Explorer, and other examples of HTTP back end applications are Nginx and Microsoft IIS.
Do any of these sets of HTTP clients have a monopoly over the other? Not exactly. And more keep popping up!
Blockchain may be entrenched as HTTP is, but BitCoin, Ethereum and many other cryptocurrencies are simply applications of the blockchain protocol and are not entrenched. Some cryptos are non-blockchain based. The number of blockchain applications though are multiplying at a much quicker rate than HTTP applications due to current highs in popularity. Cryptocurrencies are multiplying because of current highs in hysteria and greed.
I’ll concede that BitCoin is like Google Chrome and Apache in that it holds the statistical majority of users at the moment. However, just like how FireFox dropped in popularity from past to present, there is no guarantee BitCoin will maintain its popularity in the future.
If BitCoin fulfills its promise of effortless financial transactions, then when a better competitor comes along, it will be easy for BitCoin holders to just sell their BitCoins in favor of the newest, hottest alt-coin. Combine this with the replicable nature of software and it should be evident that BitCoin estimates of $100,000 per BTC is an absurd valuation. It would only reach that valuation if public hysteria and the pyramid scheme reach insane levels.
You can still bet on BitCoin if you’re confident more people will be fooled into entering the pyramid and you can time the market. But don’t let crazy Keiser persuade you to pad his pockets with your money. His HTTP argument to a non-techie will sound impressive, and gives power to the persuasive “if you did your research, you would invest in BitCoin” line. Of course, “you don’t understand cryptocurrencies” is not an argument.
Keep calm and think rationally.
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