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.
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.
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.
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.
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
Price has been much spikier than user growth.The red dots are monthly total subscribers. Watch for the big gaps.
Widely adopted technologies often follow a long S Curve as documented by Carlotta Perez. Within this curve there are shorter S patterns.
If Bitcoin becomes widely adopted and the Cambridge study is correct, we’re at 1993-4 in ‘Internet user adoption years.’
User adoption is smooth but collective trading is volatile. Comparing Nasdaq (red) price to Internet user growth (blue) reflects the adoption vs price difference.
5. @Renegadeinvestor believes we are near the knee of the longer term S curve -
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.
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.
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.
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.
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.
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?
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:
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.
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:
And yet we know that humans thrive when they:
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.
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."
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Thanks to @jimmysong for feedback on this.
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.
In March, Vinny Lingham tweeted his alarming message:
Andreas Antonopoulos retweeted this on 25th April. Contrast this with a quote from Fred Wilson. 'Nothing important has ever been built without irrational exuberance'. ICO mania is indeed getting worse, but is it cause for long term concern, or a promising sign?
In a previous essay I discussed in my conclusion that speculative bubbles:
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.
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.
Disclaimer: This is not investment advice.
Here are some of the metrics that prominent bitcoiners use for valuation (there are lots more).
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.
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.
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?
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.
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.
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.
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?
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.
People value bitcoin and cryptocurrencies in many different ways. I won't list them all, but between Coingecko.com, coinmarketcap.com and Blockchain.info you will find most of the main ones. As the Bitcoin protocol is just 8 years old, it's not clear yet what objective values people will broadly agree on in the long term. My interview with Vinny Lingham revealed that the price to mine a coin is his primary metric, among others. Dan Morehead of Pantera Capital believes that transactions per day is the best model to use.
And yet we know from the exchanges that an increasing number of transactions occur off-chain. We can’t even be sure if the user numbers in the first two charts in this article are reliable.
Bubbles occur in well established markets when a large portion of investors depart from historical valuation methods. In the dot com bubble, focus shifted from profit to eyeballs. In the housing bubble from yields to leveraged capital appreciation.
Dot Com Lessons - Bubble indicators
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.
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.
In the 1990’s we had eyeball mania, today it's the altcoin/blockchain hype. Whether this is the narrative that carries into the mainstream bubble, or something else about central bank bailouts, disrupting Wall street, the IoT or some other buzz word also remains to be seen.
What the bubble got right
In his article entitled ‘What the Bubble got Right’ Paul Graham has noted that the beginnings of the dot com bubble were rooted in rational thinking. The internet really was a big deal. The crash occurred because it took much longer than people expected to disrupt incumbents.
The consensus among prominent technologists, with a strong record outside Bitcoin is that it really is a breakthrough technology. Misguided Euphoria emerges when people forget that it may take 30 years for the full value to be realised. Willy Woo has touched on this in his article Woo’s law of bitcoin user growth. Suffice to say that very few people think on this long term time horizon when it comes to something that is appreciating rapidly in value.
So when can we expect the next boom to happen?
Based on Bitcoin's short history, is not unreasonable to expect another bubble to grow and pop in the next 2 years but it may not be ‘the big one’ that involves people with no technical or even basic understanding of the protocol. If and when it comes, we may see some or all of the following:
1. The storage scammers - Mom and Pop investors struggle to understand how to store their bitcoins. There will be no shortage of fake hardware, cold storage, and hot wallet scams to take their money.
2. More hacked exchanges - Even legitimate exchanges will come under much more pressure from sophisticated hackers. Many new investors won't have even heard of Mt Gox and will happily leave their fiat money and bitcoin in exchanges.
3. ICO scams - It hasn’t been hard to sell some technical people on the idea that bitcoin is old news and they are about to miss out on the latest coin/token offering. Imagine a scenario where 1000’s of tokens have launched on the Ethereum Blockchain and it suddenly ceases to function for some unforeseeable reason.
4. Other tech gets pulled into ‘blockchain’ - ICO’s for VR, AI, Drones, Autonomous Vehicles ramp excitement up to another level.
5. Taylor Swift ICO’s an album - This is the peak.
The aftermath - Regulation
After the dot com bubble, greater regulation followed soon afterwards and this time will probably be no different. It will become harder to invest in bitcoin without getting advice first and the government will most likely track and regulate industry practices much more carefully.
Can this be prevented?
Due to the enormous latent demand for early stage tech investment, the new narratives, high growth predictions, lack of regulation and long history of speculative cycles, I don’t think that it can be stopped. For novice investors, it is only through individual psychological tricks that you can prevent FEAR and FOMO. Here are a few that have worked in the past.
Making it hard to over-invest at the peak of a cycle or sell at the bottom of one.
Bitcoin Pensions - Government regulated pensions essentially incentivise delayed returns and punish those who withdraw early. This would protect those who don't have the expertise to assess the short term risk. An ETF would probably be needed for this to happen on a wider scale.
CheckLockTimeVerify or CLTV. Merged into Bitcoin Core in 2015, this feature should in theory allow parents to create a trust for their kids or savers to restrict their own ability to sell in a panic. As of yet, no service or wallet has integrated and promoted it in a meaningful way. Tom Nguyen has implemented a version of this using Solidity.
Leverage - Ensure leverage is hard to get in relation to bitcoin. I don’t think there is a practical way to prevent this. The market will demand it and ultimately it will be probably be limited in government regulatory crackdown on Wallets and Exchanges.
Savings schemes In the 1990’s in Ireland, the SSIA savings scheme allowed consumers to get a very high rate of return on their saved cash by putting it into a government backed high interest scheme for at least 5 years. This was an attempt to try to incentivise them to save during the property boom. The problem was that the money was released in 2007 at the height of the boom which exacerbated to problem. The potential for this to work in bitcoin is probably limited given the untested nature of bitcoin and the potential reputational damage for politicians who get this wrong.
Examinations for advisors. So many people fall down on the basic facts of the protocol that it would be a useful starting point if you want to advise new entrants to the market on bitcoin/blockchain investment. Post ‘big crash’ this will be imposed anyway so it's no harm to get ahead of them and create something that the community can discuss.
Public Index Fund for total Cryptocurrency Market Cap
This will of course fluctuate but might save individuals from trying to bet on what the ‘next bitcoin’ will be. For more data on this check out this post by none other than Willy Woo. A number of index funds are in the pipeline as of today's date.
Split your coins into 2 separate pots
One that you will never sell and can afford to lose. I actually use 3 pots as explained in this article.
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
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?
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.
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.
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.
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:
Using this formula I have come to depend on a mix of opinions from the following people. You may have your own A Team.
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.
Disclaimer: This is not financial advice. Seek professional advice before making any investment.
The value of BTC could go to zero.
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:
I’ll start with my prediction and work backwards.
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+
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.
D. Reasons for dramatic drop = $0 to $200
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.
In a previous report, I posited that that the price of bitcoin was not predictable, but that euphoria and disillusionment may be identifiable. There has been a short boom and bust cycle since I wrote the report but nothing like the 2013 crash. I pointed to two things that occurred before the last 2 major crashes, (which I defined as 40% drop or more within a month):
Neither has happened yet, and both may not preceed the next big crash, but some euphoria seems to be back. Is there someone with a good track record of predictions who can help if we are returning to animal instincts? I decided to focus on longer term predictions with three key characteristics as influenced by Philip Tetlock's book, Superforecasters:
Below are all of the more specific predictions I could find. Please point me to more if they exist. I will ultimately compile them into an excel type scoreboard. As of now, Vinny Lingham is the only person I can find with a strong track record.
March 2014 - Vinny Lingham - $350-500 by year end (correct)
Feb 2014 - Alena Vranova - $50-10,000 = ( very wide but correct)
May 2016 - Vinny Lingham - $1000 by year end (ended about $970)
bitcoinprice.tech= $2000 by year end ($1000 off)
1 - Sept 2016 - Willy Woo - currently is $680 should be $2500. Target for in 2017
2 - Dec 2016 Vinny Lingham - Will hit $3000 in 2017
3 - Dec 2016 Cancord Genuity $1200 - by end of 2017
4 - Tim draper $1000-1400
5 - Daniel Masters, bitcoin will hit $4,400 by the end of 2017.
6 - http://bitcoinprice.tech/bitcoin-price-prediction/ = $5000 by 2017.
7. Petar Zivkovski - $2000
Less specific times within the year.
Joe Lee - Over $1500
Ryan Rabiglia - Over $1400
Alex Tapscott - $2000
Tim Draper - $10,000 by 2018
http://bitcoinprice.tech/bitcoin-price-prediction/ - $10,000-$50,000
Cancord Genuity - $5300 by 2025. (link above)
Wences Cesares - $500k+ in 2024 (20% chance it could be 0)
Rick Falkvinge - $2-5 Million
This report does not constitute investment advice. Always seek professional advice. I am not an accredited investor.
Euphoria, Disillusionment and the Wisdom of Crowds
This report proposes that the fluctuations in the bitcoin price are not predictable. That the price movements are driven by behaviors and phenomena that collectively, are too complex to model. I propose that those who claim to predict the future price have been vague in their predictions, following none of the ‘Superforecaster’ guidelines outlined by Philip Tetlock. I further propose that they are mostly attaching the movements to macro factors, after the fact.
I would preface this report by saying that I’m not an economist, programmer or mathematician. This report is heavily influenced by Scott Adams, Nassim Taleb, Philip Tetlock, Naval Ravikant and Robert Shiller. The evidence that will convince me that I’m wrong is a public, specific, track record of correct price predictions. To my knowledge there aren’t any like Gurufocus, even in a range of prices.
So how is this an investment report? I do think there is a potential leading indicator of something, but I could also be Fooled By Randomness. Part of the reason for this report is to see if I can be shown to be incorrect, so I can learn from it.
Specifics Matter - The Wisdom of Crowds
In the following article , written February 2014, 50 people involved with Bitcoin in some way were asked what the value of BTC would be in 12 months time. It was about $650 at the time and would be $420 a year later. This is a useful survey because it is so specific. I thank the author for leaving it up. Out of the 50 asked, very few showed a measured analysis. Many prefaced their comments by saying it's very tough to predict, but still predicted at least a doubling in value. One of the key factors may have been confirmation bias, in that their businesses would probably benefit from a big uptick in the price. Only one person predicted the right range. By simply saying they didn't know, two others were more accurate than all of the other bullish predictions.
Alexander Lawn admitted he simply didn’t know
Frederick Thenault didn’t know either.
Alena Vranova of Trezor predicted a range from $50 to $10,000. The only correct range. Even with it she admitted that it was a rough guess.
Alena emerges as a voice of sanity here. A very wide range but nonetheless someone who could identify that a wide price range for bitcoin in 12 months time is barely predictable, if at all.
Tuur Demeester - I find Tuur to be one of the more knowledgeable bitcoin commentators. In his Adamant Research - November 2015 Report he outlined the reasons why the price of bitcoin might go higher. There is no specifics about when this rally will happen, and how much bitcoin will appreciate. It is nonetheless, a compelling summary of the potential for bitcoin and I encourage anyone interested to read it.
Barry Silbert has a strong inside track with many investments in the cryptocurrency space and posts lots of content on Twitter, claiming to have sold all stocks and bonds in December. He predicted a rally of ETC against ETH but like Tuur he hasn’t made any specific price predictions with any exact future time horizon.
Bitcoin undervalued by $200
This report is only partially useful, in that it is specific about values, but is vague about time. It says that BTC is undervalued by $200. It has since passed that value which makes it broadly correct but there was no indication that this would take 3-4 months. It could have been 3-4 weeks or 3-4 years or any other time horizon you can think of. Time and price are essential for specific predictions.
Cancord Genuity - This recent report is useful because they are giving specific price. In November 2025 bitcoin will be worth $5739. They have laid out the reasons they think this might happen and in Figure 19, they see a strong correlation between the bitcoin price and the rise in transaction volume, with departures from it in times of mania. It also splits this transactional volume away from the Perception Value which may be attached to Gold. Again this could be wrong but it is very specific and therefore, crucially, disprovable.
Richelle Ross in 2015, predicted correctly that Bitcoin would pass 650 in 2015. She claims to have predicted On 23rd July 2014 on Quora that the price of bitcoin at the end of the year would rest around $420. Although no link is inluded in the article. I don't see any record of it here either.
Is Euphoria and Disillusionment more identifiable?
Fred Wilson - We are in the trough of disillusionment - Sept 2014.
But Bitcoin is resilient - July 2015.
“It goes up, it gets knocked down, but it hangs in there, and then it goes up again.”
Fred continued to show faith in the technology through blog posts as it declined and then rebounded in value. His prescription was just to buy the same amount each month throughout this period. That would have been a wise strategy that would already have reaped rewards. Alena and Fred are useful because they are measured in their approach. Freds leading indicator about bitcoin is transaction volume on the network and developer adoption.
Here are two potentially useful facts:
There has never been a bitcoin crash (40% or more devaluation in a month) without a spike in the search volume for the term ‘bitcoin bubble’. By spike I mean 10x or more increase in search volume from previous 6 month or more trough.
In the last 5 years, there has always been a crash within 30 days of the price doubling in 15 days or less. So should you sell out when this happens? I don’t think so, but I do think that you should consider reducing your position by a small amount (lets say 10%) in order to bank some of the gains. I think that bitcoin potentially has long term value, but if you have a lot invested in it it's prudent to have some liquid assets for long periods of decline or slow growth. During these periods it may be a good idea to follow Fred Wilson's system as outlined above.
But wait! You say. How can I know when to sell out? The answer is that you can’t. You can only try to listen to people with a good record who have predicted when greed and fear are taking off again.
Here are 3 predictions:
But I could be wrong.
22 December 2016
Disclaimer: Always seek professional advice before making an investment. This report may be wrong.