Defining a Bubble

From Charlie Bilello’s post on when a bubble becomes a bubble, specifically looking at Bitcoin in this case:

The textbook definition (from Wikipedia) is “an asset at a price range that strongly exceeds the asset’s intrinsic value. It also could be described as a situation in which asset prices appear to be based on implausible views about the future.”

Does Bitcoin’s price exceed its intrinsic value? Are the views about its future implausible?

He correctly points out that bitcoin produces no cashflow and therefore has no intrinsic value, thus coming the conclusion it’s like other anything else without intrinsic value:

If you are of the belief that Bitcoin has no intrinsic value and therefore has to be a bubble, then you must call anything without intrinsic value a bubble, including fine art, stamp collections, coin collections, wine collections, etc.

Somewhat related to George Soros’ theory of reflexivity:

As long as people believe Bitcoin has value, it will have value. If that sounds crazy, ask yourself why a Picasso or a Rembrandt has any value. At the end of the day, market prices are the result of our collective belief in a story. And right now, the story of Bitcoin appears to be good one.

Will bitcoin futures pave the way for ETFs?

More on the new CME bitcoin futures, from RCM Alternatives, and how this will likely lead to Bitcoin ETFs and more: Welcome to Future(s), Bitcoin:

[Last] week came quite a shock to some as the CME announced plans to launch Bitcoin futures after dismissing claims to create the contract just a month earlier. Maybe this chart of it 78,900% growth since 2011 had something to do with it…

On the mutual fund/ETF/ETP side of Bitcoin, there have been many failed attempts to get a Bitcoin “product” going. But the futures markets could change all that. The SEC even went on record back in September saying they would hold off reviewing Bitcoin products until a futures contract started trading!

Will Blockchain/Crypto End of Traditional Firms?

From Nick Tomaino’s post The Slow Death of the Firm:

Economists typically suggest that firms exist for two main reasons: to minimize transaction costs and to aggregate capital and people.

Firms have played an important role in society for decades for these reasons (and likely a variety of others). Despite their prominence, most people dislike them.

He goes on to state that BitCoin is the first organization benefitting from both traditional firm characteristics as well as new characteristics made possible by blockchain:

Bitcoin is the first example of an organizational structure that has the beneficial characteristics of the firm (minimizing transaction costs, aggregating capital and mindshare, and providing job security for contributors) combined with some new characteristics:

  • Ownership isn’t controlled by an exclusive group of founders, employees, and investors
  • Data isn’t controlled by any one entity
  • Decision making power is not controlled by one person or group and there are checks and balances from a broad variety of market participants

These new characteristics may help billions of people around the world in the future, apparently by sidestepping law:

Blockchain-based organizations that aren’t bound to a physical location offer new earning opportunities to billions, as the elimination of a legal entity reduces the need for legal contracts and friction and opens up new short-term, global labor opportunities

While I agree that Bitcoin cannot be entirely regulated by laws, I’m not yet convinced that this extends to the earnings of billions of people around the world. Anonymity is a possibility, though he cites as an example, which requires Facebook authentication.

One of the biggest changes from a traditional firm is that users can become owners, which he touches on, and that:

Creating new products that weren’t possible with firms

More than merely creating “blockchain for X” projects, there’s entirely new possibilities. Blockchain technology and cryptoeconomics are more like adding a new dimension than changing the playing field compared to traditional firms.

Before we get to that point, Tomaino belives there will be steps in that direction along the way.

some centralization of decision making is generally necessary in the early days of a project. The best projects will likely be designed to be decentralized across all facets of the org for the long-term, but not necessarily right from the beginning.

Most labor still requires some centralized human judgement to effectively allocate resources. There are some interesting efforts in the works around proof-of-stake and other systems that may enable the decentralization of resource allocation across a wide variety of labor types in the future.

In the end, he believes the changes will come on two levels:

  • New decentralized organizations will emerge.
  • Traditional firms will transition to decentralized organizations.


Blockchain mergers

Dill Chen writes about the potential to merge blockchains, both for crptocurrency and tokens. He encourages forking as way of to innovate but states:

there needs to be a process to merge chains just as there is the process of forking.

He goes through two potential solutions for merging, citing the potential valuation problems:

Also, as we see in centralized mergers and acquisitions, the larger company often has to purchase the shares of the smaller company at a price premium. We’ll have to establish a better pricing mechanism beyond hash power and other matters.

Though he initially starts with crytocurrencies, he gives an example of how this could pertain to utility tokens as well:

These wouldn’t just have to be currency tokens, you could potentially also merge utility tokens as well. For example, looking at Sia and Filecoin. If Filecoin were to establish a dominant market cap and share position, it might behoove them to purchase the Sia network. An additional step would need to be taken. Individuals would need to, before they can acquire any of token A, transfer their files over to the new blockchain. Once this is performed, they can claim their Filecoin token.

Examples of implementing blockchain technologies

Jeremy Epstein lays out how blockchain technologies can be utilized in two great, simple examples. In the first example, he shows how a smart contracts could be used for a SEO marketer:

In a smart contract, we set up the rule that says, “if the result for search term ‘blockchain marketing,’ goes to Never Stop Marketing on May 21, then pay Sandy 2 Bitcoin. If not, only pay .5 BTC”

We might agree that we will use the .json feed from Google (called an “oracle”) to serve as the arbiter and then, we would both sign it with our unique cryptographic signatures.

I would put the 2 BTC into an escrow account for payment.

Then, we let it run.

On the prescribed date, the contract queries Google, sees the result and the appropriate amount is released immediately (or not, if it fails). Either way, the contract is recorded in a blockchain and open to verification (here’s one I ran).

Done, basically no friction or time delay. The provider of the service, in this case, SmartContract gets a transaction fee of .0001 BTC.

And in his second example, he shows how a decentralized rideshare app could help users capture the value created by usage:

Riders need Zoozs in order to pay for rides. Drivers accept Zoozs in return for rides.

As there is a finite number of Zoozs-or a predictable inflation to it based on the protocol rules- (though they are digital so they can be cost-effectively sliced into multiple decimals), the value of each Zooz increases as the demand for them increases.

Let’s think of it this way and keep it very simple.

There are 100 Zoozs out there.

Each one is worth $1.

There are 100 network participants. 50 drivers and 50 riders.

Each ride costs 1 Zooz.

As word gets around that La’Zooz is cheaper than Uber, more people want Zoozs. So they trade their dollars or Bitcoins for Zoozs which increases the price of a Zooz to $2. So now, everyone who has a Zooz has $2 worth of value instead of $1.

The purchasing power has doubled, so you can afford 2 rides for 1 Zooz instead of 1. So you sell half a Zooz to someone who needs one, keeps the Zooz you want for buying rides and get the profit from the other one.

The drivers who were charging 1 Zooz now see the value of the ride they gave in the past go from $1 to $2 (retroactively) and are more inclined to accept Zoozs because they expect more people to join the network. In effect, by taking these tokens, you are getting value today AND getting value in the future.

Instead of Uber capturing the value that accrues, the owners of the network (the token holders) capture the value. Whoa!


$280 million in ether gone forever?

From Code mistake freezes up to $280 million in digital currency at Engadget:

Observers estimate that there could be more than 1 million in ether locked away, which would amount to roughly $280 million.

The digital wallet company Parity is warning users that a large volume of Ethereum funds have effectively been frozen after code contributor devops199 claims to have accidentally deleted the library needed to use multi-signature wallets (those that require more than one signature to move funds) created after July 20th.

This doesn’t mean that the currency is permanently off-limits, but unfreezing it and compensating users could involve a bailout. And whatever happens, the incident highlights a simple problem: digital wallets and cryptocurrency in general are only as reliable as the code that guides them.

Decred Intro

Linda Xie gives a beginner’s overview of Decred:

Decred attempts to create a better balance of power between miners and users by allowing users who don’t own a miner to participate directly in the network consensus and act as a check on miners. That involves a hybrid consensus mechanism of both PoW and Proof of Stake (PoS).

Funding the Evolution of Blockchains – Fred Ehrsam – Medium

Coinbase cofounder Fred Ehrsam’s post, Funding the Evolution of Blockchains:

Ethereum is starting to suffer from a tragedy of the commons problem: while lots of people own ETH and would benefit from Ethereum improving, the economic reward for any single individual improving it is low.

Ehrsam looks at how to give incentive to developers to continue to work on core protocols, like Ether, when launching new tokens is more lucrative:

The lack of incentives to work on core protocols is reflected in the large number of people working on Etheruem tokens vs. the small number working on Ethereum itself.

And he projects there are significant improvements that can be made:

Improvements to these protocols would create massive amounts of value. For example, let’s say someone or a group of people implemented an Ethereum scaling solution like sharding or Plasma. Each of these improvements would likely increase the value of Ethereum by over 10%, creating roughly $3 billion in value at current Ether prices.

One possible solution he proposes is inflation funding:

Inflation funding is where things get interesting. It allows economic rewards that are otherwise unthinkable. Remember, if Ether holders believed an upgrade (ex: sharding) would make the price go up by >10%, they’d be happy to pay close to 10% of their tokens for it. That means Ethereum could crowdfund a $3bn feature bounty by inflating the number of ETH by 10% and pay the newly created tokens to the creator(s) of the upgrade.

Ehrsam points out that protocols that offer good incentives will become stronger over time, thus making it important to build that in correctly from the beginning.

So, perhaps the highest leverage thing protocol designers can do is think about how to engineer the evolutionary characteristics of their blockchains — specifically, the economic incentives for anyone to come along and improve them. The best engineered organisms can outpace others, even if they start smaller or later.

This can be the biggest step function change in the rate of innovation in the blockchain space if implemented well. By harnessing their decentralized nature they can evolve faster than a centralized organization ever could.

Would it be possible to use a built-in sink to create an incentivization pool to reward developers that enhance the protocol – or even are most active users of the token?


Transaction load follows price in crypto is few months old, but new to me. Discovered while looking for NTV calculations, this site is very impressive.

Here’s a few highlights from a post titled Mean-reversion and reflexivity: a Litecoin case study:

Quite simply, this is (early and incomplete) evidence that transaction load follows price. This is a relationship we have noticed in a number of other cryptos over periods in which their market values appreciated rapidly.

There are three broad conclusions we can draw from this story, in order of importance:

  1. Cryptocurrencies exhibit reflexivity
  2. Market to Transaction Value is powerfully mean-reverting, so pay attention to trends.
  3. The better tech may not always win.

A Bubble Bursting Scenario

From traditional fund manager Denny K comes a fairly reasonable article about how things could playout in a similar manner to the tech crash. 

Denny begins with a few comparisons:

In the .com bubble existing technology firms listed on the Nasdaq sometimes decided to add “.com” to their company name and saw their shares surge, sometimes 30–50%.

Well, guess what is happening now…

During the .com bubble, the major problem for analysts and investors was that most of the companies had losses and not profits, so there was hardly anything to value them on.

Fast forward to today — the same is happening again. While I want to be clear that there are important differences in that Bitcoin does have some sort of a value as a “store of value”, people making up new ideas like network value for token (not so much for Bitcoin) just makes no sense.

Then he mentions the differences that makes this even more risky, including the ridiculousness of ignoring non-released tokens, which we’ve posted about previously:

if you look at, the “go-to” site for crypto market caps, you will notice that they only count the “Circulating Supply”

In equity markets, of course there are occasional scams and there were IPOs that turned out to be founded on not much more than a pyramid scheme. However, looking at crypto ICOs, the sheer amount of obvious scams is breathtaking.

While the .com bubble had its fair share of retail investors, the main driver were the institutions. In the crypto bubble, the field is made up almost exclusively of newcomer retail investors that probably have never held a stock in their life.

And he ends with his projections of how this may play out:

all ICOs will lose 90%+ of their value (just like during the .com bubble…) regardless of the strength of their projects. I keep bringing this up, but Amazon fell to 5.5 USD / share in 2001. It now trades at 1000 USD+. So also the good projects will fall 80–90%…

At the same time the utility token related to the ICO boom will probably crash in tandem

Cryptocurrencies such as Bitcoin will also be impacted, but I would expect an almost V-shaped recovery there as the listing of futures on the major exchanges, the formation of ETFs and more regulatory certainty will undoubtedly introduce institutional money to the space and more than 90% of that will flow into Bitcoin. Make no mistake though, Bitcoin will also suffer.

In the aftermath of this ICO carnage, I would expect the same story as with the internet firms from 2001. Really good projects will give their token holders equity-like rights and fulfill securities regulations. New ICOs will be strong companies that will have a good value proposition and again, will actually be selling something valuable and not just hot air. When this ICO 2.0 phase starts, platforms such as Ethereum will also strongly recover.

I would therefore personally not invest into any random ICOs at all nor their respective token at this late stage in the game. The likelihood you can buy all of these cheaper at some point over the next 12 months is extremely high.

Even if you completely disagree, it’s well worth a read as he brings up some great points.