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 coinmarketcap.com, 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.

Apple is still Value at Nearly 8x Bitcoin

From Howard Lindzon’s post Apple is my Favorite Crypto Asset comes a reminder of how small Bitcoin is compared to other asset classes and even single companies, despite the seemingly unending tear it’s been on this year.

At $7300, Bitcoins now are valued at over $120 billion.
Apple this morning is just 7.5 times more valuable than all the Bitcoins in the world.

I hope Bitcoin passes Apple in terms of total market value as I still hold some, but I like the idea of owning Apple just a little more at this morning’s ratio.

PS – I heard tonight from a Coinbase investor that 100,000 people opened accounts today. As Bitcoin continues to rise, I check it’s price first on Stocktwits when I open the app. We have entered a very strange point in time where the Bitcoin rise might just be pulling the general markets along.

CME will allow Bitcion-related products

On Chicago Mercantile Exchange’s decision to allow Bitcoin-related products, Owen Davis at Dealbreaker writes Hedge Funders: You No Longer Have Any Excuse Not To Leap Headlong Into The Bitcoin Frenzy:

According to the press release, CME is looking to launch sometime in Q4, joining CBOE in the race to start hawking bitcoin-related products. The data underlying the futures will come from Gemini Trust, the Winklevoss twins’ exchange. Bitcoin went vertical on the news.

And for good reason. Not only does this mean hedge funds can now blithely launch themselves into the crypto orgy with at least a little peace of mind, but they can do so purely on the basis of cash-settled futures that involve no underlying transfer of actual bitcoins, a process that remains rife with inefficiencies and risks like being hacked.

If bitcoin is a bubble, it’s still got a lot of inflating to do.

Are ICOs Are ‘Attracting the Wrong People’?

CoinDesk reported on comments about BitCoin and ICOs by Joi Ito, MIT Media Lab Director

Ito told the crowd:

“The problem is we’re creating a system where people can pump or dump and speculate. Anyone who has issued an ICO needs to sit down and meditate: are you making society better? Or are you making money unfairly?”

In contrast, Ito framed the “whole point” of cryptocurrency as being about using technology to prevent the societal ills he believes have resulted from economies defined by government-issued currencies and the financial institutions necessary for their use.

He included what he’d like to see:

Ito espoused the idea that cryptocurrencies should think more about their intent than their value, with one of his examples focusing positively on the insular economies of online role-playing games as an example of how restrictions can heighten an asset’s worth.

And clearly feels Bitcoin is doing things right while ICOs are missing the point:

“We haven’t won the battle yet. [But] I think the thing that is interesting is that Bitcoin Core has substantially more brain fire power than any of the other networks.”

Can Bitcoin Follow Gold’s Path to become Digital Gold?

Alex Gurevich writes on the origins of gold as a store of value and Bitcoin‘s path toward the same outcome.

Bitcoin is battling to become digital gold, while ether, for example, is elbowing to become digital copper. If the analogy holds, the price of ether will be driven by technology demand, while the price of bitcoin by the need to store liquidity.

He then argues that altcoins are complementary – not competition to bitcoin.

As a corollary, the rise of altcoins geared towards specific purposes is not at all dilutive, but actually supportive of bitcoin. While diminishing its share of trading volume in actual transaction flows, it shields bitcoin from being demand driven and makes it a more attractive store of value.

He then examines bitcoin’s likelihood to become digital gold by answering four questions. His conclusion:

In summary, despite the rise and fall of various alt coins and fork considerations, “time” works FOR bitcoin, not AGAINST it. Every day it doesn’t disappear, it gets one step closer to a permanent status of digital gold.

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.

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

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.

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