20 June 2018

Institutional Investors in Crypto-Land

I think there are a few things going on around the "institutional investor" theme in crypto-land...

One reason for our not seeing a flood of Big Money into cryptos is that these guys are very, very patient. Their salaries and bonuses do not depend on them moving quickly, and there's a lot for them to do in preparation for tackling an entirely new asset class.

Two is that some heat has been taken out by the derivatives. They can trade without having to deal with the problems of holding actual crypto-currencies — all the custodial challenges and regulatory uncertainties.

Three: They're probably intensively consulting with the regulators. They live in a highly regulated climate, and Legal will want to know exactly when and how they're crossing lines before doing so.

Four: Custodial solutions for large organisations are in hot development, but they're certainly far from developed or tested anywhere close to the levels an institution would require. You do NOT want a billion USD worth of BTC sitting in a hot wallet when some janitor walks out the door with the keys on a flash-stick.

So I think there are, and will be for a while yet, some delays in seeing actual institutional flows into the crypto markets. But they will come. A future contract on the price of BTC may make for nice trading, but it's not ever going to be the same as an investment in the real thing.

17 May 2018

Do We Really Need StableCoins?

When I was a very small child growing up in South Africa, most of the world's fiat currencies were backed by Gold. One South African Rand bought you two American Dollars, and that rate of exchange never varied. The price of Gold was fixed by an Agreement of Nations at $35 per troy ounce.
I suppose that, with the value of the world's money being fixed by decree to the value of shiny metal, it is to be expected that things will favour the currency of that country where most of the shiny metal was mined. At the time South Africa mined substantially more than half the world's annual tonnage of new Gold, and its currency was as hard as rocks. Today you need almost twelve-and-a-half Rands to buy one single US Dollar (though by the time you read this that exchange rate will be different), and that US Dollar is a meagre shadow of its former self. Its value has been eroded by something like 87% since Nixon abandoned the Gold Standard back in '71. I still remember banknotes that had printed upon them, "I promise to pay the bearer on demand." I occasionally wonder how many people actually pitched up at the Reserve Bank in Pretoria to ask for their One Rand in Gold in exchange for that bit of paper. I don't suppose there were many, because of course there was a Catch. The best Catch that ever was. Catch 22. It was illegal to own Gold metal, so any exchange of paper money for the Real Thing could only result in your immediate detention for hoarding Gold. Standard M.O. for sovereigns, really...
The thing is that everything prices, wages, relative currency values, and so on — were all pretty stable back then. At least major governments tried very, very hard to make it appear so despite many people harbouring serious doubts that it was true. So a lot of people have come to believe that ditching the Gold Standard was a Bad Idea because it resulted in a bunch of volatility in the prices and monetary valuations of all things, a lot of fluctuation and a WHOLE LOT of inflation eroding the value of the very thing we use to value our time, goods and services. Money itself. These people have become convinced that if only we returned to using Gold as the basis for valuing our money, many of the evils of the world would be corrected. Stable money would be the Big Fix for everything that's wrong with the world.
And, of course, they're wrong. There never was such a thing. The stable value of Gold was simply a form of government-enforced price-fixing, an agreement by that cartel of sovereigns who were best placed to impose their will by dint of terrible weapons.
Fast forward to the present day where we find ourselves in the Alice in Wonderland world of neonatal crypto-assets, and one of the big complaints is that crypto-money is too volatile, the wild price fluctuation rendering it nearly unusable as actual currency for the purchase of goods and services. (Of course that volatility is the very thing we love when we go out to buy our new Lambo from the profits of our cryptocurrency speculation, but that's another conversation for another day.) What a lot of people claim to want is a StableCoin — a crypto-currency whose value changes very little, preferably not at all. Then when the price of Bitcoin takes a dive they could convert their stash into the Stable Coin (further fueling the fall in the price of Bitcoin as the mass selloff takes its course) and preserve the value of their money.
Of course we could just convert our Bitcoin back to fiat when the price takes a dive — most will call that "taking profit" or "taking risk off the table" — but that seems contrary to the whole Crypto Programme. It buggers with the notion that we ought to be taking control of money away from governments if, as soon as we run into headwinds, we run for refuge in the arms of Mommy and Daddy. So the idea is that we should make our own stable money as safe harbour from the Winds Of Adversity.
Ironically, when we look at this whole situation a little more critically, you'll notice that we keep blithering about the "price" of various assets — Bitcoins and so on —  without considering what unit of account we're using to quantify that price. It's usually — almost always — the US Dollar — itself hardly a bastion of stability or safety. Anybody who has speculated in the Forex Markets has surely profited or lost at the mercy of the fluctuation in the relative value of the USD, not to mention all the other national fiat currencies.
Hell, even the value of Gold wobbles up and down at the whims of the marketplace, and those wobblings have also been the source of fortunes made and lost to the vagaries of the Hidden Hands.
The point is that it's all relative.
So what EXACTLY does it mean to create a StableCoin that is pegged to the US Dollar or backed by Gold when the values of those underlying assets wax and wane in imitation of near-perfect random noise? What does it boot us when one DAI — by exceedingly clever and cunning means — maintains its value via Smart Contract at Pretty Close To One Dollar when the very value of that Dollar wanders drunkenly up and down in response to random draughts of hot air?
Initially I was all for having StableCoins, but over time I've become rather sceptical about their value and their usefulness. I certainly think they are a good thing in the short to medium term, while the rest of the crypto-money space gets its shit sorted out. StableCoins can and will provide a useful place to store value in the face of speculator-driven price changes to other crypto-assets, and they serve as a useful way to say to a sceptical world, "Look! See! Crypto-assets need NOT be unruly wild beasts. They CAN be tamed!"
But over the longer run I am a bit more dubious about their place in the ecosystem. Over time, as institutional investors increase their shadowy presence in the crypto markets, as Central Banks begin to participate in the flows of crypto-money, and as financial regulators and tax authorities develop the tools to impose a degree of order on the space, we should expect volatility to decrease. Lambos will, once more, become less easily attainable, but the true value and purpose of crypto-money will be more closely realised and we'll find it easier and easier to get paid with crypto-money, to pay our rent with them, use LTC to buy groceries, BCH for Fiats, XLM for plane tickets, and so on.
And then,... as the "prices" of crypto-assets become less wild,... then we can become more comfortable with letting those valuations fluctuate against the assets we use a units of account — the thing that gives some meaning to the numbers we assign to any asset to tell us its value. In return, quite likely, we will start to use these crypto-currencies as units of account themselves. We'll start to quote the price of Euros in ETH and the price of Rands in DSH. Just like the EUR/USD exchange rate wobbles up and down from one trade to the next, so will the XAU/BTC and the OIL/XMR, and we'll become more comfortable with that.
So, for a little while at least, StableCoins seem to have a useful niche to fill in the crypto ecosystems, but in the long run?

I am not at all sure they make a shred of sense.

14 April 2018

The Futures of Bitcoin

(Originally published at https://medium.com/@mikro2nd/the-futures-of-bitcoin-eb226927cb94 on 30/3/2018)


Leaving aside all the hype and hyperventilating, the personalities and poison, the shills and snake-oil, what might be The Future of Bitcoin?
First a quick and cursory glance at its past — just to give a little context. The original Bitcoin paper starts out forthrightly:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Satoshi’s stated intent was to implement a trust-free system of payments. So far Bitcoin has failed to be this. Instead it has become primarily a vehicle for speculation. Yes, a few hardy evangelists do trade using BTC, but they’re few and far between. Certainly every time I have asked someone to pay me using Bitcoin I was met with something between blank incomprehension and outright hostility.
The reasons are myriad and intertwined, and not particularly interesting to me here and now, save that it helps us to place where Bitcoin is in the landscape of status-quo-challenging innovations. At present — and this implies directly that things may well change in the future, perhaps even the quite near future — at present Bitcoin largely fails to serve as a Medium Of Exchange.
Generally we want a currency to provide, in some measure, the following three functions:
  • Medium of Exchange — a means to facilitate the barter of goods and services while eliminating the disadvantages of direct barter,
  • Store of Value — a way to hoard our wealth while we wait for something to spend it on, and
  • Unit of Account — a measure of how much value we’re storing or exchanging.
Bitcoin also fails as a Store Of Value due to its wild volatility — the very attribute that speculators love so much.
And I certainly know of nobody who uses Bitcoin — or any other cryptocurrency — as a Unit Of Account.
It is these latter two failings that drive the first. If I were a merchant, pricing goods in BTC is problematic. Adoption is not wide enough that I can in turn pay my suppliers, my landlord or my taxes in BTC, so I am tethered to the fiat world, no matter how firmly I may be a crypto-future true believer. Even if I advertise pricing and accept payment in BTC, the real price of my wares is constantly referenced back to fiat — the BTC/fiat exchange rate. And that, as we’ve observed, fluctuates wildly — that damned volatility at work. I suspect this is the main reason we’ve seen a number of vendors exit from BTC pricing and payment rails. Indeed the volatility is such that you’d have to reprice on a minute-by-minute basis, and even then, if a transaction takes more than a second or two to be confirmed, as happens during periods when the Bitcoin network is congested, you’re unlikely to receive the same value you invoiced.
Even assuming I do sell some stuff and get paid for it in BTC, there is every reason to believe that the value of BTC I hold will bear little relation at all to the value I exchanged when it comes time for me to spend those BTC. So, because it is not a very stable way for me to store wealth, I am less inclined to accept Bitcoin in exchange for the value I sell. Catch 22.
Being “not a good store of value” discourages all but the most ideologically-committed vendors from adopting Bitcoin. Low adoption means that the pool of Bitcoin-enabled trade partners ends up being a very small pond indeed. And a lack of trade partners diminishes the usefulness and usability of the currency. In econospeak, there is a lack of liquidity in the Bitcoin economy, resulting in thin value underpinning the coin, and because there is a low volume of trade using the currency, even relatively small exchanges of Bitcoin can significantly alter its perceived value. Small transactions causing large changes in value is the very definition of volatility, and it is hurting Bitcoin adoption badly.
But are we stuck in this vicious cycle forever? I doubt it.
I can see three possible futures for Bitcoin:

Future 1: Brave New Coin

The technical difficulties with Bitcoin get solved, and hopefully quite soon, otherwise other projects are likely to close the still-open window of opportunity that Bitcoin has due to its primacy as the First Comer.
The problems are primarily:
  • fluctuating and sometimes excessive transaction costs — ideally users should never be confronted with the question of transaction costs at all,
  • unacceptable transaction confirmation times, and
  • abysmal user-interfaces that make transactions error-prone and needlessly difficult.
Solve these and there’s a very good chance that Bitcoin finally begins to take off as a Medium Of Exchange.
Solve these and Bitcoin stands by far the best chance of occupying the core (though certainly not all) of the Electronic Cash space, simply because of brand awareness, primacy and market dominance. And we can thank the “bubble” of late 2017 for much of that…

Future 2: Going Gently Into The Night

The technical difficulties don’t get solved, the Bitcoin identity gets fragmented by all the forks, things remain messy and in the meanwhile some other, newer-generation coin quietly and steadily gains acceptance as a means of payment. Litecoin? Zcash? Monero? And slowly but with a dreadful inevitability, Bitcoin’s dominance slowly wanes into irrelevance and ultimate extinction.
This might be the best outcome — not for Bitcoin or its adherents and believers, but for society at large. Let’s at least acknowledge that Bitcoin is the zeroth-generation of cryptographically-enabled distributed ledger (with all the good things that arise from that). But seldom is Version 0, the Proof-of-Concept, the best solution. Usually it takes us a few iterations to get something right. Just look at the evolution of conventional money for an instructive example!

Future 3: The Gold Standard

The last possibility is that the technical difficulties don’t get solved, Bitcoin never becomes a mass Medium Of Exchange, but instead becomes the internet’s primary Store Of Value: Crypto-Gold, in other words. This is a world in which transaction costs and confirmation times don’t matter. After all, look how much hassle and friction is involved in trading, moving and storing a tonne of physical, real-world Gold!
Bitcoin-as-Gold could easily happen. All it takes is for one or two of the world’s Central Banks to start openly using Bitcoin as part of their toolchest in hedging challenges to their national fiat. Using it as a tool in conducting their core business, in other words. Indeed, I would be surprised if any Central Bank in the world has failed to dabble in Bitcoin at this point, but so far it has only been sticking a toe in the water as a way of understanding this mysterious beast, and we have yet to see any Central Bank openly commit to using Bitcoin as a strategic vehicle. I am not speaking here of those few Central Banks that implementing their own in-house crypto-currency. Those are not true crypto-currencies, though they may derive some strength and advantage from being transacted on an open, unpermissioned and (hopefully) immutable distributed store. No. If it’s issued by a single Authority, then it’s fiat, not crypto-currency, whether the authority is a Central Bank, an airline, or a startup issuing dodgy tokens.
If/when Bitcoin starts getting openly used as a hedging instrument by central banks I would bet on four things following really quickly:
  1. All — or almost all — other Central Banks following suit,
  2. The price of Bitcoin will rise enormously. A million dollars per BTC? Who can say.
  3. Bitcoin’s volatility evaporates overnight, driving the speculators (mostly) out of the market (though not until after they take profit, of course.)
  4. Bitcoin mining gains a new and very substantial set of players — the Central Banks and the BIS of course, because these suddenly have an asset and transaction records to protect.
I part ways with a number of BitCoin’s True Believers in thinking that Bitcoin As Gold is not the worst outcome in the world. Yes, it departs from Satoshi’s Original Vision, but… for many, many reasons, the world needs safe and reliable stores of value.

Wake Up: Time to Choose

What’s it to be? Cash? Gold? Or oblivion and a short paragraph in the history books?Refusing to choose is a choice, too.
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