Right tailed, MS Paint, bell curve. Co-integrated with broken dreams.

If you look at the responses to any stock to flow Twitter thread, you get predictions that  look a bit like this curve. The wisdom of crowds? Not exactly. The above numbers are NOT where I think peak selling will happen. The chart is where people say or think they will sell, in theory. In practice, Bitcoin newcomers usually sell early and buy back towards the top.

In 2017 when Bitcoin was worth €1,200 I thought it could track the growth of the web and go higher. But the quick jump to €18,000 meant we were in a mania period. After a 75% fall to €3500, I said it had never been stronger to the independent.ie. ​

No one can call the top, but Everyone is getting rich articles , or maybe this time; ‘FIAT is over, gold is getting flipped, we’re going to $1M!’ articles, are good indicators. This is often the point where newcomers buy back in.  Who will be the new parabolic Trav?

I expect the following to play out among more experienced market participants:

• Some STF watchers sell off well before $100k (sell the news) and bank significant gains from $3-4k.
• Others will use STF in conjunction with the Mayer Multiple and other metrics and chart patterns, which may lead to selling before or after the coveted $100k.
• Long term hodlers won’t sell at any price.

STF Bullievers

• In 2020 the model will be perceived as ‘under the radar’ for newcomers until we approach previous all time highs. (Google trends search data can convince you of anything if you input enough variations. Halvening, STF, moon, etc).
• Some are saying that historically we tend to ‘overshoot’ the model and hope for the same to happen again. Sample size be damned.
• If the price breaks $20k, Much more STF believers, who buy in above this level, will depend on the model holding up and will be uncomfortable selling below $100k, looking for a quick win. Crazy predictions will really get going if $100k holds for any length. Queue ‘End of Fiat’ articles.
• If the model breaks down and price stays below $10k for a few years, obviously none of this applies.

Many people will plan to sell if the model gets overshot, but in practice they get carried away and don’t sell till it's way too late. Maybe those newcomers sell at $120k, panic buy back in at $160k. The price peaks at $200k and they ride it all the way down to $40k. Welcome to Bitcoin. 

Maybe the Mayer Multiple will be the limits that people cling to, or something else like Willy Woos Top Cap. Maybe an anonymous Duck or Wolf will guide us. Maybe we just go sideways. But there is something about the simplicity of Stock to Flow, and how many paid group leaders are already representing it as fact, that I think will make it an unbeatable meme. 

https://twitter.com/BTCBehaviour

In 2017 when Bitcoin was worth €1,200 I thought it could track the growth of the web and go higher. But the quick jump to €18,000 meant we were in a mania period. After an 80% fall to €3500, I said it had never been stronger to the independent.ie. 

​A study by Red Flag in June 2018, showed that about 120,000 people say they own some kind of cryptocurrency in Ireland. Millennials are 3 times as likely to own cryptocurrency as the average person. What is it about Bitcoin, the most widely held, that is so attractive to this age group? Irish Millennials currently face a number of headwinds :

1. They owe €200 Billion for a property binge leading up to 2008 that they didn’t benefit from. Instead of burning the bondholders, the government burnt the millennials. David McWilliams thinks we should be borrowing even more now. Will more debt solve a debt problem? Maybe the government should be scaling back its size and improving the tendering system to private companies instead of increasing their debts? Maybe the only way to force this change is to remove their ability to borrow money so easily?
2. The Euro printing machine is in overdrive. This makes our Euros worth less and disincentivizes saving. The ECB says it will do Whatever it Takes ™ to maintain stability. This bailout mentality penalises savers, privatises gains and socializes losses. Contrast this to Bitcoin, which can’t be inflated, bailed out or co-opted in a crisis.
3. Public pensions and publicly financed home care are due to rise by 66% over the next few decades. Who is going to pay for this? Ronan Lyons sums up how serious the situation is here. You can’t confiscate Bitcoin easily to pay for government services that taxpayers didn’t sign up for. Of course our generation wants to help the elderly. Many of us would just prefer to finance our own solutions.
4. Over-dependence on tech and pharmaceutical multinationals. If there is a tech recession in the US or a crack down on our tax haven status, the first jobs to go may be the sales and admin roles based in Ireland. We can’t rely on tech incumbents forever. Portugal and South Korea have declared cryptocurrency trading free from capital gains tax. Ireland has claims to be ‘pro-blockchain’ but there has been little legislation to signal this.
5. Unaffordable housing. Irish people historically use their house as a store of value due to the tax benefits (no CGT). There is no equivalent tax break for renters. Add to that the asset price inflation caused by QE and you get a rigged market. Some believe property as a store of value it will lose its Monetary Premium, if Bitcoin takes off. Maybe Irish Houses become cheaper as more people realise Bitcoin is a better store of value than a house. Will there be less hoarding of land? ​
6. The Government Housing and Healthcare market are not functioning properly. The Government provide 80% of healthcare spend, about €20B and are the largest owners of the €370B national land stock. All their assets have been estimated at €500B+ . If deregulation of taxis worked, why can’t we do the same for housing and healthcare? No taxi driver got any bailout, government loan or tax break and yet the market didn’t go into some kind of a bubble or collapse. The market balanced supply and demand and we can all get taxis easily today. The problem is that it caused short term pain for taxi drivers, a small voting group. Short term pain in housing and healthcare would be much more widespread and therefore politically impossible. We need a new way to approach the problem.

​
Ireland went from worst to best performer in Europe by combining a business friendly, low tax environment with strong rule of law. This format has worked in, Singapore, Malta, and Hong Kong among others. China’s threat to the rule of law in Hong Kong shows how free trade alone isn’t enough. Low friction commerce must come with strong property rights. Bitcoin is the digital equivalent. Low friction money, with strong digital property rights.

Bitcoin is the first, un-inflatable, un-confiscatabale, truly global money. But most importantly it is free from politics. When a number of the big Bitcoin companies tried to collude and change the code in 2017, it backfired, confirming that it is the individual user who has control. Much like torrent software, Bitcoin is extremely difficult to stop or change because it is cheap and easy to run the software at home. 

Bitcoin, if it succeeds, it should act as a check on governments and central banks. Bitcoiners don't want special treatment, just an equal right to compete with the dollar or Euro. That may be the Central Bankers biggest fear, that people realise printing money without limits only benefits the already wealthy.  And yet no Irish economist has taken a stance in favour of it. It is because Bitcoin questions one of the dogmas of today's economists. The need for a Central Bank.

David McWilliams sees a swing towards the left coming in Ireland but I’m not sure. I think we’re moving from the current, populist attempt to attack the rich to an era of taking personal responsibility for our own finances, via Bitcoin. David is a flexible thinker though and my guess is he will side with his friends Max and Naseem soon and come over to the dark side.

Disclaimer: I’m long Bitcoin.
​
https://twitter.com/btcbehaviour/

“Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million.” Hal Finney Jan 2009

A lot has been written on known attack vectors for Bitcoin. What challenges might there be if it succeeds and Hal’s thought experiment comes to pass?

1. Extremely wealthy early Bitcoiners -  Bitcoin was launched to the public, without any preference given to anyone. In spite of this, people like to claim its current high price is somehow ‘unfair’ on those who missed out. As if those investing early didn’t take enormous risk on a totally untested idea, constant scams, hacks and extreme volatility. It is likely that these early adopters will diversify as their gains grow, selling older coins to newcomers. At least once Bitcoin is widely adopted.

​2. Reactionary, failing nation states - China and Russia will still command major resources if Bitcoin approaches Gold in value ($7trn). As gold starts to sell off against the dollar, they will have no choice but to hedge it. Their militaries are unlikely to have a large early stake in Bitcoin and so will be the most dangerous group in this scenario. This is probably the most worrying part of a transition to a Bitcoin denominated world economy.

3. Queues to lodge money at Bitcoin ATMs - When the Greek economy collapsed in 2008, we saw long queues outside ATM as people realised the bank didn’t have the money they thought was theirs. In a Hyperbitcoinisation scenario you would get the opposite. People queuing to get rid of their Euros and Dollars, with ATM providers struggling to lodge the cash quickly before the exchange rate changes. 

4. Privacy - In a scenario where some form of privacy scales to the degree that wealth can be hidden very effectively, how would this be policed? The same way as it is today in many countries. You can hide all the wealth you want with enough effort today, but if you go out a buy something tangible like a yacht or a mansion you hit the radar of the tax men and need to account for how you got it. Bill Browder's Maginsky Act is the best current example of this. Bitcoin may become very hideable, but you probably will not be able to spend it very easily everywhere you go.

5. Central Bankers fear more extreme business cycles on a Bitcoin Standard. This is unlikely for two reasons. It didn’t occur during the 1800’s gold standard, and there is no reason for the dollar or another 'stablecoin' to go away as it serves the role of hedging against volatility, at least until all of the worlds value is represented in Satoshis. When people began hoarding gold in the 1929 financial panic, Roosevelt promptly banned the practice. The difference with Bitcoin is that it is both worldwide and much harder to seize than gold. In the next major recession Bitcoin may be blamed, but it will be very hard to effectively ban.

6. Kidnappings - While this is currently a threat, it is likely to diminish as key management solutions like Casa become more prevalent. Unfortunately people will continue to lose money by leaving their Bitcoin on exchanges until key management is idiot proof.

7. Other coins fade to 10-20% of the liquid market cap, a level comparable to R&D spend in a company. Ethereum and others are possibly doing interesting research work setting up what will be done on Bitcoin, but much like the Pets.com in 2000, they are ahead of their time and not sustainable. That doesn’t mean they won’t remain popular in the next few years before this is suddenly realised and they go down low for years and resurface at higher levels on Bitcoin. Many crypto games that using smart contract platforms are chain agnostic and so could shift to Bitcoin when the time is right. They will just need to survive a potential smart contract winter.

Disclaimer: This is not investment advice

TLDR; Bitcoin is a long term store of value and Medium of Wealth Transfer (MoWT). It takes most people years to adopt this outlook due to the volatility, complexity, misinformation and security challenges. Tools for long term asset holding exist in traditional finance and are starting to appear in Bitcoin. New Bitcoiners should have tools so they can’t panic buy or sell quickly. These tools can be programmatic, legal, social or financial. The catch is that once they are widely available, the higher risk and speculative opportunity in Bitcoin will be mostly over. 

April 2017 Report Update - Too Pessimistic and too Optimistic

In April 2017 I wrote about how I thought Bitcoin adoption might track that of the web and tried to reflect potential numbers in a simple chart below. 136x return over 12 years seemed very optimistic in April 2017 but relatively pessimistic by December 2017. This summarises the challenge for newcomers. The purpose of the chart was not to be exactly accurate but to extend my time horizons. My long term view hasn’t changed but I underestimated how hard it would be to resist timing the market. This report covers my change in perspective and some tools that are developing to help newcomers avoid such pitfalls. For a current valuation guide I recommend Tuur's recent report. 

​

 2017 report

Surviving the transition - Four Lessons

Surviving this period for new Bitcoiners depends on learning from others mistakes. Here are four that I have learned the hard way:

1. The longer you spend learning about Bitcoin the higher your conviction will be. During 2014, I sweated a lot about ‘bad news events’ and panic sold my Bitcoin. But as time goes on, misinformation became my friend. By January 2019 I was willing to publicly say in Ireland’s most popular newspaper that after a 85% drop It had never been stronger.  My outlook is now most aligned with Wences Casares.

2. Bitcoin climbs a ‘wall of worry’ and separating the reliable sources of information from the rest takes time.  If the value proposition was already clear to everyone, the price would be higher. There are now only about 10 people I would listen to as legitimate sources of serious Bitcoin issues. Jameson, Trace, Nick, Adam , Nic, and Tuur to name a few. There is no shortcutting this list for yourself and it may be different to mine. If it lowers your time preference, it’s a good list.

3. Market timing on Twitter. Most people can’t time the market top or bottom but Twitter will make you feel like many people did time it well. There are a lot of incorrect calls that fade to nothing on Twitter and if you make enough bear market calls you will be right eventually. New thought leaders emerge each bull market and most generally fade quickly in the bear market. I remain long term optimistic but I’m not banking on a quick recovery.

4. As a new user, you will probably get drawn into Altcoin Hype, and possibly get scammed. Very few people can resist this first time around. It is a partially rational approach to admitting that you underestimated Bitcoin’s potential so now you want to remain open minded to all new approaches. Most of the features that are popular in other altcoins may be integrated into Bitcoin. In June of last year I wrote about how many tokens may eventually be listed on top of Bitcoin.  I have written previously about 12 ways to avoid the hype when things heat up again. But are there specific tools developing to help?


Mowt Tools


1. Lock Up - Bitcoin's volatility is comparable to early stage startup valuations. To prevent the temptation to overtrade their shares, Venture Capitalists often lock their investors funds for 10+ years. CheckLockTimeVerify was merged into Bitcoin Core in 2015. This feature should in theory allow parents to create a trust for their kids, or savers to restrict their own ability to sell in a panic. Although currently available in Bitcoin Core, as of yet no service or wallet has made an easy to use version.

2. Bitcoin Pensions, (20-40 year lock up). Pensions can be seen as a country wide sacrifice short term liquidity, to counteract the human tendency to spend and save at the wrong time of the ‘business cycle’. Jameson Lopp went deep on how to do this as it is the ideal time horizon to think about Bitcoin. This is Mowt level Hodling. Transferring Wealth to your future self.

3. Standing Order to a DEX - Many people know that a small monthly standing order of Bitcoin is a sensible, easy way to invest, but the tools to do so securely are not yet available. Coinbase currently allows this, and while it is a good ‘set it and forget it strategy’  it doesn’t solve the counterparty risk or the temptation to sell at the wrong time. Having to withdraw each time to a hardware wallet isn’t ideal either. The best mechanism would be to somehow automate the purchase and transfer from a decentralised exchange to a hardware wallet on a monthly basis. I expect this to be available in the next few years.
 
4. Key management Tools - Casahodl is leading the charge here in enabling security against more sophisticated attacks.  Getting hacked or losing your private keys are the two biggest risks after gambling away your funds. Most newcomers leave their coins on an exchange to avoid the hassle of dealing with private keys. When Key management is easier and less risky than leaving coins on an exchange, it will be a major step forward for long term holders. Casa makes the cost of attack against a bitcoiner much higher (if 3 keys in different locations are required to send coins) and provides insurance against the failure or loss of one device.
 
5. Bitcoin as inheritance -  A house can in some cases be used as a Medium of Wealth Transfer with both utility and intentional liquidity drawbacks.  Before parents die, if they can afford it, many help a child buy a house. The house itself is of course functional, but the transfer is not without legal and record keeping fees. In Ireland this amounts to about €3,000 for the sale of a house. The average house in Dublin is worth €300,000 so this amounts to a 1% fee on the transfer. A contribution to a house for say a child who is married with children provides not only a useful function but also serves as a difficult thing to easily gamble away. There will be legal fees in selling, possibly a mortgage to pay down first and a legal right by the spouse to half the property.  I wonder will similar liquidity drawbacks eventually be programmed into Bitcoin inheritance? Maybe time-locked, multisignature contracts with penalties for early withdrawal, or bonuses for later withdrawal. This is probably a long way off for the average user.
 
6. ‘Savings’ accounts in traditional banks have historically come with more favorable interest rates but also penalties and withdrawal limits. This essentially allows the bank to lend your money out for longer periods. Blockfi now offers 6% on your Bitcoin but there is counterparty risk and like many other tools, this is too early for new entrants but I expect it to grow rapidly as exchanges increasingly offer the service. Su Zhu tweeted some helpful guidelines to those thinking of it.
 
7. Trust or will (MoWT beyond death). See Pamela Morgan for more on this this. Gifting to family and handing over private key management. There is of course a danger in who you trust to execute this.
 
8. Buying options with of a small % of your portfolio.  I don’t do this myself but some people use it in times of low volatility. Probably too complicated for the average new entrant.
 
9. Writing my 2017 report was less an attempt to be exactly right, than to publicly tie myself to that long-term store of value mentality. If you had bought and held bitcoin for 4+ years at any time over the last 10 years you would have avoided any losses.  Most of my articles are in this vein. This is a mental tool that I find helpful. In 2017 I compiled some of my favorite bitcoin articles on essaysonbitcoin.com.  Curating this kind of thing has certainly helped me.


Conclusion


At the height of the dot com bubble the market reached over $5 trillion in total value. By comparison the last crypto bubble reached only $800B and as Nic Carter pointed out, this may not be a very good metric for actual adoption. In booms and busts, of which there have been 3 major ones in 10 years, Bitcoin seems too volatile to store your money. And yet this is exactly why it is an interesting asymmetric bet. Those with high conviction on the importance of non-government money gradually worry less about short term fluctuations. For the average newcomer this isn’t so easy.  If Casa’s slogan is ‘can’t be evil’, Bitcoiners should aspire to ‘can’t panic sell’. I’m working on software tools to help develop his way of thinking. Any suggestions welcome.

Ethereum is a highly risky experiment. It has no core values in the way that Bitcoin does and has been prone to hacks. Full nodes are very hard to run and it has a central leader problem. In my opinion it has a lower chance of long term success than Bitcoin but I try to resist writing it off or calling myself a Bitcoin maximalist, minimalist or anything else.

There is a reason why Nick Szabo's blog is called Unenumerated or why Andreas Antonopoulos retains an interest in all attempts at decentralised networks. It’s because to call yourself anything is to start having to defend it.

That doesn’t stop you from defending Bitcoins core features though. For Bitcoin to be widely adopted it has to be usable by the average person but not necessarily fully understood by them. Very few people can explain how the internet works or the open nature of TCP/IP but we all rely on it. Therefore a hardcore base of feature defenders is a good thing. You can fight for Bitcoins core features, without joining a tribe.

Rusty Russell, Elisabeth Stark and few others are technical, moderate Bitcoiners but still tough feature defenders. They resist personal attacks and relentlessly focus on the building and defending of core features. They identify as skeptics of other networks and focus on the potential long term problems in Bitcoin. They are both working on Lightning and Rusty has flagged the potential for a big fight over the 21 million limit once mining rewards drop off. They don’t need to attack anyone, force bets or label themselves because their work speaks for itself.

The lack of clear, core values in Ethereum is what many Bitcoiners find hardest to accept. It is literally running in every direction which has created a host of problem and increasing complexity at the base layer. Bitcoin Maximalists who constantly call out central players in Ethereum on this are missing the point. Many Ethereum developers just want to experiment with the technology, not change the global monetary system. Some may play down the problems that all this complexity is leading to but many others have flagged this as not safe or scalable.

I have spoken with other people who feel Bitcoin Maximalist Guilt. They fell in love with The Bitcoin Idea, associated their views publicly with the community and we’re welcomed.  They then felt they would lose some sort of camaraderie, or identity by voicing interest in other platforms. They like experimentation but don’t want to come out as a former maximalist. They have been having a mental affair with parts of Ethereum or other platforms that are highly risky, less likely to work, but still interesting. I’m here to say its ok to fiercely defend Bitcoins core features, and still retain an interest in other platforms. I’m right there with you.

​

Apologies to Willy Woo for this chart massacre. Source http://charts.woobull.com/bitcoin-nvt-ratio/

If you are feel slightly annoyed or irritated, is it because my chart doesn’t tie in with your future plan for the Bitcoin price? Are you irritated that Bitcoin could store your USD reasonably well for a few years and could reach $500k+ in just 6 years?! Do you find yourself hoping for capitulation so as we can 'get going' again soon?

Here are some more annoying ideas. Let's say Bitcoin remains relatively stable for a few years vs the USD and its role as a ‘stablecoin’ becomes the new, incorrect media narrative. Krugman starts to say it’s becoming a better currency because of this. Traditional markets climb higher and an ETF fails to drive retail and institutional demand. Ethereum and/or others take off again as more speculative, seemingly 'cheaper' assets as Bitcoins volatility drops. Would you hold through this period? Many Bitcoin developers would be happy with this situation as they build out the infrastructure needed for a global, reliable, digital gold.

There is a chance that Bitcoin could go to 0 as Wences Casares and others have pointed out . What's more likely is that Bitcoin won’t follow the path of popular opinion, which is a recovery between 2018-2019. I honestly don’t know how it will play out and would welcome an earlier recovery. But drawing out reasonable, if somewhat  disappointing short term outcomes can help manage your expectations.

To use a Buffett cliche: "The stock market is a device for transferring money from the impatient to the patient." Maybe Bitcoin is too. If Altcoins stole your Bitcoin in 2017, maybe boredom will take them next.
​

It’s not for everyone but I personally enjoy the shared misery humour. Timing market cycles is extremely difficult and surviving is more important. Laughing at the situation can help.

Draw a few long term charts.

Even if you feel we have already reached a bottom, long term charts help to remind you how much you have been focusing on daily prices. They stretch your outlook, even if they are wrong. You feel you have considered a range possibilities other than hoping for an immediate recovery, depending on others or shorting at the wrong moment. ( Price could go lower than this chart below, it's just an example. I don’t know where the price is going short term but I remain positive long term) My long view from April 2017 remains the same.

​

h/t @MunroMhat

5. Track your daily sentiment with a simple app. Then back test some of it against charts.

Were you optimistic at top and miserable at the bottom? Even using a simple emoji mood app like Daylio once a day can help you spot fearful and greedy periods and manage them better next time.

6. Transfer your Bitmex balance to your most secure, non-trading wallet. Now.

Have a read of your Bitmex P&L if you need an extra push.

7. Write a short blog post.

Writing anything remains a great form of therapy for me. You may not publish it, but if you do, you might find others share your feelings and find it helpful. I strive to do all of the above but fail at times. Feedback is always welcome.

​

If Bitcoin becomes widely adopted and the Cambridge study is correct, we’re at 1993-4 in ‘Internet user adoption years.’ ​

Assigning value is fundamental human instinct. Fantasy Sports leagues allow anyone to bet on the exact monetary value of every participant in a market within a tight set of rules. As each player wins and loses games, over and underperforms, bettors update their value with new data. With the emergence of eSports Leagues, we have seen a market for young gamers emerge. Much like the sports market, there are some elite players that are dramatically better than most people.

Promising soccer, golf and tennis players enter the world market for their skills at 9 years old. We often see local crowdfunding campaigns to help them afford dedicated schools that will improve their skills. Their community know that they are the most promising players in the area. Supporters hope that big sports teams or sponsors will eventually agree and sign their local talent up for a specific amount of FIAT. These early backers are then cut off from their predictions. Could young, promising players raise money based on issuing credits? Could you allow scouts to be rewarded for finding promising players by buying up these credits?

Software developers apply to Y Combinator with the hopes of becoming the next Airbnb, Stripe or Dropbox. Sam Altman and Co. admit that they are really just looking for smart, determined founders. The ideas will mutate but they are betting that market demand for the efforts of motivated, young software developers will continue to rise. YC then lock this value into a mentorship/corporate structure. YC gives €120,000 to each startup for 7% of the company. They typically look for startups with 2-3 founders, so if each company has approximately 2.5 founders (guess), that values the average YC participant at about €685,000. They may have to wait many years to redeem any of this equity value.

Bitcoin Core developers are just one side of a network that includes users and miners. But if there is no major difference in market value from one user or miner versus the other, as they perform the same function, then the value of the network is a combination of the incentive structure, development team & network uptime. The longer BTC exists without being hacked, or another flaw being exposed, the more valuable it becomes. In probability terms the Lindy effect is a useful heuristic.

Will the importance of the developers in Bitcoin diminish over time as the protocol ossifies, like the internet protocols? Or will it continue to be an important factor like Linux or Mozilla? If Vitalik left Ethereum, what would it do to the price of ether? It seems strange today to value individual developers like athletes. We can’t just use metrics like Github contributions or association with promising startups as exact value signals. But markets like to uncover information. Would you invest in the future contributions of Peter Wuille or Vitalik if you could? Cristiano Ronaldo’s legs are worth £90m. What is Adam Back’s brain worth?

In new markets like cryptocurrency, the value of key participants is not yet clear because the rules and scope of the market are not clear. The token launch gold rush has been an attempt to capture the value of decentralized markets and strong teams. In uncertain, emerging markets, the quality of the team is the primary valuation metric, as the idea often mutates and changes. Ethereum was to be a world computer but so far its primary use case is token launches. Tokens represent a liquid, decentralized, if currently over-hyped version of a new Venture Capital market.

PIT’s

Today you apply for a job and the wage gives you a very rough idea of what your value to that job market is. Third parties set this, but they get it mostly right if there is plenty of competition in their market. Payscale.com helps give you an idea of what this is in advance. In the future, someone might launch 1 million John credits. This market could allow people to bet on or against my progress in uncovering and contributing useful market information. I wouldn’t need to share anything. John traders could profit from being right or wrong about what some or all my time is worth. Alternatively, I might decide to float a Personal Index Token, with associated consequences to my behaviour like sharing in the proceeds and being penalized for not doing so. There might emerge a standard for personal tokens. An individual version of ERC-20’s. Markets for promising participants would become liquid and widespread. An improved version of Upwork and other online marketplaces.

Your CV could become be a cryptographically provable calculation of your market cap or an estimation of your eventual net worth. If you did nothing in your career but join YCombinator at 18 you might jump from $0 to $680,000. If you left your co-founders and the YC mentorship structure to continue the company alone, this value would probably drop. If you worked at Google, Stripe, or came in the top % of people in a cryptography exam, maybe a value could be attached to this. We currently use mental shortcuts to put some value on these credentials. Most employers scan CV’s for keywords. Maybe more specific values will be attributed to them. Reid Hoffman advocates that you approach your career as a Startup. Personal Index Tokens would be an attempt to value you the Startup of You. Maybe you keep it privately, to be shared with trusted parties, or until you're ready to raise money for something.

If this comes to pass it is hard to think of the second order effects. Imagine seeing your floating value drop live after being fired, or your company becoming insolvent. Imagine a bad actor shorting your stock for some reason. Maybe you might dump your own tokens while claiming to be progressing in some capacity. Each company might have an exact ‘employee market cap’. Plenty of fodder for a dystopian future. Black Mirror have already produced a version of this idea based on social popularity.

Scaling

It may seem like there wouldn’t be enough resources to value every working person but much of the credentialing could be estimated and automated. As you add more metrics, you get clearer values or value ‘ranges’. In theory, an anonymous developer, who can consistently, cryptographically identify their achievements (hacks, patches, blogging etc.) could have a floating value based on their contributions. You could have a private and/or public PIT.

Conclusion

While we are all well accustomed to reading the Forbes 500 and other ‘Rich lists’ the average person would be initially uncomfortable with a ‘live value’. But it might also have positive effects. It might focus people on ethics and the long term value of their career versus short term wins like scammy articles, business practices and political moves.  Market based meritocracy seems to be coming.

This thought experiment brings up more questions than answers. It also may be not be welcome by most people. But if the history of technology tells us anything, it’s that eventually, technology for the wealthy often trickles down to everyone. Your market value is emerging, it’s just not liquid yet. ​
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If Aliens came to earth and decided that Bitcoin was a type of independent intelligence, what might they conclude its intentions are? Kevin Kelly originally came up with this thought experiment in his book, What Technology Wants.  Aliens might observe that Bitcoin wants:

1. Divisive arguments and hacking which seems to improve its resilience.
2. Governments to keep inflating national currencies.
3. Many, geographically diverse nodes to verify its transactions.
4. Developers to spend wetware hours improving its codebase.
5. Humans to spend energy to secure it.

The aliens conceit allows you to stop trying to mould Bitcoin into what you want it to be and just observe its effect on people. Bitcoin is incentivising people to delay consumption, learn about digital security, study the history of money, revisit Austrian Economics & consider Game Theory. The first Bitcoin users understood the proposition quickly because they had studied many of these topics before it was introduced. They were in many ways waiting for Bitcoin. The rest of us now immerse ourselves in an attempt to catch up.
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https://twitter.com/AriDavidPaul/status/879876453575389186

Bitcoin rewards long term thinking and punishes short term speculation. Those who jumped in during the mania phases with the hope of rapid, risk free profits have been punished quickly. Those who researched, gradually added and held have been greatly rewarded. The Aliens might go as far as speculating that Bitcoin highlights what humans want vs what they need. Many people want 'a blockchain that can do everything', but maybe we need it to do one thing very well. Many people think that they want:

1. Steady investment returns or a lottery win.
2. To relax in luxury.
3. To save the environment by not ‘wasting’ energy.
4. To invest in Stocks, Bonds and FIAT because they are historically safe.
5. Technology to leave their job alone.

And yet we know that humans thrive when they:

1. Face and overcome difficult challenges.
2. Delay gratification.
3. Learn new things.
4. Work with Technology.
5. Undergo stress and recover.

Saifedean Ammous has mentioned that humans didn’t ask for Bitcoin but they may ultimately be thankful for its long term effect on them.  When you start to accept that stressors will always be a factor as the protocol develops, you can start to enjoy the process of evolution. Gabriel D Vine is another advocate of this approach.

The experiment will run until it breaks or becomes increasingly unbreakable. When you start wishing bitcoin was less divisive, more ‘energy efficient’, less volatile etc. stop yourself and; Ask not what you want from bitcoin but what bitcoin wants from you.

​​twitter.com/btcbehaviour

I travelled 3179 miles from Ireland to go to the Tokensummit. Here are my main takeaways:
 
The cost to attend was 1/5th the cost of Consensus tickets. This led to a good mix of developers, investors, lawyers, hobbyists, researchers and startup founders.
 
Promising signs
 
Siacoin, Civic and Brave stood out to me as having a combination of strong development teams and an ability to execute. Juan Benet & Muneeb Ali also spoke with great clarity about IPFS & Blockstack.
 
0x was the most promising project that I hadn’t heard of. Its a peer to peer exchange for ERC20 tokens. You can learn more here. Prism, a portfolio management application from Erik Voorhees has the potential to be the first widely used smart contract application. Chris Burniske’s talk on valuations had every suit wearer in the room furiously scribbling notes.
 
Worrying signs
 
If there was a consensus on one thing, it is that ethereum is great. A number of people used the following logic: It has most of the new token sales so there is huge value in that. It is worth considering if the opposite is true, that this dependency creates a more fragile scenario for tokens. Interestingly Civic was the only company that discussed issuing their token on RSK.
 
There were very few dissenting voices on the viability of the token sale model. I would like to have seen more of a heated debate around the potential dangers inherent in this structure. Tone Vays, who was in attendance would have been useful on a panel.
 
Long term
 
The event was oversubscribed and benefitted from the small venue. Apparently some people were willing to spend 5x the ticket price to get in. I suspect the next version will be bigger and it will be hard to for the organisers to resist the big corporate sponsor invasion that Consensus suffered from.
 
My long term view on the current token model is neutral. Not a very satisfying conclusion but I’m trying to hold the ideas of the bitcoin maximalists, the token evangelists and the confused lay person in my head. Picking tech breakouts is very difficult so beyond Bitcoin and Stripe, I rarely do it.
 
Overall it was well organised and brought together some of the best people in the space. It will be interesting to look back on it in 5-10 years.

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This is not investment advice

1. Every 12-24 months the number of bitcoin users doubles. Therefore, the majority of bitcoin/crypto owners have never known a bear market. This leads to recency bias and animal spirits.

2. Consider the possibility that there are unknown factors going on behind the scenes. This was the case in previous bitcoin bubbles, the housing bubble, the dot com bubble, the south sea bubble etc. Is this time different? Vinny Lingham and Chris Ellis have discussed information asymmetry before.

3. If you can break-even on your total FIAT investment and keep some bitcoin for the long term you will probably do better than most people. Don’t compare yourself to others who have done well recently, compare yourself to people like this guy who lost major amounts when MT Gox collapsed.

4. Listen to people with a strong, long term tech investment track record. Most people in Crypto have a very short track record & tend to make specific predictions. Clear vision may be comforting, but it is unlikely to be correct. It is worth reading Benedict Evans recent post on this common mistake. (TLDR; The bitcoin breakthrough is trustless value exchange. The exact applications are harder to call.) @Naval or @wences for example believe that the technological discovery is important, but accept some uncertainty in how cryptocurrency will play out.   

5. When a major correction happens, there will be a rush to the door at exchanges. This will slow down processing speeds and will make you panic if you haven’t experienced it before. You will be tempted to sell at any level.

6. In moments of rational thinking, take out your initial investment capital and put it in a savings account that heavily penalizes withdrawals. It will hurt in the short term.

7. Fantasize about potential losses. Picture telling a spouse or dependent that there isn’t as much cash as you thought there would be because you thought you could call the top of the boom, even though seasoned investors agree this isn’t possible. 

8. Avoid Leverage. It will work 9 times out of 10 in a bull run and you will think that you are getting better at it and put in more. You will lose the first 9 and more on the 10th go.

9. Read about the dot com bubble stories here. Many investors were too young to participate in the dot com bubble and so have no memory of losing lots of their own money on technology bets.

10. Separate your holdings into 2 or 3 pots. One small one that you will speculate with and probably lose. One that you will sell off to break even in FIAT (if you haven’t already). And a small amount that you will hold for the long term, that you can afford to lose.

​11. Read other articles about common bull market mistakes. Here is one from Bread wallet. Robert Shiller recently wrote an article about how the idea of flipping houses spread like a virus. Today its 'Crypto Millionaires', trading from their parents basement.

12. Consider the timing of when you are getting involved. Is it after a long decline and partial recovery, or when Dan Bilzerian got involved, search volumes are at an all time high and the mainstream media say this time its different.

If crypto is very promising over 10 years, but highly risky over 2, the question is not whether you should buy a small amount, it is whether you are capable of buying some and holding for 10 years. If you do decide to, hopefully some of these ideas might help.
 

​In March, Vinny Lingham tweeted his alarming message:

Andreas Antonopoulos retweeted this on 25th April. Contrast this with a quote from Fred Wilson. 'Nothing important has ever been built without irrational exuberance'. ICO mania is indeed getting worse, but is it cause for long term concern, or a promising sign?

In a previous essay I discussed in my conclusion that speculative bubbles:

1. Are inevitable and unpreventable.
2. The crashes that follow serve important, useful functions like exposing cracks, protecting novice investors and preventing future scams.

I’m not exactly sure what alternative ending they both expect in a largely unregulated market that is beginning to pull in novice investors.  Let’s look at some historical examples in reverse order:

Dot Com Bubble -

Post-crash regulations have disincentivized tech companies from going public early, but they did not stop the march of the internet. I have argued that an overly heavy hand may be contributing to the current frenzied speculation around cryptocurrencies. But when the dust settles, the backbone will be built. Unlike the Dot Com Bubble, this backbone is investable.

Mississippi and South Sea Bubble.

To quote Paul Graham ‘The same thing [wild speculation] happened during the Mississippi and South Sea Bubbles. What drove them was the invention of organized public finance (the South Sea Company, despite its name, was really a competitor of the Bank of England). And that did turn out to be a big deal, in the long run.’


Early US Stock Market Bubble -

In February Chris Burniske posted some good tweets that highlight the scams that occurred in the early days of this market. Once scam protections were implemented, the US stock market created an unprecedented amount of wealth for investors.

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Protections for investors and other regulations will follow this speculative cycle, or whichever one gets big enough to affect a mainstream audience. Ultimately the government will provide tighter regulations for how businesses can operate in the US. If the regulations are too strict, cryptocurrency businesses will move abroad. I’m not sure that constitutes ending badly. It may delay the growth of the industry, but it is unlikely to destroy it.

Nick Tomaino has suggested that we need industry standards for ICO’s and I agree. But there is no strong incentive for everyone to follow them until there are severe consequences for not following them. To quote Charlie Munger. 'Never, think about something else when you should be thinking about the power of incentives'. Regulation comes after speculative frenzy. Not before or during it.

If you hoped that bubbles, crashes and regulation could be avoided, it is worth going back to study the history of markets. I suspect that what Vinny meant is that it will be bad in the short term for new market entrants. While this may be the case, there has never been a way to stop speculation on a new technology from happening in advance. 

I’ll let Naval represent my opinion on whether it is worth bouncing in and out in uncertain times.

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Disclaimer: This is not investment advice.

Here are some of the metrics that prominent bitcoiners use for valuation (there are lots more).

1. Cost to Mine - Vinny Lingham
2. Transactions on the network - Dan Morehead
3. User growth rate- Jeremy Liew
4. 200 Day Moving Average - Trace Mayer
5. POW equivalent days -Tuur Demester
6. Dilution Adjusted Price. Willy Woo

Both Vinny and Dan have recently indicated that the fair value of bitcoin has departed from what their respective metrics indicate to them. Vinny calculated that the cost to mine, which he sees as a huge indicator of what the value of bitcoin is, stands at around $800. For Dan Morehead, a fair value was $986 in March 2017.

Growth

Bitcoin has grown 5-6x in value over the last 2 years. In that time user growth seems to be somewhere between 2x and 4x, though it is hard to tell. Vinny has mentioned that people need to understand the economics to estimate a fair value for bitcoin.

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I see little evidence to suggest that new entrants are concerned with fees. The price has risen for two years and that is enough reason for them to believe that it will continue in the same direction. If you have never used a low fee bitcoin, and you are just speculating on higher prices, higher fees are no deterrent.

Tuur DeMeester recently mentioned Peter Wuille’s metric ‘POW equivalent days’ as an important signal of how secure the network is. Its worth listening to his full interview with Adam Meister. This measure is not widely known though and so is unlikely to be a primary reason for recent enthusiasm.

Now you might say that compared to the early adopters and the whales, new entrants don’t hold anywhere near what the bigger players have. But the smart money historically won’t sell much of their long term holdings, unless the price goes parabolic (doubling within a month). Supply is constrained, so new entrants bid up the remaining limited number of coins.

Excitement Masks Problems

In the last boom, we know that MtGox stayed solvent for longer because the price was rising. When it crashed, Willybot was exposed. The price eventually settled on a value that long term holders were not willing to sell below.

It was only after the 2008 property crash that the wider public realised the extent to which subprime loans had been mixed with more secure loans to create a leveraged disaster. Cryptocurrency is much more volatile and much less regulated than the US property market. What are the chances that there is nothing unusual going on behind the scenes in bitcoin today?

Conclusion

In a bull market, these metrics are not accurate indicators of what the current price will be tomorrow. They may be useful for estimating where bitcoin lands when the current euphoria passes. These will of course change over time.

Like Mike Casey, I don’t think a peak can be predicted. Certainly a doubling within a month has been a bad sign, but we are not there yet. In the long term none of this should matter, but it’s no harm to be able to see the ground every now and then, in case you are forced to land.

twitter.com/btcbehaviour



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Src: https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs2016Statistics_Mar29_2017.pdf

It has been well documented that tech companies have remained private for longer to avoid the scrutiny, short term earnings pressure and regulatory burden that comes with public markets. Retail investors have been left out of the high growth stages that previous generations enjoyed with the likes of Apple, Intel, Microsoft and Dell. We can also see from the above chart that the last year for 100+ tech IPO’s was 2000. A latent demand has been building for high risk, fast growth, early stage technology stocks. Bitcoin and Altcoins may have opened this door again, after 15 years.  Brock Pierce discusses this transition in more detail on a recent Crypto Show episode.

Valuation metrics

People value bitcoin and cryptocurrencies in many different ways. I won't list them all, but between Coingecko.com, coinmarketcap.com and Blockchain.info you will find most of the main ones. As the Bitcoin protocol is just 8 years old, it's not clear yet what objective values people will broadly agree on in the long term. My interview with Vinny Lingham revealed that the price to mine a coin is his primary metric, among others. Dan Morehead of Pantera Capital believes that transactions per day is the best model to use. ​

And yet we know from the exchanges that an increasing number of transactions occur off-chain. We can’t even be sure if the user numbers in the first two charts in this article are reliable.

Bubbles occur in well established markets when a large portion of investors depart from historical valuation methods. In the dot com bubble, focus shifted from profit to eyeballs. In the housing bubble from yields to leveraged capital appreciation.

Dot Com Lessons - Bubble indicators
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1.Rapid price appreciation

Apart from 1996, the first chart above shows steady, but slowing growth of internet users each year from then onwards. Contrast this with 3x growth in Nasdaq composite index from 1600 in aug 1998 to 5000+ March 2000. The value of the Nasdaq was growing exponentially, as the user base growth rate was slowing.  

In the short history of bitcoin we have regularly seen the price depart from user/transaction growth levels. Very rapid price appreciation has been a precursor to crashes in both bitcoin and the Nasdaq. For instance, in the last two bitcoin bubbles, once the price doubled within a month you could start your timer.  There was a 40% or more crash coming within 30 days.

2.Media endorsements

During the dot com bubble, a number of mainstream articles encouraged retail investors to get involved in the late 1990’s. Smartmoney magazine predicted AOL was a sure thing in 1999.
In the cryptocurrency world we have had a number of endorsements from mainstream media. This article contains many worrying elements such as blockchain hype, ‘getting in early’ and descriptions of small companies in the space as ‘penny stocks’. For the time being though, there remains a balance of cautionary warnings as well. Bitcoin has died 100+ times.  Many mainstream economists have been consistently dismissive of it. The tide has not yet swung into widespread FOMO yet. I suspect if certain prominent naysayers change their opinion, this might begin the swing.

3.Exponential growth predictions

There is no shortage of these in bitcoin. From Wences Cesares, Rick Falkvinge, Jeremy Liew and Tim Draper. I am aware that even writing something like this can contribute to FOMO. I can safely say that don't know where the price is going.

4. Mobile wallets become as easy to use as Netscape

Mobi wallet from BTCC already makes it easy to buy and sell bitcoin in any currency. I suspect that this or another wallet will eventually catch on and lead to much wider adoption. Whether we need to wait till 2019 as per Willy Woo’s volatility prediction remains to be seen.

5.New Narratives

In the 1990’s we had eyeball mania, today it's the altcoin/blockchain hype. Whether this is the narrative that carries into the mainstream bubble, or something else about central bank bailouts, disrupting Wall street, the IoT or some other buzz word also remains to be seen.

What the bubble got right

In his article entitled ‘What the Bubble got Right’ Paul Graham has noted that the beginnings of the dot com bubble were rooted in rational thinking. The internet really was a big deal. The crash occurred because it took much longer than people expected to disrupt incumbents. ​

The consensus among prominent technologists, with a strong record outside Bitcoin is that it really is a breakthrough technology. Misguided Euphoria emerges when people forget that it may take 30 years for the full value to be realised. Willy Woo has touched on this in his article Woo’s law of bitcoin user growth. Suffice to say that very few people think on this long term time horizon when it comes to something that is appreciating rapidly in value.

So when can we expect the next boom to happen?

Based on Bitcoin's short history, is not unreasonable to expect another bubble to grow and pop in the next 2 years but it may not be ‘the big one’ that involves people with no technical or even basic understanding of the protocol. If and when it comes, we may see some or all of the following:

1. The storage scammers - Mom and Pop investors struggle to understand how to store their bitcoins. There will be no shortage of fake hardware, cold storage, and hot wallet scams to take their money.

 2. More hacked exchanges - Even legitimate exchanges will come under much more pressure from sophisticated hackers. Many new investors won't have even heard of Mt Gox and will happily leave their fiat money and bitcoin in exchanges.

 3. ICO scams - It hasn’t been hard to sell some technical people on the idea that bitcoin is old news and they are about to miss out on the latest coin/token offering. Imagine a scenario where 1000’s of tokens have launched on the Ethereum Blockchain and it suddenly ceases to function for some unforeseeable reason.

 4. Other tech gets pulled into ‘blockchain’ - ICO’s for VR, AI, Drones, Autonomous Vehicles ramp excitement up to another level.

 5. Taylor Swift ICO’s an album - This is the peak.

The aftermath - Regulation

After the dot com bubble, greater regulation followed soon afterwards and this time will probably be no different. It will become harder to invest in bitcoin without getting advice first and the government will most likely track and regulate industry practices much more carefully.

Can this be prevented?

Due to the enormous latent demand for early stage tech investment, the new narratives, high growth predictions, lack of regulation and long history of speculative cycles, I don’t think that it can be stopped. For novice investors, it is only through individual psychological tricks that you can prevent FEAR and FOMO. Here are a few that have worked in the past.

Making it hard to over-invest at the peak of a cycle or sell at the bottom of one.

Bitcoin Pensions - Government regulated pensions essentially incentivise delayed returns and punish those who withdraw early. This would protect those who don't have the expertise to assess the short term risk.  An ETF would probably be needed for this to happen on a wider scale.

CheckLockTimeVerify or CLTV. Merged into Bitcoin Core in 2015, this feature should in theory allow parents to create a trust for their kids or savers to restrict their own ability to sell in a panic. As of yet, no service or wallet has integrated and promoted it in a meaningful way. Tom Nguyen has implemented a version of this using Solidity.

Leverage - Ensure leverage is hard to get in relation to bitcoin. I don’t think there is a practical way to prevent this. The market will demand it and ultimately it will be probably be limited in government regulatory crackdown on Wallets and Exchanges.

Savings schemes In the 1990’s in Ireland, the SSIA savings scheme allowed consumers to get a very high rate of return on their saved cash by putting it into a government backed high interest scheme for at least 5 years. This was an attempt to try to incentivise them to save during the property boom. The problem was that the money was released in 2007 at the height of the boom which exacerbated to problem. The potential for this to work in bitcoin is probably limited given the untested nature of bitcoin and the potential reputational damage for politicians who get this wrong.

Examinations for advisors. So many people fall down on the basic facts of the protocol that it would be a useful starting point if you want to advise new entrants to the market on bitcoin/blockchain investment.  Post ‘big crash’ this will be imposed anyway so it's no harm to get ahead of them and create something that the community can discuss.

Public Index Fund for total Cryptocurrency Market Cap

This will of course fluctuate but might save individuals from trying to bet on what the ‘next bitcoin’ will be. For more data on this check out this post by none other than Willy Woo. A number of index funds are in the pipeline as of today's date.

Split your coins into 2 separate pots

One that you will never sell and can afford to lose. I actually use 3 pots as explained in this article.

Conclusion

Bitcoin has grown in hype cycles to date. There is no reason to expect this to change. Bubbles and crashes may serve some useful functions. They weed out the temporary speculators or ‘weak hands’. They force the industry to create new standards around the mistakes of the last cycle. They expose false narratives and cracks in the system. The incentives to self-regulate do not exist until these cracks are exposed. There are probably lots of unexposed cracks in the system at the moment. If the damage radius gets wide enough to affect unsophisticated investors, regulation will come in from the outside.

The next crash may also have the unintended consequence of solving the scaling debate. A subsequent crash and trough may lead to a better environment for compromise in that miners fees will be relatively lower again. Alternatively, exchanges may route around the problem with off chain scaling solutions as suggested by Jimmy Song.

That is all. https://twitter.com/btcbehaviour

I just finished Nathaniel Poppers book Digital Gold. Here are a few of my main takeaways:

1. Digital currency discussions have always been contentious. People like to note that Hal Finney and Gavin Andreessen were civil in the early days and things have fallen apart in the scaling debate. In fact Popper reports that the Cypherpunk mailing list was full of sniping comments from Nick Szabo and others. Heated debate is the norm.

2. Very easy and well written narrative of the early days of bitcoin. I had no idea about Marti Malmi or that Hal Finney was a bit of jock.

3. In the history of digital currencies bitcoin is still young. If it goes away and gets replaced its not the end of the world. It has started something important.  Wences Cesares prediciton sums up my subjective thinking on this uncertainty.  30% chance of failure but more than 50% of big success. It is an asymmetric bet. The asymmetry is due to lack of understanding about its potential.

4. Listening to those who have remained calm the longest may be a useful strategy. e.g. Wences Cesares, & Dan Morehead.