Bitcoin and Other Monkey Bubbles: How Do They Work


A friend of mine from MIT posted this and I’d like to see your thoughts on that. “Please permit me to explain so you can potentially avoid future financial pain.

Classic market theory considers information asymmetries. Bitcoin economics revolve around misperception of information symmetries. Everyone thinks everyone knows Supply and Demand.

The supply of Bitcoin is about 16 million. There will never be more than 21 million Bitcoin and that doesn’t come until more than 110 years from now.

If Janet Yellin were in charge of Bitcoin supply, it would be fully allocated within ten years.

If Donald Trump and Republicans could find a way for fat cat puppet masters like Robert Mercer or Sheldon Adelson to take a cut…ten months.

If Robert Mugabe…ten weeks.

So the predictable and slooooow increase is the key to creating the perception of relative scarcity.

The key to the hyperbolic rise of Bitcoin (so-called cryptocurrency pump) is a completely computable and predictable mismatch between supply and demand. There are only ten Bitcoin mined every 10 to 20 minutes by solving exponentially harder math problems that get harder based on the number of people throwing hardware at the problem. Supply is purposefully constrained and does NOT follow classic supply demand curves.

Demand is driven by the desire to own one Bitcoin. There are more than 16 million people who want to own one or more Bitcoin (250 million people own gold) and they all know this.

If this is too complicated, let’s consider how to artificially create scarcity.

Once upon a time in a village a man appeared who announced to the villagers that he would buy monkeys for $10. The villagers knew that the jungle held countless monkeys, easily caught. The man bought 2 thousand.

As the supply diminished, they become difficult to catch, and villagers returned to their farms. The man announced that he would pay $20. The villagers renewed their efforts and caught 1,000 more monkeys.

The supply quickly diminished, but before they returned to their farms the man increased his offer to $40 each. Monkeys became so rare that it was difficult to even see a monkey let alone catch it. But they caught 500.

The man now announced that he would buy monkeys at $100! However, since he had to go to the city on some business his assistant would now buy for the man. The man departed.

Then the assistant told the villagers, “Look at all these monkeys the man has in that big cage. I will sell them to you at $50 each. When the man comes back you can sell the monkey’s back to him for $100.” The villagers queued up with all their saving to buy the monkeys. The assistant took their money. They never saw either the man or his assistant again.

They now owned 3,500 monkeys. They were paid $60,000 to catch them, and bought them back for $175,000.

Similar stories took place in real world: The Dutch Tulip Mania (aka “Tulipomania”) of 1634-1637 The South Sea Bubble (1716-1720) The Mississippi Bubble (1716-1720) The British “Railway Mania” Bubble The Florida Real Estate Bubble of the 1920s The Stock Market Crash of 1929 Kuwait’s Souk al-Manakh Stock Bubble & Crash Black Monday – the Stock Market Crash of 1987 Japan’s Bubble Economy of the 1980s The Dot-com Bubble (Late 1990s) The US Housing Bubble – 2008-??? and Bitcoin – 2017-???”

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