I follow the argument that Bitcoin is the monetization of energy consumption. Whenever the price of Bitcoin is higher than the price of the total quantity of energy required to mine it, it's profitable for miners to put more energy into mining Bitcoin. So they will. This action arbitrages away the difference between the two prices until the quantity of energy put into the mining process rises (or falls) to match the price of the Bitcoin.

But the price of Bitcoin itself isn't determined by the mining process. Bitcoin is a speculative asset much like gold. People buy (and hold) it because they're hoping it will increase in value. Just like gold, the price of Bitcoin could go to zero, but it probably won't because so many people out there are committed to "buying the dip" and holding it as a long-term savings instrument.

As you point out, Bitcoin (just like gold) is not a proper financial claim. And the energy that goes into Bitcoin mining is just gone.

So far, I basically agree with everything you're saying.

But then we get into your thought experiment about monetizing computing activity and making a market in CPU cycles.

Are you just saying that:

1. In addition to (or instead of) using their own data centers, Amazon could farm out some of its computational load to the public, and pay them for it?

2. Amazon can pay for the CPU cycles by issuing its own tokens that are IOUs for CPU cycles?

3. Miners can sell those tokens to people who want to pay Amazon for cloud computing services?

If so, what's in it for Amazon? Why don't they just use dollars? Why is it useful to issue a new token when they can instead just pay the miners in dollars and continue to bill their clients in dollars?

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Dear Mr. Neilson

I find it very difficulty to understand your point on the design flaw of Bitcoin compared to gold. How does the fact that coins are digital make Bitcoin a worse base layer money? How does the form (digital vs. physical) have anything to do with the monetary function?

Let me also mention that I believe you mischaracterize the function of mining. In concert with the programmatic difficulty adjustment, prove of work ensures that miners deploy costly resources (capex and opex) to attend a new block to the timechain. Since node operators determine the value of the coins released to the miner, he / she must behave according to the rules to not end in financial ruin. Energy is the resource chosen by the protocol because it can never be costless.

Bitcoin, to mention an ancillary point, is not only appreciated because of scarcity, but has many more attributes that make it a suitable base layer counterparty-free money: privacy, divisibility, ease of storage, ease of transfer, ease of verification and infinite scalability (via smart contracts like The Lightning Network). Many of those attributes are not present in gold.

The emergence of credit is a function of market demand. Credit is also possible (actually a reality, see exchanges and custody wallets) in the emerging Bitcoin monetary system. However, the public ledger plus make credit expansion more difficult to credibly establish and generally less mandatory given the ease of storage, transfer, verification and divisibility.

Thank you for your consideration.

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