tl;dr I know you just want the money shot: buy privacy coins and Tezos.
The below is ungroomed, thinking out loud, a collection of thought bubbles written as a messy tangle and has not been processed for concision/to make it easier to read. Patience and indulgence is required. There is not a sequential flow, paragraphs are ordered randomly. No effort was made to format for easier reading/viewing.
How much of any crypto market drop is due to Chinese/Korean/Japanese/etc. markets, or a few large whales, versus how much is due to panic/euphoria by the rest of us; who can know, really? As a trader and/or investor, you have to make a guess as to how much each factor forms up a portion of the observed falls and rises. We naturally love to retro-fit our favoured pet narratives that we think explain what we observe, but even this retrospective narrative telling is biased, let alone ably predicting a future. Who knows for 100% sure why crypto did all of what it did, precisely why the market went up or down. Humans seek narratives that attempt to explain what we observe around us — but the wild child of crypto is the last thing you should try and fit into a narrative frame. Crypto laughs at the narrative bias, the retrospective bias, the recency bias. Crypto = bias killing machine. Crypto was sent to us to teach us to kill our biases. Stop attempting to describe the future by using your past-driven bias frames.
Note the chart lines of most coins = beta 1.0 vs BTC. Stop thinking your coin is special, most coins are heavily correlated/driven by BTC/overall market psychology. Hence why all coins fall when China (or some other large entity that crypto responds to) stamps its foot occasionally. These behemoths are likely doing ‘operant conditioning’, seeking to turn us into Pavlovian dogs: the light goes on and the dog salivates at the thought of impending food; lesson learnt by the hapless operant (us punters). Your coin is roadkill on the Darwinian path, expect gov’s, regulators, lawyers to squish most coins over time. Your coin is not special. The genes/ species will survive, but individual animals will get slaughtered by the thousand. The gov’s and regulators are trying to teach you to still heed their words of control, to still respect them as the makers of the market. They want you to obey their power, their fiat edicts. The worse thing they can face is when you switch off and stop listening to them as the highest authority. They want you to remain a conditioned operant, where you obey the signals, the dog whistles, a viewer of their reality-defining channel. Decide your own future, stop being Pavlov’s conditioned dog.
Up-then-down cycle time is decreasing — does this mean we are getting clued in more? Anti-fragility by Taleb — these stressors are improving us, not weakening us, as we ingest them each time around. Expect more polarising twists and turns over the coming 1, 2, 3+ years as the Darwinian cycle attempts to figure out which candidate is best able to adapt and thus fittest to survive. Can your chosen altcoin re-invent itself along the critical path as new preferences are expressed over time by cryptomarket participants = Tezos? All-or-nothing: heroes and villains will appear and fade with increasing rapidity, accelerating time cycle. Expect an ‘arms race’ as cycle times condense and the ongoing drive towards ‘winner-takes-all’ end point emerges.
Note the recent price increase pattern of privacy coins — rotation away from openness of BTC’s ledger? Feds have been able to bust darknet sellers by tracing their transactional behaviour across the ledger. NAV, Verge, Komodo, PIVX, Dash, Monero, BTCPrivate, Zcash, Zen, Zclassic, Zcoin, Cloakcoin, Bytecoin, DigitalNote, Hush, Aeon. Wait until gov’s and law makers realise they can’t regulate crypto into their old-world legal framework = loss of control — gov’s (coercive fascists) will not take this lying down, they will bite back once cornered and they feel maximum survival threat.
China crackdown = governments increasingly realising that crypto will obviate gov’s. So expect more gov’s to outlaw all coins/launch their own govcoins. Gov = iatrogenic, trying to help but cluelessly inflicting harm, but crypto is antifragile, robust, benefits from stressors. Each shock only makes coins stronger. Mt Gox, Silk Road, The DAO, Bitcoin Cash fork. Each episode is survived and the patient emerges stronger. Each gov rash act creates more robust crypto.
“First, they ignore you. Then they laugh at you. Then they attack you. Then you win.
Mahatma Gandhi”
If your gov is not cracking down on crypto, then that implies they are not taking crypto seriously enough — you should expect your gov to trash talk crypto, something’s wrong if they are not bad mouthing crypto.
BTC code has been running for 9+years and is worth USD$100billion+ Ethereum [or its successor] has a shot at winning even bigger slice of the pie. If crypto model/idea was weak, someone would have cleaned it out or collapsed it by now. Each stressor only makes its future more assured = hormesis, so expect more episodes of robbers attempting to crash the kitty but then we emerge stronger out the other side. As bettors, we need to ride out the seasickness of massive ups-then-downs. Own your own private keys, don’t trust any third party, the pot is huge and increasingly tempting to thieves as the pile grows higher — threat follows value. As the net value of crypto space grows over time, expect even more attempts to hack it, rob it, corner it, co-opt it, trashtalk it into submission, kill it off, dumb it down, de-fang it; be worried if this isn’t attempted by the vested powers). Until crypto climbs over these trials, then it has not yet reached its full maturity.
Nassim Taleb defines for us Extremistan: where one sample accounts for 99.9999% of the total outcome quotient, you can’t predict it ahead of time (= winner takes all effect); and afterwards, everyone says, “we shoulda seen that coming, it was so obvious” (=retrospective narrative after-fitting). Bet accordingly = treat each coin as if is it a lottery ticket: cheap to buy each, so buy a bunch of ’em and if one of them wins it will be disproportionately huge. Expose your portfolio to such positive White Swans. This is not a Gaussian distribution, so don’t think/bet in terms of sigma, bell curve. Chart pattern analysis is entertaining but useless. I bought ETH early 2016, I didn’t think it would be $1,000 a year later. What chart/technical indicator in early 2016 would have assured that? Crypto will win all, but which precise part of it, which individual coin/project will, is ~impossible to predict, today. There is path dependence too, that you have to predict now, to know what to invest in if you want to make only a single bet on the whole space.
(Extremistan = http://www.wou.edu/~shawd/mediocristan--extremistan.html)
Barbell is the betting assumption; winner-takes-all effect e.g. Amazon. So your altcoin is either going to zero$ or $100B, eventually, it shifts from the moderate centre out to either end of the barbelled outcome space. This should inform your betting approach and your portfolio management approach: each coin is like a lottery ticket: buy it, keep it in your draw, don’t ever sell it, just wait for your coin’s path to reach its barbell end state one day.
Tx fees: does it make sense that for every email you send, you have to chew up the total coin supply? EOS, Steem and IOTA, and, to some extent, NEM and ByteCoin = zero fees. When you spend a $20 bill at your local corner shop, do you also have to pay a separate, visible ‘transaction fee’ on top to the shopkeeper? Humans attribute value in certain ways, only certain ways that we are willing to spread out/absorb the internal costs of trading. PoW coinz typically have mining fees, but that is like paying SMTP email servers to handle your email send. Coinz will need to figure out how to fund them self treasury-style, where end user doesn’t pay an added/extra/visible fee just to press ‘send’ button from his/her/their wallet.
Via Negativa: we may not know the answer, but we have positively ingested/identified the non-answers; we approach a right answer by encountering/chewing through all the varying non-answers and/or wrong answers, ones that don’t work; via negativa = negative knowledge, knowledge via knowledge of what isn’t. We fail our way into the future, so as you see forward evolutionary paths of BTC and ETH twist-and-turn, this is a healthy sign = via negativa. Gain confidence, hold on to your lottery tickets. If in contemplating my words here you are unsure, confused, more uncertain, then via negativa has done its job = none of us can predict the future, just set your betting behaviour accordingly and recognise the via negativa engine at work here.
Critiquing crypto right now is like complaining in 1994 about Netscape’s or your ISP’s instability, slow speed, limited feature set. Don’t you wish you had bought some lottery tickets in early 2000’s: Amazon, Facebook, Google shares. BTC=AltaVista, ethereum=google, ??coin=next tier of ubercryptowinner? The Extremistan nature of the eventual winner means that today, you can in no way predict the path forward, guess the right horse to back in the race ex ante. Clarity and narratives can only be fitted retrospectively, ex post.
Looking at your coin’s price today and saying, “it can’t go up 5,000% in the coming year” is fallacious — you’re in Extremistan, winner-takes-all territory. You can’t apply stockmarket-style quant analysis to this phenomenon. Abandon your need for certainty, embrace Extremistan, buy lottery tickets accordingly. Sptiznagel, Universa = buy cheap out-of-the-money options, then wait for the multi-sigma, ‘reversion to the mean’. How large does the world need the eventual winningest cryptocoin to be, years from now? Is $1Trillion enough? Is $100T enough? By analogy: was it possible to predict how large the internet needed to be in 2018, from the view afforded us early adopters in 1994?
Roadkill: most coins today have a chance at ending up some year soon as roadkill: unwanted by-product squashed on the side of the road. Darwin, Schumpeter’s creative destruction. Worry only if this doesn’t prove to be the case. Like Edison making thousands of failed attempts at a lightbulb design before he hits on the right answer. Mother Nature breeds thousands of variants, then lets them all find their own way forward. Some die off, some sustain, some spawn offshoots then start all over again. The game never ends, does not allow the individual winner to be predicted ahead of time, but the process is real and works to give us the best (fittest, best adapted) outcome eventually if we let the process do its work naturally.
Can’t predict crypto’s future by extrapolating its past. Regression lines, reversion to the mean, etc., don’t apply to Extremistan crypto. Guessing crypto’s future path is like asking 7 billion humans: “what will you believe in tomorrow? What economic incentives will you respond to a year from now? What payoff matrix will you be willing to accept a year from now in this virtual global-scale game of prisoner’s dilemma?” Human brain’s ability to predict its own future hedonistic state is woeful. We are bad at guessing what will make us happy tomorrow, we barely understand why we’re happy today, we mis-attribute, mis weight, mis-intuit. This suggests a need to draw up a scenario mapping that lays out quadrants that weight all the possible scenarios/quadrants of the game theory matrix: will humanity want a scalable crypto the most (EOS, DAGcoinz)? Will we want a programmable crypto the most (Ethereum, Tezos)? Will we want a private coin the most (Monero, Zcash, PIVX, ZenCash)? Will we want a stable commerce coin the most (MakerDAI, USDT)? Will we want the best UX coin (Dash, Electroneum, Ethos)? Behavioural economists and behavioural psychologists will happily tell you: humans are bad at predicting today their future happiness goal, we only discover/elucidate our new end-state desires along the way by serendipity, by luck, by adventure, effectively we ‘fail our way into the future’ as our tastes and preferences form up over time.
The temptation is to imagine or posit equivalences between crypto and other markets/domains. For example, “crypto and the stockmarket (S&P500, VIX) are recently showing a 0.8 correlation” or “crypto is displacing gold as a safe haven/store of value”. This is kind of like saying, “I drove down the freeway and saw a bird flying alongside my car also going 80km/hr — gee, the two are correlated somehow”.
The worst thing you could see is if the crypto market as a whole starts behaving, e.g. tamely, predictably, manageably, like traditional markets do. This would mean that the beast had been tamed, that the fangs have been blunted. I don’t want crypto to be stable like the S&P500 is, explainable, predictable, studied, algorithmically programmable. That would mean that we had blunted the brash pioneer inner engine of crypto, that the regulators had in some sense de-fanged crypto, that volatility has been ‘excised out’ of crypto, that too many safety mechanisms had now been dropped onto the crypto space to smother its wildness — this will kill the unpredictable randomness that is the source of crypto’s disruptive power going forward. Unpredictability is the aspect of crypto that makes it so valuable to us. Crypto’s ability to change, to be random, to surprise us with its twists and turns, it acts as our volunteer test dummy: we need crypto to be unruly as our proxy way of discovering the future via the chaotic process that ‘future building’ ordinarily requires. Schumpeter’s ‘creative destruction’. Raw, unsafe, wild, capable of anything. Over ten thousand years of history, humans have shifted upwards through discovering an ever-burgeoning ecology of systems, theorems, engines that enable ever more variation of outcomes, more complex combinations of behaviours, greater extremes. The price for that is volatility (=entropy, long tail surprises). Nature breeds ever bigger dinosaurs and ever smarter dolphins.
Current economic constructs use higher authority/coercive power/the law/jail/sovereign disincentives to nudge, normalise, enforce or impose power over market behaviour. We go to work because it means we get to pay our bills, pay our taxes and stay out of jail. In crypto, we use Game Theory to act as a natural incentive structure to ensure desired behaviour. We don’t rely on altruism or coercion. We harness the natural mental process of incentive maximisation by using game theoretic constructs coded into crypto codebases. Crypto participants don’t have to be coerced into acting, the imputed incentive payoff informs our decisions as enacted into behaviours. E.g. we mine a coin because we know it will pay us back. No law has to be made by a gov to make that so. We HODL because we know that will maximise our return over time. We don’t need fed gov superannuation/401K regime to ‘make’ us behave that way in crypto.
This represents a death of old-world coercive (e.g. gov, civil) structures. In future world, you can only make people act socially together (e.g. as a city, a state, a province, a country) if you construct an incentive scheme like a crypto, nominally one that offers rewards when you behave in a certain way. Humans will no longer be willing to submit to old-world social constructs when they can instead respond more naturally to obvious (i.e. crypto-encoded, game theoretic) self-interest structures such as crypto. Why work for gov-poisoned fiat dollars when I can instead get paid in crypto coinz that I can then path whatever way I best choose? Societal planners will no longer be able to assume the coercive threat of jail, the courts, the police/military, as a way to ensure final compliance by citizenry; citizens will act instead only when the game theoretic payoff favours them. The old structures will vanish, nation states will lose their power. All new systems must figure out how to reward/incentivise the participant freely, by choice, without coercive implicit threat, as the only way to get participants to offer up/exhibit the desired behavioural act/response. Crypto-economics will be the only economics.
Who are the first class citizens of a crypto future state/world? Right now, Facebook, Amazon, the Kardashians and Apple are the first class citizens that everyone observes via their free choices. In future world, when everything is blockchain mediated, then who/what are the prevailing newly minted first class citizens? Crypto+blockchain is valuable, new, because it solves double spend problem, Byzantine Generals’ problem, immutability problem, consensus problem: will this always remain as the (only, exclusive, primary) reason basis why crypto is first class citizen? Future crypto coinz/crypto economics may emerge that value other aspects/attributes/outcomes. The fittest cryptocoin will need to have onchain governance capabilities that best observe this need for the rules to self-emerge as participants’ preferences evolve over time.
Crypto economics will change over time. Humans will converge then diverge then re-converge on varying ‘first class crypto citizens’ as time goes by. Humans will evolve their preference thinking over time. Will crypto lead humans, or will humans lead crypto, as this evolutionary process unfolds step by step? When crypto codebase gains AI/ML capability, will humans cede control and influence to the AI’s own internal compass/pathing, or will we feel threatened at this ceding? Will we still need/use/employ crypto economics, or will we lay down and submit/relent? Will cryptosoftware eat our inner homo economicus?
In 2008, Satoshi was beavering away, quietly creating a coming revolution that would soon change everything; Satoshi did so deliberately, via a pseudonym, shielding his/her/their real-world identity. Today, who is the next Satoshi? Somewhere, in some off the main path chatroom, the next Satoshi is quietly writing up message board entries, creating the next revolution. Like Satoshi, they will purposively do so in the quiet, away from the spotlight, lest they later get attributed with creating word-changing children that threaten old world entrenched interests. In the town square, humans listen to the loudest commotion/spruiker, not the quiet revolutionary at the edge. Blockchain quietly generated, then was given to us cloaked in anonymity for its creator/s — future genius revolutionary gifts are also likely to come to us unheralded and un-attributable. Watch the backchannels for the signs.
Cryptocurrencies represent a new way for humans to keep track of their financial state. Historically, we might explain money and wealth as being (allow me this simplistic analogy):
a) taken at the single unit level: you do some work for me, I give you ten ethers in return for your work.
b) at a societal level: our country in aggregate was more clever/crafty/productive this year than some other comparative country/our previous year, so our country aggregate profit outcome is higher, means that we can buy more stuff and make more new investments with the profit of our efforts than the comparative countries can. We give all ourselves a pay rise.
So one could say that currencies and economies serve to symbolically keep track of each’s outcomes relative to the others — arguably, money is a social construct. Hence the reason why cryptocurrencies are based around ledgers, as the ledger logic serves to keep track of the running score/balance as events (transactions) occur over time (changes in shared state). Cryptocurrencies are thus making themselves (whether intentionally or not) into societal-level running scorecards, that we use to measure our view of how valuable, productive and/or profitable we reckon we have been/are, relative to some other comparative group/entity and relative to our own past record. The underlying idea is that we are essentially measuring and tracking some aspect of ourselves that we find important, so that we have some reliable way to track/allocate outcomes and resources and gauge our bearings.
[The scorecard aspect also serves as a signalling mechanism: if the press tell us that this year, our nation’s GDP was higher than last year, we see a ‘wealth effect’, where people then ‘feel’ richer and so are notionally more inclined to borrow/invest more loosely next year than they otherwise might have.]
It might be the case in future that we find some other way to measure ourselves or to assign resources. Imagine a cryptocurrency where we just decide by common agreement (or some other socially-agreed to mechanism) how much coin to allocate to different persons or efforts. How flexible should a cryptocurrency be towards serving our decisional outcomes given such a basis? So instead of just being a ledger that accurately records historical outcomes based on agreed-to rules, perhaps a cryptocurrency can serve as a tool of societal engineering: we come to an agreement about who ought to receive funding and then we just allocate accordingly. So a cryptocurrency starts to act as a forward signalling mechanism: society decides to fund me and that signals to me to go ahead and dive deeper into my proposed venture. How easily should a cryptocurrency support such a ‘signalling’ use case?
In a society where AI’s are 3D printing most goods and they are performing most services, just how much do we then need to constrain our social construct (money) to being an accurate ledger only.
[=MMT Modern Monetary Theory; “Macy’s can’t run out of Macy’s gift certificates.”]
So taking the above ideas into consideration: Four future scenarios:
- Privacy coins = black money finding new, friendly channels = social nexus’s
- Ethereum uber alles, until scaling breaks it. Then market seeks ultra-evolvability, hence Tezos. Irony is, a coin that can self-govern via its own codebase probably doesn’t need the decentralised psych-economics and programming codebase of crypto consensus mechanisms — the governance rules themselves would cause/incentivise/punish/nudge humans to behave.
- Governments successfully compete with altcoins, gov’s herd sheeple into using govcoins = banks dominating, so altcoins remain like Linux, not Windows or IOS, the bazaar rather than the cathedral, as gov’s foist their govcoins onto their populaces
- Darwin / White Swan / barbell continues to dominate the marketplace development curve = the best coin triumphs, bit by bit, then massively at the end (winner takes all, survival of the fittest, barbell White Swan)
Disclaimers: just my ideas about possible scenarios for near-term future. This is not investment advice. I’m ego-driven, clueless and biased, so do your own thinking. I’m not qualified, I have no special privileged position to drive my insight, I’m a nobody, is what you should assume about me and what I say here.
The above are formed in the framework of: the past is not necessarily a reliable basis from which to posit the future: the future is likely stochastic, different from the past and will probably confound the past’s lessons or at least disrespect the past’s contours. Given that, what are the scenarios and what factors might help us weight and handicap each possible future scenario? What posture/psychology should we have as market participants (trader, investor, analyst, commentator, actor) given that we’re in crypto Extremistan. I aim to consider/present/elucidate some ideas, YMMV.
My ZenCash address = znk9GjfbzRHwDiMWmq2xeTi5FNkgnzQXthg
