Goodbye to Ripple

Additional Note: within a couple of hours of posting this article to the Reddit/Ripple forum, i was banned without warning or reason given. It's worth noting a few things:

1) over the course of the last several months, i have seen literally tens of thousands of referrals from the same subreddit to my blog - particularly my initial analysis. though i knew it might upset some people (and i swear, i take no joy in receiving angry messages), i felt an obligation to share my updated views on the forums where my previous work had gotten the most attention.

2) It has been about a week now, and despite thousands of reads (and public calls to those 'smartest people in the room' on ripple, there have been no meaningful refutations, rebuttals, or even serious questionings of the piece below. just ad hominem attacks, expressions of faith and hope that ripple will be successful (without addressing why a higher price for the XRP coin is necessary for that).

4) That Reddit banned me as they did makes it clear that the Ripple subreddit should not be relied upon as an unbiased source of information. if all they will generally allow are posts and opinions that support the bull case, then it is no different from a 'pump piece' or cheerleading section. Immediately before I was banned, my post was aggressively downvoted (which removes it from the feed for most readers). Investors and speculators alike should beware.

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Goodbye to Ripple

Follow @cryptoizzy

Summary

• I feel the need to ‘set the record straight’ on my current Ripple views – especially as I see others use my original analysis in unsavory ‘Pump Pieces’ 
• I no longer think my original analysis should be used to value Ripple. With what I know now, I see my initial ‘valuation’ of ~$0.83 per coin as far too high. I now replace this with a per-coin value of ~$0.05 
• What have changed are my perceptions of the possibility of Ripple being used as ‘money’, required inventory hold rates, and penetration of the market in the face of a competitive response.

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When I was first becoming acquainted with blockchain and altcoins I thought that Ripple was the 'right horse to bet on'.  It was exciting to me to find a new area in the (potential investment) world where I could use the analytical tools in my kit, and bring some clarity to the situation.

With what I knew then, I did what was intended as a thoughtful analysis, focusing on its potential utility for international money transfers - while holding out hope that it might somehow carry the mantle of the 'greater crypto' world.

I realize now that I was wrong. 

I had an inkling of it a few months ago, which is why despite having mostly moved on (and largely lost interest in ripple) I still felt obliged to share some updated thoughts on it, which it was my hope, would point out some issues to a genuinely interested (and skeptical reader). 

But instead of people focusing on my update and asking more questions, I find that people are still linking to my original analysis, and even referencing it in pump-pieces that belittle and misrepresent my work (P.S. Taking credit for a type of analysis after you have read it from someone else makes you a plagiarist. Never mind that the particular ‘author’ I’m addressing – who has not responded to my polite request to change his posting - still managed to wreck the material.)    

So despite being relatively bored with XRP, and having since moved on to an in-depth and exhaustive Bitcoin piece of which I'm very proud (which will soon have a significant update, especially as it pertains to Monero) I find myself coming back to XRP to attempt to set the record straight on where I currently stand on it.

 I currently believe that XRP is a losing proposition for three broad reasons.

1)    XRP misses the 'bigger point' of cryptos at large

*NOTE* - this is not an issue I outlined in my earlier piece - nor is it an expressed purpose of RIpple. I mention it here because I believe there are still significant numbers of people who ascribe some value to ripple in the hopes that this may still yet 'come to pass'. I wish to disavow people of this notion. If this hurts your sensibilities, then by all means, skip to the next section.

While it has payment processing time benefits (for now) this comes at a significant cost. The supply and system is ultimately in the hands of the company, who despite their claims of libertarian principles, instead in action aspire to work with the very banks and bankers who have facilitated the unsound money world we live in today. As such, any hopes for XRP to eventually be considered ‘money’ in its own right – that is, have a value beyond functional utility – are unrealistic and out of accord with the most encompassing aspects of blockchain. (To be fair, I didn't really attribute any of RIpple's value to this in the prior analysis, but I felt it worthwhile to address here).

This then brings us to its value as a means to facilitate cross-border transactions.

  

2)    My ‘Functional Utility’ analysis – and the example I originally gave is far too optimistic – to the point at this stage of being flat out wrong.

But first – a quick note on non-cross border transactions. Some people claimed that my original analysis was too conservative because I only focused on cross-border transactions. They claim that if you include intra-country transactions, the upside is much greater.

This argument is without merit.

The reason cross-border transactions have been targeted by Ripple (and why I exclusively focused on them in my analysis) is because they, not intra-country transfers, are the ones that operate within a currently massively over-complicated, overpriced system. It is for this reason that Ripple ever has had a chance of establishing a foothold on an economic basis through technological disruption. 
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The first correction I make here related to my estimation of what % of all the ‘float’ traders would need to hold in order to accommodate all the transactions. I had originally estimated 35%. But I now see that as far too high.

Most B2B international transactions do not need instant transfer or confirmation. 6, 12 or even 24 hour confirmations for most businesses would be most of what’s required – so long as the costs came down as well. As such, most transactions could be done in batches, and therefore netted– meaning that on average, far less Ripple would need to be held to effect the transactions: only that which is necessary to accommodate the amounts that exceed the ‘nettings’. As such, I would reduce my 35% by 2/3 to ~12%. This of course brings my valuation down by 2/3… but there’s more.

The second correction I make here related to Adoption rates. I alluded in my Update to the fact that I thought Adoption rates were the big risks – but again, this hasn’t gotten the attention – so I focus on that here.

The main competitor to Ripple in foreign interbank transfers is the SWIFT organization and system. (In hindsight, I should have spent far more time on the competitive response than I did in the original report). Not only is SWIFT the incumbent for a notoriously reluctant-to-change customer base, but they are launching their ‘response’ to the business-threat of Ripple (and crypto in general) with their ‘GPI’. 

https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi

Their GPI claims to lower fees and transaction times, while increasing transparency. I don’t know much more about it than that. But frankly, I don’t think I need to know more about it, and here’s why: it’s probably enough.

Even if GPI falls short of Ripple in technology, speed, etc… it’s still a far easier choice for a bank to staywith SWIFT and give them time/space to upgrade their systems… so long as they are getting a discount to historical rates.

Can SWIFT build a system that can come close to Ripple? That’s an excellent question – so let’s think about it.

Ripple is open-source. This means that much if not all of the code is freely-available. What’s to stop SWIFT from cherry-picking the bits they like, and launching their own ‘version’ to effect similar outcomes? All this while giving their clients the peace-of-mind that the fallback old system still works in case of emergency.

Well, one thing to stop SWIFT from successfully launching a good competing product (that is just enough to keep their clients from switching) is money. How much money are they willing to spend on it? 

Well, considering that if they did nothing, their entire business is at risk, it seems like it should be a high priority. Do you think they could re-create a Ripple competitive system (leveraging the open-source nature of the tech) in 1-2 years if they spent $50 million? How about $1 billion? 

Considering that even a $1 billion investment could potentially protect for them what is a multi-billion annual profit engine, the economic motivation to try is a no-brainer (and the funding probably already available).

I do not see any reason to believe that Ripple has significantly accelerated its very early success in getting banks to use their system. If anything, there are many reasons to believe that their penetration prospects are far worse than even a few months ago – particularly as bigger banks develop their own systems (surely JP Morgan can do the same thing with ETH), and smaller banks sit-on-their-hands waiting to see where the technology goes before they stick their necks out. As such, the notion of Ripple getting 30% of the global market in 3 years should in my view be replaced with the prospect of a 5% market share.

So my ‘present value’ per coin number of $0.83 should first be divided by 3 (as per my comment above) and then again divided by 6 - making it worth today ~$0.05: or more than 75% lower than current price.

Alternatively, you might be saying to yourself... what is SWIFT simply bought Ripple? This way they could get all their technology in one fell swoop! Well, that’s all well and good, but the cost of doing so at current prices would be many billions of dollars paid to the Ripple consortium. Why do that, when you can just re-create your own system for much less? If the price of XRP crashes significantly, then maybe it would be worthwhile for SWIFT to buy Ripple – but of course that would be at drastically lower prices.

To Ripple supporters, I would just like to say, none of this is personal – and hey, maybe I’m flat out wrong about my current perspective. Time will tell, and as always I welcome constructive feedback. If presented with new information, I will of course reassess. But especially as I saw people using my earlier work (which is no longer representative of how I feel) in ‘pump’ pieces, I felt the obligation to set the record straight now.

 

Izzy

P.S. made it this far? thanks for reading! Why not go just a little further and check out my postscript to this article? There's a good example in there which I came up that has some numbers which i think adds some real value to understanding. Cheers

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Did the Rise of China Help or Harm the US? Let's not forget Basic Macro

This is a question which was posed to me after I presented last week at the Federal Reserve Board in DC. Presenting there was an honor for me, and I got a lot of sharp feedback. It's also getting to the point where I need to start thinking about my upcoming AEA presentation alongside David Autor and Peter Schott, two titans in this field who both deserve a lot of credit for helping to bring careful identification to empirical international trade, and for challenging dogma. After all, before 2011, as far as I know the cause of the "Surprisingly Swift" decline in US manufacturing employment had not been written about in any academic papers. This was despite the fact that the collapse was mostly complete by 2004, and was intuitive to many since it coincided with a large structural trade deficit. (Try to explain that one with your productivity boom and slow demand growth, Robert Lawrence...)

On one hand, there is now mounting evidence that the rise of Chinese manufacturing harmed US sectors which compete with China. This probably also hurt some individual communities and people pretty badly, and might also have triggered an out-migration in those communities. On the other hand, typically the Fed offsets a shock to one set of industries with lower interest rates helping others, while consumers everywhere have benefited from cheaper Chinese goods. Which of these is larger? I can't say I'm sure, but of these shocks mentioned so far, I would probably give a slight edge to the benefit of lower prices and varieties. However, I suspect, even more importantly, Chinese firms have also been innovating, more than they would have absent trade, which means the dynamic gains in the long-run have the potential to be larger than any of these static gains/losses you might try to estimate courageously with a model.

Many (free!) trade economists use the above logic (perhaps minus the dynamic part), and conclude that no policies are needed to help US manufacturing right now.  However, I think this view misses 4 other inter-related points, and in addition does not sound to me like a winning policy strategy for the Democrats in 2020. And a losing strategy here means more Trumpian protectionism.

First, when a trade economists' free trade priors lead them to argue that the rise of China was beneficial for the US, they forget that China and the US do not and did not have free trade between them. Just ask Mark Zuckerberg. Or google, or Siemens, or the numerous other companies who have had their intellectual property stolen. (Of course, the Bernie folks also need to remember that it is probably rich Americans who have been hit the worst by China's protectionism -- IP piracy certainly harms Hollywood and Silicon Valley, probably quite badly, while Mark Zuckerberg may be the most harmed individual).  It might be that the rise of China was beneficial to the US, but would have been even more beneficial had China not had a massively undervalued exchange rate for much of the past 30 years. If you disagree with this assessment, then you, like Donald Trump, are not exactly carrying the torch of free trade. (What's wrong with having the market set prices, tavarish?)

Another problem with the view that everything is A-OK in trade is that China's surpluses are now reduced, but reduced due to a huge reduction in demand and growth in the US and Europe. That's not a good way to solve imbalances. See diagram below, drawn on assumption that the exchange rate is held fixed: A shift down in US demand (increase in Savings, SI shifts right) left income depressed, but improved the trade balance from CA0 to CA1. However, if US demand increases/savings decline, the US won't go back to the Full Income/Employment and CA(balanced) equilibrium. For that, we'll still need to devalue the exchange rate (shifting up the XM line with a devaluation, it shifts down with an appreciation). As they say, it takes a lot of Harberger triangles to plug an Okun Gap.

Sure, you might object that it is less obvious that China is overvalued now. You might have heard stories about capital wanting to flood out of China, not in. But, this is because the exchange rate is set largely by capital flows and not by the structural trade balance. All this indicates is that monetary policy is relative tight in the US/Europe, not that the structural trade balance is in equilibrium. It isn't.

The third factor that most economists neglect when they think about the rise of China is the issue of hysteresis, defined weakly as "history matters". Clearly, being overvalued for an extended period of time will shrink your tradables sector. Yes, it can also decrease your exchange rate, but it will for sure decrease the equilibrium exchange rate you need to balance your trade. And if your exchange rate is being set in Beijing, or by the ZLB, then you can forget about a quick return to normality.

The chart below shows that US dollar appreciations are followed by a shift up in the relation between the US trade balance and the RER. Undervalued periods (just 1979) is followed by a shift to the southwest. Thus, shifts NWs are shifts in the direction of a shrinking (in relative terms) US tradables sector/income. The trade balance itself won't be hysteretic, as movements NW reduce imports, but the intercept of the exchange rate/trade balance slope will be.

This is all as Krugman foretold in 1988...

To put hysteresis another way, consider the event study diagram below of the 1980s US dollar appreciation (from my paper here). The dollar appreciated 50% (black), and as a result, employment in the more tradable sectors (blue dotted line) fell about 10% relative to the more closed sectors (red line). The interesting thing, though, is that after relative prices returned to fundamentals, employment in the more open sectors came back only slowly, if at all.

The above makes clear that a temporary shock has a persistent impact. But, could it actually lower income? Well, imagine for a second what would happen if the US dollar were very overvalued for a long period of time, say, due to policy. Eventually, it would lose all of its tradable sectors. Then, what would happen to income and the exchange rate when it floated again? Would things go back to normal overnight? Or would it take some time to build up the tradable sector capacity back to where it used to be? In the meantime, you would be likely to have a vastly lower exchange rate, which means you can afford less, which means you are poorer. Also, in an inflation-targeting regime, if a period of overvaluation coincides with a recession, and you shoot for just 2% coming out, then you might never recover your hysteretic tradable-sector losses. Thus, it isn't that free trade is bad, but having an artificially overvalued exchange rate is.

   Wait, there's more. You might be thinking -- is there really a Macro effect of a trade shock? Won't the Fed just offset a trade shock by lowering interest rates? In that case, won't a trade shock just alter what gets produced and not how much is produced? For a small shock, the answer is probably yes. But, for a large shock that pushes you close to the zero lower bound, like the 2000-2001 shock did, there is no guarantee. The Fed likely would have responded more aggressively to the 2001 recession if not for the ZLB. Secondly, lower interest rates from the Fed work in part through exchange rate adjustment. If the ZLB comes into play, the exchange rate will be over-appreciated relative to what it needs to be for a full-employment equilibrium. This may imply more tradable-sector job losses. And, if China is pegged to the US, that adjustment won't happen. And, as my students can all tell you, monetary policy becomes ineffective with a fixed exchange rate and open capital market. Sure, the US had a floating rate, but being pegged by China, and essentially by other East Asian economies following the Asian Financial Crisis, leaves you with much the same result.

    So, am I then proposing Trumpian protectionist policies? Not necessarily. You see, while US growth is still slow, the US is not at the ZLB any more. The Fed can cut interest rates, and spur growth and weaken the dollar, helping manufacturing. The beauty of this strategy is that it solves multiple problems at once. And, there are certainly specific trade issues that the US could raise with China, in addition to exchange rates. It would, of course, be strange to push on the issue of exchange rates while US interest rates are too high. A higher inflation target would also be a passive way of discouraging China from holding so many dollar reserves. But, I think a possible winning political strategy would be a high nominal GDP target, which will also weaken the dollar, and also campaign on a push to defend US corporate interests in China on specific trade issues, including the exchange rate.

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Reader Q&A - The Power of Money

Below is a (largely) un-edited Q&A correspondence on Cryptos and The Power of Money between me and a reader. Thanks to him for consenting for me to share. Even though English isn't his first language, I think he's done a solid job of outlining some questions that may be on the mind's of other readers.
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 Hi Izzy,

I just finished your script and again I am deeply impressed with what you wrote also the sarcasm towards the famous 1% of this world with the truth in it made me laugh. I already shared your paper with my brother and my friends but here are some questions from a simple mind:

Let’s say that bitcoin and crypto currency take over the current monetary system how is that going to work out at the end? Right now crypto currencies are valued against the fiat currency but if they are going to take over then the fiat currency is going to collapse - how will we then value crypto currencies and who is going to decide that?

I also read about your 3 different scenarios of the future and I hope it’s going to be the third one as well, but how is the crypto currency going to develop after they take over the current system? I am worried that it would become just a digital version of the corrupted sick system as we have now because people still need loans and mortgage for their houses and all that I don’t know if I am a doom thinker but I just try to wrap my head around it.

Furthermore me my brother and my friends investigating a lot of new currencies as my brother if very opportunistic he thinks the crypto currency streets are paved with gold but i try to reason with him but since he knows more about this technology  so could you help me out a little bit with how to look at upcoming currencies because as i read the internet they have all these standard things like prove of stake github white paper and developers by name on their site but good scammers also read this and then they implement it on their and  it can still be a scam as you found out with stratis.

Best regards ********

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Hi again ********

I’m glad you enjoyed the piece, though I didn't think I was being mean or sarcastic to anyone. I was really just trying to communicate what is truth to me. I meant what I wrote about amnesty - but didn't actually define it. To me, amnesty is not specifically the forgiveness of individuals from repercussions or punishments for their perceived crimes, but an appreciation for the shared predicament we all face in this life. We all 'just got here'. We all have been born into and molded by environments that lead us to approach life a certain way. I do my best to not cast judgement on people, certainly not based on what family and worldview they happened to be born into. I do however believe that at certain points in life, you realize that you have to make a choice, and acknowledge what is balanced or not.

I suspect that what I’ve just expressed may be very difficult to translate - much less understand… in any case, I’ll try and answer some of your questions:

Cryptos are valued against fiat currency simply because most ‘stuff’ is currently priced in fiat currencies. As people increasingly appreciate it for its money characteristics, this will change. Bitcoin is still far away from its potential value relative to fiat currencies. As more people convert their transactions such that they’re done in Bitcoin, we will increasingly find a world where people price their goods and services in Bitcoin. We’ve barely even scratched the surface of this shift.

One thing I was a bit disappointed in re: the response to my piece in general was how little attention the idea of pricing things in bitcoin (and at a discount to fiat) got - at least so far. I thought (and still think) selling goods and services at a 10% discount if the buyer pays in BTC will be a great way to facilitate the movement. Everyone wins, and people are motivated to get involved – because it’s in their financial best interests to do so.

Regardless, if and as Bitcoin becomes a more frequent mechanism for pricing goods and services, people will increasingly think of Bitcoin as their ‘main’ currency. If you could pay for everything in your life - from paying your rent to buying a chocolate bar, in Bitcoin – and the world accommodated that lifestyle (maybe even at a 10% discount to fiat!), wouldn’t you begin to consider Bitcoin as your main currency, and all stuff (including dollars) priced against it?

What will decide this? Adoption. Whether that’s because of egalitarian realization or profit motive, people will adopt it and begin using it to transact. At some point critical mass will be achieved, and there will be a whole ‘bitcoin country’ within all geographic domains.

On your question relating to lending/mortgages, etc. – I had actually thought about addressing these aspects in The Power of Money, but decided against. To the extent lending will likely continue to play a significant role in how people live, this needs to be addressed. That we currently live as a world of borrowers is a reflection of how not-present we are. Where we are ‘here and now’ isn't right - so we feel the need to pull forward from what we perceive as our future and in so doing indebt ourselves. 

I think we're so far away from a loan-free world now that it's at risk of being a distraction (at present).. though maybe not for long. I'll give it a think. But in the meantime, think of it this way - would you still need to 'borrow so much' to buy [a house] (I put house, but u pick your asset) if not for all the price inflation over the past 50 years? I suspect not. So where does the problem really lie - in not having a lending mechanism to allow you to 'afford' expensive things? Or in a money that generates inflation and makes things expensive in the first place?

As to your point of 'paved with gold', check out my last twitter comment. There are a lot of scams out there (deliberate and otherwise), and even still no guarantees for anything. We all need to be careful. Fear and greed are destroyers of both rational thought and investment returns in any market - crypto or otherwise.

Finally, in terms of where to look for good information on coins etc. going forward – I agree with you that there appears to be a shortage of good analysis out there. I'm sure that will change, but even when it does, we all need to continue to think for ourselves and critically.

Best,

Izzy

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Ancestry and Development: the Power Pose of Economics?

I was fortunate to be invited to present at George Mason this week. I was very impressed with the lively atmosphere of brilliant scholars. George Mason certainly has had an outsized impact on the economics community, and also likely on economic policy in the US given its admirable commitment to participating in the public dialogue.

In any case, they asked me to present my work joint with Ju Hyun Pyun, taking down the "genetic distance to the US predicts development" research, which Andrew Gelman blogged about here.

It was the first time I had thought about this research in some time. This has evolved into an Amy Cuddy "Power Pose" situation, in which Spolaore and Wacziarg refuse to admit that there is any problem with their research, and continue to run income-level regressions and write papers using genetic distance which do not include a dummy for sub-Saharan Africa, but exclude that region instead. (For example, they have a paper dated September 2017, "Ancestry and Development: New Evidence", which continues to exclude SSA. Surprise, surprise, they continue not to cite us. Note that here, both I and they are really talking about genetic distance, not ancestry generally...)

In their comments over at Gelman's blog, they also stressed that "our results hold when we exclude Sub-Saharan Africa and so cannot be driven solely by those countries". 

I am skeptical of excluding observations which are essentially counterexamples. Within sub-Saharan Africa, the correlation between genetic distance to the US and development is slightly positive (Fig. 3 below), rather than negative, so excluding these observations is self-serving. One can also see that there is a significant positive relationship between genetic distance to the US and development for Asia, another counterexample. 

Another reason to be skeptical is that if we exclude sub-Saharan Africa and Europe, there is also not significant correlation, although, to be fair to these guys, the sign is correct.

Thus, the remaining question is how robust the genetic distance-development relationship is in Europe. In fact, there is already a paper, by Giuliano,Spilimbergo, and Tonon, saying that the impact of genetic distance on both trade and GDP in Europe is not robust. Note, the early drafts of that paper also said something about GDP in Europe, while the published version stripped out GDP precisely because the referees -- likely Spolaore or Wacziarg -- wouldn't allow it.

I also went back to look at what my referees had said about this paper. Wacziarg has now posted regressions on his website used by this referee, so I gather that he must be the author. Interestingly, Romain had some very choice words for this paper, even though Paula Giuliano is a colleague: “Regarding the paper by Giuliano, Spilimbergo and Tonon, the authors of this paper are clearly referring to an old (2006) version, which contained numerous errors and imprecisions.”

I'm curious, Romain, if you're out there, what kind of "errors and imprecisions" this paper by your colleague had.

In any case, I decided to check if Giuliano, Spilimbergo, and Tonon were really that careless, or whether Spolaore and Wacziarg were, once again, wrong.

Thus, on the metro ride from Dupont Circle to George Mason, I fired up Stata to check how robust the results were when we exclude sub-Saharan Africa. Admittedly, it took me several regressions (see below) to get this correlation to disappear. The key control was a dummy for former communist countries, or controlling for Eastern and Western Europe separately. In each of the regressions below, I've excluded sub-Saharan Africa. In column (1), I include controls for absolute latitude and a dummy for Europe. In column (2), I include a dummy for Western Europe instead (excluding former communist countries). In column (3), I include dummies for former Soviet Union countries (FSU) separately, and, unfortunately, the results are no longer significant at 95%. In column (5), I also add in "Percentage of land area in the tropics and subtropics", and now the coefficient on genetic distance falls to -3.7, but with standard errors of 3.6.

Hence, it would seem that genetic distance to the US is not a good predictor of income levels, even if you exclude SSA, which are counter-examples. Only caveat here is that I spent about 30 minutes coding this up while extremely jet-lagged. 

It's amazing to me that these two Harvard PhDs would want to continue to push this, and to stake their reputations on this. To me, there are a lot of ways I would like to spend both my research time, and my free time. Even if I was them, I don't see why continuing with this project appeals to them so much. They now have written an additional 5-6 papers, it seems, repeating the same mistakes, even after they became aware that their results are not robust. The answer must be that now they perceive themselves to be in a life-or-death situation in which their reputations are at stake. They really need this correlation they discovered to be robust. And so they continue to churn out papers using this measure. In fact, I suspect no one really cares. That's why it's surprising they haven't moved on.

Another thing which is strange about their new paper, is that in the comments over at Gelman, they said that their paper was mainly about the country-difference pair regressions. I showed that these results, too, are not robust once one separates out poor sub-Saharan Africa from richer North Africa, and includes a full set of continent fixed effects. I should add that Spolaore and Wacziarg claim that when they run these same regressions, their results are robust. However, they won't provide us with their data or regressions to check. Nevertheless, in their new paper, they've gone back to the cross-country income regressions, which they previously conceded were not robust. I guess they were hoping that their comments over at Gelman's blog (and at Marginal Revolution) would be forgotten.

In any case, if Spolaore and Wacziarg want to respond with more gibberish, I'll yield to them the floor. I do wonder what kind of evidence they would want to see that would convince them that there is nothing here. Figures (3) and (4) are already pretty damning, not to mention the table after it. I'm sure they'll continue to be as defiant as ever, which should provide some comic relief for the rest of us.

Update: I have put in another request to Wacziarg and Spolaore for their data. I wouldn't hold your breath. I'd be willing to bet my life savings that they will not provide their data and code. They do provide their new genetic distance data, presumably so that other people can use it and cite them. I downloaded this data to test robustness. Stay tuned for results!

Update 2: Someone writes in, directing me to a link to the debunked genopolitics work on whether there is a "voting gene". 

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Segwit2X - A Billion Dollar Windfall Event And Opportunity Bitcoin Miners Control

This is my final post before the coming Segwit hard fork. Note that I do not have access to miners, developers or whales. These observations are my own and they are deduced from the available public information accessible to everyone. Do not take this as investment advise. If it helps you  .... You're Welcome.

A Once In A Lifetime Golden Opportunity For Bitcoin Miners

Segwit2X futures are trading at 0.15 BTC. If you are a miner supporting Segwit2X, can you pass up on this opportunity to make a quick, clean, and legal, profit of 5X on your investment, in a situation where the outcome of the event is in your (industry) control?

If it all works out for the miners, and they reap this huge windfall, you cannot criticise or sue them for being deceitful or for insider trading because they have actually signed an agreement publicly stating that it was exactly what they are going to do. They can't be blamed if you did not believe them.

As a miner they are in business to make money. We even assumed that this profit motive drives them to mine the most profitable coin. Mining margins after costs are at best small, and it may take years to recover their investments. Why would they not take advantage of this golden opportunity? A million dollars "invested" will nett them at least 5 million, after BT2 is declared to be the new Bitcoin.

Major companies like Blockchain.info, Bitpay, Xapo and Coinbase have publicly stated that they will recognise the chain with the most accumulated hash power (hashrate x blocks) as BTC. This calculation will not take into account the price of BT1 or BT2. This means that if a majority of them (miners) are supporting Segwit2X then Segwit2X will become BTC. Note that it needs just a majority and not 80 or 90%.

Opaque messages from exchanges recognising Segwit1X as BTC. Eg. HitBtc

1) "On the day Segwit is activated B2X withdrawal and deposits enabled". All it means is that they will trade B2X, and if B2X become BTC so be it, if not they will trade it as a token. It means nothing really. Just stating the obvious.

2) "We may temporarily suspend BTC deposits and withdrawal ...... once we are sure it is safe, we will restore full functionality"

It is actually the same policy as Coinbase. They did not insist that if B2X has more accumulated hashrate, they will still treat B1X as BTC, because they can't. No customer will accept that trade. So it is clear that even if exchanges say that they prefer Segwit1X to be BTC they still have to wait till the situation resolves. It is just a PR stunt or it may be construed to confuse as they may also be keen to jump in on this "golden opportunity".

Trading volumes were light in the begining but now with 10 days to go, the 24 hour volume have reached 5700 and increasing. It is conceivable that we could have 100,000 or more contracts outstanding at the fork. This could easily become the record single Billion dollar wealth transfer event in the history of Bitcoin.

So why would anybody take the opposing view if they stand to lose that much money?

Perhaps they are committed (Blockstream) and have to protect their position. Perhaps they are putting up their money to protect their principles (misguided), or maybe they just can't see the wood for the trees. The truth is - They are not in control. The miners are. We have to at least expect that human beings will act in their own self interest.

Group 1 losers : Bitcoiners, and new bitcoin converts who believe that they will be getting Segwit2X coins as dividends which they can quickly sell for a profit. (ALA Bitcoin Cash). See my last post on No Segwit2X Dividends. No dividends but they will still have their BTC.

Group 2 losers : Investors who purchase Segwit1X futures thinking that they are getting BTC at a discount. 100% loss if Segwit2X wins as the Segwit1X chain is unlikely to survive.

Group 3 losers : Those who believe that miners will mine the most profitable coin and so factor in the future price of BT1 and BT2, but as stated above, price is not a factor in calculating accumulated difficulty. If you really think about it, the most profitable option for miners is the windfall scenario.

If Miners End Up Supporting Segwit1X

In the unlikely event that miners end up supporting Segwit1X, they will have to answer to why they reneged on their word and agreement. There could be class action legal suits (against NYA signatories) flying about from the people who lost money trusting them. Why would they sully their reputation and risk the wrath of these investors. Sticking to their word and agreement is the most profitable and safest course of action.

The Battle For Bitcoin Cash To Become Bitcoin Is Not over.

Bitcoin Cash is not an Alt Coin. It is still in the running together with Segwit1X and Segwit2X to be the real Bitcoin. They all have the genesis block and compete for the same hash power. The tussle between Bitcoin Cash and Segwit since the last fork is still continuing. It has now morph into a tussle between Bitcoin Cash, Segwit1X and Segwit2X. In this coming fork Bitcoin Cash is not in the running for the title of BTC because it is very far behind both Segwit coins in terms of accumulated hash power. What can happen to Segwit1X if it becomes the minority chain is covered in my previous post. However, in the long run only one coin can survive on the Bitcoin proof of work. This has implications if you are a fund manager.

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Weekend distractions: a perfectly good dining table

I've been a DIYer all my adult life. Some of my non-software projects still revolve around computers, especially when they deal with CNC machining or electronics. But I've been also dabbling in woodworking for quite a while. I have not put that much effort into documenting my projects (say, cutting boards) - but I figured it's time to change that. It may inspire some folks to give a new hobby a try - or help them overcome a problem or two.

So, without further ado, here's the build log for a dining table I put together over the past two weekends or so. I think I turned out pretty nice:

Have fun!

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Segwit2X Equals Free Dividends ... Come On ... Tell The Truth ... PLEASE!!

In my last article I was curious as to why the BT2 futures price is at 0.15 BTC while miners support is at 90%. Totally weird. This is as though - with the Reserve Bank announcing a 1%  interest rate increase, the banks react by dropping mortgage interest 2.5%. Bonkers!

The article here : Battle Royale Segwit2X And Segwir1X

I realise now that the reason is because investors are thinking that after the fork they will be getting Segwit2X fork coins as dividends, which they can immediately dump just as they did after the Bitcoin Cash fork. This may also to some extent explain why bitcoin price is increasing now just before the fork.

Wow! Stop! Newbies Beware! Stop swallowing this nonsense! It is not going to happen this way. Segwit2X is not the same as Bitcoin Cash. All major exchanges have announced that they will treat the chain with the most work done as BTC ( Bitpay  Coinbase  Blockchain ). Take this announcement seriously. It means that everything freezes after the fork and the large bitcoin companies ( users by proxy effectively) will decide which chain is BTC and that is by observing which chain has the Most Work Done. It is a race and the winner gets the Bitcoin name. Price does not come into the calculation. Only mining hashrate. Because of this decision,

Segwit2X will be the chain with the most work done after the fork.

It will be given the Bitcoin name.

How it will play

24 hours before the fork all BTC deposits and withdrawals will cease.  They will  now wait to see which chain will have the most work done basically the most hashing power.

Segwit2X will have 90% hashing power. The first block will be mined in about 11 minutes then the next in another 11 minutes. At the end of 2 hours there will be at least 10 Segwit2X blocks found. If Segwit 1X is lucky it will find 1 block after 2 hours. If we stop here we can already conclude that the Segwit2X chain has the most work done and so will be named BTC.

If we carry on longer, miners on Segwit1X chain will find that they are continually lagging behind Segwit2X in total work done, and at some point will start to switch over. When this happens the Segwit1X chain eventually dies ( Chain Death Spiral ) and will be abandoned. All blocks found on the Segwit1X chain will be worthless. The longer this carries on the more miners on this chain stands to lose.

Miners Miners Miners (Update)

Do not take your eyes off the miners. They control the play. You can be sure they are talking to each other. Look at it through their lenses and it will appear less hazy. So if you are a miner and you see this 6X play on Segwit2X what will you be doing?

Firstly you will want to keep the price down while you buy in. What an opportunity. If they make the play for 6X gain. They can say " it's what we said we would do " and no one can pull them up for insider trading. Then there is the longer game. What is the long game. I will have one more post before the fork next week to square up all these events and happenings since the last Bitcoin Cash Fork.

It is strange that there is quite a premium on the asian exchanges for Segwit2X. Do they know something?

No. Miners will mine the most profitable coin and they will move back to BTC (Segwit1X).

Get this. Do not fall into the argument that Segwit1X is BTC before the fork and Segwit2X is a new coin after the fork and so is an Alt coin. Both are bitcoin at the point of the fork. If you send btc from a wallet after the fork it is a valid transaction on both chains. The wallet does not care which chain wins. SPV wallets will follow the longest chain.

At the exchanges, and users like Coinbase, Bitpay effectively suspend trading. They wait to see which chain becomes the longest chain. This now depends on which chain has the greater mining power. They will not wait forever and at some point after they see that hashrate have stabilised, they will start trading the longest chain as Bitcoin. When this decision is made by consensus, the other coin is effectively dead. Price does not come into the equation only hashrate matters. 

No. The nodes will reject Segwit2X and miners will go back to Segwit1X

Nodes do not matter is this fight and is another fallacy thrown in to confuse. If this was true Bitcoin Cash could not have happen. It did. So this argument is false. And don't fall for the argument that Bitcoin Cash uses a different Proof Of Work too. It uses the same. Nodes do not matter because the system will propagate even with 2 nodes.

No. The users will rebel they will boycott all the "enemy services" and those services will pay a heavy price.

After the fork and if Segwit2X becomes BTC, the decision is made. Election is over. We could argue forever and never agree. So those that do not agree - can exit. The rest will carry on. No point spitting in the wind! Nothing will come off it. The community will move on. There will be more controversy and fights for "the soul of Bitcoin" going forward. For now this argument is over. The next fight will be between Segwit and No Segwit.

Effect of Bitcoin Cash hashrate

The impact of Bitcoin Cash will probably not be great because of a change to their Emergency Difficulty Adjuster (EDA) through a hard forked on 13 November. Bitcoin Cash hashrate would reduce in volatility and probably fluctuate around 1 Peta Hash.

51% attack and Wipeout

If Segwit1X gets only 10% or less in hashing power it can also be 51% attacked. However this is not likely or necessary as such an attack by miners will not look good on them.

Bitcoin Core is Legacy bitcoin and it will never die, may get smaller but never die.

Very dangerous unmovable position to take. Not healthy if you are betting your own money on it. Sometimes an immovable object meets an irresistible force. Only tenable if you are betting with someone else money. What if it does die? and it can without mining support.

What happens to the Core Chain

1) They can change the Proof of Work algorithm and branch out like Bitcoin Gold, but they won't be Bitcoin. This is not easy to do and will take some time to accomplish. Then there is all the infrastructure to build around it like wallets, exchanges, nodes etc. This is not easy as can be seen from the experience of Bitcoin Cash. Add in the need to finance the development and it is really nearly impossible.

Note :- Bitcoin Gold self mined 100,000 coins presumably for development. The price of futures started at $400 and is now about $150. These are futures. There are no coins yet. The longer it takes to release coins the less it will be worth. To me, Bitcoin Gold looks more like a get rich quick scheme preying on the uninformed, misinformed and the greedy.

2) They can hard fork to 2MB and remain as a competing client, and keep developing Segwit.

3) They can hard fork incorporating EDA, but it is rather too late to implement now.

Whatever happens there will be no Segwit2X dividend coins to dump.

The aftermath

If you own BTC in your wallet they will just continue to be BTC. Nothing changes. SPV wallets will just recognise the longest chain.

What if Segwit2X does not get 90% of hashing? Well, it just need to get the Majority. Add to this the probability that miners on Bitcoin Cash will move to help Segwit2X and you quickly see that, because the criteria is total work done, Segwit2X will win and become BTC.

Back to Segwit2X futures

So what happened with Segwit futures. For every BT2 coin sold someone must split 1 BTC into 1 BT1 and 1 BT2 coin. These are just numbers on Bitfinex ledger. These coins do not exist. So if someone holds 100 BT2 another person must hold 100 BT1 on Bitfinex ledger. If BT1 chain dies as the above scenario would suggest, then those holding BT1 coins will be valued at zero and BT2 coins will become BTC.

There will not be any BT1 coins to issue unless Segwit1X successfully hard fork which as explained above is a tall order. Even if Core hard fork to 2MB it is still a Segwit2X chain. If you have been deceived by the No2X campaign, than you will be very angry indeed. If you bought BT1 coin at 0.85 BTC thinking it is a 15% discount. You will lose 100% of your investment.

It is very important that you do your research. Do not listen to one side only. Be wary when people vent and rage loudly, aggressively, uses censorship and threats to make their point. Also be careful of those who do not fully know what they are talking about. Don't just accept their point of view. Examine their reasoning. If non is forthcoming - RUN.

Am I right?

I could be wrong! But it comes down to this. Do you think Segwit2X will start with more hashing or Segwit1X? I have described the above scenario if Segwit2X gets the majority hashing power come fork day.

If you still believe that Segwit1X will get the majority hash power then take the opposite view. However do consider :
1) There are 90% miners signalling for Segwit2X already. Are they lying? Bitcoin.com
2) There will be hidden hash power that will come up on fork day. These will more likely be for Segwit2X as their supporters have more money.
3) Nodes play no part in this fight. Don't be fooled by this argument.
4) If you are wrong you lose 100% of your investment.
6) Bitcoin Cash miners are Segwit2X supporters. They can switch their hash power.
7) Reputable People in business honor their agreements. Re NYA.

Can't emphasise this enough. DO YOUR RESEARCH. If you want to gamble on the futures, DO YOUR RESEARCH. I repeat again. THERE WON'T BE ANY SEGWIT2X COINS TO DUMP. One or the other will go to ZERO. If in doubt Do Nothing. Your bitcoins are safe.

The argument stops. We move on.

Regardless which side you are on in this argument the issue will be resolved. ( Good Video )The fork will happen. One coin will emerge. If you gamble on an outcome and you are wrong you will lose 100% of your bet. Unless you are willing to lose all just hold. Your BTC before the fork will still be BTC after the fork. There will be no Dividend Segwit2X coin that you can dump. It is not a repeat of the Bitcoin Cash fork.

Bitcoin Is A Beautiful System. It Will Win.

Despite all the noise, internal fights and external attacks, the price of Bitcoin goes higher. It will survive and get better. Even China can't kill Bitcoin. Bitcoin is what the majority of users agree is Bitcoin and the consensus process is constantly changing. We can't explain what is Bitcoin but we all know one when we see one. This is a social movement like we have never seen before. Hope you profit from this.

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