A quick mathematical analysis of Bitcoin and the world of crypto-currencies: After plunging nearly 30% last week in a severe correction, Bitcoin has since surged back to the $2800 range, this time riding a wave of optimism from Bitcoin noobs in Japan and South Korea who have become irrationally convinced that Bitcoin is a replacement for their retirement savings (see Reuters report, below). Now, even kindergarten teachers are throwing money at Bitcoin, believing they’ve discovered a magical source of unlimited wealth (yep, they really believe it’s all different this time).
Little do they know they are going to lose nearly everything when the Bitcoin end game rears its ugly head, as has already been mathematically programmed into the system. How’s that, exactly?
For starters, due to increased volume, Bitcoin transactional costs have now skyrocketed from roughly $16 per transaction to $23.30 per transaction in just the past week or so, according to Blockchain.info. This is a transactional cost increase of over 30% in just a few days, and it demonstrates the stress of the increasing volume of transactions on the distributed blockchain ledger. It is yet more mathematical evidence that selling Bitcoin and exiting the market in a time of high trading volume will be increasingly expensive and difficult, with long delays on transactions that could require days or even weeks to be confirmed.
Bitcoin will approach its “end game” in the next decade when all Bitcoin mining permanently ceases due to the mathematical limit of 21 million Bitcoins in circulation. (The mining algorithm allows no more than 21 million coins to exist.) In the last 24 hours, 1,850 Bitcoins were successfully mined. This is equivalent to approximately 675,000 Bitcoins in a year, accounting for parallel increases in computational difficulty and enhancements in ASIC mining rigs that carry out hashing calculations more efficiently.
As Bitcoins are limited to a grand total of 21 million Bitcoins, and given that nearly 16.4 million Bitcoins are already mined, this means that if the current mining computational infrastructure keeps pace with the increasing mathematical difficulty for achieving Bitcoin rewards, all Bitcoins will be mined out in about seven years (by roughly 2024). (There are difficulty adjustments in the Bitcoin algorithm, so it might take longer, but Bitcoin mining is approaching an end point in the very near future.)
Once Bitcoin’s block mining rewards are no longer available, mining operations will subsist entirely on transaction fees, which currently represent just 19.34% of the earned miner revenue for Bitcoin mining operations. In other words, rewards will collapse by 80% for Bitcoin miners, making nearly all mining operations unprofitable. This, in turn, will lead to a rapid loss of mining capacity, subjecting the blockchain to an ever-increasing barrage of 51% attacks which will fork the blockchain ledger and obliterate the integrity of the blockchain. (Note: If you don’t know what terms like “hashing” and “51% attacks” and “blockchain” really mean, you have no business owning Bitcoin.)
Once this happens, the blockchain and mining infrastructure self-destructs, and everybody heads for the exits in search of the next “big thing,” causing Bitcoin prices to plunge toward zero.
Or, alternatively, the Bitcoin community decides to change the rules of Bitcoin and open it up to unlimited mining (erasing the 21 million coin limit), effectively engaging in “quantitative easing” policy fraud just like the Central Banks, instantly obliterating any trust in the scarcity of Bitcoins and devaluing all the Bitcoin already in existence. In essence, raising the Bitcoin mining limit would be the massive theft of Bitcoin value from those who already own Bitcoin. A “virtual heist,” in effect.
Either way, Bitcoin comes to a catastrophic end. This is mathematically engineered into the system.
Of course, noob Bitcoin speculators in Japan and Korea don’t understand any of this, so they don’t comprehend the risk they are undertaking when they trade in their retirement funds for virtual currencies. “…[B]itcoin is going mainstream in Asia, attracting Mrs Watanabe – the metaphorical Japanese housewife investor – South Korean retirees and thousands of others trying to escape rock-bottom savings rates by investing in the cryptocurrency,” reports Reuters. “Asia’s moms and pops, already regular investors in stock and futures markets, have been dazzled by bitcoin’s 100 percent surge so far this year.”
Reuters covers the Bitcoin mania as follows:
“After I first heard about the bitcoin scheme, I was so excited I couldn’t sleep. It’s like buying a dream,” said Mutsuko Higo, a 55-year-old Japanese social insurance and labor consultant who bought around 200,000 yen ($1800) worth of bitcoin in March to supplement her retirement savings.
“Everyone says we can’t rely on Japanese pensions anymore,” she said. “This worries me, so I started bitcoins.”
“Right now, it’s a form of speculation, like stocks,” said Park Hyo-jin, a 27-year-old South Korean who owns around 3 million won ($2,700) of bitcoin. “I don’t think anybody in South Korea buys bitcoin to use it.”
Rachel Poole, a Hong Kong-based kindergarten teacher, said she read about bitcoin in the press, and bought five bitcoins in March for around HK$40,000 ($5,100) after studying blogs on the topic. She kept four as an investment and has made HK$12,000 tax-free trading the fifth after classes.
“I wish I’d done it earlier,” she said.
Yep, kindergarten teachers are now buying Bitcoins and thinking they should have bought in earlier. If this isn’t a sure sign of a “mania” bubble in the process of heading toward a catastrophic collapse, then nothing is. The Bitcoin mania has even spawned multi-level marketing “pyramid” schemes across Asia, where Bitcoins are the “reward” for recruiting others to blindly buy into the system:
The bitcoin frenzy has spawned scams, with police in South Korea last month uncovering a $55 million cryptocurrency pyramid scheme that sucked in thousands of homemakers, workers and self-employed businessmen seduced by slick marketing and promises of wealth.
Seminars in Tokyo, Seoul and Hong Kong promote similar multi-level marketing schemes that require investors to pay an upfront membership fee of as much as $9,000. Members are encouraged to promote the cryptocurrency and bring in new members in return for some bitcoins and other benefits.
The funny thing about all Ponzi schemes, however, is that they all end in catastrophe. It’s just a matter of how many fools can be suckered into the scheme before it reaches a point of unsustainable irrational exhuberance, after which the collapse is almost instantaneous.
I hope I don’t have to be the one to tell Mrs. Watanabe that she’s going to lose everything when Bitcoin mania comes to its inevitable end. When the vast majority of new suckers entering the Ponzi scheme are total noobs, you know the mania bubble is approaching its inevitable collapse.
Bottom line? Don’t get caught holding Bitcoins when the music stops.