The Forking Paradise – Precious Metals Supply and Demand Report

by Keith Weiner, Acting Man:

Forking Incentives

A month ago, we wrote about the bitcoin fork. We described the fork:

Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!

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This fork came about from a disagreement among the bitcoin miners, those who control the blockchain and hence the currency. The equivalent of the disgruntled Acme Bank group left to form bitcoin cash, the equivalent of Wile E. Bank. However, it has often been said that necessity is the mother of invention. Applied to bitcoin, that means that what happened due to irreconcilable differences in this case, could also occur deliberately later.

Why would someone do this deliberately? Well, as of this writing (Saturday afternoon), bitcoin cash is trading for $568.28. This copy of the original bank ledger is worth over fahv hunnert Benjahminns! Actually, not the ledger. Each record in the ledger. The ledger as a whole is worth $9.4 billion.

For anyone — or a cartel of someones — who can fork bitcoin, there are now 9.4 billion reasons to do so. Think about that. Take as long as you need.

Now, we don’t want to disparage anyone. We are absolutely certain that everyone who is speculating to get rich in bitcoin will turn away from forking. It just doesn’t feel right, and it couldn’t possibly be moral to create forks on purpose, to get richer quicker.

But if someone did wish to do it, there is a powerful incentive. Economics tells us that if a powerful incentive exists to do something, then someone will do it. For example, if the government subsidizes borrowers by pushing down the interest rate then there will be all sorts of borrowing that would otherwise not occur (to finance all sorts of activities that would otherwise make no sense). Or, if it subsidizes insurance for people who build in flood plains, then many people will build in flood plains.

We now live in a world where altcoins are proliferating. There is a crypto currency named for a set of Internet memes called Doge. There is Pot-Coin for the marijuana industry, and even Pepe-Cash and Putin-Coin. There is a coin named for the most popular four-letter word. By this standard, it makes sense to fork bitcoin as many times as one can. To fork and fork and fork until the marginal Fork-Coin has a value lower than the cost of forking.

And then there is of course Titcoin – currently ranked 603rd in market cap among the 1,101 altcoins currently in existence (at last count, that is – this is a figure that changes almost daily). [PT] – click to enlarge.

Snark aside, and in all seriousness, the point of our article a month ago is that the fork shows the contradiction in a ledger of liabilities unbacked by assets. By dispensing with the need for assets, the liabilities can proliferate — fork — and there can be any number of alt liabilities too.

Our point in this article is that this contradiction creates a powerful perverse incentive, that someone sooner or later will take up. We prefer the term “perverse incentive” to “unintended consequence”, because it puts the focus where it belongs. We look at what is profitable for someone to do, rather than the real or alleged intentions of the designers.

In some cases, the intention is obviously evil. For example, Obamacare was designed to destroy the insurers and drive America towards socialized medicine. In other cases, perhaps in bitcoin, the designer did not foresee much less intend the outcome.

However, here we are. Both the possibility to fork and the incentive are now obvious. We would not bet against it, as we would not bet against Boromir putting on the One Ring. In a Middle Earth minute.

We have not much focused on price, other than how rising price makes bitcoin unsuitable as money or how bitcoin does not have a firm bid. We do not subscribe to the view that bad means the price must go lower soon. However, let’s look at the price of an asset in a bubble starting with the dollar.

The dollar, it is often and loudly asserted, has value only because of faith. As soon as the faith is pricked, the air will rush out of the bubble. This partly explains why the gold bugs latch on to every story about gold repatriation to Germany or Treasury Secretary Steve Mnuchin visiting Fork Knox. Mnuchin said, “I assume the gold is still there,” and thus began quite a tempest in a tea pot.

The belief is that as soon as the one-awful-fact-they-don’t-want-you-to-know becomes known, the dollar will collapse. And gold will go to $65,000 (price measured in collapsed dollars). It’s a quest for the holy grail. Now, we enjoy tilting at windmills as much as Don Quixote, but this view is wrong. The dollar does not have value because of some fragile, collective faith.

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