Jan

10

Observation on Cryptos, from Jeff Watson

January 10, 2018 |

3 Comments so far

1. Randy on January 10, 2018 5:12 pm

   Heard the same chatter at the barbershop yesterday.

2. Scot John Law on January 11, 2018 8:09 pm

   The Concept: Crypto-markets are a classic asymmetric boom/bust event. I intend to construe the current phenomenon using a reflexive model borrowed from Soros. I wrote this out some time ago, I believe we are currently in Act 3. When Act 3 will progress to 4 is the question which haunts all speculators.

   Underlying trend: Bitcoin and other cryptocurrencies use block-chain technology. Block-chain is a promising new technology that will have to be developed and built upon. A decentralized currency is useful for those seeking to operate outside the control of a particular polity. Etherium becomes a platform for ICO’s, and the coins start the proliferate.

   The Prevailing Bias: The rampant rise of the cryptocurrency market is due to the inevitable rise of block-chain technology which will come to play a central role in modern economy. Although some of the rise is definitely due to “the fact it is a bubble”, there is no way that block-chain technology won’t be part of the future. Those who publicly come out against bitcoin don’t understand the technology. It isn’t just a currency; it is the future of business. It decreases the transaction costs of trust, and is a horizontal technology that touches all kinds of verticals. Although there are definitely “shit coins” out there, there are plenty of coins that will be a part of the future.

   Misconception about the trend: Most of the “coins” in the market are actually a means by which upstart companies can easily raise huge sums of capital. Similar to pink-sheet stocks—yet even that analogy is contrived. None of the legal protections afforded to equity holders are available for “coin” holders. Companies are able to raise funds through this unregulated market, shirking most of the burdens placed on public corporations, because regulators have not yet realized the misconception.

   How Prevailing Bias reinforces the underlying trend: The higher speculators are willing to pay for the coins, the more capital they can raise. As long as their businesses appear promising, aka seem authentic and capable of disrupting an industry using any of the concepts attributed to the initial conceit, people will buy their coins hoping it continue to go up. The more capital they can raise, the more they can spend on marketing, employees, and seeking to develop partnerships.

   The Drama Unfolds:

   Act 1 (The Beginning): The influx of capital through ICO’s to these upstart corporations creates a proliferation of companies with access to huge sums of money in a short amount of time. More companies pursuing easy capital enter the market and the number of coins continues to germinate. The rise in prices leads to more speculators buying hoping the prices will increase, more buying leads to higher prices, and more buying at high prices means huge influx of capital to companies. Companies start building out their teams, spending money on advertisements in the media and at conventions, and courting established corporations in hope of public partnerships.

   Act 2: (The Test): Initial expectations of a correction begin to arise. A negative event, whether it be an issue particular to the crypto-currency market as a whole, to an individual crypto-currency issuer, or perhaps simply a negative trend in the price movement of a particular currency, will cause both the prevailing bias and the underlying trend to be tested. The trend will survive. The prevailing bias is very strong, and the belief in the future of the technology is fervent among most participants—at this stage the participants are only those who are technologically sophisticated enough to access this market. How the online communities, i.e. reddit et al., may influence the prevailing bias is uncertain—my suspicious is that crowd will move in lockstep. Furthermore, the corporate ventures will have made concrete progress using the capital made available to them in ICO’s: they have taken out loans in fiat currencies, leases on buildings, hired teams, and announced partnerships. While they may feel the squeeze of their contracting coin base, many of these companies have gotten auxiliary funding in fiat currencies from outside investors and partnerships, using the capital generated from ICO’s as collateral, allow some of them to ride out this sudden lack of liquidity.

   Act 3 (The Acceleration & Weakening of the Trend): Having successfully withstood a negative test, or perhaps multiple negative tests, the underlying trend and the prevailing bias reinforce each-other, and the boom accelerates. Prices go up, companies get more capital and issue news of more corporate partnerships, driving prices further up and more participants into the market. Hordes of speculators enter the market, seeking rising profits, or simply volatility having been starved of it in current public markets, and thus weakening the prevailing bias because a smaller share of the participants believe ardently in the technology. Concurrently, the underlying trend begins to develop areas of potential weakness. For many of the companies attempting to scale their businesses, the lack of true innovation in their business models becomes apparent as the technology is equally adoptable by their competitors. Even for the few innovative business models, the hardships of both scaling the technology and growing a profitable business under a new capital structure, one that includes ICO funding, will provide a daunting test.

   Act 4 (The Misconception Revealed): As the reinforcing boon grows and because less stable, the chances for the misconception to be reveal increases. Could happen a bunch of different ways. As the impact of the bubble grows larger, i.e. “crypto” corporations partnering with corporations viewed as important by the government, or crypto-currencies are being used increasingly in transactions, or a concerning portion of publics savings has been poured into the asset, or prominent institutions begin trading in the market, the government will grow increasingly worried and eventually step in to regulate. They will slice through the misconception; decentralized currency may live on, companies using block-chain technology may eventually prosper, but companies raising large amounts of capital without any regulatory oversight will not. They will impose legislation that reveals the misconception. Or, perhaps, the misconception will be revealed by the private sector: established institutions and corporations will implement block-chain technology, revealing the difference between a decentralized currency, a method for companies to procure unregulated capital, and a new technology—distinct phenomenon which have been uncritically subsumed by the prevailing bias.

   Act 5 (The Bust): When the misconception is revealed, the jig will be up. As in all boom/bust sequences, when the misconception is removed the disparity between the prevailing bias and the underlying trend is revealed. The speculative holders, which constitute the lion-share of the participants at this point, will hear that the music has stopped playing and rush to liquidate their positions and realize their returns. The bust will be quick and painful. Corporations will suddenly become insolvent, having borrowed in fiat currencies against funds denominated in crypto-currencies. Short-sellers feast amidst the carnage. Only market participants who believe in the technology will remain, faced with dazzling losses. This stage is path dependent, so its outcome will be unique and unpredictable. The inevitability of regulatory action makes the outcome even harder to predict. What eventually becomes of the “crypto-currency market” is not a concern for present speculators, nor something a speculator can confidently speculate on, so I will end here. Would love feedback.

3. Andre on January 12, 2018 1:35 pm

   It all screams dot com. A great idea met with unbridled enthusiasm. Although I admit there is some jealousy at not being along for the ride at what seems the easiest money ever made. It’s like printing one’s own money and having others buy it.