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Cryptocurrency and virtual economy
Material posted: Publication date: 03-12-2017
The article presents several considerations that have arisen in me at different times and on different occasions. Put together these considerations will help to give the reader some perspective on the phenomenon of cryptocurrencies.

I will discuss the following topics:

  • What is money as such, and why the emergence of cryptocurrency was inevitable
  • Whether cryptocurrency is the next financial bubble
  • Who are the "rich" and "poor" from the point of view of mathematics
  • What you can become in the field of cryptocurrency

An important concept for the article is a virtual object or state, which do not exist in reality (reality), but can occur under certain conditions. In the context of information technology these terms are software and algorithms.

Thus, we can talk about virtual money and the virtual economy. I'll start with the arguments about the virtual nature of money.

Cryptocurrencies are a natural evolution of money

People are dying for the metal
Couplets of Mephistopheles from the Opera "Faust"

Money was always. This is true if not to take into account the ancient times, about which we have a very vague idea, and times when the monetary system failed, and people had to resort to direct exchange. Basically, people used for the exchange of tool mediation, that is, has always been in the money.

The advantages of exchange by means of money, in comparison with direct exchange:

  • You can convert part of the eight hours spent in the office, at lunch. That is, the money allow you to compare things directly incomparable
  • Hours spent in the office, can be exchanged for vacation in the summer (pending exchange)
  • Money greatly increase the efficiency of exchange at a distance, from which has grown the whole trade.

From a mathematical point of view the main interest is a function of money as universal measure of value or rates. You can represent money as an imaginary line, which we apply to goods and services and get a number. For example, a box of matches 1, for a coffee Cup 100 to 1000000 cars. These numbers allow us to make reasonable adjustments acceptable to both parties, the exchange.

Initially, as money was used items that could be directly consumed: salt, honey, hides, and pearls. Met and difficult measures. For example, in the samurai of Japan were used as koku of rice — quantity of rice needed to feed a samurai during the year. However, the most popular steel metal money of copper, silver and of course gold.

The basic comparison operation for metallic money was weighing. Number-the measure of prices is uniquely determined weight of metal, generally accepted as money. To exchange, it was necessary to set the amount (weight) of gold corresponding to one subject and another. Gold became the dominant metal used as money, for several reasons:

  • Gold is resistant to chemical effects — over a long period of time does not lose its characteristic Shine
  • Gold is a soft metal that can easily divide to compare the products of different cost
  • Gold mining was difficult, and it is relatively rare in nature, confined to the private issue of money
  • More than anything, gold is not particularly good, except for decoration (direct consumption of gold is very limited)

In the course of history, there was an amazing substitution. Gold is selected as the material (carrier-up rates) for money in technological and operational characteristics, has itself become a measure of the price. From the idea that gold is convenient to use as money, the man quietly came to the idea that only you can use gold as money. Silver and copper were used as bargaining the metal, but the standard was still gold. Technological and operational properties of the medium of money pulled the original mathematical purpose of the measurement of the equivalent-line.

Humanity has fallen into the trap. It turned out that the control of the quantity of money supply (money in circulation) and the economy of a state was directly dependent on the amount of gold available. The loss of gold, for example, transportation by sea, led to the reduction of money in circulation. On the other hand, the increase in the quantity of money in circulation in case of need (population growth and production, increased turnover) required intensive exploration and extraction of gold, even through wars and bloody exploitation of miners. More details can be found, for example, Niall Ferguson.

The so-called gold standard was pursued by the people even in the 20th century. Despite the fact that the amount of money needed to the world economy, could not be inscribed in the border of the gold reserves, the state continued to make attempts to tie currency to gold. This was done by fixing the price of gold, as well as conditional guarantees free exchange of paper money for gold at that fixed rate. Conditional in the sense that, of course, most people will not go to change money into gold, but rather buy food and clothes. Finally from the peg to gold was abandoned only in the 1970-ies. Since the world is dominated by the Jamaican currency systemthat gave rise to the phenomenon of Forex — the foreign exchange market with free exchange rates.

In ancient times the measure of the price was just gold. But, with the invention of coins, the operation of the weighing (measurement of weight) was gradually replaced by the operation of the account, due to which exchange transactions are now much easier. Price became possible to Express the number of coins ( Golden).

The coin has two sides, and each side has its specific meaning:

  • front side (obverse): on it is depicted the face of a ruler who produces the coin
  • the flip side (reverse): contains the denomination of the coin

That is, the coin, on the one hand, contains information about what kind of value it represents, and, on the other hand, contains a confirmation of this information. For the first coins of the denomination was only a confirmation of the weight of the metal contained in the coin. But over time, began to appear coins no correlation between weight and value. Although until the beginning of the 20th century was in the course of the coins, which tried to reproduce this binding. Now coins of gold began to serve only for the collection and gift purposes.

With the growth of the economy manifested the inconvenience of coins when exchanging expensive goods. For the purchase or sale of such items it was necessary either to produce huge coin, or take a bag of coins. The problem was solved with the help of paper money (credit cards, Bank notes, banknotes). On a small piece of paper is designated the nominal value is indefinitely great number. In a small suitcase could fit a fortune. Only had the problem below at the piece of paper you have typed the correct number. Indeed, what prevents me to add an extra zero and thus increases the nominal value of the bills in order? The guarantor of the correctness of the money has been made by the state.

The development of information technology has led to the emergence of electronic money (second half of the 20th century). Bank card (VISA, MasterCard, etc.) no longer contains the information about the amount of money. In fact, it is only the access key to the account — a certain amount of money. Today the Bank card is the main attribute to the availability of money from the person.

But technology has made the next step. In 2014 there is a system of mobile payments Pay Apple. Now, for the payment of services not even need a credit card. You should have a mobile phone. Money has become simply an application in the mobile phone, without any specific tangible attributes, that is, a completely virtual entity, which is implemented with a special program at the time of purchase.

We identified two main characteristics of money — a specific value measures the price of goods and a confirmation of the correctness of this action. The latest achievements in information technology and possibly money from a specific carrier (gold) show that this is enough. Proceeding from the foregoing, I propose the following definition:

Money is reliable information about their number

Cryptocurrency is expected to be the epitome of this definition. A fully virtual money, which are built in the mechanism for confirming their value and authenticity. Their appearance was historically inevitable, and we can expect the emergence of a growing number of cryptocurrencies and their improvement. And there is much to improve. A pioneer of the bitcoin has the same flaws as the gold quantity is limited and production is difficult. Also bitcoin is not convenient dimension for your daily needs: we tend to think in millions and shares similar digital coins. At ether , we can observe an attempt to overcome some of the problems of bitcoin. However, widespread adoption of cryptocurrencies are still a thing of tomorrow.

Pyramids, bubbles and cryptocurrencies

Something immaterial — the most honest product. It is worth exactly what you pay for it
Robert Heinlein. The man who sold the moon

Cryptocurrencies changed the usual rubles and dollars, the rapid growth of bitcoin already makes it attractive for investment and speculation. While bitcoin shows the rapid growth overtakes Bank deposits, but for how long?

Opponents of cryptocurrencies compared bitcoin with the financial pyramid. Let's see whether this is so. A pyramid scheme name Ponzi, Maddie or Mavrodi involves the payment of promised income from the investment of new members.

"Attraction" pyramid of the asset to the investor is that offers very high yields. The pioneer pyramid business Charles Ponzi it reached 100% in the quarter (1500% per annum with quarterly compounding). However, our revenues will depend on and just how many more people will become participants in the pyramid. Ponzi lasted less than a year, as the flow of customers could not compensate for the exorbitant rates of return, which he did. Balanced is a pyramid implies that the yield is still higher than all the other assets available on the market, but not so high that new customers could not compensate for the lack of cash for current payments. Bernard Madoff offered returns slightly above the market, and his pyramid and worked according to some estimates from the 1970s until the crisis of 2008.

Does it all in bitcoin and other cryptocurrencies? Only partly. On the one hand, as for the pyramids, the more people want to buy cryptocurrencies, the more there is a chance of growth in their prices. Of course, if it will increase the offer that is already happening (cryptocurrency becomes larger). On the other hand, bitcoin as an asset, unlike the pyramids, at the time of purchase has no promise of income with a given yield. It all depends on whether you find another person who agrees you have to buy it even for any price. The seller who sold you bitcoin no longer has any financial obligations related to bitcoin.

Now look at the cryptocurrency (bitcoin) from the perspective of the concept of financial bubbles. By definition, a financial bubble is trade something for a price much higher than the so-called fair price. As a consequence, when more is not willing to pay an inflated price for this item, the market price returns to the fair. The main symptom of a bubble is a sharp and unexpected drop in prices on the subject of a financial bubble (e.g., the Tulip mania or the dotcom). Unexpectedly, because all market participants expect a further rise in prices.

What is the fair price of bitcoin or any other cryptocurrency? What is the real price confirmed quantity prices? In my opinion, outside the framework of the existing barter system, this price is zero. In other words, if one does not agree to measure the available goods or services using this "ruler", then its value will fall to zero.

A common problem of financial pyramids and financial bubbles is a limited demand for these products. In the case of the pyramid is no longer willing to invest in the proposed conditions, and the organizers lose their ability to fulfil their obligations, as no other source of revenue they have. In the case of the bladder also is more willing to pay a higher price to acquire the products and the owners are forced to lower the price to get rid of overpriced goods.

I think that cryptocurrencies will evolve along with the development of the virtual economy. Virtual economy is an economy that becomes possible thanks to the software: the distribution of shows via the Internet, computer games, augmented and virtual reality. In this economy of virtual currency (play money, for example) already exist. Cryptocurrency will become a universal tool that will allow for the exchange between different areas of the virtual economy.

It seems to me that the virtual economy has truly endless potential for growth. This is because the virtual economy to overcome the law of diminishing marginal utility. For example, if you nothing to sit at home, you buy the chair. Perhaps a few chairs so not to drag the only chair from the room to the kitchen and back. You may acquire a set of chairs in case guests arrive. Each new chair will have to you less and less utility. That is, you will buy a very limited number of chairs and call it a night. A business model built on continuous sale you a large number of chairs will collapse.

Quite different is the case with virtual goods. If the first episode of the series you liked, you will want to watch the second — the usefulness of the second of the series will not diminish as the second chair. Then you will see a third series, the second season When the series ends, you will begin to see new. The virtual goods of the same category you can sell in unlimited quantities. It's only proper drama, proper development of the plot and selection of characters:

The human psyche — a market with endless demand

If you compare modern mining with gold rush (who has read Jack London, has about it some idea), then it is clearly not enough drama. The miners of the past risked their lives and health for the sake of a few nuggets of gold (in modern parlance, a few Satoshi). And now competition between miners there (they even gather together in pools), we don't hear about hardware failures, interruptions in the supply of electricity, the lost state invested in cryptocurrencies, etc. If all these stories to reproduce in the virtual economy, virtual reality, c is a proper drama, it could stir interest in bitcoin and analogues (first swallow — the series "StartUp").

Cryptocurrency and people: "rich" and "poor"

Fitzgerald once wrote a story that began: "the Rich are not like you." And someone said Fitzgerald: "that's Right, they have more money"
Ernest Hemingway. The Snows Of Kilimanjaro

Cryptocurrency (bitcoin) was conceived as a revolutionary tool, which is intended to change the financial world (e.g. here or here). However, as I have shown, the creators of bitcoins stepped on a rake in the gold standard, and the revolution never happened. Take a look at what the wealth from a mathematical point of view, and how cryptocurrencies can change the balance in the existing distribution.

The dividing line runs not on the amount of money. In this case we would have to draw the boundaries quite arbitrarily. Indeed, 1 million, expressed in some currency, this is wealth or not? But 10 million? And we are talking about the market value of all property or of the ability to simultaneously spend the same amount? Or you need to focus on the car, which drives people? And if he does walk? There are more questions than answers.

I want to offer the original basis for dividing people on so-called "rich" and "poor" mathematically methods that people use when handling money.

Money is often associated with the word "many". That's the beginning and figure out what means "a lot" from a mathematical point of view. The answer to this complex question. The ancient Greeks formulated it as a heap paradox: how many grains form a heap already, but what else is there? Reformulate the paradox in relation to money:

  1. A million dollars is a lot of money
  2. If a lot of money to take away one dollar, a lot will still be a lot

Sequentially applying the second rule (999999, 999998, ...) we get to $ 1. And, under this rule, $ 1 will also be a lot of money. Which is obviously wrong. This is the paradox. At some point the pile of money still ceases to be a pile, but what? In mathematics, the attempts of the answer to this question became one of the reasons for the emergence of fuzzy logic. However, for our discussion, the interest is the response from the field of probability theory and statistics — law of large numbers.

As an illustration I'll take a simple model of enrichment and raspredelenia wealth. Imagine all the population of our country (approximately 146 million) invests a sum equivalent to the 1st dollar, simple game. In this game each participant at each step, tosses a "fair" coin (the probability of "heads" and "tails" are the same):

  • if it comes up tails, the player loses his bet and is out of the game
  • if heads, the participant receives a prize equal to the wager, and the game continues

Again, for simplicity, models assume that to exit the game, or to withdraw the money or add other than the original rates, it is impossible. The game continues until the participant can not throw in one of the rounds "tails" or accumulates a million. In each round a participant is betting all the money he had accumulated in the game at the moment. If we apply this model to the world of business, it roughly corresponds to the closed joint-stock company, in which each member contributes equity capital, dividends are not paid, and to sell shares (share) can only a majority shareholder.

Rate the appeal of the game for the participant. At each step the amount of money doubles. Investing just $ 1, a participant in the next step has two dollars, the next 4 and so on. At the tenth step the participant for more than a thousand dollars, and by the twentieth round he becomes a millionaire. A story that is consistent with the stories of people who came to America with a few dollars in his pocket, and then got into the Forbes list. So our simple model has a certain relation to reality.

However, the flipping of a coin case with a random result. In each round the participant can double his fortune, and lose everything (become bankrupt). Psychologically, the more money the member have at the moment, shame there will be a loss, although they initially invested only one dollar. What are the chances of becoming a millionaire? The answer to this question gives the formula of binomial distribution. The probability to throw twenty "eagles" in a row is less than 0,000001 (I used a formula in MS Excel for binomial distribution):

As we can see, the chances are slim. Only 140 out of 146 million will become millionaires. And again, this is consistent with the fact that the Forbes list for Russia includes 200 people. Our model continues to show its efficiency in application to real life.

In addition to the small chances of a single party, our model has another important property: it is impossible to predict who will become a millionaire. Participant, by entering the game, has no formula, scheme, approach how to throw a "fair" coin to win twenty times in a row. And this property is also true. We have all heard stories about people who got rich. About them write books, make films and legends. But, tellingly, no one has heard of people who got rich reading books like Think and grow rich, Rich dad poor dad or a biography of sir Richard Branson. And all this because:

The basis of wealth lies the random and systematic use of

The basis of all the stories of people wealthy, like the participants in the model described above is a fair share of luck and the coincidence of a huge number of circumstances, without which success would not have been possible. There is no systematic way to wealth, until now were found. In the garage in Sunny California , the computers were gathered thousands of people, but rich one. And the 1970s nobody could say that they will become bill gates or Larry Ellison. However, success stories of the current IT-"rich" turn heads and create the illusion that they can be repeated one person. But the odds are about the same as the throw of "heads" twenty times in a row, as soon as you saw someone who just did that.

How to use randomness and probability in a systematic way? The answer to this question is what brings the law of large numbers. Put yourself in the place of the organizers of the games used in our model. The condition of the game the loser in this round loses all game money, and the winner doubles their capital. Obviously, you can use the money losers to pay the winners of the round (like in a financial pyramid). There are three options:

  • The number of winners equals the number of losers. In this case, all the outgoing money from the game participants get to those who threw the "eagle" and remains in the game. The organizers of the game there is nothing left.
  • Winners smaller than losers. Organizers in the black. They get an amount of money equal to the bet amount multiplied by the difference between losers and winners
  • The winners more than the losers. The organizers must pay the winnings of their funds, or like the organizers of the pyramids with a shortage of new participants to declare themselves bankrupt

Organizers interested in the fact that the number of losers was not less than the number of winners. In the first round of the game the probability of this event is approximately equal to 0.5:

In the first round the chances of a single party (originally the "poor") and the organizers of the games look the same. And we need to get the systematic use of probability by the organizers ("rich"), that is, such a scheme game that they consistently and systematically supported the game and had a profit. For this we need to find a practical and reliable event in this game. That is, the event whose probability is equal to 1 or close to this value. Again use the formula for binomial distribution in MS Excel format selection find that with a probability of almost 1 (accurate to four digits), the ratio of winners and losers diverge from equality the winners and losers not more than 23600 thousands of participants:

In statistics this is called a confidence interval. The idea is that in advance with a given probability (e.g. 0,9999) value of some quantity (in this case, the number of losers) will be in the specified range. In our case, we got that in the first round the organizers as much as possible will get or will spend no more than $ 23600.

If we know the maximum possible flow that can create a stable game. Where the organizers can take this amount? The answer is widely known: of the Commission (banking), taxes (state) award (insurance), etc. simply put, to take from each participant fee (for participation in the game) are minor in comparison to a bet. The minimum required for this stake is determined by the ratio of the maximum expected deviation in the number of winners from the mean (23600) to the total number of participants of the round (146 million) and is equal to:

One of the most popular cryptocurrency exchanges livecoin this is the size of the minimum trading Commission (surprising the accuracy with which we predicted this number with the help of our simple model, isn't it?). If we take out a maximum fee of 0.18% and applied to our model, but get virtually guaranteed profits are the organizers of the games in the coin in the first round of equal

In subsequent rounds, the situation is changing for the organizers. On the tenth round a number of players should be reduced about a thousand times, but the bet size will have 2 ^ 10 = $1024. The maximum expected number of winners, deviating from the average will be 750:

Accordingly, the minimum necessary, the Commission, at the tenth round will be already

At the 20th round of the minimum Commission up to 16%. It turns out that the less participants in the round, the more likely that the number of winners deviates from the number of losers and the more unpredictable the game becomes for the organizers. This is the manifestation of the law of large numbers. The position of the organizers of the game ("rich") the more stable and profitable, the more the game participants ("poor").

In cryptocurrency we can note at least three groups of players that already use the approach of "rich":

  • exchange of digital currencies take transaction fees, Deposit and withdrawal of funds
  • the sellers of mining hardware to mine, including graphics cards
  • producers of electricity

For these three groups, and the exchange rate for bitcoin itself practically important. It is only important a large number of players in the cryptocurrency.

The model looks almost perfect when a large number of participants. However, it has a small flaw — the confidence interval still does not cover a certain event (probability 1), and a little less. Even though it is 0,00001 chance of failure of the organizers of the game, but due to this small magnitude in the list of "rich" there is a continuous rotation. If you look at the history of information technology, thirty years ago, it was impossible to predict who it is from it people today will be in the TOP 10 richest people in the world. However, technologies are the basis of wealth, four out of ten people in the TOP 10 through 2017. In the first Forbes list in the TOP 10 was dominated by real estate, which is in 2017 falls short of only 18 seats.

Cryptocurrency can really become game changer'th in the world distribution of wealth, creating the possibility for another shuffling of the list of Forbes. But the chances of a single party, is he playing the exchange rate for bitcoin or launching a new startup, a small. Unless, of course, he's not going to come up with a scheme of "rich". And, in my opinion, the virtual economy provides a great opportunity, as it is easy to create and distribute mass.

Who is involved in cryptocurrency: fans, regulators and, perhaps, professionals

In a world where humanity is at an unprecedented pace have become redundant, we were both retained, the remainder in a different era: professional workers
Peter Watts. About blindness

Cryptocurrency appeared on the background of the rapid development of virtual economy. It's the economy, which is entirely created software in the human psyche. That is, the goods and services of this economy do not exist in the material world, but arise in the moment of interaction of special software and humans. First and foremost, it's a computer game. In this economy already widespread virtual money. This money exist and are used only in the virtual economy, but can be exchanged for the usual so-called Fiat money, i.e., money whose value is guaranteed by a member state (rubles, dollars, etc.). There is the purchase of virtual money to Fiat. And it is already possible to do business in a virtual economy.

The development of virtual economy, not only due to the rapid growth and spread of information technologies. Not less important factor is the release of a large amount of free time people have. Indeed, if people spend all their time making money (in real world), the virtual time just would not stay. But thanks to the automation and robotization of an increasing number of people will be forced to seek alternative employment. And the virtual economy with endless growth opportunities are ready to offer a better alternative.

Interesting feature of the virtual economy is the low entry threshold in terms of training. The same applies to cryptocurrency. Information about what it is and how to start (how to start a mine, how to trade cryptocurrency , and even draw the idea for a startup) is freely available. No need to go to graduate school, get your diploma, you can join the game right now, spending a couple of hours in the Google search engine or any other. It is now observed in the field of cryptocurrency. Few of the millions of participants in the sector have at least some specialized education.

A similar situation is observed with other information technologies: programming, big data, artificial intelligence. On the Internet you will find a lot of information that can be applied to practical problems from the comfort of home. If you do not get tired of it, for a couple of years you will be able to fill out and will find a permanent job. And can press the professional who is not judged on time in order to master the newfangled toy like a blockchain:

Virtual economy is an economy lovers

Employee virtual Economics profession does not guarantee a comfortable future. Higher education, a pack of certificates and years of experience in some sector of the virtual economy may not protect the professional from reduction. On the other hand, employers do not want to pay for competence, which can be much cheaper to buy from an Amateur-beginner.

Where to go to professional Finance? As usual, the big players (banks) and regulators. Sooner or later, cryptocurrency will be regulated and assimilated into everyday life. And, contrary to the initial idea of decentralization, cryptocurrencies will simply replace the current money and so are almost all virtual.

Interesting puzzles to me is the creation of a self-regulating crypto-currencies. As one of the key problems, now solved by means of manual manipulation of a single parameter (the refinancing rate) is to maintain the optimal amount of money in circulation, it professionals can focus their efforts on this task. Unlike bitcoins, the amount of which is fixed and the course is unpredictable ranges, the cryptocurrency of the future will maintain the right amount and the rate, based on the needs of the economy. If possible to create a cryptocurrency, States will be able to transfer this technology, the function of maintaining the optimum cost of money and the amount of money in the economy.


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