A few thoughts - Wednesday, December 17, 2014

[Steve Sokolowski]

A few thoughts for today:

Rich people don't wait until things are looking up

Investors who get extremely rich don't wait until stocks are looking up to buy. They evaluate the fundamentals and decide whether a stock is a good choice, and then wait until everyone else disagrees with them. The same goes with bitcoins. Right now is a time to evaluate whether bitcoins are a good choice or not, because everyone else disagrees with you if you decide that they are.

My opinion on bitcoin value has not changed since the beginning. There are no indicators that the promise of the technology is any less than it was before. I'm waiting for a crash and will buy another 10 or 20 bitcoins when it happens.


Crash is incoming

You may recall how, way back several months ago, I changed my outlook to bearish in early July, saying that the last cycle had been a false bubble (given that there was the high top and then the second lower top). I then said that the price would fall to $290 in October, although it actually went below for a few minutes. Afterwards, I said that the bottom had already been in, and that prices were going to fluctuate for a few months, as has happened during every cycle before that. Finally, I said that the cycle, which has held true for years, predicts that the next bubble will occur in January or February, which will be eight months since the May 31 high.

There is nothing to suggest that this prediction has been off, and I am not changing it. None of the fundamentals have changed; there is more merchant adoption and there are more bitcoin businesses than ever before. Bubbles don't start because of any news and they don't wait until the infrastructure is there. They come before the next wave of software and crash when some part of the system fails. I read /r/bitcoinmarkets and don't understand why today there are so many people who are suddenly in a panic, as if anything has changed since two days ago, when people were in a good mood.

There has never been a time when "consumer adoption" has been high, but that doesn't seem to stop bubbles. It's pretty apparent by now that bubbles don't form based on consumer adoption, as each one is way out of proportion to the amount of adoption. When prices were $266 last April, nobody whatsoever accepted bitcoins, and yet now prices are falling towards that value despite the darknet being far larger and investment being far greater.

The only issue that is a cause for concern is the popularity of Ripple recently. Ripple is a centralized system that would significantly limit the abilities of developers to do the sort of things that bitcoin could do, if it becomes the worldwide payments network. Furthermore, the creators of Ripple own most of the Ripples that exist. That's obviously bad, but the question is whether people will care about that or not. One thing that makes me confident in Ripple's ultimate demise is that /r/ripple has few posts, most of which have no comments. Keep in mind that one of Ripple's founders quit, sold out, and started a bitcoin company, for what it's worth.


The killer app

Some people are selling out today because they don't think that a "killer app" will ever appear for bitcoin. The killer app is already very obvious: OpenBazaar. If OpenBazaar itself fails due to poor developers, then someone else will create a clone or something very similar to OpenBazaar. So far, the attention has been on the ability to buy anything without censorship, which is a killer app in itself, but there is much more.

The benefits of a worldwide marketplace are enormous. Right now, we have a worldwide currency that doesn't have a worldwide market to support it. Distributed marketplaces require distributed currencies to function. People's current view of the future of bitcoin is that people will spend it directly, or even that machines will spend it. But those machines don't currently have a way to interface with the sellers of the things they need to buy. Suppose I want to design a security system that detects when its cameras are about to break and order replacements. It's easy to give the system money in the form of bitcoins, but how is it going to buy anything? At best, the developer would have to write specific code to integrate with a few vendors. When those vendors go out of business, the developer needs to write code to integrate with new vendors.

If new vendors pop up and offer lower prices, it doesn't matter, because the price to integrate with those vendors is higher than the cost of continuing to buy expensive products from the existing vendors for years. It takes thousands of dollars to write and test code, which means it's worth it even if you're overcharged $100 per unit for an item you order a few times a year.

Look at the big picture here: OpenBazaar provides a way for machines to source and buy things in a completely automated fashion. A developer can simply add vendors to an array and let the software do the purchasing, or can even design intelligent software that seeks out new vendors with cheaper prices (or even new products). That has never existed before. The idea is nearly as important as bitcoin itself was.

And for the vendors, you have automated inventory management without needing to design a separate system. There could be a future where all products are settled over the OpenBazaar network, even purchases in retail stores. As you scan your item at the register, the store's server sources more of the same item at the best available price and schedules a delivery. There is a record of every transaction, so if the network scales appropriately, theft becomes extremely difficult. How can you steal a PS5 from Wal-Mart and sell it at a pawn shop when the shop finds that your PS5's serial number has its chain of custody ending at Wal-Mart?

The killer app is already obvious. It's just a matter of how long it takes the OpenBazaar developers to get it out.