post by Adnandz : 20 min read
being update on news about cryptosphere on twitter and elsewhere found that quite a few myths hold steady in different parts of the community.
Mostly my judgement here is based on the fact that I cannot help myself, but almost every week I smile to myself and think “I cannot believe this is all happening again, it is like I am in the same film twice”.
I am referring to the .com bubble of course and the exact same way that events unfold and sentiment manifests itself today as it did then. It truly is as if I have seen this once before.
So I decided to put down what I consider to be the biggest myths around cryptocurrency and blockchain investing. I try (did not manage at all times) to stay clear of the technical aspects that I am not an expert on, but I do believe you can take my opinion seriously on the investment side of things. It is what I have done my entire life and if you check out my articles here you can see that my thoughts on bitcoin price and crypto in general have been reasonably accurate on that side so far. Remember all of the below is my opinion, it is never advice and if I have learned one thing investing it is that I can be wrong. Without more of a preface, here we go.
The biggest myths in cryptocurrency investing (in no particular order)
We are still so early. If you buy crypto now, you are an early investor
Look, I know it would be great if that were truly the case and I know everyone in the community tells you so. But think for a moment. There is more than one daily crypto show on US national TV, CNBC and Bloomberg show the price of bitcoin in their on-screen tickers, and as opposed to earlier hype cycles in bitcoin price, this time it truly caught hold with the majority of people (if you don’t believe it did, check out the google trends above; the December interest high was easily 6x higher than the 2013 high).
In 2015/16 only the rarest of dinner parties would breathe a word on crypto. Back then, despite the fact that prices rose 10x, you had maybe 15 (if that) serious “alts” listed. This time around everyone is talking about bitcoin and blockchain. There are over 1,000 altcoins and I know of at least 10 bitcoin forks that further increased the supply side of crypto. There have been over 150 crpyto “hedge” fund launches last year. Still we 10x the price. Only this time, a lot more capital was necessary for that to happen and the signs are all there: this is the final (or at least the largest) bubble in crypto. This time is when the majority of people that would ever consider investing money at all got involved. Whether or not you think crypto is a great investment now, which is a fair opinion to have, you got to realize you are not an early investor.
All decentralized systems are more secure than centralized ones
Yes, calling this a myth would likely make you call into question how much about bitcoin I really understand. But consider this regarding bitcoin specifically:
a) Bitcoin is vulnerable to a 51% attack of miners
b) Decentralization comes at the expense of scalability
Both points above could be solved with a new proof mechanism (but so far, there does not seem to be one that will truly work, POS is certainly getting a lot of technologically advanced naysayers) and the lightning network. Except, not really.
The lightning network is not that different from centralization on the blockchain. It would mean that we all have a pay channel with Amazon that we can just keep open and where we can transact in nanoseconds, but after all that paychannel is still a centralized paychannel that will provide a point of attack. Before you write it on the blockchain, it will not be decentralized. So if Amazon is the point of attack and stands the chance to lose its lightning network transactions by being “forced” to close the channel without confirmation from the other side in the event of a hack, then Amazon is unlikely to opt to take part in this system as they will perceive that they have more control over their own servers. I admit I am not technically adept enough to fully make this point. Let’s just say I can see how lightning can scale bitcoin, but I do think it is a step back from decentralization that could be rivaled my other systems just as well. Luckily it is not a necessary part to dispel the myth so I can happily be wrong about lightning.
More worrying is really the specter of a 51% attack — that sort of attack certainly seems viable on a huge list of altcoins (https://www.crypto51.app) and when this gets exploited it will at least show to the world that not every blockchain is made equally. On bitcoin itself, the fact that c. 65% of bitcoin hash power are located in China should at least give you pause. I do not think for one second that China has an interest in destroying bitcoin, but if they were to arrest the heads of most mining rings and order them to carry out a 51% attack, do you really think they’d have a zero chance to succeed. Note that I am not saying this would definitely work, but I am saying that maybe bitcoin is not as immutable to government action as many people would like you to believe. That begs the question whether a server farm at Apple is more secure or bitcoin. I know the outcome for now would clearly swing in bitcoins favor. Just remember that nobody thought the WiFi standard used by Intel could be hacked either. Until it happened.
Let’s just say that I can at least see the possibility of a semi-decentralized network owned by numerous very large parties (for example a blockchain run by Apple, Amazon, Goldman Sachs, Siemens and Petrochina) as more robust or at least similarly trustworthy as a fully decentralized one that can be under a 51% attack. But maybe I am wrong.
Imagine holding the keys to the internet in 1991
I get the point and the attraction behind this myth, but think about it: Do you really think that the above is how the internet caught on? If this is all an adoption curve then wouldn’t you say adoption has topped?
(Nota bene: I know there is batching going on. The above chart does not look different for active addresses or any other metric)
There are some key differences between bitcoin/crypto and the internet. Without being technical at all, it should be easy to see that:
a) blockchains can be forked and still provide similar functionality (if not development nor security)
b) if TCP/IP would actually trade on an exchange as a listed asset, its value is unlikely to be as high as bitcoin’s is today, particularly if it could be copied (see an earlier article)
c) no token are necessary for a blockchain to work as long as participants are properly incentivised
The main point is — you can use a blockchain without buying token. Yes, it will not be as decentralized as bitcoin, but at some point you have to wonder, taking into account miner centralization as described above, whether that should really be valued at $150bn+ or if, say, $20bn is just fine.
Crypto will put banks out of business and they hate the blockchain
I understand where all the hate against banks is coming from, but let me assure you that banks love the blockchain. The likeliest outcome here is not that banks are being put out of business by bitcoin, but rather the following:
a) Large global banks will co-host an oligopolistically organized semi-centralized blockchain to settle asset transfers. This blockchain is owned by the banks and run by them. It will help them save enormous amounts of settlement costs, providing instant settlement of asset transfers
b) This blockchain will help banks further by getting rid of clearing houses, which are one of the biggest tail risks to the global financial system as instant settlement makes them obsolete
c) Institutional money is happy to trade with the banks today and to use their accounts. There is absolutely zero reason to believe that instead of sticking with those exact banks who then operate a centralized blockchain that is just as secure from hacking as today’s system, but faster by a factor of 100 they would opt for a decentralized public blockchain that is prone to a 51% attack they cannot rule out or that seems to be at least as likely once the incentive is large enough as a hack on all the banks
d) Banks will be happy to trade anything their customers want to trade. They won’t be fighting bitcoin if they can make money off it
So no, banks will not go out of business due to bitcoin. They will take the technology and profit massively off it.
Crypto “OGs” got rich from HODLing and they are better investors because of it
Yes, people who invested in bitcoin and even altcoins earlier than 2017 got rich (on paper) from holding onto their investments. However, as evidenced by the last five months that does not make them better investors nor does it mean that if you copy that approach today, you will succeed just like them.
Think about it — anyone who invested prior to 2017 (or even earlier than that) was actually investing at a time when people did not talk about bitcoin everywhere you go and there was still the potential for all of you guys to join the movement. Furthermore, many of these “OGs” (though clearly not all) actually have an active interest in the technology and simply saw a big potential probably not even caring too much about the financial gain. They were investing at a time when it was an asymmetric opportunity. You could invest very little (which is what most of them probably did) and forget about it, while there was the potential for prices to 10x without this meaning that the whole world had to believe. Just a small amount of people would be enough.
Fast forward to today. If bitcoin prices were to 10x again from their December 2017 all time high it would mean that the value of the bitcoin network is $3.3 trillion. Is that impossible? No. Anything is possible. But at this point you basically need the world as we know it to end and at least some noticeable fiat proportion be replaced with bitcoin. It is no longer an asymmetric bet. The likelihood that the speculative bubble will burst further is at least just as high (I would say much higher).
Of course, if you entered bitcoin at $500 and Ethereum at $10 then it is very easy to keep tweeting about hodling and about how stupid it is for people to ever sell bitcoin. If you had those entry prices you might think the same. But just because you caught a great technology early on (by accident in the investment sense if I may add) does not mean that your investment advice is sound based on your one experience.
Crypto is a scarce asset, as opposed to fiat, which is hyper-inflated
I get that there will only ever be 21m bitcoin in existence. However, bitcoin forks have already blown up that number to 210m. Of course, I know as well as you do bitcoin forks are not the same as bitcoin. Still, the vast proliferation of crypto assets that mostly (not all) offer the exact same thing, namely a value transfer and store of some (inferior) sort, should make you realize that crypto is not scarce.
When you are trading the n-th altcoin with the exact same properties, receiving the x-th airdrop and claiming your z-th fork, then inflation has truly taken hold. Inflation currently lives on the blockchain. Fiat is just a spectator.
There is a long line of institutional buyers secretly accumulating bitcoin OTC, paying big premiums and keeping spot prices artificially low
Okay, so a few things on institutional money managers:
a) Custody: there are strict rules as to where institutions can put their clients’ money. A cold wallet with a private key that can be lost for coins on a network that could see a 51% attack (almost all alts with blockchains) is not a part of it.
b) Liquidity: Liquidity in crypto and bitcoin, after taking out all the bot volume from exchanges who try to lure customers, is wafer thin when it comes to institutional money requirements. If at all, institutional buyers will ask for a liquidity DISCOUNT, none will be paying a premium.
c) Regulation: At this point there is a case to be made that 99% of all ICOs have been illegal security sales. Furthermore, spoofing and wash trading are obvious and omnipresent in bitcoin. You cannot expect institutions to truly pick up the asset class until regulations are clear and enforced.
d) Asset quality: With most ICOs and altcoins these days you get an uncertain claim on some future network value and no security-like rights. If you do not have these kind of rights, unless you are offloading your worst projects to unsuspecting retail investors (hint: VCs) or receiving a discount of 90% on the ICO price, you would never sanely invest in this stuff.
e) Keeping spot prices artificially low: Enough with the conspiracy theories! I can tell you from my own experience that if there were any kind of exceptionally high OTC demand, that demand would find its way into spot prices some way or other. It happens all the time in all kinds of markets.
Regulators are the enemies of crypto investors
I am not sure what really led to people buying into this, nor how many out there really do. I have said previously that regulators are not there to take away your toys. They exist to protect you as a small investor against scammers and market manipulators. Authoritarian, Socialist and Democratic regimes all agree that wash trading, spoofing, insider trading and pump and dump trading are poor forms of market behavior. These practices are outlawed in all jurisdictions world wide. You should at least realize that there is probably a good reason that is the case.
Potential scams like Monkey Capital, Bitconnect, Veritasium, Ripple coins, Stellar and Iota should not have such an easy time to find investors who have no idea about investing in the first place and who will likely lose all or most of their money. Crypto needs to help regulators address these issues, not fight them. Look at WCEX/WCX here to see how much scammers get away with and still raise millions. Its simply unacceptable.
Bitcoin will set us free from fiat oppression and all this evil debt
That is just plain false. If we really assume that we all move to bitcoin as a fiat replacement then you are essentially just swapping one broken system for another. Nothing is better about having to live in a bitcoin world. Your debts will be in a currency that is disinflationary and will turn to deflationary (meaning you have to make more over time to pay it back), the wealth distribution is easily just as bad as in fiat currently and we have actually already lived in a world with such a currency. It was called the gold standard and it did not end well. I cannot stress that enough — the current siren songs in crypto about a deflationary currency being better for society than an inflationary one are so wrong I don’t even know where to begin. Read up on the gold standard and the great depression if you haven’t yet and still think a deflationary currency is best. Humanity has just forgotten, as everyone who lived then (almost) has died. That does not mean we need to repeat our mistakes (though we probably will) just because it sounds novel and so wonderfully anti government.
Nota bene: just because everyone now uses bitcoin (or tomatoes for that matter) as a payment method does not mean you will magically be gifted bitcoin at your birth and not have to incur debt to build a business. It will be the same as today, just with other creditors and a currency that incentivizes “hodling” (ie NOT investing it to produce growth or an income but to sit on your butt if you have it or have little chance to attain it if you don’t).
In all seriousness I also fail to see why central banks are getting all this blame. Technology is taking our jobs and that is an issue we need to address as a society. Maybe a lot of things need to change (and I would claim that as a whole, automation should be a positive for human society). Central banks simply tried to prevent a depression with their quantitative easing and I would say it has succeeded. I get that fiat money has generally devalued due to it, but nobody kept you from investing in stocks, real estate, gold or indeed crypto to diversify your risk. You can be reasonably certain it would have been much worse without the central bank actions. But that s a very different discussion.
Bitcoin will replace gold as a global store of value
I’ll admit this is the most difficult myth to dismantle. I think there is a chance this happens, though not a large one. A store of value needs to show the following characteristics (among some others perhaps):
a) provide stable value at all times (low volatility, no big, rapid drawdowns)
b) be universally accepted as value and liquid
c) build trust
If you look at the above, bitcoin has a hard time competing with gold. Yes, bitcoin can be transferred more easily and is more divisible, but providing stable value, especially in a crisis is possibly the most important of the above characteristics. Now look what happened to bitcoin since the beginning of the recent massive devaluation (for a fiat currency) of the Turkish Lira:
This happened exactly when Turkish investors needed the stability most. Now look at gold above. That is what you want from a store of value. So basically bitcoin’s volatility at this point is way to high for it to replace gold as a store of value. That can change of course.
The issue of universal acceptance as well as liquidity does not go away that easily either. You will likely be able to find at least one person to give you fiat or produce in exchange for gold at any point in time in your neighborhood. That is not necessarily the case with bitcoin and even if it were, there is still the issue with liquidity that I have alluded to earlier.
Maybe just as importantly, Gold has a multi-century track record as a store of value. Bitcoin is not even 10 years old and has already lost c 65% of current investors (estimated using exchange volumes) more than 50% of their invested money. That is not how you build trust as a store of value.
So can bitcoin become an alternative store of value? Yes. Is that likely to happen any time soon? No.
Just DYOR (do your own research), find “undervalued” projects with great teams and a really good product and you will make many times your investment
The above might have worked (and might work again) in a full on bull market. However we are currently at the junction where investors are (slowly) waking up to the question of what they really bought with their most recent altcoin purchase.
I go into detail here as to why most ICOs today are worth zero and I encourage you to read it. Since then one thing has worsened and that is the outlook for those token (which I explicitly exclude in the linked article) that have their own blockchain. Not sure if you noticed, but we have seen two successful 51% attacks on Verge, one on Bitcoin Gold and probably a few more in lesser known coins. If you check the site I liked above you will see that quite a few blockchains would be very much at risk to such an attack.
So if you add up the fact that most token out there were sold with the same promises as a security would, but with none of the rights of such a security with the fact that decentralization can actually become a risk when there are mining pools that could reasonably easily attack your network, then you aren’t really left with a lot of reasons to believe that, even IF the project you like so much succeeds, their token would appreciate in value. So I think the myth above will be tested quite severely reasonably soon.
Hyperbitcoinization
This myth is particularly intriguing. The story goes somewhat along the lines of bitcoin will succumb all fiat currencies and everything from ownership rights to software and data will be stored on the bitcoin blockchain. The Dollar has been abandoned, it is bitcoin’s world — Gold just lives in it. Bitcoin rises to above $1,000,000 in value IF the dollar is still used.
Okay. So it is not that you cannot make a reasonable case that fiat currencies in their current form are doomed, nor is it unlikely that the blockchain technology will indeed store quite a few of these items. However, assuming that bitcoin is the system behind everything is exceptionally doubtful, as is the price target mentioned above. A currency needs government backing to work.
Companies need to be doing business in it, we need to do our day to day purchases with it and it needs to be trusted. Furthermore you would need to replace gold, the metal that has always acted as the crisis currency in the history of humanity. Did I mention that you need to see a global civil war of the masses going against the elites but at the same time them not realizing that the distribution of bitcoin is similarly elitist and uneven (or even worse) as the US Dollar?
Hypertokenization of all kinds of assets and contracts might well happen. As for whether this automatically implies hyperbitcoinization I am not so sure.
Nota bene on this point — major economies starting to use bitcoin as their currency is a big part of this. That won’t happen (peacefully) and there is no reason for us to be rooting for it. Please read this article:Bitcoin’s viability as a currency for a major economy Tales of Depressions, stores of value that become a medium of exchange and workings of the economy, as well as the role…blog.goodaudience.com
The bubble in bitcoin has already burst and there will be a new one soon
I get how you would think that. After all, bitcoin has seen 1000% rises followed by 90% drawdowns and more 1000% rises before. The difference is that in the most recent bubble, you can make a point that it has actually been just as bad as the .com bubble was.
in which I try to understand where bitcoin stands in adoption vs the internet (I conclude we were in 1998/99 end of November 2017; remember the .com bubble topped in 2000) as well as how it compares to the .com bubble in terms of value. In both cases, bitcoin and .com topped at nearly the same point in time. Might be coincidence, but I am not that sure it is.
I still see bitcoin futures in contango (meaning they trade at a premium to spot), funding rates for perpetual contracts paying financing to the short sellers and any twitter poll made by the so called “OGs” that I stumble upon are massively Bullish. Furthermore we have not seen a true capitulation in the charts. I therefore think that maybe the next short squeeze is around the corner, but it certainly won’t be the next bubble and this one has not properly burst yet. Always remember, the asset that falls 90% is the one that first falls 80% and then halves in value for anyone who enters at that point.
So with all this negativity (remember though, I explicitly tried to address myths), what would actually take us to new all time highs in bitcoin?
In my opinion, the current situation can be summarized like this:
Crypto is mostly a retail investment field and the majority of people investing in crypto today did so in Q4 2017 with the goal to get rich quick. Most of these “investors” do not understand, nor particularly care about the technology itself. Therefore, since at least September 2017, crypto prices have de-coupled from the value of the underlying technology and have been exclusively (!) driven by speculation. Now, six months later most of these investors are waking up to their crypto hang over and new money (ie fiat from people not already invested in crypto) is nowhere to be seen as the stories about “how I got rich with crypto” are not coming about, while the “unbanked” are really a strong minority when it comes to capital flows (not necessarily people), so that bitcoin and crypto is void of a use case with mass market appeal (aside from tax evasion and a cryptokitties game that only shows that Ethereum isn’t currently scalable). Crypto exchanges are ghost towns these days that need to deal with the issue of having enabled illegal security trading and existing bag hodlers are feeling the pain more and more with each new dump. This will ultimately yield to a massive capitulation which will see everyone try to get out of crypto at the same time. Institutional investors are not currently able to nor interested in massively investing into crypto for the same reason that the retail money flows have dried up. Greed has been replaced with fear as people are pondering how much of the move up was manipulations from the Tether/Bitfinex complex.
In order to break this cycle, one of the following needs to happen:
- People need to get rich with crypto again and brag about their gains. That would start a new FOMO cycle (similarly artificial as the first) with everyone, especially as crypto is now very visible publicly. I do not believe that would be a healthy move, but you can probably safely assume it won’t occur unless bitcoin rises by at least 100%. No one brags about 30% gains, you need to double your money if you play in the Casino for people to take note
- Bitcoin (or another decentralized, investable coin) becomes the host to a DApp or another use case that we all use daily. Due to this use, there is organic pick up in the demand for coins as more transactions are happening
- Current crypto firms need to give full security rights to their token (ie treat it like equity) AND their business models need to usurp current champions
- A global financial crisis that impacts all fiat currencies (especially EUR, USD and JPY) at the same time takes place and Bitcoin actually holds up in value (as opposed to being part of the meltdown)
- People blame governments and central banks for their misery actually caused by automation and society does not find a way to make the switch from a society in which we all need to work to gain our income to one in which automation takes care of most of this work, but people still find a way to coexist in a (at least partly) meritocratic way
- Regulations need to be enforced and clear so that institutional money can truly add bitcoin as a small percentage to their portfolios (if they wanted)
You can see that some of these scenarios are pretty gloomy and while quite a few of the libertarian folk who make up a good chunk of the bitcoin evangelists would probably like 4 and 5 to happen, I don’t think the majority of people does. The best way for it to happen would be number 2 or 3 of course and after all, that is how the .com firms came back from the ashes and conquered the world. Just note that there is a non-zero probability that one of the two actually happens but we still find out that the equilibrium value of bitcoin in the long run does not exceed $100bn. I am not saying that is what will happen, but I am saying that we should be aware that is one of the possible outcomes.
