Xrp – Some Current Thoughts

I thought I’d share an email exchange I just had, as it offers the opportunity to discuss some of my more updated views.

Copy/Pasted as is, with the exception of protecting the individual’s name.

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Hey @
Was going through some old research and re-stumbled across your blog post regarding the XRP use case. To date I believe that’s the single most reasonable and comprehensive guide I’ve read on XRP. Thanks for putting that out there.
I’m curious, do you have any additional thoughts or amendments to your previous thoughts regarding Ripple and XRP?
Thanks so much. And no worries if you’re far too busy to engage in such a conversation. Really appreciate your comprehensive and thoughtful analysis. 
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hi *******- thanks for the kind and supportive words. it means a lot to me to receive constructive feedback.
i do have additional thoughts, but they get complicated fairly quickly, as a lot of it involved scaling, timing, and sequencing. i plan on including them more formally as an addendum to my next big piece (and it quite a bit larger than previous posts) but can’t say when that will be out. hopefully not more than a few weeks. 
that being said, i’ll share a bit of how i’m viewing it. 
i wonder about the durability of the window in which ripple may exist. in other words, are we in the midst of a massive and broader economic disruption, throwing off the shackles of our current corrupted privately controlled fiat systems? or will the technologies of cryptos simply be de-toothed, de-clawed and assimilated ‘into the borg’ so to speak?
the benefits of ripple – that it bridges the gap between the current fiat monetary system, and a new blockchain-centric one (by engaging the banks and banking systems themselves, rather than just a tolling system for when you leave and return to the fiat highway) also makes it vulnerable to underperforming traditional blockchain assets in a mass adoption scenario. 
that being said, (my favourite segue it seems!)  the likelihood of a dramatic sudden shift toward blockchain adoption such that fiat gateways (no pun intended) are instantly abandoned strikes me as an extremely low probability. in that case, if/as cryptos take the next quantum leap toward being more transaction-friendly i can see ripple being centrally used as the converted payment adoption system of choice… at least for a time. the issue is then, that success invites displacing competitors. as adoption of cryptos becomes more widespread and the ability to financially ‘live’ in an exclusively blockchain world becomes more of a possibility, i can see future forks and upgrades of other cryptos usurping ripples processing advantages.
i’m pleased that i predominantly kept my ripple analysis to the functional scenario which i outlined in the article. it’s that focus that has kept me relatively comfortable in ‘leaving it out there’ – even as the broader environment continues to evolve. i still believe it makes a lot of sense, although without another data point into the current adoption rates i am wary about speculating further on that path’s timing.
Best
Izzy
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Thank you so much for the reply!!! Very much looking forward to your next piece. I’ll look out for it on Twitter.
All of that seems perfectly reasonable and educated to me. I get a little unsure of my own sanity spending too much time on these forums so its good to hear a voice I can understand and agree with.
I find myself particularly concerned about those aspects as well (competition, adoption, regulation), though I suppose those worries exist anytime I’m deciding to spend money on anything. hahhaha.
I wonder, do you think that cryptocurrency might be the simpulan piece in the launchpad that might push humans into the next stage of societal evolution?
I often think of the marshal plan and how we have become so economically dependent, but there has always been something in the way of true interdependency. I have found myself wondering allowed if this is the simpulan piece that shoots us off into the next phase of humanity? Cryptos making business and people so connected so quickly and so fast that we simply could not accept mass conflict and casualties as an answer to larger problems? (I’m not suggesting conflict will cease, but instead will be mitigated and managed to relatively negligible amount)
Any thoughts there? I suppose the real question here is regarding governments and their willingness to allow that to happen. (To your point about de-clawing and de-toothing). 
Anyway, blah blah. Just rambling now. Very excited for your next installment! 
Thanks!
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i’m reluctant to attribute any single ‘thing’ the title of ‘herald’ in the progression of our collective evolution.  the mechanisms for manifestation into our experience dictates that true causal points exist on a more subtle  (and for lack of a better word) ‘energetic’ dimension. 

by the time we come into contact with the ‘real world’ (as if commonly understood) applications and 
demonstrations of it, we find ourselves interacting with an echo of the original driving process – not unlike observing stars in the night sky and realizing that we are only seeing light that was generated in times long past. 

nevertheless, i do believe that cryptos have the potential to be an extraordinary mechanism to not only support a new way of interacting with one another, but also a peaceful dismantling of the systems surrounding us which we have so clearly outgrown. the successful evolution of our species (and yes, i know this sounds hyperbolic) will involve many such modes of manifestations, across the spectrum of all human experience.  but that’s not to say that a renewed awareness of and appreciation for the concept of ‘money’ will be anything short of integral to our collective societal functioning. 

clear as mud, right? 🙂

Izzy

Reader Q&A – The Power Of Money

Below is a (largely) un-edited Q&A correspondence on Cryptos and The Power of Money between me and a reader. Thanks to him for consenting for me to share. Even though English isn’t his first language, I think he’s done a solid job of outlining some questions that may be on the mind’s of other readers.
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 Hi Izzy,

I just finished your script and again I am deeply impressed with what you wrote also the sarcasm towards the famous 1% of this world with the truth in it made me laugh. I already shared your paper with my brother and my friends but here are some questions from a simple mind:

Let’s say that bitcoin and crypto currency take over the current monetary system how is that going to work out at the end? Right now crypto currencies are valued against the fiat currency but if they are going to take over then the fiat currency is going to collapse – how will we then value crypto currencies and who is going to decide that?
I also read about your 3 different scenarios of the future and I hope it’s going to be the third one as well, but how is the crypto currency going to develop after they take over the current system? I am worried that it would become just a digital version of the corrupted sick system as we have now because people still need loans and mortgage for their houses and all that I don’t know if I am a doom thinker but I just try to wrap my head around it.

Furthermore me my brother and my friends investigating a lot of new currencies as my brother if very opportunistic he thinks the crypto currency streets are paved with gold but i try to reason with him but since he knows more about this technology  so could you help me out a little bit with how to look at upcoming currencies because as i read the internet they have all these standard things like prove of stake github white paper and developers by name on their site but good scammers also read this and then they implement it on their and  it can still be a scam as you found out with stratis.
Best regards ********
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Hi again ********

I’m glad you enjoyed the piece, though I didn’t think I was being mean or sarcastic to anyone. I was really just trying to communicate what is truth to me. I meant what I wrote about amnesty – but didn’t actually define it. To me, amnesty is not specifically the forgiveness of individuals from repercussions or punishments for their perceived crimes, but an appreciation for the shared predicament we all face in this life. We all ‘just got here’. We all have been born into and molded by environments that lead us to approach life a certain way. I do my best to not cast judgement on people, certainly not based on what family and worldview they happened to be born into. I do however believe that at certain points in life, you realize that you have to make a choice, and acknowledge what is balanced or not.
I suspect that what I’ve just expressed may be very difficult to translate – much less understand… in any case, I’ll try and answer some of your questions:
Cryptos are valued against fiat currency simply because most ‘stuff’ is currently priced in fiat currencies. As people increasingly appreciate it for its money characteristics, this will change. Bitcoin is still far away from its potential value relative to fiat currencies. As more people convert their transactions such that they’re done in Bitcoin, we will increasingly find a world where people price their goods and services in Bitcoin. We’ve barely even scratched the surface of this shift.
One thing I was a bit disappointed in re: the response to my piece in general was how little attention the idea of pricing things in bitcoin (and at a discount to fiat) got – at least so far. I thought (and still think) selling goods and services at a 10% discount if the buyer pays in BTC will be a great way to facilitate the movement. Everyone wins, and people are motivated to get involved – because it’s in their financial best interests to do so.
Regardless, if and as Bitcoin becomes a more frequent mechanism for pricing goods and services, people will increasingly think of Bitcoin as their ‘main’ currency. If you could pay for everything in your life – from paying your rent to buying a chocolate bar, in Bitcoin – and the world accommodated that lifestyle (maybe even at a 10% discount to fiat!), wouldn’t you begin to consider Bitcoin as your main currency, and all stuff (including dollars) priced against it?
What will decide this? Adoption. Whether that’s because of egalitarian realization or profit motive, people will adopt it and begin using it to transact. At some point critical mass will be achieved, and there will be a whole ‘bitcoin country’ within all geographic domains.
On your question relating to lending/mortgages, etc. – I had actually thought about addressing these aspects in The Power of Money, but decided against. To the extent lending will likely continue to play a significant role in how people live, this needs to be addressed. That we currently live as a world of borrowers is a reflection of how not-present we are. Where we are ‘here and now’ isn’t right – so we feel the need to pull forward from what we perceive as our future and in so doing indebt ourselves. 
I think we’re so far away from a loan-free world now that it’s at risk of being a distraction (at present).. though maybe not for long. I’ll give it a think. But in the meantime, think of it this way – would you still need to ‘borrow so much’ to buy [a house] (I put house, but u pick your asset) if not for all the price inflation over the past 50 years? I suspect not. So where does the dilema really lie – in not having a lending mechanism to allow you to ‘afford’ expensive things? Or in a money that generates inflation and makes things expensive in the first place?
As to your point of ‘paved with gold’, check out my last twitter comment. There are a lot of scams out there (deliberate and otherwise), and even still no guarantees for anything. We all need to be careful. Fear and greed are destroyers of both rational thought and investment returns in any market – crypto or otherwise.
Finally, in terms of where to look for good information on coins etc. going forward – I agree with you that there appears to be a shortage of good analysis out there. I’m sure that will change, but even when it does, we all need to continue to think for ourselves and critically.
Best,
Izzy

Goodbye To Ripple

Additional Note: within a couple of hours of posting this article to the Reddit/Ripple forum, i was banned without warning or reason given. It’s worth noting a few things:

1) over the course of the last several months, i have seen literally tens of thousands of referrals from the same subreddit to my blog – particularly my initial analysis. though i knew it might upset some people (and i swear, i take no joy in receiving angry messages), i felt an obligation to share my updated views on the forums where my previous work had gotten the most attention.

2) It has been about a week now, and despite thousands of reads (and public calls to those ‘smartest people in the room’ on ripple, there have been no meaningful refutations, rebuttals, or even serious questionings of the piece below. just ad hominem attacks, expressions of faith and hope that ripple will be successful (without addressing why a higher price for the XRP coin is necessary for that).

4) That Reddit banned me as they did makes it clear that the Ripple subreddit should not be relied upon as an unbiased source of information. if all they will generally allow are posts and opinions that support the bull case, then it is no different from a ‘pump piece’ or cheerleading section. Immediately before I was banned, my post was aggressively downvoted (which removes it from the feed for most readers). Investors and speculators alike should beware.

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Goodbye to Ripple
Summary
  • I feel the need to ‘set the record straight’ on my current Ripple views – especially as I see others use my original analysis in unsavory ‘Pump Pieces’ 
  • I no longer think my original analysis should be used to value Ripple. With what I know now, I see my initial ‘valuation’ of $0.83 per coin as far too high. I now replace this with a per-coin value of $0.05 
  • What have changed are my perceptions of the possibility of Ripple being used as ‘money’, required inventory hold rates, and penetration of the market in the face of a competitive response.
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When I was first becoming acquainted with blockchain and altcoins I thought that Ripple was the ‘right horse to bet on’.  It was exciting to me to find a new area in the (potential investment) world where I could use the analytical tools in my kit, and bring some clarity to the situation.
With what I knew then, I did what was intended as a thoughtful analysis, focusing on its potential utility for international money transfers – while holding out hope that it might somehow carry the mantle of the ‘greater crypto’ world.
I realize now that I was wrong. 
I had an inkling of it a few months ago, which is why despite having mostly moved on (and largely lost interest in ripple) I still felt obliged to share some updated thoughts on it, which it was my hope, would point out some issues to a genuinely interested (and skeptical reader). 
But instead of people focusing on my update and asking more questions, I find that people are still linking to my original analysis, and even referencing it in pump-pieces that belittle and misrepresent my work (P.S. Taking credit for a type of analysis after you have read it from someone else makes you a plagiarist. Never mind that the particular ‘author’ I’m addressing – who has not responded to my polite request to change his posting – still managed to wreck the material.)    
So despite being relatively bored with XRP, and having since moved on to an in-depth and exhaustive Bitcoin piece of which I’m very proud (which will soon have a significant update, especially as it pertains to Monero) I find myself coming back to XRP to attempt to set the record straight on where I currently stand on it.
 I currently believe that XRP is a losing proposition for three broad reasons.
1)    XRP misses the ‘bigger point’ of cryptos at large

*NOTE* – this is not an issue I outlined in my earlier piece – nor is it an expressed purpose of RIpple. I mention it here because I believe there are still significant numbers of people who ascribe some value to ripple in the hopes that this may still yet ‘come to pass’. I wish to disavow people of this notion. If this hurts your sensibilities, then by all means, skip to the next section.

While it has payment processing time benefits (for now) this comes at a significant cost. The supply and system is ultimately in the hands of the company, who despite their claims of libertarian principles, instead in action aspire to work with the very banks and bankers who have facilitated the unsound money world we live in today. As such, any hopes for XRP to eventually be considered ‘money’ in its own right – that is, have a value beyond functional utility – are unrealistic and out of accord with the most encompassing aspects of blockchain. (To be fair, I didn’t really attribute any of RIpple’s value to this in the prior analysis, but I felt it worthwhile to address here).

This then brings us to its value as a means to facilitate cross-border transactions.

  

2)    My ‘Functional Utility’ analysis – and the example I originally gave is far too optimistic – to the point at this stage of being flat out wrong.

But first – a quick note on non-cross border transactions. Some people claimed that my original analysis was too conservative because I only focused on cross-border transactions. They claim that if you include intra-country transactions, the upside is much greater.
This argument is without merit.
The reason cross-border transactions have been targeted by Ripple (and why I exclusively focused on them in my analysis) is because they, not intra-country transfers, are the ones that operate within a currently massively over-complicated, overpriced system. It is for this reason that Ripple ever has had a chance of establishing a foothold on an economic basis through technological disruption. 
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The first correction I make here related to my estimation of what % of all the ‘float’ traders would need to hold in order to accommodate all the transactions. I had originally estimated 35%. But I now see that as far too high.
Most B2B international transactions do not need instant transfer or confirmation. 6, 12 or even 24 hour confirmations for most businesses would be most of what’s required – so long as the costs came down as well. As such, most transactions could be done in batches, and therefore netted – meaning that on average, far less Ripple would need to be held to effect the transactions: only that which is necessary to accommodate the amounts that exceed the ‘nettings’. As such, I would reduce my 35% by 2/3 to 12%. This of course brings my valuation down by 2/3… but there’s more.
The second correction I make here related to Adoption rates. I alluded in my Update to the fact that I thought Adoption rates were the big risks – but again, this hasn’t gotten the attention – so I focus on that here.
The main competitor to Ripple in foreign interbank transfers is the SWIFT organization and system. (In hindsight, I should have spent far more time on the competitive response than I did in the original report). Not only is SWIFT the incumbent for a notoriously reluctant-to-change customer base, but they are launching their ‘response’ to the business-threat of Ripple (and crypto in general) with their ‘GPI’. 
Their GPI claims to lower fees and transaction times, while increasing transparency. I don’t know much more about it than that. But frankly, I don’t think I need to know more about it, and here’s why: it’s probably enough.
Even if GPI falls short of Ripple in technology, speed, etc… it’s still a far easier choice for a bank to stay with SWIFT and give them time/space to upgrade their systems… so long as they are getting a discount to historical rates.
Can SWIFT build a system that can come close to Ripple? That’s an excellent question – so let’s think about it.
Ripple is open-source. This means that much if not all of the code is freely-available. What’s to stop SWIFT from cherry-picking the bits they like, and launching their own ‘version’ to effect similar outcomes? All this while giving their clients the peace-of-mind that the fallback old system still works in case of emergency.
Well, one thing to stop SWIFT from successfully launching a good competing product (that is just enough to keep their clients from switching) is money. How much money are they willing to spend on it? 
Well, considering that if they did nothing, their entire business is at risk, it seems like it should be a high priority. Do you think they could re-create a Ripple competitive system (leveraging the open-source nature of the tech) in 1-2 years if they spent $50 million? How about $1 billion? 
Considering that even a $1 billion investment could potentially protect for them what is a multi-billion annual profit engine, the economic motivation to try is a no-brainer (and the funding probably already available).
I do not see any reason to believe that Ripple has significantly accelerated its very early success in getting banks to use their system. If anything, there are many reasons to believe that their penetration prospects are far worse than even a few months ago – particularly as bigger banks develop their own systems (surely JP Morgan can do the same thing with ETH), and smaller banks sit-on-their-hands waiting to see where the technology goes before they stick their necks out. As such, the notion of Ripple getting 30% of the global market in 3 years should in my view be replaced with the prospect of a 5% market share.
So my ‘present value’ per coin number of $0.83 should first be divided by 3 (as per my comment above) and then again divided by 6 – making it worth today $0.05: or more than 75% lower than current price.
Alternatively, you might be saying to yourself… what is SWIFT simply bought Ripple? This way they could get all their technology in one fell swoop! Well, that’s all well and good, but the cost of doing so at current prices would be many billions of dollars paid to the Ripple consortium. Why do that, when you can just re-create your own system for much less? If the price of XRP crashes significantly, then maybe it would be worthwhile for SWIFT to buy Ripple – but of course that would be at drastically lower prices.
To Ripple supporters, I would just like to say, none of this is personal – and hey, maybe I’m flat out wrong about my current perspective. Time will tell, and as always I welcome constructive feedback. If presented with new information, I will of course reassess. But especially as I saw people using my earlier work (which is no longer representative of how I feel) in ‘pump’ pieces, I felt the obligation to set the record straight now.

 

Izzy
P.S. made it this far? thanks for reading! Why not go just a little further and check out my postscript to this article? There’s a good example in there which I came up that has some numbers which i think adds some real value to understanding. Cheers

The Bitcoin Flaw: Monero Rising

The Bitcoin Flaw: Monero Rising
By Izzy Otomakan

I recognize the irony that barely a few months after I shared The Power of Money: A Case for Bitcoin I am now releasing this piece – critical of Bitcoin. I wrote TPOM largely because I was fed up with people and institutions claiming Bitcoin was a fraud, ponzi scheme or bubble. It is none of those things. It is however, in a critical respect, over.
Bitcoin has been beaten[1].
We don’t need to wait any longer for further evidence of this fact.[2]There is sufficient evidence now. At this point, what we see playing out is largely pantomime – as governors of the status quo introduce more mechanisms to increasingly neuter Bitcoin and enforce control over it – whether the general public is aware of it or not. Bitcoin has been compromised as the standard bearer for cryptocurrencies, and the wound is mortal.
I recognize this may sound outlandish, so please allow me to explain.
No matter what anyone may try to convince you of, the single most historic purpose of blockchain hasn’t to do with smart-contracts or disruption of the wire-transfer industry. Those are elements of secondary importance at best – and in proportional value to the larger purpose, pale by comparison. The historic purpose of Bitcoin is that it strives to be the highest quality money[3], and as such enables modern society to peacefully and effectively throw off the shackles of a corrupted system of unsound money that poisons everything it touches.
I spent time in The Power of Money discussing the 3 elements that are required for something to be successfully used as money. These may have been familiar to many already exposed to modern academia’s core economics curriculum. But this is where I went wrong.  There are other rules necessary for ‘sound money’ besides those three. Thankfully, it wasn’t long before I was informed of my oversight by several in the Monero community[4]. I had missed a critical element that contributes to something’s ‘moneyness’ and this makes all the difference. Whether it was intuition, luck, serendipity or some combination that I included an addendum which discussed a cryptocurrency which contains this feature I don’t know – I’m just glad that I mentioned it. 
This 4th attribute of sound money is fungibility, and is an aspect that while subtle enough to escape notice (as it did with me), is also critical to determining whether a money is ‘sound’ or not. The repercussions for money not being fungible are significant, despite potentially being delayed for a time. But first, a definition:
Fungibility is a feature of money which declares that any transactional unit of the money is entirely indistinguishable from any other transactional unit of the money.
This has never really been a duduk perkara when using physical things like gold as money. After all, gold can always be melted down, and carries no recoverable history in itself to tell you where it’s been or who has held it.
But what if I could tell you with 100% certainty that a particular gold piece was kept by Napoleon Bonaparte as a good luck charm? That gold piece would surely be worth far more than the ‘average other’ gold piece that had no such impressive history. In a similar vein, what if I told you that another particular gold piece was used to launder drug money across the U.S.-Mexican border? Once the novelty of its association wore off, you might realize that because that gold was used in committing a crime, government officials could seize it at any time. You might in this case value it lower than an otherwise unburdened gold piece. 
What these two examples show is that if a unit of money has an identifiable history associated with it, it can be ‘different’ from other units that don’t share that history. As such, different units of a single money type may have significantly different values associated with them. For a money to attain fungibility, it cannot contain a history of its use. This definitionally means that all transactions (current, past, and future) using the money must have the ability to be truly anonymous. Which leads us to a critical point:
In order for money to achieve and maintain fungibility, it must maintain its anonymity.
Many people get nervous at the notion of anonymous money – feeling that it somehow implies that they will be viewed as engaging in criminal behavior. This is a due to a misunderstanding that may be addressed and corrected. We are not seeking anonymity of money for any purpose other than to ensure the currency is fungible. It has nothing to do with wanting to buy drugs or launder money. Anonymity is a purely technical requirement for money to actually be fungible – and without the trait of fungibility, the soundness of the money is imperfect and ultimately doomed to fail.
And this is where Bitcoin’s flaw presents itself.
Bitcoin, when it was launched, did have some measure of anonymity, and by extension, fungibility. It’s method for achieving this though was anonymity by obscurity – namely, no one was expected to try and figure out how to connect real-world people with public key wallet addresses – certainly not once the transactions began to become complicated. Your privacy was kept by the ‘needle in the haystack’ approach – namely your transaction of hash codes (the needle) was to be lost in a sea of other codes (the haystack).
But that has changed.
There already exists technology to ‘decipher’ the public blockchain – and it’s getting more accurate with each passing day. For those at the helms of government (and money) institutions, they sit in a sea of associative information. Everything from names/addresses of Coinbase users to geolocation’s of those same people’s whereabouts (by tracking cellphones) to voice and facial recognition algorithms – all ensure that the ability to attach names and details to most Bitcoin transactions (or similar-types of blockchain) are but a matter of time. All it takes is one vulnerability in the information chain for someone’s digital identity to be compromised, opening up entire financial (blockchain) histories to be deciphered.
How would you feel if you were required to print, in legible block letters, your full name on every dollar bill before you spent it?
I’m guessing not very excited by the prospect.
Now what if I told you that in addition to your name, it was also your home and email addresses?
A little weirder, right?
Although it’s not advertised, to those with the proper technology– this is basically what can happen when transacting in Bitcoin. Do not be lulled into a state of false security by the fact that these abilities to ‘decipher the blockchain’ haven’t been made widely known. It takes only a little bit of research to realize that the identity security of Bitcoin (the ‘anonymity by obscurity’ feature) has been compromised.
For those who would seek to undermine cryptocurrency as an alternative to Fiat, it is not in their best interests to announce to the world that they have ‘cracked the code’. Did the British announce to the Germans in WWII that they had solved the mystery of the ENIGMA encryption machine? Of course not. In fact, they hoped that the Germans would continue using the ENIGMA machine, as so long as this was the case the British could maintain a strategic advantage.  

Why Monero?
Currently, there are a handful of  coins that claim to be private or anonymous. There are also functions like coin-mixers that serve as anonymizing services. Do not be fooled into complacency with these – they all have limitations, and this essentially comes down to a critical difference between Monero and these other coins.
All traditional blockchain coins (Bitcoin, Ethereum, Dash, etc.) create transactions that are born  as public and broadcast to everyone. If you want to have a private transaction in those coins, you start with a public transaction, then do stuff to it to make it private. Unfortunately, anything done can either be undone, or at the very least identified as having had ‘something’ done to it.  
Either of these is all that is needed to destroy a money’s fungibility. For instance, if you send your Bitcoin to a ‘mixer’, either the mixer itself could be compromised (in which case the coin’s history is recovered) or at the very least the coins you get out are easily identifiable as having gone through a mixer (and you the owner – and the new coins themselves – are identified as having used a mixer). It would take only the stroke of a pen to institute a ‘tax’ on any business that accepts coins that have passed through mixers at any point in their history. Given the nature of Bitcoin’s blockchain, this would be relatively easily enforced, and isn’t even the nastiest version of how this could play out badly for users.
You may be asking now, whether there is simply a system upgrade or ‘new fork’ that could ‘fix’ Bitcoin in this regard. The answer unfortunately, appears to be no.  Bitcoin’s lack of fungibility is something deeply embedded in its core operating structure. While we should ‘never say never’, even aside from the mendasar technical limitations – the political ability to achieve such a fork is at best remote. Government hasn’t yet really imposed its will on Bitcoin, or more specifically, the highly centralized miners who would need to be ‘brought in line’ – but that they would try and do so is practically a given. When this political reality is combined with the seeming impossibility to technically achieve such an ‘upgrade’ (for Bitcoin, Ethereum or the like), the prospects look grim.
Monero though, is different. In Monero, each coin transaction is born anonymous – never even existing anywhere in the system as anything else. If you want to make your transaction public, you can – but you need to take steps to make this happen. No other coin exists with this functionality, and it all stems from a brilliant methodology called ‘ring-signatures’ (which I won’t go into here). While other coins are attempting to copy Monero in this regard, they cannot help but fall short, as this is built into the core Monero architecture.

What This Means for Bitcoin’s Price (and Monero’s)
I don’t expect Bitcoin to stop going up in price anytime soon – and I’m quite OK with that. Bitcoin is currently the standard-bearer for Cryptos, and is probably the coin that most ‘newbies’ will first buy while they are learning about crypto. As a Monero investor, I’m happy for people to invest in Bitcoin, as I know that sooner or later, the money they invest in Bitcoin will come to Monero. The reason for this is simple:

The audits are coming.
Anyone who thinks that law enforcement, tax authorities, and the full apparatus of the state has ‘given up’ on Bitcoin is kidding themselves. We know as a matter of fact that state sponsored agencies are tracking virtually every aspect of our modern life, and that they increasingly have the means to track Bitcoin transactions at their disposal.
I don’t know what form ‘the audits’ will take – but when they begin, and people realize that their Bitcoin transactions make them vulnerable to any number of problems, people will transfer – potentially en masse – to the coin with the undeniably best form of anonymity, and hence, fungibility (e.g., Monero).
What are some of the possible types of ‘audit’ that may come? I’ll suggest just two to give you an idea (in addition to my earlier comment suggesting a ‘tax’ on coins that have passed through mixers). There are, no doubt, many more possibilities which would at the least cause a headache for holders, and at worst – significant losses.
There is of course, the simple tax audit. As most of the tax rules surrounding Crypto have yet to be written, and considering that it is in government’s interest to maintain a tight grip of control (not to mention get a piece of the now nearly $200 billion pie) we may expect simple tax audits – especially for those with large value balances. These audits may range from casual to predatory. While I do not advocate for tax avoidance in any way, it would be unrealistic to not expect people to do everything they can to avoid paying taxes (never mind if they perceive the tax-process as in any way troublesome, unfair or harassing).
Then there is ‘Civil Asset Forfeiture’. In most states in the U.S., if money is suspected of being used in a crime, then authorities can seize it. How sure are you that the Bitcoin in your wallet are beyond suspicion of ever having been used in a crime? Remember, we are talking about their entire history of its existence, not just recently or while in your possession. If there is even the suspicion of this having happened, then you could in theory receive a demand notice that you hand-over your Bitcoin to government authorities or face further penalties.
So back to the header of this section – what it means for prices: whether it happens slowly or ‘all at once’, when people begin realizing that holding a money that doesn’t have fungibility exposes them to all sorts of risks, some portion of them will sell their Bitcoin (and ETH, etc.) and swap into a coin that provides these features: Monero. As such, while at the time of this writing Monero is only about 1/50th the market value of Bitcoin, it could over time reach a far higher ratio. This may take considerable time, or very little. The recent action we’ve seen in Bitcoin Cash vs. Bitcoin shows just how quickly the tide can turn. But unlike the BTC vs BCH debate, BTC vs Monero isn’t a debate at all – its settled science. One is fungible and protects holders – the other is not, and exposes all holders to the risks of unsound money. As such, if Monero were to ‘inherit’ the market cap of Bitcoin today, it would appreciate in value by more than 50 times, and put it on surer footing for long-term success than a money without fungibility.

A Few Concluding Thoughts
While there are other benefits to Monero, I will not address them here with the exception of one  – as it relates to the need for privacy (away from criminal use cases) and so supports the adoption case quite strongly. Bitcoin, and any non-private coin, will be increasingly troublesome to adopt for businesses. After all – do you as a business owner want everyone in the world to be able to see how much money you have and when/where you move it? In Bitcoin, if anyone has your wallet address (say from doing a small transaction with you), they can see exactly how much money you have in total – never mind track the money from that point on. While there are many complicated hoops you might ‘jump through’ to avoid this situation as a business owner, you could do just one – adopt Monero – and rest easy. 
Secondly, if you haven’t yet done so, I highly encourage you to read  The Power of Money: A Case for Bitcoin . While I will make an edit at the beginning to note that this piece (on Monero) is effectively the successor coin, all the arguments made about Bitcoin can (and should) be extended to Monero.

Finally, as always, constructive feedback is welcome. As I think I’ve made abundantly clear via my about-faces in Ripple and now Bitcoin, I am not shy about admitting I am wrong. If I have erred in any part of this analysis, I genuinely appreciate being corrected along with an explanation. It was just such a correction to TPOM that facilitated my understanding of fungibility and Monero.


[1] Sorry Ethereum, this applies to you too – and pretty much all other cryptos that derive a portion of their value from striving to be ‘money’ (as opposed to business use cases).

[2] In some regards, I am far ‘later to the game’ than the many Monero supporters whose direction has been invaluable to me. Nevertheless, I, like all people, need to understand things in a way that makes sense to me – hopefully this piece will help others in the same way.

[3] I explain the concept of moneyness, and why Bitcoin satisfies its criteria (even better than gold in ways) in The Power of Money.

[4] By the way, the interactions I’ve had with Monero supporters (in stark contrast to other coins) have been amongst the most thoughtful, polite and insightful I’ve received. Those who understand Monero tend to realize that it’s only ‘a matter of time’ before their day in the sun comes, and that seemingly makes for much calmer and coherent discourse.

‘Goodbye To Ripple’ – Postscript

So now, something more of an actual blog.
When I finished my ‘Goodbye to Ripple’ article, I posted it in three places. First twitter, then on reddit and finally xrpchat.com. The latter two were where I posted my initial ripple valuation article in what feels to me now like ages ago. Even though I knew I wouldn’t be making many friends for saying so, I felt an obligation to share my reversal forthrightly in all those places.
When I didn’t get any emails notifying me of a lembaga response from xrpchat, I assumed no one really cared – but I was happy to stumble across the thread today. (I had thought my email notification was turned on). On the whole, there was a really nice discourse (with a few ad hominems thrown in for spice) that I’m bummed I missed. If anyone’s interested though,I have a couple of thoughts. i’ll post this link as a response to that thread forum.
I have no animosity towards ripple. I think it’s actually very cool, and clearly hugely valuable. To be able to create a multi-billion dollar business from scratch is amazing. There are clearly some incredibly talented and I’m sure cool people working at Ripple. But my question is one of valuation – why $9 billion, and not $4 billion? Or $1 billion?  Show me the math. Exactly how does it all translate into the XRP coins themselves needing to be worth more than they are currently worth?
Most people (not all) have conceded that Ripple is not about being ‘money’, but a functional tool. In that case, we ought to value it on that metric – how much value is being created, and to where does it accrue?
Let’s use some numbers.
$207 trillion annual market size
assume evenly distributed, that’s about $500 billion moving a day.
There are 86,400 seconds in a day. Again, assuming smooth distribution if XRP was 100% used as transfer medium in the market, every 5 seconds (on average) it would have to move about $30 million. If we assume it needs that FULL balance to be held in 15 different currencies, that’s a required market float of 30million x 15 = $450 MILLION (that’s million with an M). Heck – let’s say that we’re off by an order or magnitude somehow and multiply by 10. Now we’re back to billions – $4.5 billion – or less than half the current capitalization.
Is there a fault in that example? I honestly don’t know. I just spent 5 minutes working it out and have had a couple of glasses of wine. My point is, talking about value being created and that same value accruing to the benefit of the actual coins is talking about two very different things. It’s the same thing as a company you might love, but whose stock is awfully priced.
There may still be possibilities for Ripple to justify its current value. If people want to believe  – that’s great. I would never tell someone to not go with their gut or intuition. You might be right. Lots of things could happen – even some I don’t want to mention because I don’t want add to the creation of new (possibly half-baked) hopes on a coin (and then feel obliged to explain myself) that I’m less focused on these days.
So to respond to one of the bloggers, maybe it’s not goodbye ripple, but a shift in the conversation. If any of you folks are interested, the coin I’m focused on now is Monero, and I wrote a 60 page tome (but I swear it feels like 30 when you read it!) on my blog about money and bitcoin, and now a monero piece. In any case, I wish you all good luck.
Izzy

Bob & Izzy: Monero, Dash And Protecting Your Car

Rather than call it ‘Reader Q&A’, I’ve decided to use my ‘Bob & Izzy’ convention to share some thoughts spurred on via email exchanges with readers. I hope you enjoy.

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Bob: Hey Izzy – I hope you’re right about Monero, but what about Dash?

I know that Dash’s privacy features aren’t as good as Monero’s, but the it seems to be growing still.  I watched some videos too and they make it look like they are the ultimate privacy goal. Finally, some guy on youtube says that big investors don’t want to get involved in monero because of it’s reputation of being involved with criminal activities. What do you think?

Izzy: Hi Bob,

As you know, Dash was the first major privacy focused coin to gain traction. However, just like Bitcoin has proven itself vulnerable on the privacy front, Dash has similarly shown itself to fall short of providing privacy security/fungiblity. It’s for this reason that it has largely been abandoned by the ‘Darknet’ community in favor of Monero. Despite this, Dash has spent a lot of time and money on marketing, and I think that’s what you’re seeing now.

There really isn’t a question as to which offers better privacy – Monero wins hands down. Given this, Dash reminds me of ‘the Club’ that people used to use to lock their cars. In case you’re not familiar with it, the Club was an anti-car-theft device that for a time was hugely popular in the U.S. It was a bright-red tempered steel rod you would lock to the steering wheel to make turning the wheel (and driving it away stolen) seemingly impossible.

“The Club” in action.

But eventually, car thieves outsmarted ‘the Club’. They realized they could just cut the steering wheel and slide the unopened Club off.

For a long time people still bought and used ‘the Club’ because they felt like they were ‘doing something for security’ and it made them feel good. Eventually though, people realized that car thieves could get through the Club’s security. But this took time – and was often a painful process for those who learned ‘the hard way’.

Before Dash enthusiasts get upset by my ‘Club’ analogy (hopefully they have’t already), Dash vs Monero is of course different. Dash still has some security that is far more complex to circumvent than just ‘cutting the steering wheel’ (along with other features)… but in terms of providing fungibilty like Monero does, it ultimately falls short and exposes users to risks. When ‘the audits come’  (in whatever fashion they do, as I described in the earlier piece) people will quickly realize that anything *other* than full security/fungibility still leaves them vulnerable. Remember, markets are voting machines in the short term, but weighing machines long-term.

As far as the notion that ‘serious investors’ will stay away from Monero  because it’s used by people doing illegal things – this is something that was said about Bitcoin, then Dash, and now Monero. Time has shown, and will continue to show, that there is no merit to the argument.  All it takes is for a few ‘larger’ crypto investors to realize they are at-risk in Dash, and the shift could happen quickly. As more people shift for everyday use, the percentage of ‘illicit’ users will shrink, and it will be a moot point.

Cheers,

Izzy

The Bitcoin Futures Trap


Perhaps I am all-wrong about this. I actually hope that I am. In any case, it won’t be long before I (and we) find out. Given the significance of the subject matter though, I felt it important to share my perspective for those interested. If I look the fool then so be it.

On Monday, Bitcoin futures will begin trading and many Bitcoin enthusiasts are optimistic about the impact this will have on its price. As things stand right now, I think they will be sorely disappointed. Rather than the launch of a Bitcoin futures contract being indicative of mainstream financial markets’ acceptance, I believe that instead it represents a new method of control and price suppression.

I offer a few options which Bitcoin investors may consider at the end of the article (titled, Conclusions and Options). While this article is a bit longer and more technical than I wanted it to be, I nonetheless encourage you to not ‘drop out’ before reading that short concluding section.

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As discussed at length in The Power of Money: A Case for Bitcoin, Bitcoin represents a dire threat to the status quo monetary systems’ power structure.  Currently, the ability to ‘create money out of thin-air’ is held by a small elite (which I have colloquially dubbed the ‘Masters of Money’, or MoM)– the public face of which is represented by Central Banks. The prospect that the masses will adopt a form of money that is fixed in supply (for Bitcoin it can only ever be 21 million coins) would mean that this elite could no longer conjure up new units of money to be spent wherever they see fit –  in general to enrich those of their choosing at the expense of those ‘not in the club’. As such, they have gone to  extreme lengths to fight Bitcoin.

Their initial attempts to stop Bitcoin (and really Blockchain in general as an alternative to fiat currency) were crude – they tried to simply ‘kill it’. Attempts were made to break the encryption, disrupt mining and verification processes, and undermine the public’s confidence in it through methods ranging from threatened bans to a concerted effort to disparage Bitcoin in the media as a bubble, fraud, or ponzi scheme.

While these attempts are all still being pursued (just in new forms) there are additional subtler programs being deployed to undermine Bitcoin and more generally ‘blockchain-as-money’. These include attempts to control and neuter Bitcoin – some of which I discussed in my last piece, The Bitcoin Flaw: Monero Rising. The latest attempt, which we are about to publicly see in-action, is the launch of Bitcoin futures contracts. The launch of Bitcoin futures represents a method whereby the Masters of Money may be able to accomplish two of their key objectives:

1)    Suppress the price of Bitcoin
2)    Accumulate more Bitcoin for themselves, while critically not driving up the price (which up until this point has been impossible).

Suppressing the Price of Bitcoin

If Bitcoin were to stop going up in value (never mind go down in price!) – it could halt the progress that it has made towards globally displacing Fiat as money. Not only would investors and speculators (who are only ‘in it’ for the investment return) eventually tire of having their resources tied-up in an asset that doesn’t produce a return, but Bitcoin would seemingly not be able to assume a large enough percentage of global M3 (money supply) to constitute a real threat. $200-300 billion is of course a  fortune, but with regard to global money supply, the scale at which widespread practical roll-out occurs is in the trillions, not billions. Furthermore, the talking-heads who have called Bitcoin a fraud/ponzi/etc. until now will no doubt be all over the media with insulting ‘I told you so’s’.

Before we can understand how a Bitcoin Futures contract could be used to suppress the price of Bitcoin, we need to recognize one additional fact about the situation – the Masters of Money are willing to ‘lose’ unlimited amounts of money in the process of killing Bitcoin. After all – what  ‘losing’ money means to you or me means nothing to those who have the ability to create money out of thin-air. When this is combined with the realization that if Bitcoin is not ‘stopped’ their very ability to create money is at-risk, then we can see how whether a particular ‘trading-strategy’ generates a positive return or not is irrelevant. All that matters is whether the Bitcoin threat is defeated, thus defending the power of the MoM to create money.

The presence of a market-participant with unlimited funds and no concerns over losing money throws a massive wrench into the works of traditional investing and economic analyses. Indeed, most financial and economic theories are based on the notion that market participants act in such a way as to maximize their investment returns. When this is no longer the case, the usefulness of ‘normal’ exchange and trading functions can be turned on its head.

With that, we can turn to a demonstration of how Bitcoin prices could be suppressed. The picture I’m going to paint will undoubtedly be overly-simplistic and ‘off’ in details from how things actually play out. It is just one demonstration of how Bitcoin may be controlled through Futures contract trading. The key take-away of this though is that the MoM can sell as many futures contracts for Bitcoin as is necessary to drive that price down. The lower futures price may have an impact on the actual price for Bitcoin – presumably driving it lower. That’s really all there is to it. Will those contract sales (betting against Bitcoin) eventually make money for the MoM? Maybe, maybe not. But remember, it doesn’t matter. They care not one whit as to whether they lose money on the ‘trade’ – only that it succeeds in keeping the price down and thus neutering the Bitcoin threat.

Starting Assumptions

Let’s assume that Bitcoin is $15,000 a coin just prior to trading on the exchange (December 11th). Let’s also assume that the first contract ‘expiry’ date is exactly one month later (January 11th, 2018). Let’s also assume that Goldman Sachs (GS) is acting on behalf of the Masters of Money (this shouldn’t be too far a stretch to consider – especially as Goldman Sachs is being charged with clearing all the futures trades in Bitcoin). As such, let’s assume that GS has unlimited money (and no regard for profitability) in their quest to keep the price down. Finally, let’s assume that there is a hedge fund, we’ll call it BitFund, who owns 10,000 Bitcoin (currently valued at $150 million), and that this BitFund has the ability to trade on both actual Bitcoin exchanges, as well as the Futures exchange.

December 11th
Once trading begins, and in the face of any buying of contracts, GS sells as many contracts as they need to push the Bitcoin futures price down to where they want it to be. (Note, I will be using what I expect to be exaggerated price swings to more easily illustrate the theme). Whether GS has to sell $100 million worth of contracts to effect this price move, or $500 billion – it doesn’t matter. There is no limit to how much they can sell. (This could be achieved via the Federal Reserve providing an up-sizeable revolving credit facility for $10 trillion at 0.25% interest, and not maturing for 100 years. As the Fed is not audited, no one outside the institutions need ever know – so long as that GS subsidiary was non-reporting.) Let’s assume that after 5 minutes of trading, they have sold $10 billion of futures and this has dropped the Bitcoin futures price to $10,000.

Meanwhile, on actual Bitcoin exchanges, the price will not have dropped so quickly. After all, there hasn’t been nearly as much actual selling of Bitcoin as there has been of futures contracts. Nevertheless, traders will be looking to the price on the futures exchange, and will undoubtedly be made nervous by the movement lower. Some or many will sell ‘for a trade’. Let’s assume that the price on the actual Bitcoin exchanges are (also after this first 5 minutes) is $14,000 a coin.

Now the sophisticated BitFund sees a great trading opportunity – they call it ‘arbitrage’. BitFund sells all of their 10,000 actual Bitcoin on the exchanges, at an average per-Bitcoin price of $13,500 a coin. They simultaneously buy Futures contracts for 10,000 Bitcoin at $10,500 a coin. They know that when January 11th comes around (the day of the Bitcoin futures contract), the price of the Bitcoin futures contract and actual Bitcoin coins will converge on the same price (this is a technical feature of futures trading I won’t go into here).  They pat themselves on the back for being so clever.


January 11th

Nearly a month of significant selling by GS of the Bitcoin futures contract has had an impact. The opening price of both Bitcoin and the Bitcoin Futures contract (remember, they converge at expiry) is $11,500.  Along the way, GS has bought 50,000 worth of actual Bitcoin on the exchanges. While they were selling futures contracts, they were buying the actual Bitcoin on the exchanges! In other words, while pushing the price down, they have accumulated a strategic inventory of actual Bitcoin.

This strategic inventory is very important as they can do lots of things with it… but most importantly, they can use it to ensure that buying pressure for actual Bitcoin that occurs on this day (from those such as BitFund) doesn’t push the price all the way back up to $15,000 a coin.

As it happens, BitFund isn’t so keen to replace all the Bitcoin they sold. After all, they sold it at a great price, and locked in an arbitrage profit. But in the month since that day, the price and prospects for Bitcoin have gone down. They decide to only place an order for half their original inventory of actual Bitcoin: 5,000 coins.

Knowing that demand for actual Bitcoin is coming, GS decide to sell a portion of their strategic Bitcoin hold all at once – 25,000. This is more than enough to not only satisfy actual demand from BitFund, but to further drive both the cash and futures price even lower.

At day’s end, Bitcoin actual prices are $11,000 a coin. Bitcoin futures prices for expiration on February 11th are $10,000 a coin (GS has of course continued to sell those futures). GS walks away from the month with a net gain of 25,000 actual Bitcoin while having also kept the price down. That they actually made money on their futures trade is icing on the cake, though as we’ve discussed, not that important to them.


A Few Extra Thoughts

Many people have argued that Bitcoin has not been amenable to institutional buying – after all, if a large mutual fund like Fidelity wanted to buy $1 billion worth of Bitcoin, they couldn’t do so without pushing up the market price significantly – something that most traders are loathe to do. While this is true, what is not true is that instituting a futures market for Bitcoin (or any other asset for that matter that has limited liquidity) can somehow ‘magically create liquidity’. When it comes to buying the actual Bitcoin, there is no shortcut to going out and actually buying Bitcoin. Institutions can delude themselves into believing that by going ‘long’ Bitcoin futures, they are going long Bitcoin. This is nonsense. At contract expiry, they will own nothing but a profit or loss that has been determined by a market participant who has an enormous capacity to suppress the price of Futures, along with the actual ‘set prices’ on expiration day.

By my reckoning, there are only 2 natural seller of Bitcoin futures. The first would be miners, who want to use the contract to lock-in sales prices. I think this is extremely unlikely. Most miners are well funded (and certainly strategically oriented) to not need forward monetization. They haven’t needed it thus far, and not selling their Bitcoin at anything other than ‘spot’ prices has been enormously profitable for them. That they would now seek to sell their Bitcoin via a cash-settled futures market seems unlikely to me in general. The other natural seller of the futures we have already discussed – the MoM who are seeking to use this mechanism to control the price. If there is another selling market participant for whom the futures market would benefit, I ask that someone point this out to me.

Conclusions and Options

This could be a very challenging time for Bitcoin holders. Some options are (a painful) HODL, or using the lower prices to add exposure to actual BTC coins (ie, not bothering to try to buy the futures contracts). To the extent that  deep-pocketed investors still believe that Bitcoin will maintain its status as the standard-bearer for blockchain-money, then this could be an opportunity to accumulate a large position at lower prices. After all, the process to drive the bitcoin price lower only works if holders of actual Bitcoin sell their actual Bitcoin. If holders of actual Bitcoin don’t sell, (or even buy), then eventually the futures price (which may begin the month much lower than the actual price of Bitcoin) will be forced to rise to price of actual Bitcoin. The MoM will have failed in their attempt. Of course, the MoM are betting that enough of the average Bitcoin holders will sell to move the market significantly lower, and for long enough to achieve their aims.

Another option is to migrate into a coin that doesn’t have a futures market associated with it. As I am currently of the belief that Monero is the Bitcoin successor, I personally see migration into that coin as reasonable. After all, while Monero (or any other coin for that matter) might ultimately be vulnerable to the same types of Futures-Market manipulation, if/as that time comes the coin community will have had time, information and resources with which to effect a neutralizing response. Nonetheless, first and foremost i would personally like to see this attempt to kill Bitcoin fail, and fail quickly.

Valuing Cryptocurrencies – An Approach

Valuing Cryptocurrencies – An Approach

There are well over 1,000 cryptocurrencies floating around right now, and it’s my sincere belief that many, if not most of them, will fail. This becomes especially evident when a little bit of thoughtful research is done, and one sees that many of them either have no realistic plans for success (beyond a pump-and-dump of the coin), and/or offer no meaningful value that is not already well represented in the crypto-space.  So how to tell them apart? Well, I’ll share my personal approach, which I hope you find interesting and maybe useful. I suspect that applying this methodology might lead one to ‘miss out’ on some rip-roaring rally on a coin that might otherwise have been speculated in, but hopefully it will also keep one from waking up one morning to discover the coin thought to be a sure thing for a quick in-and-out trade has dropped precipitously in value. Different people need different things to sleep at night. Diff’rent strokes for Diff’rent folks. 
Step 1: Ask (and attempt to answer the question) – Is the goal of this cryptocurrency to be considered money? In other words, does the coin hope to be considered a broad and fundamental unit of money/currency that will be used to effect value transfers?

The primary examples of coins that attempt to ‘be money’ are:
Bitcoin, Bitcoin cash, Litecoin, Dash & Monero.
The goal of eventually becoming money is potentially incredibly valuable. The prize is the displacement of a significant percentage of existing forms of money (namely, Fiat currencies issued by governments, whether they be dollars, euros, yen, etc.) and that achievement would be stupendous in its implications – both socially and financially.
The current measure of all transactional ‘money’ in the world (an economic measure called M3) is approximately $80 trillion. If any one of the 5 coins above mentioned are to be successful as ‘money’ and garner a significant share of M3, it would have astounding implications for the value of the coins. The (very rough) table below shows that ‘upside’ from current values should the individual coins achieve a 20% of M3 ‘market share’ range from 50 times current value for Bitcoin, to over 2,600 times current value for Monero. This is in stark contrast to coins that do not aspire to be money which we will explore shortly.
(Please excuse the horrendously scrappy cut/paste for the below table.. the gist of it should be clear though)

So now we come to a fork in the road – was the answer to Step 1 a ‘yes’, or a ‘no’? If ‘yes’, then proceed to Step 2. If ‘no’, proceed to Step 3.

Step 2: Check the coin under consideration for its current and prospective ability to satisfy the criteria of ‘moneyness’.  

I won’t go into a full re-hash of the concept of moneyness here, as you can read plenty about it in The Bitcoin Flaw, but in short, the coins need to satisfy the 4 main aspects of sound money – Store of Value, Unit of Account Medium of Exchange and Fungibility[1].
We check for its moneyness under the simple premise that if a coin lacks any critical aspect of moneyness, it will ultimately fail and hand the mantle of ‘money’ over to a coin that succeeds. My take on all the above mentioned coins (in case you didn’t know) is that i far prefer Monero as the best candidate. In any case, you can decide for yourself and are free to disagree and/or hedge your bets.
The math though for valuation in this scenario becomes trivial (although determination of input values is not). If the coin in question passes the test for being surviving money, then we may apply the valuation technique as {[Expected % of M3] x [M3 Value] }/ [number of coins outstanding].. all present-valued.
Step 3: Determine what value is being created by the coin and/or coin ecosystem.

*Note: you should only be here in step 3 if you answered no to the question in Step 1. I realize that some people might make an argument for ETH being in both places, but I disagree for reasons I won’t expand on here. Feel free to email me if you’d like to discuss.
Since the coin we are now looking at is not a ‘money’ prospect, we can apply much more traditional valuation metrics – without needing to understand some bigger-picture and subtler aspects of global macroeconomics. Hooray!
We simply need to ask, what value is being created?
Let’s take what has been a contentious coin for me as an example: Ripple (technically XRP, the coin).
Ripple, as a medium of exchange that can facilitate lower cost cross-border transactions, offers the prospect for enormous value to be released. After all, there are many billions of dollars currently spent (and arguably wasted) in the current archaic and cumbersome international money transfer market. We can even ascribe theoretical dollars to it, so let’s do that:
Let’s say the Annual cross-border international transfer market is $200 trillion annually, and let’s further assume the average fee savings by replacing the old archaic systems with the disruption of blockchain-type processes will be a clean 5% – that’s $10 trillion a year!
So maybe this mean that Ripple’s coin, XRP, if Ripple were to garner a 100% market share should be worth $10 trillion?! Not so fast there cowboy.
Now that we’ve identified the potential value-creation/release aspect, we need to make a critical next-step jump – and this leads us to Step 4. Of course, if we haven’t been able to identify any monetary value being created at all, we can stop here and most likely abandon the coin from consideration.
Step 4: Ask – To WHERE and/or WHOM does the value created in Step 3 Accrue?

In Ripple’s case, most of the value accrues to two parties – competitive pressures will see to that – either the banks themselves who no longer have to bear the cost-burden of an antiquated system, or the customers who will experience much lower costs and fees.
But wait a minute – we are valuing a coin here – so the real question (between the lines) is something a little different.. let’s make this our step 5.
Step 5: Ask – How does value created by the coin/ecosystem/etc. necessarily accrue to the coin under question? And by how much?

Let’s stick with Ripple for the example.
I’ve never argued that Ripple wasn’t a good idea. While I still question the uptake and competitive response, and many people have enjoyed an ‘I told you so!’ after a few recent announcements and a big price move – I have yet to hear anyone address this Step 5 question (even though it has been asked of some people who claim to be the experts).
Just because a coin/currency/etc. creates value as a whole, for an investment in the coin to be based on solid fundamentals, there has to be a demonstration as to why the coin needs to be worth more.
Good news for XRP investors – I definitely see a scenario where it needs to maintain a value. The (potentially) bad news – that value could be a lot lower than current levels.
Rather than rewrite it, I’ll just quote my other post (the Postscript to ‘Goodbye to Ripple’… even leaving in my 2-glasses-of-wine snarky comment):
Most people (not all) have conceded that Ripple is not about being ‘money’, but a functional tool. In that case, we ought to value it on that metric – how much value is being created, and to where does it accrue?
Let’s use some numbers.
$207 trillion annual market size.
Assume evenly distributed, that’s about $500 billion moving a day.
There are 86,400 seconds in a day. Again, assuming smooth distribution if XRP was 100% used as transfer medium in the market, every 5 seconds (on average) it would have to move about $30 million. If we assume it needs that FULL balance to be held in 15 different currencies, that’s a required market float of 30million x 15 = $450 MILLION (that’s million with an M). Heck – let’s say that we’re off by an order or magnitude somehow and multiply by 10. Now we’re back to billions – $4.5 billion – or less than half the current capitalization.
Is there a fault in that example? I honestly don’t know. I just spent 5 minutes working it out and have had a couple of glasses of wine. My point is, talking about value being created and that same value accruing to the benefit of the actual coins is talking about two very different things. It’s the same thing as a company you might love, but whose stock is awfully priced.
While people may love-love-love XRP as a trade right now, if it is going to maintain its value, it has to be demonstrated in theory perhaps, but ultimately in practice why it needs to be valued more than, for instance the $4.5 billion in my example above. Otherwise its value is being propped up by raw speculation – not buttressed by any mendasar value. This in turn leaves it subject to significant (and perhaps inevitable) correction risk.
I didn’t really want this to be about Ripple, so I’ll just add one more thing before moving on – in the cryptomania we’re seeing today, going up in value is not proof that a mendasar valuation is sound. Maybe there are other mendasar justifications for why XRP needs to be valued where it is (outside of a speculation medium). If there is/are, I have yet to see it/them. If you genuinely see a way to correct me, then by all means, don’t waste time leaving Anonymous blog comments – send it to me and convince me. I guarantee I’ll issue an ‘eating my hat’ mea-culpa report highlighting the error(s) in my (now current) thinking. 
So – back to how value accrues to a coin in general.
If you cannot identify how value must accrue to a coin (whether as a function of facilitating a smart-contract, money transfer, or otherwise) then you are very likely veering away from investing and toward speculation.
Hey, there’s nothing wrong with gambling/speculation per se. I’ve personally never been really good at it. Some people are. But before you convince yourself that you are blessed with innate intuitive trading sense, consider this: All those glorious and impressive Las Vegas hotels and monuments were paid for by losers – and though I’ve personally known a few paper-millionaires in the dot-com boom, each of them quietly went back to their day jobs a few years later.
As the saying goes: Bulls make money. Bears make money. Pigs get slaughtered.
Good luck!
Izzy

EDIT: March 2018: if you’ve read up until this point, then hopefully you have enjoyed it. Considering how many hits this page gets, i thought i would mention that if you are interested in engaging me for cryptocurrency education or advisory, please feel free to email me. I’ve always happy to have a chat.



[1] Technically speaking fungibility really falls under the purview of Medium of Exchange. I’m happy to leave it as a 4th criterion though given it’s incredible importance and difficulty of grasp for many, which I think may be remedied by calling extra attention to it.

Monero Valuation Musings

EDIT: I neglected a critical aspect of this analysis by not paying proper attention to the concept of stock-vs-flow. I am especially grateful to the r/monero subscriber who very kindly and extremely quickly corrected me on these points. 

The net result, as it turns out, is still not too dissimilar from the results below… especially when variability of assumptions is high. I recommend you check out his response on the sub. 

I’ll try leaving this article here (as a monument/remind to me of my error) but wrap it with the conclusion of, as he put it- ‘broad acceptance in the global black market = moon for monero/privacy coins no matter how calculated.’ 

note to self: entitling something ‘musings’ doesn’t mean you can’t scrub it better than you did here.

————————————————————————-————————————-– 

In the course of responding to a comment posted on my blog yesterday (response in the comments section to ‘Sport Coach’, on this article)  I dug up some interesting information around the size of black-market economies  – which got me to thinking about the prospects for privacy coins more broadly and the numbers associated with them.

In crypto-land broadly, there is currently a huge amount of uncertainty as to which coins will be the ‘winners’ – that is, which will have enduring and significant presence. The action today is Bitcoin versus Bitcoin Cash and Bitcoin Gold… with no small amount of suspected price manipulation all around I might add.
In any case, while I remain optimistic that the broader public will eventually come around to Monero (appreciating it for its moneyness characteristics) I recognize that there are many who feel it will always be a ‘dark coin’ – catering to the black-market, whether than be un-official, non-reporting, or otherwise illegal aspects of economies.
I won’t even bother here with trying to untangle the morass that equates behavior outside the purview of government with things that are ‘bad’ (though I will give the link to this strip which I think is terrific). However, even if we go down the path of assuming that Monero does have future only as a ‘dark coin’, the metrics are quite interesting.
While measures of black-market activity are notoriously unreliable, it is generally accepted that most developed countries have a black-market economy each year ranging in size from 15-30% of GDP. For less developed countries, the estimates go up from there. Given this, if we ascribe a flat 15% of global GDP to ‘black market’ activities, we are probably being conservative. Let’s do it anyway, and further extrapolate that 15% of GDP activity is supported by an equivalent supporting money supply contribution – so 15% of global M3 is held/used in ‘the black market’
Now, let’s make a few further assumptions and see where it leads:
In the next 5 years, 80% of global money will be digital.
This isn’t hard to accept for most people. If it were up to some people who want to ‘ban cash’, the number would be 100% and time horizon would be a lot sooner. Nevertheless, let’s stick with these numbers as hopefully accepted as reasonable.
In this time period, the percentage of all human economic activity considered ‘illicit’ will not dip lower than globally 15% of all transactions.
Considering that regulation and control seems to be increasing at a rapid clip, making more and more otherwise innocuous activities illegal (unless proper permitting, taxes, reporting, etc. are achieved) – this is probably also reasonable if not a bit conservative.
Global M3 stays constant at about $80 trillion equivalent.
We could argue it should be either higher or lower, but let’s assume it stays flat for simplicity. It shouldn’t materially change our calculus.
The best privacy coin will garner no less than 50% of the relevant digital market.
Admittedly, this is a bit of a loaded statement. How we you define ‘best’ is critical. Let’s for now assume it’s a generally favourable combination of ubiquity and true fungibility/anonymity.
Given these assumptions now, let’s do some math:
$80 trillion global M3
X
80% Digital money
X
15% ‘black market’
X
50% penetration of leading privacy coin
= $4.8 Trillion.
If we assume for the sake of argument that this ‘best privacy coin’ is Monero, then we may arrive at a per-coin value of $240,000 – or roughly 600x the current price. Not a bad return I think, particularly as it is arguably lower risk than many other coins with a ‘grand vision’… this analysis is not dependent on jockeying for best position with government acceptance, smart-contract supremacy, or some other functional utility which may be either deprecated or usurped. It is instead dependent upon a facet of human society remaining present which has done so for thousands of years – an unofficial, ‘black market’ economy.
If the broader public does ‘catch on’ to the inherent weaknesses of other coins lacking privacy/fungibility, then the returns could of course be more favorable – but in terms of sleeping at night, I’d venture to say that it’s generally a safe bet to assume that there will always be demand for ‘black market’ items. As such, even looking at Monero from the (in my mind unlikely) prospect of never growing past a libertarian V-for-Vendetta oasis, it presents quite an interesting value proposition.
Perhaps I’m seeing Monero through rose-colored glasses – that’s certainly a possibility. If I am, I humbly ask the reader to share any critique/criticism – but as far as ‘big picture, back of the envelope’ analyses go, I don’t think this one is bad.
Finally, just one more note on investment analyses and simplicity. Back ‘in the day’ when I was first professional tasked with developing traditional investment theses, I thought that a ‘good’ analysis would have at least 10 pages of historical and projected financials – not to mention all manner of detail and usually full financial statement model flowthrough. I was a bit taken aback when a very successful professional investor friend shared one of his models. It was in excel, but fit on one page. One page. And guess what – that particular thesis/trade? Worked out like a charm.
Don’t confuse length of analysis with quality. Some of the most useless investment reports I’ve ever had distributed to me (and which I’m sure no one ever really read) were also the longest and seemingly most ‘professional’ reports.  Again, in ‘the old days’, there was a wall-street maxim that if you couldn’t fit your investment thesis on the one-page space that the old Bloomberg terminal provided as an email/distribution mechanism, you were widely considered to be ‘doing it wrong’.
Cheers,
Izzy
Finally, the most appreciated form of support is an email or message of thanks/encouragment…. but as a few people have asked me to include it, a monero address that may receive donations if you feel so inclined is :
41fksK8rNJ7VUWHr5yW58C75oAJbL8mEh3ytfLDucVq3StwTudzbGPyQ75Sj3BeqvNjKtw3Mn5Gni5nD62aWZCiDNjaPY8k

 thanks for reading!