High Fees Is An Extinction Event

Make no mistake. The rats are scrambling off this BTC sinking ship. High Fees is an extinction event. Like all extinction events there is always a group of loutish and very vocal band of hard core deniers. Their arguments are hypocritical, and their reasoning always seem incomplete.

BTC dominance below 40%

Today BTC dominance dropped to 38.4%. Total Market Cap is still 600 billion. This means that value have flowed to other currencies this time to Ripple. Value flows to crypto through BTC because it is the main bridge with all fiat currencies.

This happened before when value flowed to Ethereum. That was stopped in its' track because Ethereum encountered several major problems. ( DAO, more hacks and scaling issues )

Will Ripple become the new No 1 crypto coin?

Possible but it will be temporary, until BCH takes over. This upsurge is a pump and FOMO event, timely as many investors are looking to exit BTC. The fact that bankers like it strengthens their believe that this could be a major crypto coin. Again do not be fooled. Ripple is nothing but a token. Issued by a central authority. 38 billion are in circulation and 62 billion is in reserve.

It is not a mineable coin ( POW or POS) It is just issued (printed) out of thin air. Its value is in saving banks and financial institutions billions in interbank transfer fees. For this system to work it needs a large market cap. It certainly has that now. Banking transfer systems like SWIFT will not be silent in the face of this development eating into their business model.

It will be an intermediary token for financial institutions to move value among themselves. In short Ripple is not an everyday currency to be used by common folks. I don't think there is even a wallet for it. I suspect that most are held on exchanges and by the banks.

High fees is an extinction event.

Anybody who has a sizeable BTC holding is certainly now worried that their "store of value" may be in jeopardy. As we can see most of this value is moving to Ripple. When they realise that Ripple cannot be a store of value, much of that value will look for a new home - Bitcoin Cash.

Bitcoin Cash is the real bitcoin. It always was. The fork was BTC which added Segwit. Bitcoin Cash is still the same Bitcoin that I knew and loved in 2013. More and more people are beginning to realise this, as they find that they can no longer use their bitcoin to transact. All businesses that use to accept bitcoin have stopped accepting it.

The only argument left is for it to be a "store of value" and that is gone too, now that value have moved to Ripple! of all things. I guess people still want to trust banks. But they have to realise that banks do not own Ripple, and Ripple does not represent shares in the banking system.

Bitcoin will still achieve valuation of 100,000 and even 1 million a coin.

However that is in reference to Bitcoin Cash. This will happen when BTC is booted off the bitcoin mining algorithm. For me this can't happen soon enough. Bring on the Chain Death Spiral.

What are miners are waiting for? They are in control of BTC's fate.

What do you know. BTC's hashrate just plummeted 6EH from 18 to 12 and still dropping. Maybe this is the flippening happening now. Watch BCH price action to confirm.

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Fedcoin and blockchain

I see Campbell Harvey promoting the idea of Fedcoin here: "Bitcoin is Big. But Fedcoin is Bigger." I'm not sure I agree with his pitch for the idea.

Let's start with Harvey's claim that

"Bitcoin and other cryptocurrencies are based on a complicated technology known as blockchain, which acts like a digital ledger of all transactions completed with the currency."

Complicated? Well, yes and no. As I explain here "Why the blockchain should be familiar to you," there's a sense in which blockchain technology--a growing record of communal history existing on a distributed virtual ledger updated via a communal consensus algorithm--is an ancient innovation. Indeed, I claim that most of our small-group social interactions today still make extensive use of blockchain technology. Of course, the underlying mechanics of how Bitcoin works seems complicated to most people. But the same could be said of how electronic payments are executed today.

A digital ledger of all transactions completed with the currency? Well, not exactly. Remember, there are always two sides to any transaction, with money flowing in one direction and something else flowing in the other. Bitcoin does not record what moves in the other direction. All that is recorded is the movement of bitcoin from wallet to wallet. The identity of who owns each particular wallet need not be visible. This is quite unlike the way digital money works in the banking system, where the identities of transacting parties are visible on proprietary ledgers.

He goes on to suggest that 

"It [blockchain] is somewhat similar to the serial number that you find on every dollar bill, but it actually means something because it makes bitcoin nearly impossible to counterfeit."

The notion that a monetary unit in the blockchain can be thought of as a unique non-counterfeitable serial number is not a bad analogy. The analogy recognizes that the object of concern relates to the money itself (as is the case for physical cash) and not on the identity of who owns the money (as is the case for present-day bank-sector digital money). And so, when one speaks of central banks making use of "blockchain" technology, I presume that one means the issuance of digital bearer instruments and not just plain old digital money accounts (like what we already have today at www.treasurydirect.com). 

Unfortunately, Harvey never really defines what he means by Fedcoin. At times, I think he is talking about digital cash (digital bearer instruments secured on a blockchain). At other times, I think he's just talking about plain old central bank digital money being made available to the broader public. 

Harvey identifies the following benefits associated with Fedcoin: 1) Unlike physical cash, transactions would be visible; 2) it would permit a central bank to implement negative interest rate policies; 3) it would permit the implementation of helicopter cash. 

I'm not exactly sure what he imagines would be visible in a Fedcoin transaction. A lot depends on how the system is set up and whether the money exists as a digital bearer instrument or as plain digital money in an identifiable account. As for negative interest rate policy, yes it would be possible, though this would hardly serve as a panacea as far as monetary policy is concerned. Finally, helicopter cash is possible even today. The barrier here is not technological, it is political. 

On top of this, Harvey also suggests efficiency gains in payments are possible:

"Fedcoin, by contrast, would be decentralized to various Federal Reserve banks. There would be central control over the money supply, just as we have today, but meanwhile, the technology would offer vast improvements in transaction efficiency. Digital transactions are quick, cheap and potentially a lot more secure than the system we have today."

The technology (blockchain, I presume) would offer vast improvements in transaction efficiency? I confess that I simply cannot see what people are talking about when they say things like this. In my mind, there is nothing that can beat a centrally managed ledger (with backups) in terms of cost efficiency. Consensus record-keeping methods are inherently slower and more costly. There may be applications where these costs are worth bearing. But managing a central bank digital currency is not one of these applications. 

****

My writings on the subject of Bitcoin can be found here: Collected Works.

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My perspective on the Bitcoin Project (collected works)

It's true, I really did say that.

It's Christmas time and I'm in a giving mood. So I thought I'd collect all my writings and talks related to Bitcoin and blockchain in one easy-to-access spot.


Like many people, I first took notice of Bitcoin in 2013, after its price soared to over $1000, before plummeting significantly. Many economists dismissed the phenomenon as just another bubble/scam. This was my initial instinct as well, but after checking under the hood, I discovered something intriguing and worth learning more about.

Bitcoin/blockchain is generally much better understood today than it was back then, although an air of mystery persists. But the concept is not very complicated at all, even if the underlying mechanics are. I liken this situation to how we understand machines. For example, most of us roughly understand how an internal combustion engine works, even if we don't know enough to build or repair one ourselves. Hopefully, you'll find some similar level intuition in my writings on the subject below.  You may also find my posts and presentations of interest because I approach the subject from the perspective of an academic / central banker.

I list my blog posts and talks on the subject below in chronological order (to monitor how my thinking evolves on the subject).

[1] Why Gold and Bitcoin Make Lousy Money. April 23, 2013. Link to blog post.

[2] Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currencies. Dialogue with the Fed (a public lecture hosted by the Federal Reserve Bank of St. Louis), March 31, 2014. Slide deck. Link to presentation.

[3] The Virtual Currency Revolution. Opening address at the DATA annual meeting, April 10, 2014. Link to presentation.

[4] Cryptocurrencies: Bitcoin and Beyond. SFU Vancouver Speakers Series, July 7, 2014. Link to presentation.

[5] Bitcoin and Beyond: The Possibilities and Pitfalls of Virtual Currency. Federal Reserve Bank of Atlanta, Jacksonville Branch, November 16, 2014. Updated slide deck.

[6] Bitcoiners: Surely We Can Do Buiter Than This? November 27, 2014. Link to blog post.

[7] Money and Payments, or How We Move Marbles. February 1, 2015. Link to blog post.

[8] Fedcoin: On the Desirability of a Government Cryptocurrency. International Workshop on P2P Financial Systems, Frankfurt, February, 2015. Link to presentation. Link to related blog post.

[9] Bitcoin: A Decentralized Public-Legder Digital-Asset-Transfer Mechanism. Bendheim Lecture, Princeton University, May 1, 2015. Link to presentation.

[10] Fedcoin and the Implications of Cryptocurrencies Issued by Central Banks. June 15, 2015. Link to podcast.

[11] Bitcoin and Central Banking. November 12, 2015. Link to blog post.

[12] Is Bitcoin a Safe Asset? March 27, 2016. Link to blog post.

[13] Monetary Policy Implications of Blockchain Technology. May 1, 2016. Link to blog post.

[14] Why the Blockchain Should Be Familiar to You, May 5, 2016. Link to blog post.

[15] Can the Blockchain Kill Fake News? December 30, 2016. Link to blog post.

[16] Tyler Cowen on Central Bank Cryptocurrencies. November 27, 2017. Link to blog post. 

[17] Fedcoin and Blockchain. December 27, 2017. Link to blog post. 

[18] Blockchain: What it is, what it does, and why you probably don't need one. January 21, 2018. Link to blog post. Link to Federal Reserve Bank of St. Louis Review article.

[19] Bitcoin: Beyond the Basics. Timely Topics, St. Louis Fed. Link to podcast (16 minutes).

[20] Blockchain, Cryptocurrencies and Central Banks, Dialogue with the Fed, August 29, 2018. Link to presentation. 

[21] Smart Contracts and Asset Tokenization. November 8, 2018. Link to blog post. 

[22] Whither the Price of Bitcoin (with Andrew Spewak). January 11, 2019. Link to Federal Reserve Bank of St. Louis Economic Synopses. 


PODCASTS

Fedcoin: The Implications of Cryptocurrencies Issued by Central Banks. Epicenter, June 15, 2015.
Central Banker Decrypts. A Bit Cryptic, October 31, 2018. 
The Impact of Central Bank Digital Currencies on Private Banks. Epicenter, December 18, 2018.
Cryptocurrencies. Equilibrium, SFU Economics, January3, 2019.

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Merry Christmas From Bitcoin Cash - It Is The Flippening

Woo-we. What a day we had yesterday. This was my post yesterday when Bitcoin Cash was at 0.11. It has double to .22 in less than 24 hours. Was it prescient? No. It is the same story line that I have been pushing these last few months. Let us recap.

Update 23/12/2017 : The reason BTC price is going down is because people are exiting. Proof BCH is going up. The flippening is happening. Enterprise are leaving BTC because fees and confirmation times are too high. BCH transactions and hashrate increasing. Value flows to Alts through BTC, and as it does BTC dominance reduces, now down to 44%. When Viabtc leads the way with Coinex, BCH will take over this function.

 Is Craig Wright Satoshi and does it matter?

    

     Of course it does not matter if CSW is Satoshi, but if you did think or believe he was, you would have bought into Bitcoin Cash, and look at how much you would have benefited financially. Blind faith? Not really. 

   

     CSW is the most fertile mind in the crypto space. Not just technically but economically and philosophically as well. If he is leading an equally competent team at nChain and putting his support behind Bitcoin Cash then you should take notice. CSW through nChain have openly said that they will give free access to Bitcoin Cash for some patents owned by nChain. This is a huge endorsement for Bitcoin Cash.

Bitcoin was hijacked.

    Those of us who have been long enough in this space, live through the scorn, ridicule, and pain in promoting a nascent technology which we know in our hearts then will change the world. Bitcoin would not be where it is if not for people like Gavin Andresen, Roger Ver, Rick Falkinge, and many more like them who promoted the idea of Bitcoin with a passion. 

     The cracks appeared with the scaling debated though the stage was set with the funding for developers when bitcoin was worth only $200. The Bitcoin Foundation fell to the wayside and the /money men moved in with Blockstream. Bitcoin Reddit was heavily censored, Gavin was pushed out of Bitcoin Core and the early evangelist were demonised, to be replaced by developers who presumably knows what is best for the rest of us.

       Fortunately Bitcoin by design is anti-fragile. If a chasm appear that is deep enough and consensus cannot be reached, the community will fork. This is freedom at its' very best. Bitcoin Cash was just such a fork. It represents the hearts and minds and aspirations of the early adopters and evangelists who harbored Satoshi's vision.

       The people supporting Bitcoin Core pushed the narrative that Bitcoin Cash is an alt coin fork like Bitcoin Gold, Bitcoin Diamond and countless others coming up. It is not. It can be and will be the original bitcoin because it has the same mining algorithm. The other forks are just alt coin clones, because they cannot exist on the same mining algorithm as BTC and BCH even if they contain the genesis block. Do not be fooled.

       Core has been very successful in pushing forward their agenda convincing the majority of the community on all the social media forums, in pushing their narrative, and they do it to a point of incredulity that you would not expect from smart and intelligent people. My only explanation is that these people were seduced by the technology. 

       It is sad that they of all people should know that the computer field has always been seduced by people pushing vapor ware and we always move forward with what we got, and what we have now was a simple blocksize increase to solve the transaction backlog issue. That such an easy solution was resisted should have raised flags among these people. I can only surmise that this is a symptom of cultist behavior. The tide is turning and most of these people will come to their senses. When you are so used to the dark, your eyes have to adjust to the dawn.

The Consequences Of Bitcoin going to zero.

    

     Bitcoin (BTC) and Bitcoin Cash (BCH) are like 2 Siamese twins on the same body. When we look at the price of Bitcoin now, we should add the price of both coins. This situation is precarious and unstable for BTC because without the Emergency Difficulty Adjustor it cannot survive on the same mining algorithm as BCH. BTC is forever just one price crash away from oblivion through the Chain Death Spiral.

     My greatest worry in the consequences of BTC going to zero was that innocent people will be hurt. Many who owned BTC before the 1 August fork have heeded Core supporters call and sold their BCH as dividends. Some purchase BTC after the fork at prices as high as $19,000. They are now left with BTC that they can't move. I feel nothing but sorrow for their plight. I am truly sorry. Our voices were too small to counter the censorship and the vast and extensive social media propaganda of Core supporters.

      Just last week Xapo sold the last of their Bitcoin Cash and converted all their customers accounts to BTC. I warned in the article BTC is dead long live BTC ELI5 that as custodians these people have a fiduciary duty of care to not put funds entrusted to them at a non zero existential risk. If Wences Cesares, a smart and early promoter of Bitcoin can fall into this trap shows the depth of deception that have occurred. Wences will pay a very heavy price for this decision. Xapo as a company may not survive BTC fall to zero which can happen very quickly, perhaps even before the New Year. The losses and coming litigations will be insurmountable.

BTC as a store of value coin

    BTC cannot be a store of value if its' price can drop by 30 - 50%. I find it difficult to understand the reasoning of core supporters when they accept this reality and at the same time argue that it is a store of value. The same logic is at odds when they argue that a store of value coin need not be useful for everyday transactions. It is its' usefulness as a currency that gives it its' store of value property. Not the other way round.

    Most of these people are smart, intelligent and have foresight, or they would not have been early adopters. Yet in many cases these same people have acted against their own self interest. If BTC goes to zero many stand to lose all they have worked for in storing their wealth as BTC.

How soon to the flippening.

    It can' be too far off. The last time BCH reached .22 the flippening nearly happened. This time the majority of hashrate is still with BTC holding off the Chain Death Spiral, but for how long? some of the factors slowing the inevitable are ;

a) Large holders of BTC know that they have to support BTC price and sell down the price of BCH. Most of these whales have already sold off their BCH and so their ability to sell down the price of BCH is limited. In any case they will find a huge buy wall that will eat up anything they throw at it. 

Buying up the price of BTC is an admission that they have made the wrong choice and they are doing it just to buy time for disposing off their BTC in an orderly manner and limiting their loss.

b) Miners have not moved wholesale to BCH because the fees in BTC are higher than the coin subsidy from mining. It is estimated that the fee back log is as high as 1000 BTC. As long as fees are high and as long as the price of BTC holds up they will keep mining BTC. This equation is changing fast.

c) As the price of BTC drops the price of BCH increases. More and more people will make this connection. Already those holding BCH feel secure while those holding BTC are increasing insecure. At .25 the tide has changed and my guess is that at .33 the flippening will really get on it's way, and at .50 it is THE END. 

    

    

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Monero Valuation Musings

EDIT: I neglected a critical aspect of this analysis by not paying proper attention to the concept of stock-vs-flow. I am especially grateful to the r/monero subscriber who very kindly and extremely quickly corrected me on these points. 

The net result, as it turns out, is still not too dissimilar from the results below... especially when variability of assumptions is high. I recommend you check out his response on the sub. 

I'll try leaving this article here (as a monument/remind to me of my error) but wrap it with the conclusion of, as he put it- 'broad acceptance in the global black market = moon for monero/privacy coins no matter how calculated.' 

note to self: entitling something 'musings' doesn't mean you can't scrub it better than you did here.

--------------------------------------------------------------------------------------------------------------- 

In the course of responding to a comment posted on my blog yesterday (response in the comments section to ‘Sport Coach’, on this article)  I dug up some interesting information around the size of black-market economies  - which got me to thinking about the prospects for privacy coins more broadly and the numbers associated with them.

In crypto-land broadly, there is currently a huge amount of uncertainty as to which coins will be the ‘winners’ – that is, which will have enduring and significant presence. The action todayis Bitcoin versus Bitcoin Cash and Bitcoin Gold... with no small amount of suspected price manipulation all around I might add.

In any case, while I remain optimistic that the broader public will eventually come around to Monero (appreciating it for its moneyness characteristics) I recognize that there are many who feel it will always be a ‘dark coin’ – catering to the black-market, whether than be un-official, non-reporting, or otherwise illegal aspects of economies.

I won’t even bother here with trying to untangle the morass that equates behavior outside the purview of government with things that are ‘bad’ (though I will give the link to this strip which I think is terrific). However, even if we go down the path of assuming that Monero does have future only as a ‘dark coin’, the metrics are quite interesting.

While measures of black-market activity are notoriously unreliable, it is generally accepted that most developed countries have a black-market economy each year ranging in size from 15-30% of GDP. For less developed countries, the estimates go up from there. Given this, if we ascribe a flat 15% of global GDP to ‘black market’ activities, we are probably being conservative. Let’s do it anyway, and further extrapolate that 15% of GDP activity is supported by an equivalent supporting money supply contribution – so 15% of global M3 is held/used in ‘the black market’

Now, let’s make a few further assumptions and see where it leads:

In the next 5 years, 80% of global money will be digital.

This isn’t hard to accept for most people. If it were up to some people who want to ‘ban cash’, the number would be 100% and time horizon would be a lot sooner. Nevertheless, let’s stick with these numbers as hopefully accepted as reasonable.

In this time period, the percentage of all human economic activity considered ‘illicit’ will not dip lower than globally 15% of all transactions.

Considering that regulation and control seems to be increasing at a rapid clip, making more and more otherwise innocuous activities illegal (unless proper permitting, taxes, reporting, etc. are achieved) – this is probably also reasonable if not a bit conservative.

Global M3 stays constant at about $80 trillion equivalent.

We could argue it should be either higher or lower, but let’s assume it stays flat for simplicity. It shouldn’t materially change our calculus.

The best privacy coin will garner no less than 50% of the relevant digital market.

Admittedly, this is a bit of a loaded statement. How we you define ‘best’ is critical. Let’s for now assume it’s a generally favourable combination of ubiquity and true fungibility/anonymity.

Given these assumptions now, let’s do some math:

$80 trillion global M3

X

80% Digital money

X

15% ‘black market’

X

50% penetration of leading privacy coin

= $4.8 Trillion.

If we assume for the sake of argument that this ‘best privacy coin’ is Monero, then we may arrive at a per-coin value of $240,000 – or roughly 600x the current price. Not a bad return I think, particularly as it is arguably lower risk than many other coins with a ‘grand vision’… this analysis is not dependent on jockeying for best position with government acceptance, smart-contract supremacy, or some other functional utility which may be either deprecated or usurped. It is instead dependent upon a facet of human society remaining present which has done so for thousands of years – an unofficial, ‘black market’ economy.

If the broader public does ‘catch on’ to the inherent weaknesses of other coins lacking privacy/fungibility, then the returns could of course be more favorable – but in terms of sleeping at night, I’d venture to say that it’s generally a safe bet to assume that there will always be demand for ‘black market’ items. As such, even looking at Monero from the (in my mind unlikely) prospect of never growing past a libertarian V-for-Vendetta oasis, it presents quite an interesting value proposition.

Perhaps I’m seeing Monero through rose-colored glasses - that’s certainly a possibility. If I am, I humbly ask the reader to share any critique/criticism - but as far as ‘big picture, back of the envelope’ analyses go, I don’t think this one is bad.

Finally, just one more note on investment analyses and simplicity. Back ‘in the day’ when I was first professional tasked with developing traditional investment theses, I thought that a ‘good’ analysis would have at least 10 pages of historical and projected financials – not to mention all manner of detail and usually full financial statement model flowthrough. I was a bit taken aback when a very successful professional investor friend shared one of his models. It was in excel, but fit on one page. One page. And guess what – that particular thesis/trade? Worked out like a charm.

Don’t confuse length of analysis with quality. Some of the most useless investment reports I’ve ever had distributed to me (and which I’m sure no one ever really read) were also the longest and seemingly most ‘professional’ reports.  Again, in ‘the old days’, there was a wall-street maxim that if you couldn’t fit your investment thesis on the one-page space that the old Bloomberg terminal provided as an email/distribution mechanism, you were widely considered to be 'doing it wrong'.

Cheers,

Izzy

Finally, the most appreciated form of support is an email or message of thanks/encouragment.... but as a few people have asked me to include it, a monero address that may receive donations if you feel so inclined is :

41fksK8rNJ7VUWHr5yW58C75oAJbL8mEh3ytfLDucVq3StwTudzbGPyQ75Sj3BeqvNjKtw3Mn5Gni5nD62aWZCiDNjaPY8k

 thanks for reading!

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Back To The Future With Bitcoin Cash & The Shape Of Things To Come.

Non activation of Segwit2X was intentional, dishonest and a fraud

This half confession and analysis by Two Bit Idiot (Politics Religion and Bitcoin) is an honest and candid appraisal of the mindset and thinking of people on both side of the divide.

Segwit2X was never meant to be activated. It was a ruse to get miners agreement for activating Segwit. They were not told that btc1 had faulty code until the cancellation of Segwit2X. The 93% who were warned took action to prevent activation but the 7% that ran the code got their "surprise".

Big block miners were fooled once, ( Hong Kong Conference ) fooled twice, ( NYA Agreement ) and finally F**#ed over with intentionally buggy code. Coders of Jeff Garzick caliber do not write rookie error buggy code unintentionally. It is a wonder how some seemingly incorrigible people we look up to, are willing to prostitute themselves. This guy no longer has any credibility. He is making another attempt with United Bitcoin. Don't get caught in this scam. Avoid anything he does like the plague.

The Chain Death Spiral hangs over BTC like the "Sword Of Damocles"

As long as BTC is on the same mining algorithmn as BCH, BTC is always in danger of annihilation.

1) Price Action.

The new CBOE and CME futures market increases the likelihood of BTC price being shorted. Such a drop in price for BTC, will lead to miners moving to the BCH chain and putting BTC in danger of the Chan Death Spiral.

2) BTC is a Ponzi scheme

BTC is progressively losing users mainly to BCH as fees go higher and confirmation times gets longer. Erosion of existing user base makes it reliant on uninformed new users to prop up its' value. The system will collapse when this flow of new money stops, making it a Ponzi scheme.

BTC have not had a major price correction since the last correction from 8,000 to 5000 when Segwit2X was cancelled. That event very nearly caused the flippening. It is finally correcting now. If it gets caught in the Death Spiral again, this time it will not get out.

3) Store Of Value

The proposal that BTC be use only as a store of value and not as a transactional currency does not fly. The first ever recorded use of BTC was the purchase of a pizza. Today the transaction fees are in excess of the price of a pizza. A coin that is not useful cannot maintain a value.

The stated purpose for high fees is to push users towards off chain solutions like the lightning network. However BTC no longer have a monopoly in this space and must compete for users. Gaining adoption is hard, and there are not many users left to use the lightning network if and when it is released. After 5 months Segwit is hardly used. Core has to react to the market and not attempt to drive the market. Governments do that. ( Picking winners and losers)

Is Bitcoin A Bubble 

Bitcoin is an asset class that undergoes periodic bubbles. meaning that after each crash it will recover to make higher highs. The last Mt Gox crash took three years to recover its' previous high. Today BTC is in another periodic bubble. However this time things could be different. This time it could really crash to zero and never recover.

Core have turned BTC into a Ponzi scheme and like all ponzi schemes when the participants realise that there is really no economic value produced in the scheme, it will collapse dramatically.

When this BTC bubble burst, Bitcoin Cash will be the new Bitcoin. There will be no other forks of bitcoin because none can compete on the same mining algorithm.

A Generational Wealth Transfer Of Epic Proportions.

What we are witnessing is a transfer of wealth accumulated over generations currently in the hands of a small elite, to a new generation of  libertarians, anarchist and crypto savy nerds. Young computer savy kids not even out of their teens are becoming millionaires overnight.

Wall Street is terrified. Never have they seen so much money flow so quickly into a sector that they don't understand, don't control, and are unable to react to effectively.

Scaling - The next big challenge for cryptos

Both BTC and Ethereum networks are clogged up because they are unable to scale to the unexpected demand for transaction. To this extent even Litecoin is being co-opted to fill this demand and as a result the price of Litecoin have increased tremendously over the last week.

It is not inconceivable that even Litecoin will reach its' transaction limit. Bitcoin Cash has shown that with block size of 8MB and increasing to 32MB it can handle the transaction demand now. A massive negative campaign launch against it by the BTC supporters and having to rebuilt its' whole infrastructure means that it is virtually unknown among new crypto investors.

These barriers are quickly coming down. Already OKex and soon CoinEX will be trading BCH based trading pairs. Bitcoin.com will soon offer a Bitcoin Cash Visa debit card. Businesses are changing to Bitcoin Cash for faster and cheaper transaction. These developments in Bitcoin Cash will erode BTC's user base over time. The day is not far off when BTC will succumb to the Chain Death Spiral.

The Shape Of Things To Come.

There will be many token each specialising in different use cases and segments of the industry. This is my analysis on how the crypto market will shape out.

Currency, Store Of value, Smart Contract : Bitcoin Cash ( BTC will go to zero )
Privacy : Zcash  ( No Premine )
Tokenisation, ICOs : Ethereum ( Already the best use case )
Data Access, Web Pages : EOS ( Unlimited free transactions )

1) Social Media

The future of the World Wide Web is the blockchain. All the web pages on Steemit, is stored on the Steemit blockchain. Steemit already handles more transactions than BTC, Ethereum and BCH combined and it is free to access.

There was a time when I thought that micro transactions was the killer app for cryptos. However I now believe that micro transaction may be suitable for the internet of things, but for social networks, it introduces friction. Facebook could never scale if users had to pay fees to access it.

2) Decentralised Marketplace

The future of the market is peer to peer and decentralised. Bitsquare, Open Bazaar, Bitshares. Centralised exchanges will be dominant for years to come but look out for peer to peer to improve and gain dominance in the coming years.

3) Collapse of BTC

As BTC's valuation goes higher its' user base actually gets smaller as less people can afford to hold and use it. BTC's position on the same mining algorithm as BCH is unstable. Collapse is inevitable. The risk of putting your money in Bitcoin is high.

People who still support BTC and claim that it will become a reserve currency for international transactions are deceiving themselves. Without the power of the open source development community, it is noting but a FED COIN.

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Valuing Cryptocurrencies - An Approach

 Follow @cryptoizzy

There are well over 1,000 cryptocurrencies floating around right now, and it’s my sincere belief that many, if not most of them, will fail. This becomes especially evident when a little bit of thoughtful research is done, and one sees that many of them either have no realistic plans for success (beyond a pump-and-dump of the coin), and/or offer no meaningful value that is not already well represented in the crypto-space.  So how to tell them apart? Well, I’ll share my personal approach, which I hope you find interesting and maybe useful. I suspect that applying this methodology might lead one to ‘miss out’ on some rip-roaring rally on a coin that might otherwise have been speculated in, but hopefully it will also keep one from waking up one morning to discover the coin thought to be a sure thing for a quick in-and-out trade has dropped precipitously in value. Different people need different things to sleep at night. Diff'rent strokes for Diff'rent folks. 

Step 1: Ask (and attempt to answer the question) – Is the goal of this cryptocurrency to be considered money? In other words, does the coin hope to be considered a broad and fundamental unit of money/currency that will be used to effect value transfers?

The primary examples of coins that attempt to ‘be money’ are:

Bitcoin, Bitcoin cash, Litecoin, Dash & Monero.

The goal of eventually becoming money is potentially incredibly valuable. The prize is the displacement of a significant percentage of existing forms of money (namely, Fiat currencies issued by governments, whether they be dollars, euros, yen, etc.) and that achievement would be stupendous in its implications – both socially and financially.

The current measure of all transactional ‘money’ in the world (an economic measure called M3) is approximately $80 trillion. If any one of the 5 coins above mentioned are to be successful as ‘money’ and garner a significant share of M3, it would have astounding implications for the value of the coins. The (very rough) table below shows that ‘upside’ from current values should the individual coins achieve a 20% of M3 ‘market share’ range from ~50 times current value for Bitcoin, to over 2,600 times current value for Monero. This is in stark contrast to coins that do notaspire to be money which we will explore shortly.

(Please excuse the horrendously scrappy cut/paste for the below table.. the gist of it should be clear though)

So now we come to a fork in the road – was the answer to Step 1 a ‘yes’, or a ‘no’? If ‘yes’, then proceed to Step 2. If ‘no’, proceed to Step 3.

Step 2: Check the coin under consideration for its current and prospective ability to satisfy the criteria of ‘moneyness’.  

I won’t go into a full re-hash of the concept of moneyness here, as you can read plenty about it in TPOM and The Bitcoin Flaw, but in short, the coins need to satisfy the 4 main aspects of sound money – Store of Value, Unit of Account Medium of Exchange and Fungibility[1].

We check for its moneyness under the simple premise that if a coin lacks any critical aspect of moneyness, it will ultimately fail and hand the mantle of ‘money’ over to a coin that succeeds. My take on all the above mentioned coins (in case you didn't know) is that i far prefer Monero as the best candidate. In any case, you can decide for yourself and are free to disagree and/or hedge your bets.

The math though for valuation in this scenario becomes trivial (although determination of input values is not). If the coin in question passes the test for being surviving money, then we may apply the valuation technique as {[Expected % of M3] x [M3 Value] }/ [number of coins outstanding].. all present-valued.

Step 3:Determine what value is being created by the coin and/or coin ecosystem.

*Note: you should only be here in step 3 if you answered no to the question in Step 1. I realize that some people might make an argument for ETH being in both places, but I disagree for reasons I won’t expand on here. Feel free to email me if you’d like to discuss.

Since the coin we are now looking at is not a ‘money’ prospect, we can apply much more traditional valuation metrics – without needing to understand some bigger-picture and subtler aspects of global macroeconomics. Hooray!

We simply need to ask, what value is being created?

Let’s take what has been a contentious coin for me as an example: Ripple (technically XRP, the coin).

Ripple, as a medium of exchange that can facilitate lower cost cross-border transactions, offers the prospect for enormous value to be released. After all, there are many billions of dollars currently spent (and arguably wasted) in the current archaic and cumbersome international money transfer market. We can even ascribe theoretical dollars to it, so let’s do that:

Let’s say the Annual cross-border international transfer market is $200 trillion annually, and let’s further assume the average fee savings by replacing the old archaic systems with the disruption of blockchain-type processes will be a clean 5% - that’s $10 trillion a year!

So maybe this mean that Ripple’s coin, XRP, if Ripple were to garner a 100% market share should be worth $10 trillion?! Not so fast there cowboy.

Now that we’ve identified the potential value-creation/release aspect, we need to make a criticalnext-step jump – and this leads us to Step 4. Of course, if we haven’t been able to identify any monetary valuebeing created at all, we can stop here and most likely abandon the coin from consideration.

Step 4: Ask – To WHERE and/or WHOM does the value created in Step 3 Accrue?

In Ripple’s case, most of the value accrues to two parties – competitive pressures will see to that – either the banks themselves who no longer have to bear the cost-burden of an antiquated system, or the customers who will experience much lower costs and fees.

But wait a minute – we are valuing a coin here – so the real question (between the lines) is something a little different.. let’s make this our step 5.

Step 5: Ask – How does value created by the coin/ecosystem/etc. necessarily accrue to the coinunder question? And by how much?

Let’s stick with Ripple for the example.

I’ve never argued that Ripple wasn’t a good idea. While I still question the uptake and competitive response, and many people have enjoyed an ‘I told you so!’ after a few recent announcements and a big price move – I have yet to hear anyone address this Step 5 question (even though it has been asked of some people who claim to be the experts).

Just because a coin/currency/etc. creates value as a whole, for an investment in the coin to be based on solid fundamentals, there has to be a demonstration as to why the coin needs to be worth more.

Good news for XRP investors – I definitely see a scenario where it needs to maintain a value. The (potentially) bad news – that value could be a lot lower than current levels.

Rather than rewrite it, I’ll just quote my other post (the Postscript to ‘Goodbye to Ripple’… even leaving in my 2-glasses-of-wine snarky comment):

Most people (not all) have conceded that Ripple is not about being ‘money’, but a functional tool. In that case, we ought to value it on that metric – how much value is being created, and to where does it accrue?

Let’s use some numbers.

$207 trillion annual market size.

Assume evenly distributed, that’s about $500 billion moving a day.

There are 86,400 seconds in a day. Again, assuming smooth distribution if XRP was 100% used as transfer medium in the market, every 5 seconds (on average) it would have to move about $30 million. If we assume it needs that FULL balance to be held in 15 different currencies, that’s a required market float of 30million x 15 = $450 MILLION (that’s million with an M). Heck – let’s say that we’re off by an order or magnitude somehow and multiply by 10. Now we’re back to billions - $4.5 billion – or less than half the current capitalization.

Is there a fault in that example? I honestly don’t know. I just spent 5 minutes working it out and have had a couple of glasses of wine. My point is, talking about value being created and that same value accruing to the benefit of the actual coins is talking about two very different things. It’s the same thing as a company you might love, but whose stock is awfully priced.

While people may love-love-love XRP as a trade right now, if it is going to maintain its value, it has to be demonstrated in theory perhaps, but ultimately in practicewhy it needs to be valued more than, for instance the $4.5 billion in my example above. Otherwise its value is being propped up by raw speculation - not buttressed by any fundamental value. This in turn leaves it subject to significant (and perhaps inevitable) correction risk.

I didn’t really want this to be about Ripple, so I’ll just add one more thing before moving on – in the cryptomania we’re seeing today, going up in value is not proof that a fundamental valuation is sound. Maybe there are other fundamental justifications for why XRP needs to be valued where it is (outside of a speculation medium). If there is/are, I have yet to see it/them. If you genuinely see a way to correct me, then by all means, don’t waste time leaving Anonymous blog comments – send it to me and convince me. I guarantee I’ll issue an ‘eating my hat’ mea-culpa report highlighting the error(s) in my (now current) thinking. 

So – back to how value accrues to a coin in general.

If you cannot identify how value must accrue to a coin (whether as a function of facilitating a smart-contract, money transfer, or otherwise) then you are very likely veering away from investing and toward speculation.

Hey, there’s nothing wrong with gambling/speculation per se. I’ve personally never been really good at it. Some people are. But before you convince yourself that you are blessed with innate intuitive trading sense, consider this: All those glorious and impressive Las Vegas hotels and monuments were paid for by losers – and though I’ve personally known a few paper-millionaires in the dot-com boom, each of them quietly went back to their day jobs a few years later.

As the saying goes: Bulls make money. Bears make money. Pigs get slaughtered.

Good luck!

Izzy

EDIT: March 2018: if you've read up until this point, then hopefully you have enjoyed it. Considering how many hits this page gets, i thought i would mention that if you are interested in engaging me for cryptocurrency education or advisory, please feel free to email me. I've always happy to have a chat.

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[1] Technically speaking fungibility really falls under the purview of Medium of Exchange. I’m happy to leave it as a 4th criterion though given it’s incredible importance and difficulty of grasp for many, which I think may be remedied by calling extra attention to it.

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The Great American Slump (update)

I detect some chatter out there concerning the recent "unexpected" rise in the U.S. labor force participation rate. The discussion is related mainly to the question of whether the labor market has fully recovered from the effects of the Great Recession. I suggested back in 2010 (here) that American recovery dynamic might be a prolonged one, at least, taking the Great Canadian Slump as a model. I updated that analysis here in 2016. In light of the recent discussion, I thought I'd see where we stand today.

Here is EPOP (employment-to-population ratio) for Canada (beginning in 1990) and the United States (beginning in 2008).

 
The two series bear a striking resemblance 40 quarters (10 years) out. Here is what the picture looks like when we restrict attention to the prime-age (25-54) population:

 

 The Great Recession appears to have a significantly larger impact on the prime-age labor market in the United States, relative to the 1990 recession in Canada. Look how it took about 34 quarters for prime-age EPOP to recover in Canada. We are now 38 quarters out since the Great Recession began with prime-age EPOP in the U.S. still almost two points below its initial value. I interpret this to mean that the labor market has not yet fully recovered. And no, I do not think this has very much to do with "aggregate demand deficiency." (See here, here and here if you want some elaboration.)

Here is what the picture look like for the participation rate:
 
The relative decline in the U.S. participation rate here might have something to do with demographics. When we restrict attention to prime-age, we do see evidence of a recovery that is not yet complete:

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