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The network effects of volatility and liquidity, Bitcoin vs other payment coins


The Volatility of 600 cryptocurrencies
Alt-coin volatility proportional to bubble size

2016 has been a bull year for privacy coins. Earlier this year we saw mooning of Monero which saw subsequent pumps in other dark-coins including ShadowCash and Navcoin. Then we witnessed a mega-hyped launch of ZCash which peaked at an astounding $5.3k per coin.

All of these coins are Payment Coins competing in the battle win the war to be General Money. Let me explain. While most alt-coins tend to be forging into market specific app-coin territory, what makes payment coins unique is the shear size of the potential win, while app-coins can capture a market segment which effectively puts a cap on their valuation, payment coins being a kind of generalised money can capture “M2 money supply” as a ceiling, i.e. trillions.

When I look at payment coins I see very strong economic network effects are in play. I covered earlier with my Commerce Index that liquidity and low volatility are very important for a coin to be useful for general trade. Both of these qualities are crucial to make it compelling for end consumers to charge their wallet with a payment token to spend. With high volatility there’s too much risk holding funds and with insufficient liquidity wallet recharge and merchant fees will be high.

When looking at the combined qualities of liquidity and price stability together as a Commerce Index, we could see other coins catching up with Bitcoin. In this study I will be doing a deeper dive into these two qualities individually.

For the sake of this study, I will be looking at the leading coins by market cap, namely Bitcoin, Monero, Dash, ZCash and ShadowCash. All of these coins are well above $5m market cap, NavCoin and others at less than $3m have been excluded.

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Bitcoin’s dilution-adjusted price

Bitcoin dilution adjusted price

This chart is the Bitcoin historically adjusted price taking into account lost coins and inflation effects of new coins mined into existence, if you were to treat bitcoin like a company. (Yes we are very close to an all time high.)

I thought it would be fun to plot this after reading Vinny Lingham’s post on deconstructing Bitcoin’s marketcap. Lingham reasons that since more coins are mined into existence daily, this has the effect of a continual stock split. All stock charts we see on Wall Street correct for this dilution effect so we can compare today’s price with past prices never mind the actual number of shares in existence. In this plot, we are assuming approximately 2.5m coins have been lost.

[Live chart]

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Estimating return potential for alt-coins and Bitcoin

Valuing cryptocurrency using the quantity theory of money

I personally think very few people grasp how to gauge the long term return potential of Bitcoin vs alt-coins. I often hear people say that Bitcoin is no longer cheap and that alt-coins have more return potential being in their earlier stages, while they chase returns similar to Bitcoin’s ungodly growth during its drug-induced SilkRoad euphoric climb to notoriety.

In this article I’m going to apply some actual theory in order to get solid numerically based estimates on what the limits on returns are for Bitcoin and alt-coins. To do this, I’ll be using The Quantity Theory of Money. In essence this is a pretty obvious equation that economists like to use to describe economies.

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Does ViaBTC have veto power over Segwit activation?

ViaBTC mining power distribution

Segregated Witness or Bitcoin Core release 13.1 has been released! This update promises to end a 2 year civil war within Bitcoin’s community over scaling, which unresolved,  poses a systemic risk to the network.

To the investor, the war has almost certainly had a bearish influence on bitcoin price. But before we can celebrate, Segwit only turns on when a minimum 95% of the last 2016 blocks have been mined with the Segwit code.

Now most people are jumping to the conclusion that any mining pool with more than 5% of the network’s mining power will have veto power to block Segwit from activating. It just so happens that the mining pool ViaBTC, who are fans of Bitcoin Unlimited, are opposing to Segwit. They control 6.7% of hashing power at the time of writing (Source:

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Startup investment analogies applied to alt-coins

Alt-coins startup funding analogy

I can’t help but apply startup investment learnings onto the landscape of crypto-currency investments.

Any startup investor will tell you very few startups make it to success. The path to success looks something like this:

  1. Build a team, experiment with an idea, build a prototype, try and show there’s a market need.
  2. Seed round to try and get some semblance of traction.
  3. Get series A funding ($2-15m) to improve your product as you have shown there’s real potential
  4. Get Series B funding ($7m+) to mature your product beyond developmental
  5. Get Series C, D, E…. you’re in fast growth now, it’s time to scale, scale, scale
  6. IPO onto the public markets, be a house-hold name.

Now here’s the approximate survival rates:

  • pre seed 1-2%
  • seed funded 2-5%
  • series A funded 10-20%

This should be sobering to alt-coin investors. But the story gets worse…

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Data visualisation: 118 coins plotted over time this is why HODL alt-coin indexes don’t work

Canvas Art - Shit run downhill 2016 edition

Do you like my canvas art? I’m calling it “shit runs downhill“. I’m thinking about mounting it on my wall to remind me of the perils of HODLing alt-coins. After finding out that alt-coin index funds don’t really work, I put together a data visualisation of alt-coin price performance as further research into why.

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Bitcoin volatility will match major fiat currencies by 2019

Bitcoin was created in 2009 by a mysterious character who claimed it to be a payments network. But unlike most other payment networks like PayPal and Visa, it screwed with our minds by having its own token. A token that had a price that floated against other currencies. In basic terms, this means if you fund a bitcoin wallet to buy something, it may be worth less (or more) by the time you come around to spending it.

This is the story of bitcoin volatility, we’ll be studying its personality over its short and notorious history. It was partly inspired by Vinny Lingham who calculated Bitcoin will achieve the necessary price stability to be a store of value at $3000 per coin (~$50b market cap), and estimated that to be two year away. We shall see if the data backs this up.

We’ll start this journey with a bit of eye candy. Let me plot for you the volatility of 600 cryptocurrencies against their market caps and 24 hour traded volume (i.e. liquidity). Volatility is represented by the size of their circle. Okay circles, I want you to be small and towards the top, got it? (This equals low volatility and high liquidity).

The Volatility of 600 cryptocurrencies

As it turns out it was a weak correlation between market cap and volatility. Apart from looking real nice, it showed just how far ahead bitcoin is over the other coins. Pundits should know I used log scales and exponentially scaled circles to reduce the exaggerated differences here.

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An economic comparison of payment coins, who is winning the race?

Commerce coins compared

Last week I created the Commerce Index as a means to measure a coin’s suitability for general commerce. In a nutshell it tracks the property of liquidity and low volatility.

Both consumers and merchants want a currency that is stable and has high enough liquidity at the exchanges such that converting into and out of that coin does not incur high fees.

This graph compares the Commerce Index of some more notable coins that are aiming for use in payments.

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Crypto-currency Index Funds, the simulations have surprising results

Bitcoin vs Index Portfolio of top 10 alt-coins. Bitcoin 4.6x vs Index 1.2x

This year, the idea of managed portfolios and index fund portfolios has been on the rise, you can bet on many hitting the market in 2017. It’s a popular idea borrowed from Wall Street. For stocks 99% of index funds, namely a fund that buys the entire market passively, outperform actively managed funds.

Sounds like a great idea for crypto-land right?

I’ve been running simulations in the alt-coin markets to see if this is true. If so it would be prudent to diversify across many alt-coins as a higher performance investment over Bitcoin.

The results are surprising.

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