What are the chances of a recession?

From Bill McBride’s post Is a Recession Imminent? at Calculated Risk, a look at the likelihood of a recession soon. (hint: no)

However, just because this is a long expansion, doesn’t mean the expansion will end soon. Expansions don’t die of old age!  There is a very good chance this will become the longest expansion in history.

There are several reasons this has been a long expansion. Recoveries from a financial crisis tend to be slow since it takes years to resolve all the excesses. Also, there was an early pivot during the recovery to fiscal austerity that slowed the pace of recovery. Importantly, the Federal Reserve didn’t overtighten like in the ’30s (a lesson learned). And housing, always a key cyclical sector, didn’t participate early in the recovery since there were so many foreclosures. This delayed the usual boost from housing, but housing now a key driver of the expansion.

McBride has a good track record and includes some of his key leading indicators for predicting recessions.

Fix the market cap indicator.

A post from Zach Herbert  at Sia Tech, written last April on using total tokens vs circulating tokens for calculating market caps.

Every site we could find that lists out tokens by price, volume and market cap does so based on circulating supply rather than total supply. Circulating supply indicates how many coins are in circulation, but does not include coins held by the project. By contrast, total supply includes coins in circulation + coins held by the project.

Here is our list of recommendations to remedy this issue:

  1. Replace the existing flawed market cap metric with total market cap on sites such as coinmarketcap.com.
  2. Add a new field called inflation factor.
  3. Add both metrics to exchanges.

It’s something that has bothered us as well. When doing our own ICO analysis, we always look at the total value of all tokens, rather than the amount being raised, which is often 50% or less of total tokens. It’s may not be entirely correct in all cases, especially when there is a usage for some of the tokens not released, but it’s a more accurate look than only circulating tokens.

As of today, the three sites they mentioned  coinmarketcap.comcoincap.iocryptocompare.com still show market cap based on circulation tokens.

What does Fibonacci Analysis say about Bitcoin?

All Star Charts featured a Fibonacci analysis of Bitcoin earlier this week and came to this conclusion:

While “longer-term” that 7400 area continues to be a solid target, 6570 is the next level of significance from a shorter-term perspective. There is a lot of talk about Bitcoin being a bubble or some sort of conspiracy or something. I don’t know about all that. What I do know is that this is a liquid enough market for a lot of us to participate in and it behaves incredibly well with respect to the supply and demand dynamics that we’ve experienced in other markets. This is a trade just like anything else.

If you told me this was Crude Oil or Gold or shares of Microsoft, I’d say we need to buy any weakness towards 4700 and be long only if we remain above that. So the fact that this is Bitcoin doesn’t change that. The path of least resistance here is higher, in my opinion, regardless of what the underlying asset may be.

We’ve blown by the 6570 mark now, and 7400 is in sight. Of course, a significant correction isn’t out of question either, even if just short term.

How Token Hodlers Create Added Volatility

A post from late September by Primoz Kordez, an advisor at ICONOMI, on token “hodlers” create volatility:

…there will always be a certain share of token holders who act as investors, either active or passive. Even if these investors are passive in their behavior, do they really have no effect on a network at all? Interestingly, in the token economy an investor is someone who impacts the floating number of tokens that can be utilized. By having more “hodlers” or passive investors in the token ownership structure, they effectively take tokens out of circulation for use. Assuming velocity of tokens and total spending stay constant, the floating value per token must increase if more tokens are hoarded by investors.

Essentially, the number of active tokens is reduced thus making them more susceptible to large swings caused by a large buy or sell from a passive investor. If a number of tokens are suddenly dumped onto the market:

It can lead to a downward spiral in which investors’ decisions cause underutilization of tokens exchanged, leading to lower network value and causing additional investors to flee.

This problem is most costly when token utility users (as opposed to passive holder) need more tokens to meet increased utility demands. They must trade for the tokens from another coin at a poor rate and don’t benefit from a higher token value since they require tokens for real usage.

The best scenario for stable and predictive token dynamics is to have more actual users in the ownership structure, but this isn’t something that can really be controlled.

Good projects need to be owned by real users – not passive investors. Users get the most value out of the network and should be rewarded for usage. Perhaps it’s possible to reward heavy users with increased token values or additional tokens. Using Vitalik’s idea of a predetermined sink, some percent of unused tokens could be burned, thus slightly reducing the number of tokens held by non-users? (A holding tax of sorts).

ETH Challenges & Bullish on Bitcoin Despite Drawbacks

Albert Wegner shared his view on the state of Bitcoin, Ethereum, and of course, ICOs, which he acknowledges are likely slowing down, at least for now:

So where are we today? At least temporarily there seems to be a slow down in ICOs. This could turn out to just be a lull before more activity resumes but it could also be a welcome return to more sanity (if the latter, there is likely going to be an over correction).

As most ICO tokens are built on top of Ethereum, he sees challenges ahead and believes progress needs to be made to scale Ethereum:

In either case Ethereum faces a strong headwind not only from this change in sentiment but also from relatively costly and slow on chain computation. The bull case for Ethereum is that sometime in 2018 we will see a couple of Ethereum based projects launch successfully and get broad adoption *AND* progress is made on Ethereum scaling (either directly or through projects such as Raiden or Plasma). The bear case is that at least one, or possibly both of these don’t happen.

And on Bitcoin, he is cautiously bullish and ok with Bitcoin’s “drawbacks”:

Oddly I think that Bitcoin continues to be misunderstood by many people in the cryptocurrency space who want it to be more than it has to be for it to succeed. It is one of those cases where the more you know, the more you are likely to overthink it. Yes, Bitcoin has all sorts of drawbacks as a blockchain, but it is the one cryptocurrency with a widely understood use case: censorship resistant store of wealth

The next phase of blockchain adoption

From Jeremy Epstein’s post The 2 Phases of Adoption: Marketing in a Blockchain World at Never Stop Marketing:

I expect the first phase of adoption within the marketing world to be focused on the question of “how do we use blockchain tech to do what we already do more efficiently?”

Phase 2 is going to require the most forward-thinking CMOs to ask themselves “ok, what new business opportunities and threats are going to emerge because of the arrival of blockchain technologies that we can take advantage of and need to defend ourselves against?”

Clearly, we’ve seen an onslaught of ICOs recently with teams looking to launch projects quickly while the money is flowing in. As may be expected, this hasn’t resulted in the best quality projects. A lot is going to change in the 2nd phase, It’s likely years away either, as cycles are sped up immensely in the crypto world.

Explaining the Future of Money through Stone Currency on the Tiny Island of Yap

A great explanatory video from Quartz titled the Future of Money where they compare Bitcoin to literal giant stones that are still used today on the Pacific island of Yap. Crucial to their value is that everyone in their community knows to whom each stone belongs. Relatively basic, but worth watching just to learn about the Yap and their culture.

Star Ratings and Blockchain Stock

Matt Levine shared some thoughts on the upcoming ICO from Overstock.com’s subsidiary, T0 (t-zero)

There are two fundamentally different ways to think about “the blockchain” in finance. One way emphasizes the qualities that originally made bitcoin interesting: its trustless, decentralized nature, in which no one owns or controls the system as a whole. This is of course the philosophy behind bitcoin and Ethereum, but it is also the philosophy behind some of the more interesting and successful initial coin offerings. “The point of an ICO, done right,” I wrote recently, “is that you are not building a business; you’re building an unowned system for everyone to use.

The other way to think about “the blockchain” ignores those philosophical ideas and just treats blockchain as a technology improvement.

He goes on to portray what a mere technology improvement would look like for T0:

“All stock securities will eventually become tokens” [Overstock CEO Patrick Byrne’s quote] sounds ambitious, and in a way it is. If it’s true, then the opportunity for blockchainy stock exchanges like tZero’s to displace incumbent banks and exchanges is enormous. But in another way it is a retreat from the more interesting ambitions of blockchain proponents. It’s not a new form of business organization, a new way to build decentralized protocols to displace corporations as the engine of technological innovation. It’s just the regular old form of business organization, through public stock corporations, but on the blockchain.

Not exactly the future most crypto-enthusiasts are looking for. It needs to be more than that.

Has the Bitcoin bubble already burst?

JC at AllStarCharts asks whether the Bitcoin bubble has already burst and that it’s now performing similar to other assets after a crash. He even makes the case that Bitcoin is underperforming the likes of Nvidia and Amazon.

I think a lot of people are asking the wrong question. To me, it’s not whether or not Bitcoin is in a bubble? It’s whether or not the bubble in Bitcoin already popped?

What we care about when it comes to supply and demand dynamics is how the asset has performed since the bubble popped. In the case of Bitcoin, to me it’s crystal clear that a bubble popped in 2013. Again, it’s not that I’m suggesting it was “the” bubble, but an 86% crash from high to low? Yes, that is the definition of a bubble popping. The bitcoin enthusiasts argue that there were plenty of crashes prior to that, which is fine. Moving forward, from any sort of structural perspective, this 2013-2015 crash is our point of reference. Crashes prior to that led to that run up we saw into 2013.

It certainly seems reasonable to believe after reading this post.

Further Evaluating the Classification of Bitcoin as Currency

Apparently, Aswath Damodaran faced a lot of backlash for his post classifying bitcoin as currency. His views haven’t changed:

The crux of the disagreements though lay in my classifying Bitcoin as a currency, not as an asset or as a commodity. Since this classification is central to how you should think about investing versus trading, and value versus price, and goes well beyond Bitcoin, I decided to dig deeper into the classification and provide even more ammunition for those who disagree with me to tell me how wrong I am.

On why it’s not an asset:

One reason that people are uncomfortable drawing the line between currency, commodity and asset is that the line can sometimes shift quickly. Take the US dollar, for instance. Its primary purpose is to serve as a medium of exchange and as a store of value, and it is thus a currency. However, you can lend US dollars to a business or individual and generate interest income. That is true, but it is not the currency that is then the asset, but the loan that you make with it, or the bond that is denominated in it. Building further, if I create a bank that takes in deposits in dollars (and pays an interest rate on them) and lends out those dollars as loans, I have a business and that business is an asset.

On why it’s not a commodity:

The essence of a currency is that its primary uses are as a medium of exchange or as a store of value. The key to a commodity is that it is an input into a process that has a utilitarian function. Oil and coal are clearly commodities, since they derive their value from the fact that they can be used to produce energy.

He ends with a thought similar to what we’ve written recently:

I think it is also time for us to separate arguments about block chains/smart contracts from arguments about crypto currencies, since you can have one without the other, and to differentiate between crypto currencies, rather than defend them or abandon them all, as a bundle. To me, Bitcoin, Ethereum, Ripple and  ICOs are different enough from each other, not only in structure but also in terms of end game, that they need to be assessed independently