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Bitcoin Buzz: How Does It Actually Affect the Price?

The following is an article about cryptocurrencies that I wrote back in February, intended for Mattermark. Right around the same time, Inc. hired me and my editor Alex Wilhelm left Mattermark, so the story got swallowed in the upheaval. I think it’s a decent fit for Exolymph, although the tone is much more impersonal and newsy than my usual dispatches. Anyway, I hope you enjoy this or find it thought-provoking.


Let’s say there’s a cryptocurrency called ExampleCoin, abbreviated as EXC. What would you expect to happen when stories about EXC are published in Coinbase and the mainstream financial press? You might say it depends on the tenor of the stories — are they positive or negative? That should determine how the publicity affects EXC’s price. Or you might say that raising awareness of EXC will be good for the price regardless, because some people who didn’t know it existed will find out, or some people who weren’t paying attention will start.

The influence that media attention has on real cryptocurrencies is less straightforward, regardless of which EXC hypothesis you find most convincing, according to a recent study of five cryptocurrencies. Authors Jean-Philippe Vergne and Sha Wang are associated with the Ivey Business School and economics department at Ontario’s Western University, respectively. Their research was supported by the Scotiabank Digital Banking Lab. Vergne and Wang suggest that media hype may depress the price of Bitcoin and the four other cryptocurrencies they examined.

The researchers explain, “While it has often been assumed that greater visibility in the public sphere, including in the media, would create a buzz affecting cryptocurrency prices positively, our models do not support this idea. To the contrary, we find that a one [standard deviation] increase in public interest […] corresponds to a 10% decrease in returns” (the term “public interest” is quantified in the study). This finding emerged when the researchers controlled for other variables, namely supply growth and liquidity, in an attempt to isolate the effect of media attention. Furthermore, Vergne and Shaw write, “[W]e do not find any evidence that bad press affects price.”

By contrast, Vergne and Wang found that ongoing technological development positively correlates with cryptocurrency returns. The authors hypothesize that greater security, new features, and evidence of a robust technical community that will continue to add to both, are the factors that actually increase the expected practical value of a given cryptocurrency — and thus drive up its price. Vergne and Wang summarize thus:

[T]he innovation potential embedded in technological upgrades is the most important factor associated (positively) with cryptocurrency returns. By contrast, we find that, after controlling for a variety of factors, such as supply growth and liquidity, the buzz surrounding cryptocurrencies is negatively associated with weekly returns.

In a phone interview, Jean-Philippe Vergne pointed out that it doesn’t make sense to expect a cryptocurrency to be valued in the same way as a fiat currency or a commodity like gold. What the US dollar does, in a concrete sense, hasn’t changed in a very long time, and there’s no reason to expect the dollar to develop more “features,” so to speak. Similarly, gold is gold — we can figure out new ways to use it as a material, but the substance itself remains the same. Not so with cryptocurrencies, the structural capabilities of which are always being extended by dedicated development teams.

Vergne acknowledged that this paradigm would lead us to predict that newer cryptocurrencies, with innovative technical approaches and new features, will eventually outpace Bitcoin. He pointed to Ethereum’s trajectory as an example. “People were saying, ‘Okay, in a few months the price of Ethereum will be higher than the price of Bitcoin,’ in terms of the total market cap. A lot of people started to believe that Bitcoin was dead and Ethereum was gonna be the new Bitcoin. Because of its more advanced technology team, it had more potential for future improvement.”

But then a high-profile project called The DAO got hacked, exposing Ethereum’s fundamental technical weaknesses, and the dream came crashing down. (It took a year for Ethereum to reclaim the highs it climbed to in early 2016, which it has now exceeded.) “The code underlying Ethereum was so complex that it had many more flaws than what people imagined, and it was not ready yet for large-scale implementation,” Vergne explained.

Presumably a new cryptocurrency that can excite investors and prove out its potential will not be subject to the same boom-bust oscillation, although Bitcoin’s first-mover advantage is formidable. Bitcoin has the largest number of miners and developers, providing improved cybersecurity and greater liquidity. Its name recognition also far-and-away outstrips the competitors. Up-and-coming cryptocurrencies will be hard-pressed to battle that reputation.

Tony Arcieri, a software engineer at the blockchain network company Chain, discussed the study via Twitter DM. He hopes that Bitcoin and blockchain buzzwords “are past the peak of the media hype cycle.” If so, “true technical merit should hopefully start dominating the reasoning and conversation.” Arcieri emphasized that Bitcoin’s stability, both technically and as a community, will be key to its longterm success, alluding to recent contention over a large technical update.

Joon Ian Wong, a reporter for Quartz who formerly worked at Coinbase, was a little more skeptical of Vergne and Wang’s conclusions. “I think it is accurate to say technical developments increase the value of a crypto in the long run — but its price is still driven by speculators, and media buzz plays a big part in that,” he said in an email.

“It’s analogous to the fundamentals of say a publicly traded company. Ultimately if a company has for instance a strong balance sheet, good cash flows, and strict cost controls of course it’s worth more in the long run. But its stock price is still determined by the vagaries of market rumours, trends among hedge fund managers, and the news cycle.”

In their paper, Vergne and Wang propose that the perception that publicity encourages speculators may actually be what drives reduced returns, writing, “[A] sudden increase in the ‘buzz’ surrounding a cryptocurrency could be interpreted as a signal of increasing volatility. If market participants are risk-averse, given the same expected mean returns, they would be less willing to hold the cryptocurrency if future volatility increases, which would drive prices down and affect returns negatively.”

Angel List partner Parker Thompson remarked on the state of various non-Bitcoin blockchain projects, such as Ethereum and Zcash, “These use cases are still very speculative, and these projects don’t have the maturity of Bitcoin, but my belief is that the market cap of BTC is small enough that it could be wiped out in six months by a true consumer-facing killer app built on top of one of the blockchains I mentioned, or one that does not yet exist.”

Gwern Branwen, an eclectic researcher who has studied Bitcoin in the past, was unimpressed by Vergne and Wang’s study. Branwen responded to a request for comment via Reddit comment:

[T]o sum up my problems with this analysis, the big ones are that it uses an unrepresentative and redundant set of cryptocurrencies, over a short and unrepresentative time period, to investigate a model which ignores all feedbacks and interactions between variables and returns […] to make causal claims which are not and cannot be supported by the model and data, in support of an interpretation […] which lack[s] any face validity[.] Maybe buzz and hype and the media matter a lot less than most people think to Bitcoin’s growth. But this paper doesn’t affect my beliefs on the matter one bit.

Regardless of whether you agree with how Vergne and Wang have manipulated and interpreted the data, it’s important to remember that Bitcoin and its ilk are in fact technologies. Cryptocurrencies resemble standard money — “currency” is right there in the name! — but there’s a lot going on in the code itself, and the community developing that code, that influences how the market will behave.


Header photo by BTC Keychain.

The Internet of LOUD

On the way home from dinner, I wondered, “What am I gonna write about tonight?” Then I opened Twitter and faced this headline: “Hacker breaches the US agency that certifies voting machines” (only semi-confirmed).

So, ah, there’s that.

Cybersecurity is vital but hard and also the most important institutions seem to ignore it. Great!

Also, Adam Elkus said something funny:

This is 2016, so I should be able to back a secessionist kickstarter with bitcoins sent via virtual reality

It’s kinda possible if you donate to Liberland. Apparently a lot of their funds come through bitcoin.

Avalanche in progress. Photo by Sean Gillies.

Avalanche in progress. Photo by Sean Gillies.

Anyway.

What I really want to talk about is something else. I feel angsty. It’s a result of the cacophony. The unfettered flow of information that we’ve set up for ourselves, where people’s opinions about the news go straight into my face for hours on a daily basis. (What? I could choose not to do this? Preposterous.)

I like keeping track of what’s going on. But I hate putting up with the constant ambient wrongness.

Now, I’m a reasonable person, so I know that I’m not right about everything. I have natural biases, delusions engendered by tribalism, and often I must draw conclusions based on incomplete information. Some of these flaws will be discovered and fixed at some point, but others will continue to taint how I perceive and analyze the world. Just another stellar perk of being human!

Since I am human, even though I intellectually know that I’m wrong about some things, on an emotional level I think that all of my firm opinions are correct. It is extremely grating that everyone goes around disagreeing with me all the time. Especially since I have an agenda — a way that I want the world to proceed — and pesky other people never stop working against it.

This isn’t new, of course, but I can’t help but think that the volume has increased. There is so much of it. In the “olden days” did people with opinions have to restrain themselves from starting arguments left and right?

(Pun intended.)

Bitcoin Over Bolivar

Some places are closer to the bleeding edge than others. Most of the United States, where I live, is quite tame. After all, something called “the bleeding edge” can’t be safe or stable. (Relatively speaking, folks, relatively speaking. Yes, the US could still use some work.)

So anyway, Jim Epstein wrote a great story about renegade bitcoin miners in Venezuela:

Faced with growing threats of violent crime and government extortion, members [of Venezuela’s rapidly growing digital currency mining community] interface through secret online groups and take extreme precautions to hide their activities.

In a country where cash has lost much of its value, and food and other necessities are dangerously scarce, bitcoins are providing many Venezuelans with a lifeline. The same socialist economics that caused the country’s meltdown has made the energy-intensive process of bitcoin mining wildly profitable — but also dangerous.

Did you know that electricity is free in Venezuela? That makes mining bitcoin pretty cheap. On the other hand, power is only intermittently available. Venezuela’s government is incompetent, except that the word “incompetent” is much too kind.

Naturally that same government, which tanked the national currency and wrecked the economy, wants to shut down the bitcoin miners. They also have to contend with kidnappings and other extralegal threats.

This is why libertarians are a necessary part of the political ecosystem, however horrified I would be by a full-on libertarian regime. (Is “libertarian regime” an oxymoron?) We need them to supply tools of resistance. Like, y’know, bitcoin. God bless ancap programmers!


Related: Nathaniel Popper profiled an Argentinian bitcoin broker, and the cryptocurrency’s general popularity in that country, last spring.

Very loosely related: I recommend this 2014 profile of LiveLeak and interview with the public face of the website.


Header photo by Gabriela Camaton.

Neural Fintech x2

“Neural Fintech” got more responses than anything else I’ve ever asked you all about, so it’s back *TV infomercial voice* by popular demand! If you missed the beginning you don’t strictly need to read it, but you can if you want to.


In the examination room there was machine that looked like an old-school MRI unit — Sasha remembered them from the hospital shows her grandma used to watch, 2D video of handsome doctors clumsily enhanced for her parents’ RoomView.

Next to the machine stood a beaming nurse with sleek brown hair. Everyone working for Centripath seemed to smile all the time, Sasha thought.

Jake the recruiter exclaimed, “Becky! Help me welcome our newest participant!”

“It’s a pleasure to meet you, Sasha,” the nurse said in a warm voice. On the machine’s side screen, Sasha could see the permission form that she had signed with Jake a few minutes ago.

“You’re in Becky’s hands from here,” Jake said, winking at Sasha as he slipped back out through the door.

The next few hours were busy and regimented. Multiple tests, the first inside that big machine, and then more forms. Sasha was glad that she hadn’t made plans for the rest of the day, but a little annoyed that no one had told her how long it would take.

She found out from Becky that she had “stellar capacity” for a crypto mine. Sasha tried to ask again how much they would pay, but Becky said she’d have to find out from her case manager. “That’s your next stop!” she told Sasha brightly. “Then installation!”

The case manager’s office was like Jake’s, and he even looked a bit like Jake. The nose and chin were different, but much the same smile. “Sasha, right?” he asked, half-rising from his desk.

“Hi,” she answered. Sasha could hear that she was tired.

“Would you like a drink of water?”

“Yes, thanks.” He handed it to her, and Sasha sat down.

“I really want to know how much this will pay. No one will tell me so far.”

“Of course, of course! You get a percentage of the yield from the mine. It can vary depending on your physical state, since all the energy is sourced from your body.”

Sasha didn’t say anything, just kept looking at him.

The case manager paused, waiting for her to acknowledge what he said. When she stayed silent, he continued. “It’s usually 5%, but that fluctuates based on the price of the cryptocurrency at hand, the daily processing efficiency, and so on.”

“Please estimate, in real money, how much I can earn from this.”

“Well, Sasha, I can’t promise anything. I can’t make a guarantee. But I can tell you that you’ll be able to pay half of the monthly fees for a nice PodNiche.”

She sighed. “Okay. I hoped it would be more. But okay, what the fuck. Let’s do the installation.”


Header image by Liz West.

Neural Fintech

“See, it’s a simple program.” The recruiter had very white teeth, Sasha noticed. He was wearing a navy blue suit and smiling big. The identity module said his name was Jake.

“A very simple program,” he repeated. “You know that old expression — humans only use 10% of our brain power? That other 90% is an opportunity, and we at Centripath have the software to take advantage of that opportunity.”

Sasha nodded. “Yeah.” She knew all of this from the promos she had watched. The exact figures weren’t true and Sasha knew that also, but it didn’t matter as long as they paid enough.

“Ae you familiar with cryptocurrencies?” Jake asked. “The one you’ve probably heard of is called bitcoin.”

“Uh-huh, I know bitcoin,” Sasha told him. “That’s why I’m here.”

“Wonderful!” Jake exclaimed. “Well, what this program does is harness your brain’s under-utilized processing power. The technical details aren’t important, but basically all that extra energy runs a cryptocurrency mine. Not always bitcoin, but that’s certainly one of the assets we harvest.”

Sasha was sitting forward on her armchair, leaning toward the recruiter with her elbows on her knees. “So you pay me rent for that. For using my brain. It doesn’t say on your website, so I wanted to ask how much you pay.”

“Ahhh, yes,” Jake answered, still smiling. “We have to analyze the capacity you have available, of course, and then we’ll give you a quote.”

“And this crypto mine won’t interfere with my daily life? I’ll still be able to think, like, normally? I watched the testimonials, but…”

“Then you know that you won’t feel a thing! It’ll be like nothing happened. Everything about the Centripath program is perfectly safe. All of this equipment has gone through rigorous testing. Really, you’re signing up for free money.”

Sasha bit her lip, thinking for a moment. “Okay, I want to take the scan. Or however you test people’s brains.”

Jake clapped his hands together. “Sasha, I am so glad to hear that! First let’s go over this paperwork — it should show up momentarily…”

Sasha felt the ping. “Got it.”

“Alright. I need to you read this and add your bioprint here… Here also…”

They sped through the details, then Jake led Sasha into the examination room.


Let me know if you want me to continue this. Otherwise I’ll leave it as microfiction. I owe the idea to my boyfriend, Alex Irwin. Header photo by Pantelis Roussakis.

—> READ THE SECOND SEGMENT

Cryptocurrencies Aren’t Fake, They’re Just Libertarian

Bitcoin-themed coaster. Photo by pinguino k.

Bitcoin-themed coaster. Photo by pinguino k.

A headline from the Miami Herald: “Bitcoin not money, Miami judge rules in dismissing laundering charges” — c’mon! Bitcoin is clearly money. I have mixed feelings about how cryptocurrencies should be regulated, but they are obviously currencies. The judge’s rubric for this question was weird and ahistorical:

“Miami-Dade Circuit Judge Teresa Mary Pooler ruled that Bitcoin was not backed by any government or bank, and was not ‘tangible wealth’ and ‘cannot be hidden under a mattress like cash and gold bars.’

‘The court is not an expert in economics; however, it is very clear, even to someone with limited knowledge in the area, the Bitcoin has a long way to go before it the equivalent of money,’ Pooler wrote in an eight-page order.”

Most mainstream currencies are backed by governments, but that’s not an inherent feature of money, just a modern quirk. How do people think money got started? It grew out of bartering, and for a very long time it wasn’t regulated or centrally controlled at all. [Edited to add: David Graeber’s Debt asserts that money actually emerged before bartering. Does not change my larger point. See the note at the end.] Just as an example, per the Federal Reserve Bank of San Francisco:

“Between 1837 and 1866, a period known as the ‘Free Banking Era,’ lax federal and state banking laws permitted virtually anyone to open a bank and issue currency. Paper money was issued by states, cities, counties, private banks, railroads, stores, churches, and individuals.”

And that’s relatively recent! John Lanchester wrote a truly excellent overview of what money actually is and how it functions for the London Review of Books, and I wish I could make this judge read it.

Granted, legal definitions exist in a parallel reality, so maybe there’s some legislative reason why the US government can’t bestow official currency status on non-state-sponsored currencies. They’d certainly have to step up their game when it comes to regulating them, which would be a lot of work since so far their game has been practically nonexistent.

Just to top off the ridiculousness, Tim Maly drew my attention to this bit from the Miami Herald article: “‘Basically, it’s poker chips that people are willing to buy from you,’ said Evans, a virtual-currency expert who was paid $3,000 in Bitcoins for his defense testimony.”

As Maly quipped on Twitter, “Bitcoin isn’t money laundering because bitcoin isn’t money says bitcoin expert paid in bitcoin.”

Is this merely a question of semantics? Yes. But I’ve always come down on the side that language is important — it’s both my first love and my livelihood, after all — and it bothers me to see foundational economic concepts misapplied. Let’s at least describe our brave new world accurately.


Note on the origins of money: Facebook commenter Greg Shuflin mentioned David Graeber’s book Debt: The First 5,000 Years and its assertion that bartering came after money. It doesn’t change my larger point, but here’s the relevant Wikipedia passage:

“The author claims that debt and credit historically appeared before money, which itself appeared before barter. This is the opposite of the narrative given in standard economics texts dating back to Adam Smith. To support this, he cites numerous historical, ethnographic and archaeological studies. He also claims that the standard economics texts cite no evidence for suggesting that barter came before money, credit and debt, and he has seen no credible reports suggesting such. […] He argues that credit systems originally developed as means of account long before the advent of coinage, which appeared around 600 BC. Credit can still be seen operating in non-monetary economies. Barter, on the other hand, seems primarily to have been used for limited exchanges between different societies that had infrequent contact and often were in a context of ritualized warfare.”

Sounds like an interesting book!

I Swear I’m Not a Statist

Allow me to string some ideas together, using technology as a metaphor:

“A world where people, businesses, and governments rely on IT for almost everything they do is a world where SIGINT will be the most important form of espionage.” — John Schindler on “SpyWar”

“If you’re not looking for the structure, you won’t find it. If you are, it’s obvious.” — Scott Alexander on his mystical universe

“Only machines that can be inventoried and centrally managed can reasonably be secured against advanced attackers.” — Brandon Wilson on enterprise security

The community of Bitcoin developers is currently struggling to decide between a couple of different technical directions that I don’t understand or care about. The interesting parts are the human conflicts and what the whole brouhaha says about group politics. When I wrote “Power Is Necessary”, this controversy was on my mind.

Wind turbine photographed by Paulo Valdivieso.

Wind turbine photographed by Paulo Valdivieso.

There is a reason why centralization happens over and over again in human history. We didn’t invent the Code of Hammurabi out of the blue. Monarchy did not develop randomly, and republics require executive branches. Centralized power is efficient. Hierarchies of decision-makers, each able to dictate and veto the level below, allow for instructions to be disseminated and enforced.

“It is generally considered that there are four forms of structure employed by terrorist groups: conventional hierarchy, cellular, network & leaderless resistance. The decision to employ one of these formats is grounded in the security/efficiency trade-off of each; conventional hierarchy providing the most efficient and least secure, leaderless resistance the opposite: highest security, least efficiency.” — Tom Hashemi on guerilla warfare

I love the ideals of anarchy, but it fundamentally doesn’t work. Neither does direct democracy or its hands-off “don’t tread on me” equivalent. Coercion is a basic component of societal structures that accomplish things and manage to self-perpetuate. Are fear-based incentives good? Are they virtuous? No, of course not. But they get the job done.