Can you still call crypto currencies a bubble after an almost 50% crash?
Over the course of Bitcoin’s nine year history, there have been at least a half dozen crashes similar to last week’s near-50% dip.
Prices have recovered somewhat. Bitcoin’s market dominance remained pretty steady throughout the crash and recovering, peaking at 37% during the worst day of the crash, and now representing about 35% of the value of all crypto.
I think that within the crypto space, Bitcoin represents stability. (The next newletter will outline Bitcoin vs everything else.)
So is it a bubble?
Here are the accurate arguments for each camp:
Crypto Currencies are a Bubble
– Compared to normal businesses, many crypto currency projects have outrageously high valuations, especially considering how many of them are still at the idea or prototype stage.
– Many crypto investors have only seen huge success and are excessively exuberant.
– Many crypto investors make investments with little or no serious research.
– The deluge of money has attracted unsavory entrepreneurs.
Crypto Currencies are not a Bubble
– Crypto currencies are a new technology that allow people to do things which were previously impossible, namely structure incentives with strangers in a way that does not rely on trust.
– Crypto currencies solve real, tangible, important problems.
– Normal people have access to investment opportunities like never before. The most charitable explanation you can give to the ridiculously high valuations of idea-stage projects is that people are willing to risk failure and fraud to have a stake in world-changing research.
– The values of crypto currencies will not go to zero.
2014 Bitcoin Price Manipulation
The journal of Monetary Economics recently published strong evidence of massive Bitcoin Price Manipulation in 2014. Story here.
2014 was the Mt Gox Era. One, Japanese-based exchange accounted for 70% of Bitcoin transactions. Mt Gox eventually shut down and about 650,000 Bitcoin went missing.
Today, there is much more decentralization, but concerns about the behavior of exchanges remains.
Decentralization still far away.
In the previous Newletter, I listed decentralized exchange projects. Unfortunately, I’ve since discovered that this holy grail of crypto is further away than it seems if one judges by the market caps of these projects.
There are real serious engineering problems that still need to be solved. Atomic transactions aren’t tested, and I’ve heard of one Kyiv-based researcher funded by the Dash project who has been trying and failing to make Atomic transactions work for six months.
Right now, if I understand correctly, the available decentralized exchanges rely on third party escrow services, and cannot handle high volume.
Binance CEO, Zhao ChengPeng
If you’re assessing the space of crypto currencies as a whole, you must absolutely listen to this wonderful speech by Binance’s CEO, Zhao ChengPeng. He’s a pillar of the crypto world.
His company, Binance, emerged in just six months as one of the biggest (on some days THE biggest) crypto exchange. They do $10B in trading a day.
He speech covers the practical as well as the visionary. He talks about about Binance’s growth, their criteria for listing coins, and how they’re starting to incubate crypto projects.
Silicon Valley is no the center of inspiration for building the future.
Silicon Valley feels more like Wall Street. It’s overflowing with money, and it’s the stage for a big cat-and-mouse game of investors and entrepreneurs, full of its own traditions and habits. But as Peter Thiels observed, the world is no longer copying America, and, I would add, the technology pioneers are longer copying Silicon Valley.
Yes, they have great businesses, and probably the best concentration of talent in the world. But when it comes to envisioning the future the world is looking elsewhere. The excitement seems to be in East Asia, and in an Archipelago of isolated communities of programmers, many of its islands in Eastern European.
Silicon Valley star-up pioneer Sam Altman recently stirred controversy by writing that Political Correctness has damaged Silicon Valley. This meant a lot because he is as impeccably “progressive” as anyone.
Between this, and American securities laws excluding Americans from many aspects of the crypto boom, the Valley may be in trouble. I think they’ll still be able to act like everything is fine for a couple years, but by 2020, it’ll be too hard to ignore.
I would consider it justice if history regarded the infamous Google Memo as the Valley’s jump-the-shark moment. It may also be simply the course of economic evolution. Physically moving has a price, and jurisdiction hopping has a premium.
The decentralized crypto era is on the horizon. Just like the web liberated journalism, crytpo will liberate finance and investment. Just as the web allowed us to see each other as never before, crypto will allow us to cooperate with each other as never before.
Coin Watch – What does the token do?
my plans for “Coin Watch”
After spending the majority of my time over two weeks learning about crypto currencies, it’s become obvious that no one person can’t keep up.
I hope to keep a running list of categorized currencies, which will include the categories I mentioned in newsletter #8.
- Investment Coins
- Content Coins
- Smart Contract / Application Platforms
- Prediction Markets
- Misc Crypto Infra Structure
- Community Building
- Supply Chain Management
- Web 2.0
- Decentralized Exchanges
- Decentralized Computing
I’ll add another category: stability coins. Tether is the most famous — it presumes to be exchangeable for dollars. Its price rose to $1.03 during the crash. There’s also DAI. I found it by looking for coins which weren’t red during the crash. I don’t know how DAI works, but I understand that there are a bunch of projects like “Chain Link” which I categorize as infrastructure, which try to connect crypto currencies to real world things. If chain link could reliably broadcast the price of gold, for example, then another crypto currencies could, for example, use some scheme to remain proportional to the price of gold.
I’ll try to keep doing that because it offers some structure for understanding a complicated space, but some weeks, I’ll just publish my disorganized research and views and different coins. Like this:
I’ve decided that two coins are probably scams: Monetha and Black Moon Crypto. They’ve both raised so much money that they may go on to produce great product anyway. Also, I could simply be wrong. But in any case, I’d steer clear.
Monetha claims to be a payment system with a trust mechanism. This is a simple, important value proposition for which other coins are also competing. Who ever pulls it off will make a lot of money for themselves and their investors. My concern:
– Weak answer to the question of why someone will adopt them and not someone else.
– Marketing is just a little too slick.
– Too many of the lower-brow crypto youtubers have made what seem to me like hype videos praising Monetha. “Monetha (MTH) The Sleeping Behemoth!!”
– In all their forums, in their chat, which I’ve been monitoring, and under all their articles and video, there are huge number of hype comments about the price potential.
– The CEO was previously a model and a DJ, and doesn’t have a tech background.
– He makes very professional videos aimed at crypto beginners, which seem devoid of substance. One of them was about avoiding pump and dump schemes. If he is self-consciously a pump and dump scheme then this is typical psychopath behavior. If he isn’t, then I would still wonder why is doing public service announcements instead of busying himself with building a company.
– In a recent interview of their lead developer, I thought I saw fear in his eyes. The video seemed to over-hype a not-very-important milestone.
– They seem to quickly identify and aggressively counter negative press.
Black Moon Crypto is an Ireland-based company run from Moscow. They’re one of the Investment services coins I listed in newsletter #8. Their value proposition includes being the only investment coin through which users can invest in real world assets. It seems like they’re a more-or-less legitimate investment company AND they’ve launched a crypto currency. And it seems like these two facts exists uncomfortably side by side, like new roommates, and nobody has decided what each has to do with the other.
– Their white paper is vague and full of marketing nonsense.
– There seems to be confusion whether the company was founded in 2014 or 2016.
– Despite listening to over an hour of interviews and reading their white paper and other materials, I can’t figure out what anyone gets for holding their coins. The tie between an organization and its crypto currency is a key aspect of evaluating cryptos.
There are suggestion in their interviews and marketing materials that holders of BMC coin will have the privilege(?) of working for BMC by doing marketing, legal, or other clerical work. This makes no sense to me. They also said that holders of a lot of BMC tokens will participate in their strategy sessions.
So it’s like a game of pretend. They’re a normal investment company (or perhaps I should say, a normal Russian investment company), which raised tens of millions of dollars selling these digital tokens. And now they’re really really trying to create the impression that these tokens mean something, though it seems like they themselves aren’t sure how they’ll use the tokens.
Their market cap is about $30M. I’m not sure what portion was sold, but it’s typical for issuers to keep anywhere from 10-50% to cover development costs.
In a recent interview, the CEO spoke about “fund tokens”, and setting up different funds where investors can simply buy tokens and collect dividends. Of course this is a great idea, and after raising so much money, they have the capital to pursue it. But what about the already issued BMC token? It’s certainly possible that I misunderstood something, but to me it seems like it’s backed only by vague promises.
Other investment coins
There are two other crypto currency investment projects which seem to be doing the hard work of building a platform for investment fund management, where the holder of a token has a cryptographic guarantee of a fixed share of the fund’s profit.
Those projects are Swiss-based Melons which I mentioned in newsletter #8, and Czech-based Iconomi, which I didn’t mention despite it being a top-100 crypto currency. I simply hadn’t known about it.
I had also written about the Kyiv-based TAAS project. This is an investment fund, a digital one, which not only claims to pay dividends to token holders, but has a track record of doing so. However there’s no crypto graphic guarantee. I heard a rumor that the guys behind it are both overwhelmed and a little intimidated by TAAS’s $60M market cap, as if they didn’t expect their experiment to go so right.
Here too there are no crypto graphic guarantees. You have to trust them. I guess I’m not as hard on them because aside from being the home team, they’re geeks, and not finance people. TAAS recently announced a relationship which another crypto currency called Bancor which is a top-100 coin that calls itself a “liquidity network”. I think it’s a decentralized exchange, though I’m not sure.
Misc Coin Watch
Cardano – I remain very confident that this project has a bright future. They’re late comers to the smart contract space, but their engineering team, methodology, and network of experts is second to none. Their founder was a co-founder of Ethereum, whose value proposition Cardano aspires to address even better.
Rchain – I recently discovered Rchain. It’s only traded on obscure exchanges. It’s the only other project besides Cardano that uses some technological approach to scaling called “lambda” (?), and it’s team also contains Ethereum veterans.
Both Cardano and Rchain seem like the opposite of Monetha. They’re both hugely technical with weak marketing.
Hacken – This is a small Ukrainian projects (market cap $15M) which I’m mentioning because I think it illustrated the weakest possible, but still viable justification of crypto currency. Hacken is a network of hackers, including some world-famous ones, apparently, who’ve created a community where companies can ask for security testing. By insisting on getting paid in Hacken tokens, they’ve created a way for people to invest in this project, and it gives them the capital they need for marketing and other expenses. This is the weakest possible justification for having a currency, but I think it’s viable.
From what I understand, many large American companies had their own currencies in the mid 19th century (though it was for building loyalty rather than allowing investment). Also in the video of Binance’s CEO posted above, he envisions a future in which many services, many businesses, and even many individuals have their own currency. It’s a beautiful vision. It allows anyone to invest in anything.
Tether & DAI – Stability coins, tether, by far the more popular, is pegged to the dollar.
ByteBall – I guess it’s a competitor to Iota. Like Iota, ByteBall doesn’t use a blockchain, but a tangle. It recently exploded into the top 100.
Oyster Pearl – In newsletter #8, I described this as an advertising coin based on it’s ambition to give websites a different scheme of monetizing. Instead of showing ads, website owners can burden their visitor with the requirement to do a little math on their devices. Since then, I’ve learned that Oyster Pearl uses a tangle instead of a blockchain, and that it also tries to do decentralized file storage. At first glance, these disparate value propositions seem far afield from one another, but the community is enormous and active. I think they’re re-imagining the internet in a similar way to projects like substratum (which I like), and Tron (which is probably over-hyped).
Salt – A lending platform that allows users to put up digital assets (like a bunch of Bitcoin) as collateral. Lenders have a crypto graphic guarantee of the collateral. I’m not sure how the platform attempts to see the real world and determine whether / when loans are paid back. Salt is a top-50 coin.
Ardor & Gnosis – These are the two most prominent prediction markets. Ardor was first, and is in the top 50. Gnosis came later and surprised even hard core crypto believers by raising a $300M ICO. It’s in the top 100.
Loop Ring – I looked at loop ring a month ago and couldn’t figure out what it does. It seems to be a middle layers that allows you to interact with it instead of going to crypto exchanges. I guess I misjudged it. It has since exploded into the top 50. Perhaps it’s similar to Bancor which bills itself as a “liquidity network”.
Publica – Publica is a content coin trying to revolutionize the book industry. I’ve listened to at least an hour’s worth of interview of their affable CEO, and I’m still not sure precisely how what their tokens do. However, they’re well funded, they have a huge community, lots of connections in publishing, and they say that they’ll do a beta launch tomorrow. Their market cap is about $25M.
Generally, I’m more wary of customer focused projects built on top of a smart contract platform because there are important scaling questions hanging over everything. We don’t know which platforms will survive. Thus I’m more interested in Cryptos which take the role money, or in infrastructure-type projects. Publica is built on top of Ethereum which is going to have scaling challenges. However they’ve said they’re ready to change platforms if necessary.
I guess I like it because I know the book industry. I’m both a published, and self-published author. (See my books here.) And I can imagine it working. Your investment in something should be proportional to your understanding of it.
About the Tweedle Whopper Newsletter
This newsletter currently goes to 108 people. I’ve known almost all of you for years. I trust all of you to take responsibility for your financial decision. I am not giving investment advice, but sharing my perspective in the hope that you may find it useful.
If any of my readers what to collaborate on researching cryptos, please let me know.
Also, feel free to drop me a line. I love hearing from you. 🙂