The downturn continues. BTC down another 20% from the last update, when I said “we’re in something of a downturn.”
The good news is memes!
Quality memes from r/Bitcoin pic.twitter.com/qdoAzAL2Db
— Washington Sanchez (@drwasho) February 4, 2018
The bad news is…lambos are on hold.
What’s a still-bullish bitcoiner to do?
Answer: Remember the value proposition of cryptocurrencies
In August 2004, ex-PayPal libertarian Peter Thiel bought a 10.4% stake in a new tech company called Facebook for $500,000. In 2012, he sold the majority of his stake for more than $1 billion.
Why was someone willing to pay Thiel more than $1 billion for something Thiel picked up less than a decade earlier for the cost of any over-valued cheaply built house? Was it because some mysteriously rich monopoly guy decided to invite Thiel to the rich-as-fuck club for no goddamn reason?
No! Facebook had compelling cashflow business fundamentals. Facebook equity had growing revenue from a growing userbase in a new market — social media — where Facebook increasingly dominated. Hence, compelling reasons to believe it would grow in value in the future. If the buyers of Thiel’s shares held on, they are indeed much richer for it today (though perhaps not as richer as Peter Thiel, a proven expert of capital allocation who probably put some of that cash into bitcoin).
Why is Facebook’s stock so much more expensive now? Well, we’re getting into some speculative reasons and investment analysis that is beyond my expertise (Facebook’s equity valuation is much higher than pure cashflow could justify)…but one reason is people expect Faceboook to use its dominant market position to add more users and more revenue in the future.
A thought experiment in real estate
It’s amusing to imagine Thiel had actually thrown that $500k earmarked for Facebook into what every Westerner knows is the BEST investment, a leveraged shoddily built house. To be fair, had Thiel bought such a rain shelter in the “right” location, and sold rightnow, he might have made as much as four times his money! Compared to the more than 2,000 times his money made on the Facebook pick.
Most of what we think of as “investing” today is in fact speculation. Hence the house example, where people are going into debt hoping that if they just live in some falling apart dump in a crack infested neighborhood with a mortgage so high they can’t even afford to call a plumber…they’ll be filthy rich in no time! Because, like, some rich fer’ner will totally buy it off of them, because Chinese people don’t understand money or something.
Facebook’s equity valuation has a component of speculation. But it also has fundamentals like mindshare, market dominance, growth, inelastic demand (addicted userbase), and cashflow.
What about bitcoin?
Most if not all of cryptocurrency price growth in the second half of 2017 came from speculation. I’m not saying that’s bad. Cryptocurrency is an intelligent speculation. Ask anyone who put under $1,000 into bitcoin in 2012 and is today a millionaire, or anyone who put less than $300 into Ethereum in 2014 for the same result.
But WHY are people paying $900 for Ethereum, $8k for BTC, and $1200 for Bitcoin Cash today? Why would we expect them to pay a higher price in the future?
Crypto speculators, including so many who simply got lucky, have what I call the monopoly guy investing mindset. They expect to buy something for $10,000, knowing they can simply sell it to the monopoly guy for $100,000 in the future because lambos bitches decentralized money cash segwit segwit lighting bro, lightning!
Rich people are not mysterious idiots running after early speculators with bags of cash for no goddamned reason, no matter how much real estate propaganda you’ve swallowed. They are in almost all cases more intelligent and sophisticated than you. They did not become rich by throwing giant bags of cash at lucky plebs.
People are only going to buy bitcoin for $100,000 if there’s a good goddamned reason (alternatively, there could be a speculative frenzy, but those are not lasting).
What are good reasons?
- [exponentially] Growing inelastic demand
- [exponentially] Growing userbase
- More people entering bitcoin as a business, despite opportunity cost
Bitcoin BTC today, with its high fees and cult-like insistence on a 2nd-coming (aka lightning network) to solve all of its problems, is looking like a tough candidate. Not to say its network effect and the wealth of its market incumbents is worthless.
But…there’s a worryingly large contingent in BTC who thinks they will just intelligently buy this $8,000 dip and then sell it to the monopoly guy for $100,000 next year because, like, reasons…and China…and…erm…lighting segwit lightning, you stupid bcasher!
Hence, My Bitcoin Cash Bias
I think a system where everyone becomes wealthier by adding greater value to a greater number of people is the better bet. Growing inelastic demand for hard money that works for a low fee — to me — has more compelling fundamentals. You don’t need to sell your 1BTC to the monopoly guy for a lambo. It’s a more intelligent speculation to imagine one day selling your 1 BCH to thousands of users who want it or need it to participate in the new global open sourced hard money based financial system.
That’s how facebook matured as an intelligent speculation / investment. The cashflow side of crypto investments will come later. It exists now in gambling and the adult industry, the perpetual pioneers of profiting from new technology. But massive growth in smart contracts, social media, and conventional marketplaces is on the horizon.
At the time of this post, 1 Bitcoin traded for $8,050 and 1 Bitcoin Cash traded for $1,115 on GDAX.
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