Of bubbles and metaphors

Bubbles and metaphors EMC2 Blog

With the prices of crypto-currencies quickly rising out of everyone’s reach, one of the more common questions being asked is: “Are we in a bubble?”

What this metaphor is really asking for is a risk assessment regarding price stability and the likelihood that our potential investment may see a price collapse that leaves us somewhat poorer and less hopeful about the future

to discuss the subject in a language less informal than that of bursting bubbles, let’s define the condition in question as an over-exertion of the market. markets have buyers and sellers, the numbers of which wax and wane, and as the ratio of these two classes of participants changes, it causes prices to rise and fall, like the tides. generally, as demand for a commodity rises, it stretches the supply causing price hikes and and attendant enthusiasm from those long the position (those who own the commodity). at some point prices are sufficiently high (a point of over-exertion) that demand starts to loosen and prices fall, finding the other end of the pendulum, only to rise again

however, to assess whether market is over-exerted one cannot merely look at the price of an asset e.g. a single share of Berkshire Hathaway is quoted presently at $249,610 yet no one would point to it and claim it’s ready to burst. similarly, a rapid rise in the price of an asset is also not sufficient to classify a market as being in a bubble — consider that Monster (the beverage) saw a 11,731% gain since it’s IPO (as of Aug. 2016) but has found stability, and was thus never a bubble

a “bubble” therefore is a condition of instability. anyone looking at Monster’s scandalous ascent may have concluded it would soon burst, but they would have been wrong. the asset did not collapse in price, nor will it do so at this point

to answer the question of price stability we must turn to the fundamentals of the particular market, in this case, the nature of crypto-currencies, their structure and potential

the single, most important fact to comprehend about Bitcoin, Ethereum, Dash or any of the nearly 2,000 “alt-coins” in existence today is that their supply is limited i.e. the amount of currency available for purchase is finite

this differs substantially from sovereign currencies (those issued by governments, like the Euro or US dollar) whose aggregate monetary supply (i.e. the total number of dollars in existence) is a factor of credit. the signifcance of the previous statement can be expressed as two characteristics of these currencies: 1) nobody, not even the Federal Reserve (who issues US dollars) knows how many dollars exist, and 2) anyone can create a dollar

whilst the last statement may seem shocking to most, consider that any person who deposits $100 in a bank account, through the magic of fractional banking, has just manufactured roughly $1,000 or that the credit cards in your pocket represent a promise to pay which is monetised by banks into actual dollars — as are mortgages, promissory notes, bonds, or any other promise to pay

crypto-currencies are thus a new breed of animal and, of principal interest, one designed to maintain (or increase) the value of the holder, that is to say, they are deflationary. to any reasonable human being, a comparison between these two types of currency yields the simple conclusion that keeping the fruits of one’s labour in fiat represents financial ruin vis-à-vis the potential for a comfortable retirement, a chance to live it up for once, and an inheritance for our children

a secondary fact of consequence to contemplate, in answering the question of the bubble, is that crypto currencies provide a degree of service not currently available by sovereign currencies e.g. security, concealment, ease of transmission and control

security is of paramount importance where wealth is concerned. we work hard for our pennies and therefore keeping them safe from the many hands that would take them by force is a consideration as old as money itself. by its very nature, crypto-currencies defy theft, confiscation, taxation (another form of theft) or devaluation

additionally, as human beings we have an innate sense of what’s “our own business” — the notion that what we do is our affair and no one else’s. in today’s modern world our privacy is tresspassed upon in every way by greedy and controlling governments and corporations that do not serve our interests, and whilst crypto cannot protect one from cameras and NSA snooping, it can protect our identity and the particulars of our transactions

of course, it is also possible to compare crypto-currencies with sovereign money in terms of their transmission capabilities. send money to your parents, it’s 3 banking days; if they live abroad, it’s 10 days or more. and there are fees (everyone takes a cut of your money). and there are limits, and regulations, and snags and misunderstandings, and questions about “our” business. with crypto, on the other hand, a transmissions takes a fraction of a second and is effected for any amount. no rules, no questions asked

and finally, crypto we control. we like control, because we can trust ourselves. across time we have learnt that any time we trust someone else we become vulnerable, and that others put their own interests ahead of ours. do you trust your bank? your government? have you seen what these institutions do? to you? to others? with crypto you have only to ask yourself: do you trust yourself with your own money?

in summary, from a service perspective, crypto currencies are also clearly superiour to fiat, and this creates ancillary demand for that type of asset

as a final third factor in the analysis of fundamentals, consider that each currency offering represents thousands of man-hours of effort. these currencies represent solutions to difficult problems arrived at by brilliant minds whose sole aim is to make life better for everyone

what problems and solutions? take one currency as an example: Ethereum. This is a platform born of the recognition that whilst bitcoin is a state machine capable of managing transitions of a numerical value, that transitions of all kinds can be managed by a blockchain i.e. ethereum is a generalisation of bitcoin that allows others to build distributed applications to solve real-world problems. the market for ether thus comprises not only people and organisations, but also applications i.e. ETH serves as the fuel that runs applications within the world computer that is ethereum

or take Dash, an incarnation of a DAO (a decentralised, autonomous organisation). a DAO is like a company but is not incorporated in any jurisdiction (has no legal existence), has no board of directors, no CEO and no staff, only shareholders. to paraphrase, there is no old-boys network of directors to fleece shareholders, compensating their CEOs with outrageous salaries, bonuses, and golden parachutes. no fancy jets or million-dollar birthday parties at the expense of dividends. DAO investors use their tokens to finance projects, the proceeds of which then compensate shareholders directly, without the panoply of parasites traditional of corporations. is there value in this new modality of business? does Dash not represent a more democratic, fair and desirable way for capital and labour to meet? you bet it does

and as we continue down the long list alt-coins, each one of them represents a different set of aims and choices: coins for raising charity funds, coins where the economic model consists of manufacturing liquidity just-in-time and value can’t be stored (i.e. wealth accumulation is impossible), coins issued to pay for specific services, such as with Storj

so given the analysis above, perhaps we can now answer the question of whether at present the crypto markets are in a bubble

what maketh a price is the balance of supply and demand. in the case of crypto, supply is fixed but demand is clearly buoyed by an increasing awareness of a planetary magnitude, by an entusiasm for the discovery, innovation and potential these represent, to change the world we live in, by the growing recognition that our institutions have failed us, but that we have an alternative

there will be price corrections. it is natural of any market, but the party’s just getting started. how much higher can prices reach? where will these markets find balance, stability?

the answers are here:

erick calder

BTC Ad Astra

BTC Ad Astra - EMC2 Blog Image

I run a bitcoin ticker on my Mac to keep me apprised of the ever-changing price of bitcoin on a second-by-second basis. Today it reads $1,591 — the value of a single coin on the Kraken exchange (on Coinbase it’s $1,633 (arbitrage anyone?)), as you can see in the picture above

With a market capitalisation of $26B (see CoinMarketCap), however, BTC remains Liliputian vis-à-vis the sums invested in other asset classes. If compared to gold (market cap: $8.48T) bitcoin represents a tiny 0.3%, and gold itself is considered a tiny market with relation to equities ($69T), debt ($230T) or derivatives ($1,200T) — not to even mention the gargantuan f/x markets

The consensus for establishing market cap is that the last trade’s price forms one of two factors in the calculation, total supply being the second. Regardless of whether that makes sense (in my view just because one coin is valued at a given level doesn’t imply all coins are — try selling all the coins in existence and see what happens to price), bitcoin is unique in one respect: the constraint of its supply. In fact, the same argument could be (and generally is) made of gold but in practice the price of gold does not represent physical gold (which is constrained in supply) but that of the nearest futures contract (which is not). This matters because with a finite supply, increased demand can only be satisfied via a rise in price

As I watch bitcoin’s nearly vertical progression, I cannot help but wonder: where is the threshold at which the computation on the street transforms from ”the price of bitcoin is rising, I should get in” to ”the price of dollars is collapsing, I should get out”? The difference being that whilst the former represents merely an act of speculation, the latter signifies an exodus of capital from the banking system as a protectionary measure from financial ruin

Where is the threshold? where is that point at which a sane human being can only ignore bitcoin at their own peril? does the computation change at $5,000/coin? what about at $50K or $1M? because at some point it becomes patently and excruciatingly obvious that not liquidating all of one’s positions, retirement accounts — basically one’s entire net worth — and placing the lot of it in bitcoin is tantamount to financial ruin

And when that conclusion is reached, what happens to the world we live in? a world without central banking and the ruinous path the ruling élite has chosen for the 99% of us by way of its monetary controls?

My guess is that the élite is finished. They are unable to place their wealth in bitcoin without causing the very demise of the financial system they currently control, and they are equally unable to prevent the 99% of us from doing so — the final outcome of which is that we are about to witness the greatest transfer of wealth in the history of humanity, with the corollary that as their fiat currencies devalue to nothing, the 99% become rich, creating the hyper-wealth imagined in certain academic circles

As a person becomes rich, he is able to make more decisions, to exert his will on the course of events in the world he inhabits. His decisions are, of course, to his own benefit, but by having a greater number of decision makers in the pool, better decisions can be reached i.e. individual greed is evened out to produce the benefit of the commons, which is of course, the lesson bitcoin teaches and that is already embedded in the proof-of-work solution to the Byzantine Generals’ problem that Satoshi Nakamoto (whoever he is, thank you for this breathtaking gift to the world) solved

Our societies have been a great experiment, primarily one of representative democracies as the ensuing organisational structure after the monarchy. As such their apogee has passed and is slowly yielding to other more egalitarian forms of democracy, closer to the Platonic vision of Classical Greece where the nation state fades away to make room for meritocracies

Already we are witnessing the construction of distributed autonomous organisations, prediction markets and other forms of decentralised decision-making and collective knowledge structures, the predecessors of mechanisms that will reshape our civilisation in this 21st century anno domini

To conclude, bitcoin is a harbinger. If you have ears, what you’ll hear are the tidings of our finis mundi — the end of the world as we know it. Not the TEOTWAWKI of the survivalist preppers, who stock food and ammunition in expectation of a Mad Max scenario, but quite the opposite, the end of oppression by the few, the liberation of the human mind to solve the problems already within reach, that the élite prohibits

erick calder