On the Bitcoin Bubble

Famously, the price of Bitcoin has surged. Many compare the hike to tulip mania back in the 1600s. Tulips at least had aesthetic value. Bitcoin has no fundamental value drivers to become disconnected from, so theoretically it can absorb infinite speculative money. People say $15k is a ridiculous price for one Bitcoin, but they said the same at $100 and then $1000. So people keep speculating. (Might it feel more comfortable if people were investing on their belief in the underlying forces of decentralisation and monetary theory? Possibly, but let’s remember people don’t generally go to work in the morning buoyed by the theory of capital, production and free exchange.) Is a bubble always a bad thing? For new technologies, it brings in capital to help it develop, to fund experiments and research, to solve the problems that need solving. But for those piling into speculation only because they’ve seen their friends getting rich, it could be dangerous.

In this case, some of the price movement can be explained by the forks — key ones this year being Bitcoin Cash and SegWit2X. If the price of Bitcoin is balancing tension between it becoming a dominant digital currency/store of value and the risk that it fails and goes to zero, the chance of one specific execution succeeding is very low. Differing opinions about which will succeed can lead to forks, where either one of the new paths could succeed. The combined value of the two paths is often higher than the pre-fork value, because now we have two experiments, with higher chances of success. The dominant of the two paths is likely to appreciate, because if one path falls away, then its risk, previously baked into the price of the coin pre-fork, also falls away, leaving the chances of success weighted towards the dominant fork. Bitcoin Cash didn’t get much traction, so BTC surged. Then SegWit2X was cancelled, propelling BTC once again.

On Bitcoin as Digital Gold

Once you think of BTC as a long-term digital store of value — like gold — rather than a common transaction currency, some of its bugs become features, or at least matter less. Limited transaction volume, slow transaction speed and high fees all discourage impulse decision-making and small nuisance transactions that clog up the system. Of course volatility is not good, but this may settle down in long run. Someone quipped that 57% of bitcoin wallets are unspendable because fees are now too high — with the gold analogy, that’s probably fine.

On Decentralisation

One of the big advantages claimed by the crypto-economy is decentralisation and the so-called trustless networks. However, for lots of applications that don’t require decentralisation this just makes them inefficient, requiring vast applications of computing power. Less known, is the fact that Bitcoin is not actually that decentralised: a proof of work system favours cheap computing power, and by extension the relative costs of energy and hardware around the world. More than 70% of mining hash power therefore lies in China, and there are a few large pools -Antpool and F2Pool being the biggest. One day they might collaborate and/or the Chinese government might bring in sweeping regulation to control them. It’s possible Proof of Stake will affect this outlook. As so often said in this field, “no-one really knows”.

On Scaling

Scaling is a big problem, as shown by the CryptoKitties issue playing out last week.

With Bitcoin, blocks are limited to 1mb, roughly every 10 mins, and median transaction size is 250 bytes, so fewer than seven transactions per second are possible. Transaction fees go up as more transactions appear on the blockchain (which is how miners choose which transactions to verify). Many experiments are out there trying to work out the Holy Grail solution: increasing block size (e.g. Bitcoin Cash), modifications of the transaction format (SegWit or Schnorr Signatures) and off-chain, or side-chain settlements (MimbleWimble) are all attempting to crack the problem. I think this is a great example of a single tough problem triggering a flourish of innovative solutions that could all end up being adopted for their most appropriate functions.

On Assessing Tokens

There are many parallels with traditional venture investing and similar interrogations apply: is this a team who can execute? Are they already executing? What are the game theory incentives they are putting in place?

You could think about game theory as the crypto-equivalent of a business model. It boils down to the incentives you’re creating, which is pretty similar to traditional venture investing. The difference is that the tech is much more important, and developer talent in the space is scarce, with some estimating that it takes 2 years for an experienced developer to ramp up on blockchain tech.

On Custody

Owning and keeping cryptoassets today is not straight forward — a significant barrier to adoption. I heard someone ask that if they lose their BTC how can they get it back — a pretty basic question for someone prepared to pay hundreds of dollars to attend this conference. Many institutional investors want to get involved with this asset class but may lack the sophistication to manage it themselves. And protecting and the asset is just one part of it: dealing with airdrops, forks, voting and governance all need to be handled too. Some solutions to custody are popping up, such as itBit and Coinbase and there is a view that 2018 will see these mature, opening the gate to much easier adoption and user experience.

On Regulation

Regulation, it appears, is even messier than I thought. Different government agencies are looking at this. SEC, OFAC and DOJ all have reason to pile in. Meanwhile the US Government has yet to figure out whether tokens are securities. New guidance may have to wait for precedent to be set in court. Likewise, there is low likelihood of new regulation addressing crypto specifically any time soon, and RegA+ and RegCF (crowdfunding regulations) are probably inadequate to deal with token sales. The exchanges could be a chokepoint for regulators to target since they are the on and off-ramps for crypto, although even this is could change given the development of decentralised exchanges. More widely, the problem seems to be that blockchain is global but regulators operate locally.