This space changes rapidly and I will most certainly be proven wrong on some of this. Being wrong is exciting, I seek it out, as a means to ascertain truth.
So tell me where and why I’m wrong below.
I want truth and am willing to pay in embarrassment.
Full disclosure: I hold a portfolio and trade actively. Nothing in this post is motivated by pump and dump, but out of a desire to find longer term fundamentals style truth.
- Crypto is big, as in, as big as email. It will change the world.
- Calling it a bubble is oversimplification and lacking in understanding of the fundamental technological shift. People dismissed the internet as a fad too. It is a bubble inasmuch as the excitement has overshot the utility, however, make no mistake: there will be lasting change from this.
- Bitcoin is probably the MySpace / Friendster / Altavista / Yahoo of the space, as the underlying technology is a wonderful sketch but seriously inferior to newer systems. Google, Facebook, and even Amazon – none of these were the first in their categories. Some of the players today are surely Pets.com all over again, but some are probably Amazon / Google.
- The USA and EU is a poor use-case for alternative currency, we simply don’t care because the dollar is stable. It was backed by gold (see below) until 1971 and failed 2x during the formative years post revolutionary war. Bitcoin and other cryptos are exactly as nothing-backed as the paper money in your wallet, albiet with one major difference: military threat. Zimbabwe, Venezuela, Kurdish Iraq on the other hand are hungry for a non-government-controlled system of value and transfer.
- Deflationary systems with traction will always appreciate relative to inflationary (fiat non-backed) currency. As long as some people assign value to a token or coin, the system will grow, and since it will grow relative to fiat, others will want in. This cycle makes me a maximalist (vs. minimalist) and therefore, it seems inevitable that cryptocurrency will achieve massive value.
- How much value, however, requires understanding the supply. That’s not as simple. While bitcoin will max out at about 21 million coins in the year ~2100, other systems of value also appear inevitable and frankly more likely to succeed because of utility than Bitcoin, the “grandfather” of the space but which is perhaps past its prime and like comparing a model T to an Edsel.
- The current excitement has vastly overshot actual use cases for the most part and as such, the entire sector is generally a crash waiting to happen. People talk about a “small $15,000,000 raise” for projects with little real-world traction. They’d be laughed out of silicon valley with the valuations vs. traction ratios.
- The intrinsic value as a general baseline (subject to comments below) that I most follow is that of Tom Lee, who calculates based on metcalf’s law, which essentially states the value of a system increases exponentially with the number of nodes, i.e. a phone with nobody to call is useless but as the phones increase, the possible connections go up exponentially.
- Government will not tolerate a serious threat to their own fiat currency, and because of this, we’ll eventually have a serious showdown. It will get ugly. Governments do have the power to block retail acceptance.
- I don’t particularly trust the government to have my back and think a lot of millennials and young people feel the same. Money the government does not control will always be superior to me than one they can print at will, and since millions of others feel the same, we are probably in the beginning stages of the collapse of the U.S. dollar as we have known it. It’s early, but appears inevitable.
- There will always be a demand for true anonymous coins, i.e. Monero and Dash type systems for the above reasons and for use by nefarious actors. It may sound a bit Nietzsche but cash can be an is used for all sorts of bad purposes and therefore I reject any moralistic objections to the systems out of hand. Fire can cook your dinner or kill you, and simplifying it to moral good/bad labels is childish.
- My desire to predict the future is of course, as a means to profit from it. Precisely speaking, “profit” means conversion to stable and cash-flowing long-term assets and/or hard assets such as real estate. It is not enough to be a paper millionaire.
- 1.0 systems like Bitcoin are wasteful with mining. Future systems will leverage assets for real-world production; see also Chia.network for example which leverages empty hard drive space, instead of wasting electricity solving useless equations. For this reason I won’t buy mining contracts as the sooner these go away, the better.
- Gold is to me, useless. Some old people talk up gold and criticize bitcoin, but I feel they usually have a “horse in the race” i.e. financial incentive for their position. Gold is a store of wealth but still subject to the “bigger idiot” theory of value. It has hundreds of years of acceptance, but what would happen if tomorrow a molecular 3d printer could change carbon into true atomic gold for pennies? Supply would flood and nobody would assign it much value.
- Blockchains can be broadly divided into a few categories:
- Store of value systems – bitcoin, litecoin, etc.
- Transaction focused systems. The fees and speed of Ripple for example are far superior to Bitcoin.
- Global Computer “Operating Systems”. These systems such as QTUM and Ethereum seek to be the Windows or iOS of a global decentralized computer. This is probably the beginning of skynet (or a benevolent self-aware global computer superior to any human intellectually), longer term (20+ years).
- Utility tokens. This space is probably the most scammy, as people are buying essentially blossoms from a tree they hope will bear fruit. This is not the same as buying stock and it will not entitle the buyer to future profits. Oculus Rift raised 1.3 million on kickstarter, then sold to Facebook for 2.1 Billion. The kickstarter backers took all the financial risk, and Oculus founders reaped all the reward, while the backers received nothing except the headset. This cycle appears ready to repeat in ICOs.
So, where to go from here?
- Wait for a crash in the overall space wherein the fundamentals reconcile with the technical over-enthusiasm.
- Watch newer projects carefully. They are more likely to be the long term winners.
- HODL wisely and trade to maximize absolute holdings, not fiat comparison.
- The entire space is likely to grow by 6x in the coming 1-2 years, however, it’s not going to all flow to Bitcoin.
Thoughts? Next I’ll dive into specific projects.