A few thoughts - Wednesday, September 24, 2014
Posted: Wed Sep 24, 2014 12:35 pm
Does PayPal's announcement signal the trend reversal?
Looking at the charts, it seems that yesterday's PayPal announcement signals that a trend reversal has occurred. It's amazing how on most of the forums, the mood all of a sudden is so positive. PayPal's announcement is good news, to be sure, but this euphoria is unjustified.
People should be more cautious and think carefully about the actual content of this announcement. PayPal announced that they will be enabling bitcoin acceptance only for digital goods, only with other bitcoin wallets, and only with a specific subsidiary of PayPal. The number of companies that are likely to be affected by this news is very small. Companies have many options today from which to choose if they wish to accept bitcoins, including implementing their own architecture (since it is free and simple using something like bitcoinj). There may not even be many merchants who use PayPal for this uptake, unless PayPal charges fewer fees for bitcoin transactions than for credit cards.
PayPal may find that few merchants adopt bitcoins, or that the ones that do receive little business. They'll either recognize that they need to take the lead and provide consumers with a way to adopt bitcoins, or they will end their experiment on the grounds that nobody is using it.
Each bubble cycle has a question. Last cycle, many agreed that the question was whether bitcoin would be the den of fraudsters, liars, and cheaters. This cycle is undoubtedly about whether consumers will ever use bitcoins. PayPal's announcement does not address the core question of this cycle, so I argue that it does not signal a trend reversal. Nobody is worried about whether more merchants will adopt bitcoin payments. PayPal is simply enabling more merchant adoption; it is not providing consumers with the means or the incentive to spend bitcoins. After this news dies down, I believe the downtrend will resume until there is either a final panic, or someone comes along with a consumer-focused product.
An institutional "arms race?"
It's been discussed at time in the past that there will come a time when people just need to own bitcoins, because the value of all other currencies is crashing and every minute they wait will cost them more money.
While that event is a while off, the possibility of institutional investors entering the space is much closer. Like anyone, these institutional investors want to maximize profits. If they believe in the long-term benefits of the technology, there's no reason to wait until the future to invest. Assume that bitcoins will be worth $100k someday. Banks investing now will get 50% more bitcoins than if they waited until they are worth $600 again. They make five times as much as if they wait until they are worth $2k, and so on.
There's an interesting parallel to business here. Just like in traditional business, the first people to the market make more money. If there are three lemonade stands on a street, and one opened two weeks before the others, the first stand will likely have many more customers because the customers know what they will get by buying from the first vendor. If there are three software companies, and one releases its product two weeks before the others, the training buyers have invested in learning the first product is likely to make them customers for life.
The hedge funds are in a situation where there are more profits to be made by being first to the market, just like any other business. While anyone who buys bitcoins this year is likely to make money in the long-term, the funds that do so earlier are likely to get richer. If multiple bitcoin funds get approved, then it will be in their best interest to start buying as soon as possible, even if it runs up the price, because they know that they have competitors who will leave them in the dust if they don't act first. Competition between hedge funds in such an undervalued market could lead to significant gains in a short period.
Drop before PayPal announcement again like clockwork
Those paying attention to the past few weeks will probably have noticed that there have been significant drops before each PayPal announcement. Before the Braintree announcement, prices fell, and before this latest announcement, there was also a freefall that lasted several days. In both cases, people were left scratching their heads wondering what was happening because there was no news.
Remember, there is always an explanation for every market movement. If you don't know what it is, then chances are that people who know more than you do are taking action based on the hidden news. The PayPal announcements weren't the first time this happened, and they probably won't be the last.
"Community forks" of altcoins
One of the newer concepts in the altcoin world is that of a "community fork." Uncommon in the early days, we now see coins where the developer loses interest and community members decide to put out their own versions of the coin. These actions are surprising in that altcoins rarely have enough support that more than one developer works on them. Yet, in some cases, such as what occurred with Nibble, community members have decided to overrule the developer and have even convinced exchanges to replace the old code with their forks.
These forks set an interesting precedent by showing that it's possible for a group of people to take over a project and become the official maintainers of its code. It demonstrates that, should the bitcoin developers continue to focus on the wrong problems, a solution to a big issue like the 1MB transaction limit that is proposed by an outsider can be made into the "official fork" of the system when enough exchanges agree to it.
Notice that I didn't say that "enough miners" need to agree to such a change. The old Nibble fork had a higher hashrate than the new fork, but as soon as Cryptsy changed which fork it was using, the miners changed. The exchanges have the power to decide which fork is valuable; miners will not continue to mine coins that have no value.
Looking at the charts, it seems that yesterday's PayPal announcement signals that a trend reversal has occurred. It's amazing how on most of the forums, the mood all of a sudden is so positive. PayPal's announcement is good news, to be sure, but this euphoria is unjustified.
People should be more cautious and think carefully about the actual content of this announcement. PayPal announced that they will be enabling bitcoin acceptance only for digital goods, only with other bitcoin wallets, and only with a specific subsidiary of PayPal. The number of companies that are likely to be affected by this news is very small. Companies have many options today from which to choose if they wish to accept bitcoins, including implementing their own architecture (since it is free and simple using something like bitcoinj). There may not even be many merchants who use PayPal for this uptake, unless PayPal charges fewer fees for bitcoin transactions than for credit cards.
PayPal may find that few merchants adopt bitcoins, or that the ones that do receive little business. They'll either recognize that they need to take the lead and provide consumers with a way to adopt bitcoins, or they will end their experiment on the grounds that nobody is using it.
Each bubble cycle has a question. Last cycle, many agreed that the question was whether bitcoin would be the den of fraudsters, liars, and cheaters. This cycle is undoubtedly about whether consumers will ever use bitcoins. PayPal's announcement does not address the core question of this cycle, so I argue that it does not signal a trend reversal. Nobody is worried about whether more merchants will adopt bitcoin payments. PayPal is simply enabling more merchant adoption; it is not providing consumers with the means or the incentive to spend bitcoins. After this news dies down, I believe the downtrend will resume until there is either a final panic, or someone comes along with a consumer-focused product.
An institutional "arms race?"
It's been discussed at time in the past that there will come a time when people just need to own bitcoins, because the value of all other currencies is crashing and every minute they wait will cost them more money.
While that event is a while off, the possibility of institutional investors entering the space is much closer. Like anyone, these institutional investors want to maximize profits. If they believe in the long-term benefits of the technology, there's no reason to wait until the future to invest. Assume that bitcoins will be worth $100k someday. Banks investing now will get 50% more bitcoins than if they waited until they are worth $600 again. They make five times as much as if they wait until they are worth $2k, and so on.
There's an interesting parallel to business here. Just like in traditional business, the first people to the market make more money. If there are three lemonade stands on a street, and one opened two weeks before the others, the first stand will likely have many more customers because the customers know what they will get by buying from the first vendor. If there are three software companies, and one releases its product two weeks before the others, the training buyers have invested in learning the first product is likely to make them customers for life.
The hedge funds are in a situation where there are more profits to be made by being first to the market, just like any other business. While anyone who buys bitcoins this year is likely to make money in the long-term, the funds that do so earlier are likely to get richer. If multiple bitcoin funds get approved, then it will be in their best interest to start buying as soon as possible, even if it runs up the price, because they know that they have competitors who will leave them in the dust if they don't act first. Competition between hedge funds in such an undervalued market could lead to significant gains in a short period.
Drop before PayPal announcement again like clockwork
Those paying attention to the past few weeks will probably have noticed that there have been significant drops before each PayPal announcement. Before the Braintree announcement, prices fell, and before this latest announcement, there was also a freefall that lasted several days. In both cases, people were left scratching their heads wondering what was happening because there was no news.
Remember, there is always an explanation for every market movement. If you don't know what it is, then chances are that people who know more than you do are taking action based on the hidden news. The PayPal announcements weren't the first time this happened, and they probably won't be the last.
"Community forks" of altcoins
One of the newer concepts in the altcoin world is that of a "community fork." Uncommon in the early days, we now see coins where the developer loses interest and community members decide to put out their own versions of the coin. These actions are surprising in that altcoins rarely have enough support that more than one developer works on them. Yet, in some cases, such as what occurred with Nibble, community members have decided to overrule the developer and have even convinced exchanges to replace the old code with their forks.
These forks set an interesting precedent by showing that it's possible for a group of people to take over a project and become the official maintainers of its code. It demonstrates that, should the bitcoin developers continue to focus on the wrong problems, a solution to a big issue like the 1MB transaction limit that is proposed by an outsider can be made into the "official fork" of the system when enough exchanges agree to it.
Notice that I didn't say that "enough miners" need to agree to such a change. The old Nibble fork had a higher hashrate than the new fork, but as soon as Cryptsy changed which fork it was using, the miners changed. The exchanges have the power to decide which fork is valuable; miners will not continue to mine coins that have no value.