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Bitcoin, The 1920 Depression, and Social Unrest

5/5/2020

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United States - 1920

“There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures,.....We want to reverse things.”  President Warren Harding 

Germany - 1921 

 “Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights…. My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me… it already amounts to millions.” -German Investor, When Money Dies by Adam Ferguson

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After World War One, both Germany and the US slipped into a Depression. By 1923 the US economy had fully recovered without any stimulus. Germany by contrast hyperinflated their currency the mark, causing economic collapse in the same year. 

USA - 1919 

By 1919, the Spanish flu had killed 675,000 people and unemployment jumped from 4 percent to nearly 12 percent. GNP declined 17 percent. The Secretary for Commerce, Herbert Hoover felt the only option was Federal intervention. President Harding disagreed:

“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy”.

Federal spending was cut from $6.3 billion in 1920 to $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $4 billion in 1922. The national debt was reduced by one-third. 

By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923. How is this possible?

The Harding administration’s  “avowed purpose was to withdraw as far as possible from exerting any influence on the economic life of the country except the encouragement that might be derived from a balanced budget and nonintervention with private enterprise.”

He even vetoed a popular bill that gave bonuses to WW1 veterans on the basis that it would put an extra tax burden on citizens. Harding felt relief efforts should be local to each state. It's hard to imagine this approach today.

Devin Roundtree argues that the shortness of the 1920 Depression was due to the government’s decision to allow interest rates to rise, prices to fall, and unhealthy banks and businesses to fail. ‘The Roaring Twenties were a time of unprecedented prosperity. GNP expanded year after year without inflation. Productivity improved, and real wages increased.’

Germany  1921 - Parallels to today

In April 1921, the Reparations Commission announced the "London payment plan", ordering Germany to pay reparations in gold or foreign currency in annual installments of two billion gold marks, plus 26% of the value of Germany's exports. Despite German outcry at these demands, they were accepted the following month.

As the German Mark started to inflate, speculative behavior increased and tax evasion was rife. The prime Minister of Bavaria introduced populist measures which had little effect in reducing the growing inequality. Gluttony became a penal offence described as ‘one who habitually devotes himself to the pleasures of the table to such a degree that he might arouse discontent.’  The crippling debt that Germany faced was poorly understood by people. Germans perceived the dollar as going up in value as opposed to the mark weakening.

By August 1921 the government started panic buying stronger currencies like the dollar, signaling the beginning of the end for the German mark. Survival essentials ultimately became expensive the fastest. The price of butter increased by 3300% in 8 years. Eventually the speed of inflation became unmeasurable. It wasn’t until the government pegged their currency to gold, renamed the Reichsmark to Rentenmark and removed 12 zeros from the currency, that calm was restored.


Courageous Deflation

The idea of ‘courageous deflation’, as proposed by Harding is politically impossible in the west today. There is no leader who even discusses it. And yet 10 years after the 2008 crisis, we are more indebted than ever. The economic recovery that was supposed to pay off the Quantitative Easing didn’t come in time. Are we now delaying the pain that Harding took upfront and thereby causing a much worse problem?

Those who held gold in Germany, an asset that couldn’t be inflated during the crisis did best. It operated as a type of disaster insurance. The Jewish population were resented by poorer Germans in the aftermath for their gold holding. Some argue that this laid fertile ground for Hitler's rise in the 1930’s.

Universal basic Income (UBI) and Bitcoin

Even if you are in the minority that thinks Hardings' approach is intuitively the most sensible, what is actually politically possible in today's environment?

If Bitcoin were to succeed as an un-inflatable asset, or even if Gold continues its rise, how could the resentment towards those who hold these ‘disaster insurance assets’ be mitigated? How could you get a small amount of these assets into the hands of the least well off in society now, as a type of insurance against high inflation? I don’t think that posting small amounts of gold to people is realistically possible. Not only would theft be rife, fraud would be trivial compared with the high cost of ‘assaying’ or checking the quality of each piece.

You could give the bottom 30% of income earners the option to receive part of their UBI in Bitcoin, via exchanges. These will be mostly younger people who are tech savy enough to store it properly, have been hit the worst by rising asset prices and are most likely to revolt if things get worse. If the value drops to $0, very little will be lost.  But if Bitcoin continues its rise, amid a global collapse in other assets, you will have provided a safety net for those who need it most, and possibly avoided the potential for serious social unrest. Those who can afford it are already doing this with their bailout cheque in the US (graph below) . Maybe those who can’t, should have the option as well. 

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Source: https://twitter.com/brian_armstrong/status/1250907110730170370?s=20
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Ireland's Bitcoin Millennials - Betting against Banks, Economists and Politicians

1/3/2020

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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.
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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.
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https://twitter.com/btcbehaviour/
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After Bitcoin Succeeds

6/6/2019

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“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.



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MoWT Tools

5/27/2019

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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. 


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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.


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Bitcoin Maximalists vs Feature Defenders

10/9/2018

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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.

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Banking on a quick Bitcoin Recovery

8/16/2018

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Due to recency bias, many people see the last bear market as the longest possible drawdown period for Bitcoin. What you rarely hear is that this could be a much longer bear market, let’s say 4+ years. Imagine Bitcoin stays below $10k until 2022. Sounds like a long time to hang on to a supposedly risky asset doesn't it.

But then let’s say the price then goes quickly to $500k by 2024. Seems implausible at first, but the chart below doesn’t look like anything more than a continued extension of the last two market cycles.

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Source https://twitter.com/MunroMhat

If you use NVT and exclude the very early price discovery before Bitcoin reached $1B in Network value, the first peak to peak price in red above was 2 ⅓ years. The second took 4 years. Why shouldn’t the third be 6 + years?
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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.
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Crypto Capitulation Anxiety

8/15/2018

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In May of last year I wrote about ‘How to avoid Irrational Crypto Exuberance.’ This is a follow up post that may help those who have been drawn into an Altcoin hype cycle, or leveraged Bitcoin trading against their better judgement.

For new participants, the last few days have been very stressful. It is one thing reading about capitulation from more experienced traders, but a very different thing to actually experience it. What’s even harder is if you had read enough to know that:

a. Bitcoin was probably the only strong use case at this stage;
b. Some risk management was important in December 2017.

Maybe you listened to Trace Mayer and Nick Szabo. Grasped the idea of Digital Gold and the derivative nature of other coins. Maybe you even got as far as Rothbard.  But you allowed yourself to be drawn in by short term thinking. Maybe you were re-assured by VC's with good track records in company investing and put off Bitcoin by tribal nature of some Bitcoin Maximalists.

Many of you will have told yourself that altcoins were nothing more than a gambling bet. You knew that platform with no users wasn’t worth $1,000,000,000+ but someone drew fancy chart and you went for a punt. What you didn’t realise is how painful the sudden, then slower declines can be. At least when you bet on a horse or a sports game you will lose quickly. A bleeding crypto market feels like death from a thousand cuts.

For me, there are a few good tricks to use whenever you feel panicked. 

Twitter

My first question when I think about a trade is, has the panic or excitement coincided with time spent on Twitter?

Why does August 2018 feel worse than when Bitcoin dipped to below 6000 in February? Is it because many popular Twitter accounts got irrationally exuberant soon after the February dump and are now as lost as you are? This should be re-assuring. You now recognise that these people are too short term in their thinking and it might be time to unfollow them. 

Embrace the moderates with a long term view.

There is a reason that Willy Woo, Jimmy Song, Trace Mayer and Tuur DeMeester have remained more helpful than most during this, and previous market cycles. All four in my view have maintained a long term view with a large dose of humility. They resist saying I told you so and avoid personal attacks. They have been broadly right and modest. This is rare and worth acknowledging. 

Think about the next boom and bust cycle.

It is important to think for yourself but there is no replacement for battle scars. Now that you have them, how will you manage risk going forward? Will you look into a Put option when the Mayer Multiple is high or consider selling a % of your holdings? Will you listen primarily to those who gave good advice in this cycle or be drawn in again by get rich quick schemes? If you are still bullish on some altcoins, and can’t resist trying to time pumps, will you at least use stop losses? By focusing on what you could do right in the next cycle, it will reduce the pain of current losses and might even improve your current risk management.

Gallows humour.
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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.

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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.

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Abandoning Ship - When tokens graduate to Bitcoin

6/27/2018

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The year is 2020. Plasma, Sharding and Proof of Stake haven’t provided the desired level of scaling for the Ethereum Network. Parachains and  DPoS are now being promised as the next solution. A governance decision is deemed unfair by a vocal minority and the Ethereum chain splits again. The future isn’t as bright as many once hoped.

At the same time, applications on the Lighting network are starting to scale faster than many on the Ethereum network expected. 100,000's of users are live on different Lapps. The largest one now handles more BTC dollar value and live users than any Ethereum app.

Initially the ETH die hards say that Ethereum will come up with another scaling solution, but developers of Ethereum DAPPs have heard it all before and are increasingly skeptical. Easier programming tools like Simplicity have been developed, further reducing the barrier to entry for Bitcoin developers.

All of a sudden, some of the smaller tokens with real users decide that they aren’t happy on the Ethereum platform anymore. They begin by informing their users that their application will be available on both Bitcoin and Ethereum. There are some grumbles of concern, but once the first application moves successfully, perceptions change quickly.

Many tokens can be easily exchanged with cross chain atomic swaps for Bitcoin, and as users become more concerned about Ethereum's future, some token founders set a date for the token to use only Bitcoin Layer 2. Then it goes further. Some tokens decided to refund token holders with Bitcoin by burning and discontinuing their token altogether in exchange for its BTC value.

Let’s say for example something like Decentraland becomes popular as a place to exchange NFT’s. In the future an NFT standard, similar to ERC 721 is built on one of the Bitcoin layers. As most commercial transactions on Decentraland are being completed with Bitcoin anyway, users don’t really care.

The founders poll users, who want to move away from any central trust and interference and Bitcoin is deemed the best way. Instead of the price of $MANA crashing, it stays the same or even slightly rallys. A successful transition from $MANA and $LAND to Bitcoin as the value standard for the platform is completed within 12 months. The ease of transition begins a race to the door phenomenon among other tokens. Tokens realise they only needed the token to raise money and their users prefer Bitcoin as the most reliable store of value and base layer.

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Esteban Ordano - Decentraland Founder - Not bad indeed

Transitioning to Bitcoin becomes a rite of passage for ‘strong tokens’. Projects that have an actual user base and want to provide improved liquidity, reliability and security. Transitioning becomes almost like an IPO in the sense that it shows the project name, users and brand alone are enough to ensure sufficient commerce in bitcoin.

Tokens are like the t-shirt that a band sells to earn money at early gigs. Inconvenient and illiquid but allowing loyal early fans to feel closely involved. Ultimately ticket sales for large venues in dollars make the more successful band, lasting money.

Today some people are listing an index of tokens that are Lighting compatible. Their Bitcoin-like features may make them more valuable. The logical endpoint to this is a full transition to Bitcoin. Paul Storc has documented his ideas for listing tokens as a Bitcoin Drivechain. http://www.truthcoin.info/blog/bit-assets/

I’m not certain that this scenario will play out and other scaling solutions might surprise me. But if tokens gain traction, run into Ethereum network congestion and decided that Bitcoin has begun to scale more reliably, it may cause a separation from tokens that are strong and those that are weak. It may cause a flight to safety, through an old door.

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The Imperial Faberge Egg

1/1/2018

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The Imperial Faberge Egg is one of the world's most valuable pieces of decorative art. Only 50 were ever made and Carl Faberge died in 1920. There will never be more than 50 of the original series.
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About 15% of eggs have been lost or stolen, further reducing the available float. Faberge used expensive materials, but the 1000’s of hours spent by his expert team of craftsmen, with many eggs taking over a year to finish, combined with his reputation, was a proof of work that is very hard to replicate.
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Faberge egg ‘whales’ include the Queen of England(3) and Viktor Vekselberg who bought 9 eggs for $100m+ in 2004. The eggs were made at the end of the Russian Empire. The last egg was never finished in 1917 due to the Bolshevik Revolution. A number of them were stolen during the revolution and Stalin sold 14 of  them in the 1930’s to finance his government. A recent attempt was made to relaunch the brand and make more ‘rare’ eggs. The new pearl egg is allegedly worth less than 15% of the originals but it wasn’t sold publicly so may not even be worth this much.

Bitcoin has been compared to rare art before. All comparisons fall down in some way because money can take many forms from optimal store of value to medium of exchange. But provable scarcity, proof of work and a visionary creator, who is no longer around is a good start.




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5 Comments

Bitcoin S Curves - Hitting the Knee

9/16/2017

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If you use /r/bitcoin subscribers as a proxy for Bitcoin User adoption, we have had 2 ‘S’ Curves since Jan 2013 and possibly a 3rd coming. http://redditmetrics.com/r/Bitcoin
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Price has been much spikier than user growth.The red dots are monthly total subscribers. Watch for the big gaps.
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Widely adopted technologies often follow a long S Curve as documented by Carlotta Perez. Within this curve there are shorter S patterns.
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If Bitcoin becomes widely adopted and the Cambridge study is correct, we’re at 1993-4 in ‘Internet user adoption years.’ ​
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User adoption is smooth but collective trading is volatile. Comparing Nasdaq (red) price to Internet user growth (blue) reflects the adoption vs price difference.
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5. @Renegadeinvestor believes we are near the knee of the longer term S curve - 
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Kyle Bass expects a similar ‘step function’ at some stage, which he references in this interview.

​There is no guarantee Bitcoin will become widely adopted. The best adaptation of this idea to Bitcoin is Mike Casey’s Theory.  Worth reading in full. I’m just adding small details.  

https://twitter.com/btcbehaviour
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The Future Market for You - Floating a PIT

8/18/2017

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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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Long term Views on Bitcoin & Money - Books, Blogs and Authors.

8/1/2017

4 Comments

 
When the bitcoin price accelerates, time horizons compress leading to short term thinking. These authors maintain a long term view.

Ludwig von Mises - Business cycles are caused by the uncontrolled expansion of bank credit. A socialist government could not make the economic calculations required to organize a complex economy efficiently. ”The state can be and has often been in the course of history the main source of mischief and disaster.”

Frederick Hayek - Complex markets can’t be modeled by central planners. “Whoever controls the means must decide which ends they are to serve.” He proposed that artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment.  

Murray Rothbard - What has the government done to our money? - Similar to Hayek felt that: “Under freedom, the commodities chosen as money, their shape and form, are left to the voluntary decisions of free individuals. “

George Gilder - The 21st Century Case for Gold: A New Information theory of Money - Money is a measuring stick. Inflating it damages this. Tweetstorm summary from Andrew DeSantis endorsed by Gilder “Money should be a standard of measure for the outcomes of entrepreneurial experiments”.

James Dale Davidson - Sovereign individual - We are transitioning to a world where the nation state is becoming less important than online communities. They will have their own monies. Secessions will become more common.

Naval Ravikant - Two key tweetstorms. 1/ His updating of the Sovereign Individual for 2010’s. 2/ Blockchains convert networks to markets. “Blockchains combine the openness of democracy and the Internet with the merit of markets.”

Nick Szabo - His Bitgold idea was a precursor to Bitcoin, which is referenced in the Bitcoin white paper. Longform essays on historical origins of money, among other things. His blog is Unenumerated.

Saifdean Anomous - Takes ideas of sound money from Austrians and applies it to a logical end game for Bitcoin. Bitcoin could be a world settlement system. He is working on a book which I am looking forward to.

James Rickards - Road to Ruin - Rickards gets flack for being bearish on Bitcoin and trying to time collapses but he actually writes clearly on the systemic risks of the current system. Fed will try cut rates but it won’t work this time. They will have to resort to IMF SDRS and a reversion to the gold standard. People will covet hard assets like art, gold and property.

Nathaniel Popper - Digital Gold - Early history of Bitcoin. Focuses on the characters that were drawn to it. Those who understood Bitcoin immediately seem to have realised it was an interesting test of Austrian Economic Theory.

Trace Mayer - Trace wrote a very digestable 80 page book on Money and Systemic Risk called The Great Credit Contraction just before Bitcoin launched. It is still worth a read and helps you understand why Bitcoin was so promising to him at $.25 . His podcast is also worth listening to bitcoin.kn


Who am I missing?

Twitter.com/btcbehaviour
4 Comments

What Bitcoin Wants

6/28/2017

2 Comments

 
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/GabrielDVine/status/879040452716003328
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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

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Bitcoin is the the most scarce and valuable time.

6/14/2017

5 Comments

 
An update on Developeronomics

​
In a 2011 Forbes article, Venkatesh Rao wrote that the best investment class of the future would be developers. He made some interesting points about how companies and individuals could do so, but missed the key one (so did I). He wrote:

 
..“places to store surplus capital today where it will even be safe and/or not depreciate too fast (let alone generate a return) are getting incredibly hard to find”...”But there is one safe haven, if you know how to invest in it: software developers.”
 
...“the vast majority of them haven't found a way to use their own scarcity to their advantage”....”The NPV on a strong and positive relationship with a talented developer today is ridiculously high”
 
Rao’s thesis was that companies would increasingly hunt and compete for developer talent. I remember reading it and thinking it made sense in principle. My problem was that I didn’t have anything that could attract developers and the average person wouldn't have anything either. In fact there was no need to go hunting. A programmer investment fund had already been launched. Bitcoin was the index fund on developer time that anyone could invest in.
 
People now know the main arguments for why Bitcoin is valuable. Scarce, fungible, transferable, durable, acceptable, divisible. What is less widely discussed is that you are getting access to a limited supply of developer time. George Gilder has touched on this in the Information Theory of Money in which he posits that money is time.
 
Rao mentions in the article that ‘software talent is extraordinarily nonlinear.’ Meaning that unlike other industries, the best developers are orders of magnitude more productive than the average programmer. Therefore, if money is time, and the most valuable time is that of productive developers, crypto is an investment in the most scarce and valuable form of human time.  And it is open to everyone.
 
Rao correctly predicted that developers would have increasing power to negotiate with companies as the demand for their talent grew. What has actually happened is that they don’t need to negotiate at all. They can now just create or join an independent market for their time and ability.
 
The article mentions the ways in which companies would try to retain talent, through, competitions, money, security, scholarships, open source projects and other means. At the recent token summit I spoke with a 21 yr old developer who was interested in cryptocurrency but had been offered a job at Google. His plan was to take the Google ‘credential’ in order to hedge his bets and switch to cryptocurrency as soon as possible. I suspect he will leave sooner rather than later. The above mentioned incentives are weak when compared to being involved in the exploratory phase of cryptocurrency.
 
How far can this go? Could there be an token for every talented developer? Would you take a share in all of Vitalik, Adam Back or Peter Wuille’s further work? The most talented soccer players get valuations on their limbs. Christiano Ronaldo allegedly insured his leg for £90m. How much should Ethereum insure Vitaliks brain for? While this may sound strange, there is a wide consensus that if he left the project it would have an enormous impact on the price.
 
I suspect that many developers would not like to see this individual focus and so grouping together within a loose band allows them not only to work on interesting projects but to broadly add or remove value without going long or short on individuals. At the moment, many people hold their cryptocurrency as a bet on the future utility of the currencies themselves. What they are in fact betting on is the group of developers.
 
But what about the economics, business, mining and other elements of crypto you say. You can’t just simplify it down to ‘developer time’. There are entrepreneurs, scientists, miners and other groups that have pushed the project forward. Once Satoshi had made the breakthrough, their involvement became inevitable.
 
In the beginning, the only miners were developers. There is no scarcity of miners. There is no scarcity of potential node runners. There is no scarcity of businesspeople to run wallets and exchanges. Highly capable developers are the scarce resource in cryptocurrency. 
 
I’ll finish with a 2014 Quora post from Venkatesh Rao, when asked what he thought of Bitcoin:
 
“Bullish on both Bitcoin in particular and cryptocurrencies in general. Don't really grok it too well yet, but enough to appreciate how big a deal it could be if the Internet of Money vision comes even partly true. Wishing I'd bought in big in 2011 of course, like everyone else."

 

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Review of the TokenSummit New York

5/26/2017

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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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How to avoid Irrational Crypto Exuberance.

5/24/2017

2 Comments

 
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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.
 

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The Incentive Machine - Cryptocurrency & Complex Markets

5/3/2017

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1300 words   

  1. In
Money, Blockchains and Social Scalability, Nick Szabo writes;


       “Social scalability is the ability of an institution –- a relationship or shared endeavour, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors ... to overcome shortcomings in human minds”

   2. Paul Graham more recently tweeted that:

    “Instead of switching from programming to management as their companies grow, I wonder if founders could one day manage by programming….I don't mean the software would manage people. I mean more that management would take the form of feature requests.”

   3. Chris Burniske responded:

      “All the more reason why fair incentive systems will become more important. #Blockchain based rules       may become the ADAS (Advanced Driver Assist System) of human emotion.”

If we act primarily based on incentives, and cryptocurrencies are an increasingly effective way to align or remove incentives, we are starting a period of incentive experimentation. We are testing incentive machines.

Incentives vs Narratives

Within the Bitcoin community, there is constant tension around the perceived ideal incentive structure. Bitcoin was an experiment, launched into a complex market and so is inevitably, highly unpredictable. In contrast, humans think in narratives and stories. As the experiment unfolded in directions that didn’t tie into preconceived stories, tensions grew. Bad actors were identified who, in retrospect, were making commercially rational, if self-interested decisions.

Rational responses to the Bitcoin incentive structure should be encouraging. Miners should in theory mostly care about improving their fees, and there is evidence that is the case. It is worth listening to this interview with Charlie Lee. Not only do miners not care about the centralization of the network, they asked not to be left with the decision of how to scale in the first place. Users protest that the voting structure needs to be changed to reflect this, without success to date, and yet Bitcoin proceeds. The incentives for all groups to see it continue, even with elements of centralisation, remain intact. Bitcoin may no longer be exactly what many wanted it to be, but it's close enough to prevent them from selling their bitcoin.

The most promising change to incentives is the activation of Segregated Witness on Litecoin. Litecoin is now a version of Bitcoin, with arguably better technology. Developers are moving towards it with an interest in working with the Lightning Network and SegWit. Most people discuss this move as a way to test Segwit before it activates on the Bitcoin Network.  But if the stalemate continues, and Litecoin gains further adoption, Bitcoin miners may need to vote for Segwit to ensure that Litecoin doesn’t become more valuable, or just switch to Litecoin mining. There are dozens more ways that this could play out of course. The experiment continues.

ICO’s and Weak Incentives

ICO’s are a rational way to raise money because they are easier than pitching VC’s. Many in the community refer to them as scams. The real issue is that there is no strong incentive, to not scam. Zach Herbert has suggested that we publish ‘total market cap and inflation factor’ to remedy this problem. This incentive is too weak in my opinion. The current level of excitement can only be deflated through an eventual sudden revelation for many investors that most ICO’s will fail, and a crash.

Traditionally we use law and regulation to disincentivize bad behaviour. If cryptocurrencies can replace the punitive elements of the legal system by eventually disincentivizing nefarious actors, they will have succeeded in a novel way as incentive machines. So far we have developed some interesting carrots, but the sticks have proved to be more challenging.

Companies

Much of our interaction with each other is already mix of cultural norms and automated incentives. We use NFC tap and go with our Visa cards because although it's less private, and more expensive than cash, it’s convenient. We thank the cashier because politeness is culturally important.  

Within companies, incentives are still often based on human intuition. Bonus structures are changed and tweaked by central management, a promotion may be based on perceived merit or friendship.

Bonuses and Deductions

I have a retail store and we pay our sales staff every 2 weeks. They are aware of their daily targets and other bonuses but it doesn’t have the same effect as seeing money go straight into your account in real-time. 21.co have started the beginnings of this with their incentivised micro-tasks and mailing lists.

Conversely, if I steer the company towards unprofitability (or some other unwise move), I could pre-agree with my employees that my bonus will be deducted. I could also make it difficult for me to ‘hard fork’ to a new company in such challenging times. I suspect employees would appreciate this shared risk and transparency. 

Micropayments

Balaji Srinivasan discussed recently how we could soon have 1000 times the amount of daily payments we currently do. Whereas a few decades ago we could identify all the communications (phone, letter, conversations) we had in a day, that is now impossible. Similarly you can look at your bank account today and identify your daily transactions, in 10 years time, 1000’s of micropayments may make that impossible.

This exchange of value on a small scale could produce the correct nudges, not only to make economic behaviour more efficient but to incentivise broadly positive behaviour. This is not without its challenges. If the value of small transaction is unclear it creates mental transaction costs.

Micropayments could improve socially scalable fairness, but we may also need other technologies that aren’t obvious yet. A smart contract that updates incentive models based on changes to the overall structure of the organisation might one day be commonplace.

Social Media

There are currently weak incentives to treat people politely or be objectively correct on social media platforms. Tristan Harris highlights the lack of a code of ethics as the source of this problem. When advertising drives incentives, persuading you to spend more time on screen at all costs is the net result. If outrage and narcissism are the best drivers of this, then so be it. We can see the beginnings of an attempt to solve this with yours.org and steem.it. Whether this system of attention incentives catches on remains to be seen.


DAOs

In a complex system, top down central changes have wide ranging, unforeseeable effects. The Fed rate changes are as a good example of this. The second and third order effects of major, system wide incentives take a while to come to the surface. Starting smaller, with a simple set of aligned interests, seems like the best way to test organisational incentives on a micro level.

The DAO launch was an attempt to automate investment, based on some pre-aligned, theoretically immutable goals. Although it failed, we will likely see many more, hopefully more carefully audited, attempts at this. Automated incentives will gradually move up the stack. Initially just aligning narrow fields of interest. Eventually creating an ecosystem of pre-agreed incentive structures.

This road will likely be paved with bubbles and crashes, scams and heavy handed regulation. To think otherwise is to ignore the long history of cyclical euphoria. Calling bubbles has become so commonplace, as to insulate people from when one actually occurs. Much like political discourse on social media, it is increasingly hard to tell the wood from the trees.

Conclusion

The US Constitution is arguably one of the most effective incentive structures ever created. It enabled a shared vision of the future, that created unprecedented wealth and prosperity for the US. It was a shared narrative, enforced by law. As we move towards a more decentralised, web based future, can we gradually automate similar rules? Could we automatically penalise political actors who don't balance their budgets and reward those who do? If the Sovereign Individual Thesis is correct, and governments increasingly compete for citizens, this could well become a reality. I will explore this idea further in a later post.

Bitcoin is often touted as a trustless system. More experienced participants understand that it is a system of trust minimisation that may or may not be the final word on optimal socially scalable fairness. I think Chris Burniske has hit on the best metaphor with ‘Driver Assistance Systems’. Cryptocurrencies may ultimately help us to get to our desired destination by ensuring that we avoid some of our own unconscious mistakes on the way. In Nick Szabo’s words, it may help us ‘overcome the shortcomings in human minds’. We are most likely at the testing seatbelts stage of development though. A fully functioning autopilot is a while away yet. 

​
@BTCBehaviour

Thanks to @jimmysong​ for feedback on this.

0 Comments

Creating Value on Cryptocurrency Twitter

4/28/2017

7 Comments

 
Value on Twitter comes through novel insights. @Naval is the rare person who sticks to this formula. Most others regurgitate other insights or can't resist random tweets. Finding novelty is like Discover Weekly on Spotify. You're digging for gems.

@WillyWoo is consistently novel. I would happily pay for him & @Naval's tweets. 
Nuzzel doesn’t work for novelty. Many retweets usually means the idea is already well appreciated. I had only 1 novel idea in the last 3 months. Cyclical euphoria in Crypto is an inevitable, useful thing, unlike many are claiming now. https://www.reddit.com/r/Bitcoin/comments/66nqej/when_bitcoin_euphoria_goes_mainstream_lessons/ . Here is another attempt: 

Ferocious side taking in Crypto happens because it’s comforting. Tech prediction is very hard. It requires holding multiple potential outcomes in your head at the same time. Maximalism is mentally easier. @naval, @wencescesares @pg aren’t dogmatic because probabilistically it's a bad strategy. Wences is very bullish on Bitcoin but still thinks there is a 20% chance it goes to zero. Superforecasters (Philip Tetlock) do the same thing.

TLDR; Listening to tech maximalists is probably a bad idea. I think BTC will still outperform all others, but I assign a weighting to this prediction that changes over time.

7 Comments

Vinny and Andreas say we're in a crisis that will end badly. History tells us otherwise.

4/26/2017

1 Comment

 
​In March, Vinny Lingham tweeted his alarming message:
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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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1 Comment

Bitcoin Valuations in a Bull vs Bear Market

4/24/2017

3 Comments

 
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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When Bitcoin Euphoria goes Mainstream.  Lessons from the Dot Com Bubble.

4/20/2017

10 Comments

 
Disclaimer: this is not investment advice.

According to a recent interview with Snapchat investor Jeremy Liew, there are up to 6.5 million bitcoin users in the world today. If the value of bitcoin continues to grow at an exponential rate, and it becomes a mainstream technology, we could be at a comparable moment in internet adoption years to 1993.
​

6.5 million users translates to about 0.093 % of the world population. Jeremy argues that we have already seen 54x growth and the same growth again, combined with a 10x increase in the average amount held per user ($2515 currently) would lead to a value of $500,000. In the chart below I have simply multiplied the cumulative rate of internet user growth from 1994-2006 by the value of one bitcoin today. Even if the average holding doesn't change, the number that you end up with is about $168,000.

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A recent study from Cambridge has highlighted a 50% average annual growth rate in users since 2013. If the price continued to track this growth rate you would get to $194,000 by 2030. If you see a multi-chain future, you could combine value of the top 50 or 100 coins by market cap and track the overall growth from now. There is currently no widely used index that offers this today.
​
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The price of bitcoin has fluctuated wildly to date but each cycle has yet to include a significant portion of the public. If this changes in the next cycle, is there a way to prevent the fallout that is commonly associated with cyclical bubbles of speculative investment?
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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. ​
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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
​


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. ​
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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
10 Comments

The 3 Cycles of Bitcoin - Short, medium and long term thinking.

4/8/2017

6 Comments

 
In a recent tweet, Willy Woo highlighted 1-6 month Bitcoin bull market cycles, which are characterised by FUD and FOMO . In December, Mike Casey identified the longer, 6 month to 4 year cycle in his post about speculative price adoption. At just 8 years old we are still trying to identify the longer cycles. We can now look back on the S&P 500 and see long periods of euphoria and depression. If you invest in Bitcoin, it is useful to try to think about what these longer cycles of 5-10 years might look like.

We have some ideas already from prominent bitcoiners. Vinny Lingham has identified the transition from commodity to currency in this post. Bitcoin is digitally scarce, like short '.com' domain names, but is too volatile to compete with the major Fiat currencies. Willy Woo has identified a long term downtrend in volatility and sees 2019 as a potential year when volatility may come close to the major Fiat trading pairs. If correct, that is an 10 year trend from commodity to currency.

Here are a few other speculative attempts by me to identify longer term cycles.

Government Crack Down Cycle 2020-2030

In the short term drama around scaling there is less focus on the bigger fight coming down the line. How will this manifest itself?  Taxation is an obvious first step but will you also have to disclose your total holdings in the future? Will there be laws around how you can trade, hold, transfer and buy with bitcoin? I can see a scenario in which governments try to peg to bitcoin, release their own centrally issued version of bitcoin, or try to create mass confusion about the dangers of bitcoin, while buying it behind the scenes. Suffice to say that it will make the scaling debate seem comically small.

ICO Cycle 2015-2025

We are very early days in the ICO cycle and the DAO may soon seem like a fond memory. Imagine a scenario where 1000’s of tokens have used the Ethereum Blockchain to ‘IPO’ and suddenly Ethereum ceases to function for some unforeseeable reason. It isn’t hard to see the Government Crackdown cycle coming that this stage.

Scaling Cycle 2014-2024

No end in sight here. My personal feeling is that all major changes to the protocol have already happened and scaling will happen off-chain. Jimmy Song has given the most far sighted extrapolation of this that I can find.

Ransomware cycle 2015-2035 - Bitcoin comes under pressure due to enormous growth in the ransomware market.

AI Cycle - Add any Dystopian fantasy you like here.....

What should I do?
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One of the biggest jokes in bitcoin is the advice that everyone gives that you should only put in what you can afford to lose. It is indeed good advice and if you are already quite wealthy it is probably easier to implement. I suspect that most people ignore this when they realise the huge asymmetry that Wences Cesares has identified. I try to split my enthusiasm into 3 categories in order to at least limit this. Vinny Lingham has a similar version of this.

Long term holdings
⅓ I’ll never sell. As Naval Ravikant says  Every market I've seen eventually punishes clever investors and rewards patient ones. Cryptocurrencies will be no different.

Parabolic Holdings
⅓  I progressively sell when things go parabolic. See Michael Casey's post above for detail on this. In the last 5 years, when the price has doubled in less than a month, you can start your timer. If history repeats itself, the price will have crashed by 40% or more within 30 days. Robert Shiller has mentioned this as a useful mental model in relation to the stock market. 

Short term Theories 
⅓ - I’m most likely to lose some or all of this but I enjoy testing theories with it. One theory is to buy below the fomo/FUD line and sell above it as described by Willy Woo above. He uses a log chart with lines drawn along the peaks and troughs, starting at the the 2015 trough. This holds high risk of course and will fall apart if bitcoin leaves the trend it’s been on since 2015.

That is all, happy hodling and speculating.  https://twitter.com/btcbehaviour



This is not investment advice, possibly wrong and you should talk to a professional about how to allocate a diversified investment portfolio.
6 Comments

Digital Gold by Nathaniel Popper - Book Review

3/9/2017

1 Comment

 
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.  

1 Comment

Behavioural Bitcoin Report 4 - Who should I listen to in the Community?

3/9/2017

0 Comments

 
Jameson Lopp tweeted recently that you can be a part of the Bitcoin Community and not understand it. For most people it doesn’t matter. Most people can’t explain heating systems, plumbing, computers, phones, networks etc at a granular level and yet the same people sell, invest and provide news about them. What most people do is ‘trust by proxy.’

We rely on experts to tell us that these things are safe and mostly it works well. What percentage of the population has ever had very serious issues with smartphones, electricity and their heater? A very small amount. The same can’t be said about investments, politicians and economists predictions. Nassim Taleb thinks that there is an expert problem in general when it comes to politics, money and economics. Bitcoin is of course an attempt to solve the money problem but has political problems of its own.

As someone who is not strong on maths but has spent 1000 hours reading about money and bitcoin over the last 3 years, I am a relatively early adopter but certainly not an expert. My only strength has been observing group behaviour and predicting promising teams. I filter my information through proxies (mostly on Twitter)  based on certain criteria. Here are a few of them:


  1. Skin in the game - declared
  2. A measured flexible approach.
  3. Some kind of track record (Technical, time in the community, or  correct predictions)


Using this formula I have come to depend on a mix of opinions from the following people. You may have your own  A Team.

Naval Ravikant
Adam Back
Vinny lingham
Charlie Lee
Tuur Demester
Spencer Bogart

I have these people in a separate list on Twitter that I read first. It takes curation though, and I may add and remove them if they stop exhibiting the above mentioned characteristics. I also also conscious of their biases when I read their opinions. I have a feeling that a few others will become promising but I will wait until they have been around a while and I can assess their track record. 

And yet I still check the comments of a wider group that includes those on the other side of the scaling debate regularly to test my assumptions. I also read the general crypto news once a week. It rarely reveals unusual insights but it is useful for two things:

1. Thought Trends - Consensus panic or euphoria around something is worth noting because it’s almost always exaggerated. Trump, Brexit, black scaling, doom etc. come into this category for me. If a phenomenon is widely discussed, it has historically been less likely to have as big an impact as people think. When you see big headings shouting warnings, you can be reassured that they have been largely priced into the market. Black Swans are unforeseeable shocks.

​2. Small nuggets. The smaller articles are where potential gems are because they have been declared as minor topics by the editors. As editors are trying to give readers what they want, they are less incentivised to challenge them. I try to read smaller articles more closely than big ones.


If it is well flagged, it is priced in. I look for promising changes on the margin and go deep if it continues to be promising. I hope the same system works for you.



0 Comments

Bitcoin Report #3 - Predicting a price range can prevent panic

1/15/2017

1 Comment

 
Disclaimer: This is not financial advice. Seek professional advice before making any investment.
The value of BTC could go to zero.

Inputs

Having recently ranked other forecasters I feel it's only fair that I make my own prediction. This is based on what I have learned from others and some of the principles in the book Superforecasting. The primary reason I’m doing this is not because I think I will be correct, but to test my assumptions publicly. If I’m wrong I want to learn from it. As Philip Tetlock says, forecasts are “a hypotheses to be tested, not treasures to be guarded.”

These are the inputs in my prediction:

  1. Make a price range prediction 6-12 months in advance.
  2. Revise it as needed based on new information (e.g. exchange hack) and see how far off you were from the original.
  3. Give a probability weighting towards your prediction.
  4. Seek feedback on your prediction and information to disprove it.
  5. Consider your own biases. I’m primarily influenced by Taleb, Robert  Shiller, Naval Ravikant, Vinny Lingham, Philip Tetlock. I have many other unidentified biases.
  6. Use a ‘base rate’ of some sort.

I’ll start with my prediction and work backwards.

Prediction


By Jan 2018, in 12 months time, I predict that 1 BTC will be worth:

Between €670 - €5,000
Certainty level - 60%

At first this may seem so wide that it is useless. But in a 2014 survey of 50 people in the bitcoin space, who were asked what the price would be in 12 months time, only one person made an accurate price range prediction. And it was much more wide than mine. Since then Vinny Lingham is the only person to get longer term predictions right.

I agree with Michael B Casey that an upper bound is not predictable. If things continue as they have, surpassing $5,000 is unlikely, but not impossible. The middle of this range is about $2835 if you want to hold me to being some percentage off this number, which I can safely predict I will be. Even if I am right, it may be for the wrong reasons, so let’s explore some of them.


A. Reasons that may support a higher value than today = $800+

  1. Chinese capital controls lead to increased demand.
  2. Drugs, ransomware & remittance market grows.
  3. Fed rate hikes devalue foreign dollars.
  4. Increased capital flight from Japan, India & Venezuela.
  5. Increasing speculation in the West due to media coverage.
  6. The price follows Metcalfes Law.
  7. Lower bound growth has been more steady. This could be a false, retrospective narrative though (see section B).
  8. Bitcoin is currently just a secure,  store of value, so scaling transactions may not matter and Governments start buying bitcoin on this premise.
  9. Sovereign individual theses.  Money becomes difficult to seize. BTC as an ‘exit.’
  10. Decreasing volatility makes it more attractive to new market entrants and merchants.
  11. Strong growth in Localbitcoin Use.
  12. Cyclical hype cycles and mass adoption potential.
  13. Consensus among credible technologists that it is an important breakthrough.


B. Potential lower bound = $670

In the last two big crashes this has been about 3x or more up from last ‘trough’. In this case I’m using June 2015. It could be non-predictive, but I’ll use it as a ‘base rate’ as mentioned above.

$670-800 is possible, but unusual for bitcoin to stay stable within such a range for 12 months after a long trough.

C. Reasons that may support a value of $200 to $670 in 12 months time.

  1. Regulatory crackdown in China.
  2. Big but not disastrous flaw in protocol.
  3. Altcoin takes off.
  4. Fees become much higher.
  5. Hard Fork.
  6. Multiple exchanges hacked in succession.
  7. Widespread naked short selling by exchange.
  8. China block port 8333.
  9. Wash/Fake Trades are larger than expected.
  10. Segwit/LN is adopted but doesn’t solve scaling problem or causes new problem.
  11. Other factor I can’t predict.

D. Reasons for dramatic drop = $0 to $200
  1. 51% attack, or other sudden systemic problem.
  2. Bitcoin Core stops functioning properly.
  3. Unknown factors.


Conclusion

The only potentially predictive number in all of this $670. If there is another bull run and crash, that could be the next lower bound. And so when the excitement of the next boom and bust clears, this may be a useful number to expect to get near to. It may settle much higher than this, but a low expectation, and a long term view, has insulated me from panicking in the past. Stay tuned for updates if new information comes to light.

I’m fairly sure that I have left out many factors in this article. Please let me know what they are and I will try to update. A measured response will convince me you’re right as opposed to a dogmatic view.

Thanks to Mike Casey for feedback on this.

Disclaimer: This is not financial advice. Seek professional advice before making any investment. The value of BTC could go to zero.
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