How High The Hanging Blockchain Fruits?
3 DISCUSSION TOPICS FOR BLOCKCHAIN THOUGHT
#1 — PRICE vs VALUE
Bitcoin’s price continues to defy expectations. At the time of writing, one exchange (Coinbase) recorded a high above $14000. Many, however, debate Bitcoin’s true value and to date, there is no consensus on a valuation model.
Here are a few notable attempts at projecting a value on Bitcoin.
Bitcoin Like a Social Network
Tom Lee (of Fundstrat Global Advisor) modelled Bitcoin’s price volatility using Metcalf’s Law, a mathematical equation that equates a network’s value as a proportion to the square of its number of connected users. By likening Bitcoin’s peer-to-peer network to that of a social network, they’ve been able to model their bitcoin composite against actual prices, with reasonable accuracy.
Bitcoin As Percentage of Gold
Extrapolating further, Tom Lee values Bitcoin (as at 18th October) at 25,000 USD as a percentage of Gold, assuming the digital currency amounted to 5% of an average portfolio’s holding of gold. This says much about the similarity of the cryptocurrency’s ability to store value consistently over its lifetime.
Bitcoin As Asset in Token Economy
This is a complex topic, and I will attempt to summarise it by simply stating that Bitcoin or any other digital token is valued based on how it serves its Token Economy. In other words, it’s valuing the token in similar terms to a nation’s GDP.
Bitcoin’s economy is quite large given it’s popularity, so it’s “GDP” is also expected to be quite large. Other cryptocurrencies however, will serve specific purposes (utility or equity) and hence a smaller sized market, ie. value.
Inevitably, we enter the world of valuing these tokens for ICOs — as if they were a form of Asset (Utility) or Investment (Equity or Return). Interestingly, unlike assets we know, these token assets don’t generate cashflow — so we can’t create a value based on some flow of funds or revenue stream. Chris Burniske presents an excellent analysis:
A cryptoasset valuation is largely comprised of solving for M, where M = PQ / V. M is the size of the monetary base necessary to support a cryptoeconomy of size PQ, at velocity V.
His article can be found here: https://medium.com/@cburniske/cryptoasset-valuations-ac83479ffca7
#2 — VALUE OF TOKEN vs VALUE OF FIAT
I moved to London, UK in 2001. I brought with me my total savings of $10,000 Australian Dollars. The instant I landed, I was converting everything from GBP Sterling to AUD Dollars. Even after I received my first paycheque, I still converted — until I realised it was unnecessary if you are earning the chosen currency of an economy you choose to participate in.
The public has seen the price of 1 Bitcoin rise from $1000 in January 2017 to $13000 in December 2017. Why wouldn’t you then park a sum of US Dollars into this “asset” and just wait until it increases?
For adopters of the technology, this is nonsensical. For speculators, it’s the deal of the lifetime. The difference is that speculators are still expecting some form of exit to transform from Bitcoin back into their Fiat Currency.
Let’s simplify:
If you are earning and spending Bitcoin, the value of 1 Bitcoin is 1 Bitcoin.
Let’s simplify further:
If the source of your wealth is Bitcoin, the value of Bitcoin will hold as long as you believe in it and use it in an economy where others believe and use it too.
This last premise is that challenge we currently face. Most people are speculating in Bitcoin. There is less earning of Bitcoin (unless you’re a miner) because it has yet to go mainstream for typical household or lifestyle products and services.
But this can easily change — and it will take a visionary influencer to begin the march to accepting Bitcoin as payment. Perhaps an Amazon, Apple or Google?
Perhaps it will take a foreign sovereign nation-state? Gibraltar? Panama? Estonia? What would happen if Panama replaced its fiat currency with a cryptocurrency/blockchain and pegged it to Bitcoin?
#3 — WHAT’S THE REAL BUBBLE?
It’s inevitable that any discussion of cryptocurrency will lead to interchangeable use of terms such as Bitcoin, Bubbles and ICOs as if they were all the same thing.
In simple terms, a bubble is something that’s overvalued and is doomed to crash.
Comments that mention bubble and foolish analogies to Tulips, continue to plague articles and discussions — as if to say that Bitcoin’s peer to peer network doesn’t produce anything of value, despite the fact that thousands of connected computers continue to validate large amounts of transaction.
Ironically, this confuses laypeople already experiencing speculator’s remorse or FOMO, who the see prices go higher and thus fuel the bubble-like trends.
Meanwhile, Institutions, Authorities and even CEOs have weighed in — Bitcoin is a bubble, Blockchain is the true innovation. So trust us, we know how to truly put it to good use — by using it in established banking practices.
Little is mentioned about the open-source or decentralised way that consensus is reached or that transactions are validated. Little is mentioned about how it could reach millions of people without access to banking.
Instead, institutions say, let’s take the technology that makes the most sense — and take the blockchain into our own controlled, centralised, private networks — and pin our hopes that community of investors and customers can see the value in our innovation.
For Blockchain enthusiasts, this continues to be laughable, but understandable. Sure, banks and intermediaries can attempt to create their intranets of token innovation; create their private networks via ICOs and token sales.
But raising capital for white-paper promises won’t usher in the value when the innovation that proved blockchain came from a decentralised environment. Good luck maintaining that level of innovation.
Meanwhile, ICOs are starting to not meet their targets: https://www.cnbc.com/2017/11/30/ico-bubble-is-bursting-even-as-bitcoin-price-rises.html
SERIOUSLY, let’s take a step back. Bitcoin was invented without an ICO. It’s white-paper objectives were implemented with altruism, and a simple formula: Product First. Network Second.
Even the Ethereum folk say the same thing: https://www.coindesk.com/ethereum-icos-youre-wrong/
“When you describe a technology that no one can understand, you can hoodwink people. People throw money at it, you raise $100 million dollars and still don’t know how to build it.”
Meanwhile, Bitcoin draws closer to it’s 10th birthday. Resilient and almost “anti-fragile”. Which is the real bubble — Bitcoin or ICOs?
