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?
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?
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.
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.
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.
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... :)
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.
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.
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).
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.
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? :-)
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:
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 :-)
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.
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.
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?
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.
Weird question: superrationally speaking, wouldn't the "correct" strategy be to switch to B with 0.49 probability? (Or with however much is needed to ensure that if everybody does this, A probably still wins)
[edit] Hm. If B wins, this strategy halves the expected payoff. So you'd have to account for the possibility of B winning accidentally. Seems to depend on the size of the player base - the larger it is, the closer you can drive your probability to 0.5? (at the limit, 0.5-e?) Not sure. I guess it depends on the size of the attacker's epsilon as well.
I'm sure there's some elegant formula here, but I have no idea what it is.
The superrational strategy is indeed to switch to B with some probability approaching 0.5 (or, if the system allows it, vote for A with 51% of one's capital and for B with 49% of it).
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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".
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 :)
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?