A few thoughts - Wednesday, September 17, 2014

[Steve Sokolowski]

Good afternoon! A few thoughts for lunch today:

Middlecoin pool disappears

The Middlecoin pool shut down recently, taking with it about 58 bitcoins. The owner, h2odyssey, states that BTC-e froze his account for making too many deposits to the same Feathercoin address. Regardless of whether this fantastical story is true, he appears to be taking the dishonorable route and forcing the losses on miners.

For those who don't recall, the Middlecoin pool was making 3.4% on about 15 GH/s, at a time when Chris was earning $37/day on a 700MH/s graphics card. The amount of money he made was astronomical, and now he suddenly won't pay out the remaining 58 bitcoins he owes before shutting down operations. Any ethical person would pay out in a reasonable amount of time, and then work to resolve his problems with BTC-e on his own. While there is no precedent in the court system, I would suspect that he could be sued for theft, as the money that he is refusing to pay is not his own.

People like h2odyssey are why the bitcoin community gets such a bad name. It took a while, but the exchange business seems to have had a shakedown to get rid of the scammers and fraudsters. I hope that this Middlecoin fiasco raises the bar on mining pools and shakes out people who engage in dishonest business practices.


There is a floor somewhere

It surprises me how, in /r/bitcoinmarkets, there are still so many posts expressing optimism that any day now there will be a recovery. This incorrect optimism has been going on for months; it is now clear that (as I predicted) lowstrife's September bubble idea was incorrect. There still has not been that final panic that will cause a trend reversal. I'm not going to talk much more about this except to reiterate that people predicting that there will be an immediate reversal without a major crash are wrong.

If you believe in the long-term success of bitcoins, this represents a great opportunity. The lower the price goes now, and the greater the irrational panic that is coming is, the more money there is to be made in buying. Even if you think that bitcoins are doomed, you can still make money by buying when the major panic occurs and selling the next day. People who originally purchased a bitcoin at $1000 can invest another $1500 at, say, $350 and wipe out their losses in a small recovery to $550 or $600.

The key here is recognizing that there is almost certainly going to be a floor to this cycle. It's difficult to say what price the floor will be, but we know there is a floor because localbitcoins transaction volume is going nuts. If we had entered into a terminal decline, you might see sites like bitstamp being hammered with volume to sell at any price (the sell orders at bitstamp are not market orders). Smart investors who believe that bitcoins are done for aren't transacting for cash on localbitcoins. How would they find someone who has $50k in cash to trade 100 bitcoins for, and what is someone going to do with all that cash? The localbitcoins transaction volume represents people who want to participate in anonymous activities, like porn and drugs. Remember, Coinbase recently took a stance against gambling, sending people who want to gamble off to the dark side as well. We can see here the effects of regulation the people don't support in action; it just pushes the activity underground.

Of all the indicators to watch, the localbitcoins volume is the most important. It indicates that bitcoin use is increasing significantly and demonstrates that there is some floor to this current decline. If you can figure out what it is, you can make a lot of money this cycle. The more that I see the localbitcoins volume and price headed the opposite directions, the more I become convinced that there is a huge opportunity coming up.


Silk Road picked up as TV series

As you can see at http://www.dailydot.com/entertainment/d ... -tv-cable/, Spike TV purchased a TV series on the darknet markets. Whatever you think about these markets, this is an underreported piece of news that has significant implications.

Consider Spike's target audience of young males, exactly the type of people who are most intrigued by bitcoins. And, of course, people who are interested in participating in the markets will be more likely to watch this show than the average person. It will be interesting to see how they present the cryptocurrency buying process.

This is something worth keeping an eye on, because it isn't airing right now, meaning that it is likely to debut around the time that OpenBazaar releases a final version. If the OpenBazaar developers can put together a stable product, then this show will be free advertising for OpenBazaar.


It's not our job to advertise bitcoins

On bitcointalk.org, there are various threads imploring people to "advertise" the use of bitcoins to their community. I'm not exactly sure what they are trying to accomplish. "Advertising bitcoins" is like telling people to play video games in order to increase the number of game players. What's the point of untargeted advertising of video games if you aren't telling people to play a particular game? If I play World of Warcraft and want more friends, I don't care if huge numbers of people play Final Fantasy XIV instead.

The effort being put into these threads about advertising could instead be used to improve the bitcoin protocol. Imagine if each of the people who was involved in these campaigns spent those minutes teaching themselves how to write C++ instead?

A more substantial criticism of the misguided "advertising" approach is that I've never seen advertising be effective for any Internet-based product. I've spend hundreds of dollars in Google Adwords credits on various campaigns. One campaign, to sell a house, resulted in zero calls. Another, to advertise remixsquared.com, resulted in no songs being uploaded. A permanent banner placed prominently on a high-traffic website related to video game remixes generated exactly one click in three months. Advertising is a waste of money and companies like Google make huge profits by convincing people that they can just put up a website, pay some money in ads, and then people will visit.

I'm not smart enough to know what it is that makes people get interested in stuff on the Internet; if I were, I would be rich. But I do know enough to not waste huge amounts of time and money on it over creating a good product. The things that get the most popular, like viral videos, hit songs, and cell phone games, never have any advertising budget associated with them. When was the last time you saw an ad for Minecraft? There were no ads for those videos of people bungie jumping off that arch in the desert despite the video costing about a hundred bucks to produce.

It's a huge waste of time for people to be focusing on advertising, simply because it isn't very effective in getting people to try new things.

[cryptorific]

Silkroad as a TV show
I cringe at the technobabble that will be invented to dumb down the technical concepts for a mass market. Maybe I'll be wrong and they'll get it right like Mike Judge did with Silicon Valley but I'd be lying if I thought they would. On a somewhat related note, the CEO of Openbazaar, Richard Crites, lives near me and comes the local bitcoin meetup fairly regularly.

Advertising
I've had a similar experience with google adwords, they're simply too expensive for the little business they generate. They're only really good for very specific types of products or services. The job that pays the bills is in commercial real estate and we tried out google adwords, after spending a thousand dollars, we ended up with mostly people looking for residential realtors. Turns out that people don't really google for commercial space to lease, they either drive around and look at signs or they have a broker who looks through something like loopnet (commercial MLS type site that's rather expensive).

If anyone does any advertising, it should be the merchants who stand to benefit. It is in their interest to get people to use bitcoin versus credit cards or paypal. Their advertising doesn't need to be done in a big flashy way, just having that bitcoin button at checkout is enough, when you get a critical density of bitcoin buttons (similar with paypal), people will figure it out for themselves. It's a slow road and the bitcoin community is not patient for something that can take 10-20 years. The old rule of economics was that currencies take a century or so to mature and be widely accepted, but of course we live in different times. If the euro has taught any kind of lesson it should be that starting a currency isn't easy and it takes a long history to generate the kind of confidence that warrants widespread usage.