What You Do Not Understand About Money
Money, simply put, is the medium for exchange of value. It does not have any intrinsic value. Even gold. Their value is derived from their supposed demand in the market. More people demand gold than your everyday shitcoin hence gold is more valuable.
Another factor that drives value is supply. There is only one Koh-i-noor diamond and hence, it is priceless. There is a finite supply of diamonds which lets its producers manipulate production and ‘fix’ its value.
Demand and supply always go hand in hand. If tomorrow we find a cheaper and more efficient alternative to oil, it’s value will crash despite having a limited supply.
In terms of Bitcoin, while the supply is fixed, it is its demand that causes the most excitement. This demand is also the reason why Bitcoin flounders every now and then like a bubble within a bubble.
What Do Tulips, Deutsche Marks, and Shitcoins Have in Common?
Once upon a time, in Europe, it became fashionable to collect tulips. People paid as much as a house’s worth for one tulip. Someone paid 10,000 BTC for a couple of pizzas, a few years ago so it’s safe to assume that value of any good appreciates not because of what it might be worth tomorrow (tulips wilted away in under a week) but on what it’s value is today.
In post World War – 2 Germany, the economy was in shambles. While its national governments came and went in quick successions, they continued to pump out currency units – the deutsche marks by the millions. As supply outstripped demand, an inflection point was reached beyond which, the demand started shrinking while the supply kept on increasing. At its peak, the German hyperinflation was xx%.
Modern day shitcoins suffer from the same problems as the above two from a bygone era. Someone hypes a shitcoin (as they did tulips) leading everybody to start minting more shitcoins (as they did to create rarer strains of tulips) leading to an increasing supply that outstripped the demand. The inflection point was reached a couple of months before Tet 2018 and the shitcoin industry hasn’t recovered since.
The Wolf of Wall Street was an ICO Advisor Before it was Cool
Did the Wolf of Wall Street :
- Make Loud Proclamations?
- Promise Exponential Profits?
- Sell Unethically?
- Knowingly sell snakeoil?
- Cash out at the top?
Yes to all? So did your ICO Advisors of 2017-18. The only difference is that the Big Bad Wolf went to prison for his deeds while the ICO Advisors slinked off into the night.
This is how Bitcoin is different from the shitcoins. It has no advisory board or even an MD. Practically, it is a Gutterflower. It’s most rabid proponents – Bitcoin Twitter are so passionate about it that some have likened them to be a cult of sorts.
Bitcoin Twitter has vociferously upheld two beliefs:
- More Decentralization is Good
- CSW is not Satoshi
While the courts are looking into the latter, I want to highlight the flaws of the former.
Everybody has an Amygdala and a Limbic System
The Amygdala is a part of the brain and the limbic system which is the microchip of your brain that processes emotions. Given enough emotional stimuli, people can be manipulated into acting in a desired manner. This is why horoscopists and fortune tellers make as much a killing today as they did hundreds of years ago.
Here’s a common example to demonstrate how it works :
A lousy stockbroker who doesn’t know anything about stock trading has been asked to get 100 customers in 10 days. See how he’ll do that in less than half the time.
He buys the email addresses of all subscribers to the financial newspaper in the city. Then, he picks a random stock and emails to half of the list that this particular stock’s price will fall the next day. To the other half, he says that it will rise.
Let’s assume that the price fell the next day. Now, he’ll ignore the second group while dividing the first group into two again and repeat the first step.
Assuming an audience of 10,000 people, a lousy stockbroker has correctly predicted the stock price movement for 5 straight days for 313 investors. If even half of these convert, the lousy stockbroker achieves his goals in less time and with a lesser knowledge of stock market trading analysis.
Fun Fact: All Stock Brokers are Lousy Stock Brokers
Be it stock trading or trading of cryptocurrencies, trading is done under the premise of making a profit on the future value of the stock or the cryptocurrency. Bulls buy to sell at a higher price tomorrow while the Bears do it in reverse.
To avoid being called gamblers, the traders abide by these two major trading schools of thought:
- Fundamentals-Driven Trading
- Technical Trading
In Fundamentals-Driven trading, the trader examines key indicators of a stock’s health. In traditional investing, it is DCF (Discounted Cash Flow), PAT (Profit After Taxes), and other such financial items. In cryptocurrencies, all of that is replaced with the largely intangible – utility of the token. Intangible indicators for an intangible store of value drove the ICO hype of 2017. Remember it the next time someone calls crypto a bubble.
Technical Trading based investment is an even worse way to invest. It is based on the premise that the emergence of certain patterns in the trading activity of the asset (or utility token) can indicate, in advance, whether the price would increase or decrease. That’s correlation equals causation fallacy of the highest order but still, algorithmic trading bots are programmed day in and day out by developers (not traders) to identify these patterns in intra-day trades and attempt to profit off of it. The funny thing is, just like religion, if many people believe in it, it becomes accepted and defended. Thus, if 100,000 people start investing in a cryptocurrency every time its trading chart shows a profit-impending pattern, will the price not move up because more buyers = more demand.
In the long run, we’re all dead – John Maynard Keynes
This is the fundamental unit of every aspect of Keynesian economics. It states that fixing things in the present, if it comes at the cost of ‘borrowing’ from the future, it is not a bad decision. Climate change missed that memo but let’s proceed. This led to deficit financing and laid the bedrock for memes such as – The countries of the world owe $X. XX trillion as debt. Who do they owe it to? Mars?
In the world of cryptocurrencies, it leads the token founders to look into less-than-ethical ways to keep the “fixed” value of their tokens fixed to avoid delisting from exchanges and mass selloffs. An asset can only hold a value at which another party is willing to buy it at. These price fixings are done liquidity management trading software that can keep trading with indiscriminate amounts to avoid detection and to keep the price afloat. True to Keynesian economics, all that matters is the demand. It does not matter whether the demand was created by the supplier itself.
This is another observation that exhibits that bitcoin continues to grow despite decentralization and anonymity. In a truly decentralized and anonymously traded cryptocurrency, you can buy from one market me sell it at the other simultaneously to keep the price within a ranged value. Cryptocurrencies with huge reserve tokens, founder tokens, and company tokens are therefore an automatic red flag for providing token Founders with large resources to manipulate their token’s price.
An Ode to Bitcoin Twitter
I mined my first bitcoin in 2011. I also lost it in 2011. Therefore, technically, I’m a HODLER. It is speculated that about 15-20 per cent of all bitcoins ever mined are owned by hodlers like me. This also punctures the notion that whales own over 80% of all bitcoins claim. Many such claims are punctured by the Bitcoin twitterati everyday. In the early days of Bitcoin, when it’s price maybe crashed for the first or the fifth time, only a handful stayed true to bitcoin. Mainstream media called them bitcoin cultists and what not. They communicated on message boards and private chat rooms.
They’ve grown in number and made Twitter their new home. They’re now known as the less derogatory – bitcoin maximalists. Their favorite pastime is outing incorrect utterances about their beloved bitcoin on Twitter by celebs and plebes alike.
Some of them might deal on crass but the vast majority discusses bitcoin adoption across the world. Not all of them are miners. Some of them might not even be very technologically versatile. Yet, they’re all connected by exhorting people to use bitcoin for payments instead of as an investment vehicle. While mainstream media continues to go gaga over bitcoin prices, the maximalists have seldom cried over falling bitcoin prices or thumped their chests when bitcoin price increased.
Bitcoin Twitter has shown remarkable resilience to the occasional baiting by the altcoiners and also tremendous stickiness through countless price rises and falls. They haven’t been seen to claim to be in Bitcoin ‘for the technology’ but are proudly there because all that they were looking for was a secure payments mechanism that resisted governmental and banks’ control.
No other currency, let alone a cryptocurrency has such a fan following that considers it their agenda to educate and enhance adoption.