* This document can be viewed as analysis and opinion, test and critique as one sees fit.
So this is a bit of a follow on from my previous post regarding what i see or contest as a new form of economics emerging with a new set of rules and parameters for analysis, within this document I will focus primarily on pricing a decentralized entity and then i’d like to define a few misunderstanding as i see them with regard to the evolution of cryptocurrency and give example to let the reader form a conclusion based on my opinions.
where possible I will try to give solid practical examples of any effect i discuss.
Pricing a Decentralized entity; first defining the Parameters.
Based on my analysis Pricing crypto currency can be derived from the same old tools and mechanisms that would be used for typical commodities type assets but with some radical and sometimes hard to grasp differences.
I will focus in on the differences, and so getting straight into it i’d like to define them:
I will clearly explain each practically against for example a fixed centralized asset like Gold.
- Supra national non centralized.
- A store of value and an “online” payment container.
- DAC Decentralized Autonomous Corporation. *and related effects.
- “Network effect” or decentralized participation effect.
- Neutral control.
I will then summarize with what I believe is a very relevant long term and fairly simple price analysis.
1. Supra national non centralized.
I very much love explaining this, because I believe i have the best visual way now, as we know Gold is a metal it exists in your vault and no where else.
Crypto currency exists inside an ever growing tree, we can rightly visualize a tree that is continually growing, essentially a huge wooden database, what you hold in your digital wallet are the set of keys for the little wooden lock on a little wooded door which holds your asset.
but all over the world there are exact copies of this tree essentially a forest of cloned trees, as long as you hold that set of keys to that little wooden lock, you only ever have to access one of these many trees and gain access to your asset.
by gaining access and spending your Crypto you transfer it to another location i.e you give it to someone for payment then it has just moved to a different little vault with a new set of keys (and a new owner) you can visualize if you like that your asset moved in the center of the tree to a new location, but again the whole forest was updated with that location.
of course this is a very large fundamental advantage to cryptocurrency one that makes it essentially supranational, as that forest is all over the world, and very resilient to theft (as long as you don’t give your keys away)
and let me comment* there is absolutely no benefit to give these keys away or keep them anywhere else except for in the individuals possession, so the recent losses of Cryptocurrency are all 99% related to simple lack of education, something really expected when dealing with a new form of economics.
So Crypto can be transfered across nations in seconds, and is hard to steal or be possessed, Gold is centralized and is a physical asset.
2. A store of value and an “online” payment container.
Cryptocurrency is secured by cryptographic algorithms, so the tree (or database / ledger) we just discussed is literally made out of encryption, this secures the vaults that you keep your asset in and secures the fact that the tree is cloned correctly across the forest, this encryption is in some amounts an out of the world amount of encryption, and in all cases of well designed Cryptocurrency there is little to no reward to trying to attempt to break the mountain of encryption.
This gives the asset the key parameter of fixed rarity which is a key to it being an effective store of value, then of course the digital nature of this asset allowing for the transfer of those keys almost instantly give the asset an advantage of being a payment container and net money across face to face instances, domestic boarders and across the globe.
Gold can be a fixed store of value but can not of course transfer across the globe instantly *in a trusted manner that all agree upon.
3. DAC Decentralized Autonomous Corporation. *and related effects.
A pretty underestimated vector; participants in an open source system such as cryptocurrency are in effect an active or passive part of a Decentralized Autonomous Corporation, this is a very key aspect to value that I will talk about in the summary.
Gold can be said to have a similar effect but in a much more crude way, for example people that own Gold may promote Gold ownership in a number of way, but with a DAC the participants can actually create micro businesses and add on structures to the currency, these include multinational micro business, payment systems applications and “Internet of things” devices, so one might say that a DAC is both self funding and provides direct incentive.
4. “Network effect” or decentralized participation effect.
related to the DAC , but importantly different because this is an effect that can shift, so a network effect can move on score if you like, and this essentially determines the decentralization or centralization of the entity.
so for example this is simply how decentralized the asset is how available it is and how many are seeing or feeling the direct and perceived benefit from participation.
5. Neutral control.
One of the most important aspect of value discovery in my opinion.
The fact that the entity can not be manipulated by any single entity, be it Government , Agency or corporation.
Value in decentralization
Where i’d like to focus our readers attention is on the fact that value is essentially found inside the decentralization of the entity and with that to the degree that the entity moves towards decentralization or away from decentralization will drive its longer terms value.
why is this?
Because in decentralized economics this is the fixed equation or fixed point that everything else rotates around, it also directly effects the network effect of participants and also is a key factor in the DAC efficiency, and furhtermore it has a direct relation to the neutral control of the entity in question;
so to talk in a straight manner we are talking about fiat money, paper moving into or out of this or that crpytocurrency environment, but as there can be unlimited amounts of cryptocurrency how can anyone value an entity that can be cloned or copied at any time?
The answer is inside the decentralization of the entity, and this is where I believe future analysis should be trying to test, because in fact its not a simple vector to “build in” to any cryptocurrency, because one can not IPO a cryptocurrency and there are many effects and details that play a part.
so if we start to think logically about how decentralization effects all the parameters of “value” we can start to find a way to find”value”.
To this degree i’d like to give a fair value assessment to Bitcoin based on my knowledge of these parameters.
Bitcoin Price; Flawed but will be saved by the “economy”.
Bitcoin has the first leader advantage of the original decentralized protocol design, but it is a double edge sword because the same “first of a first” aspects also lead it to be very centralized into a very few hands when accounting for both % and price value as compared to USD.
So most certainly Bitcoin is in an exuberant state or “bubble” but that bubble is working its self out as we speak, because all Cryptocurrency will seek decentralization because its the effect that primarily derives their value.
Stage one Price manipulation.
The bubble was not a bubble in respect to a traditional representation, rather it can be seen as extreme price manipulation in the beginnings then hype around it being a first of a first of its type.
At the beginning there was just simply so few players in the Bitcoin arena that “price” was irrelevant and as “exchanges” were entities that the developers in most cases either built themselves or had close participation in, so its easy to see how the whole “price structure” could be manipulated, but underneath that was a real Bitcoin protocol, something that really works the way it is meant to.
but humans take price for granted, if we see a stock we don’t question often the infrastructure of the exchange or where any of that price is derived.
Stage Two Media.
This is the proper traditional exuberant period when traditional media agencies were relating Bitcoin to Gold; so inevitably it priced towards Gold:
As you can see it literally kissed the Gold price and as everyone felt they had achieved their results the sell off began.
But, its important to note that this is when the decentralization started to take effect and volume increased and Bitcoin properly became supra nations as many of the BRICs nations started to play a larger part in the investment and exchange of Bitcoin and other cryptocurrency.
So its post this Gold price period that Bitcoin starts to find its truer value, but this will be interrupted;
Stage Three; Consolidation.
This can be viewed as the present.
Here is where the most important aspect comes into play, the decentralized effect, here is the present phase as education starts to spread about what is essentially a new type of economics, here is where businesses start to accept crpytocurrency and this is where the true value will be derived.
Crypto currency is only as valuable and the participants feel it is, decentralization i.e if there are more participants with a better % then that value over time will increase, to this degree Bitcoin gets a fair score but far from perfect, in fact there a grievous flaws that many in the business have directed participants to, and most treat as common knowledge, in a “normal” economy these would have disastrous effects on the eventual price of Bitcoin.
So certainly there is room for other system designs and evolution which allow for better network participation.
Stage Four; Crisis
This can be seen as the near term future, here is where traditional economics takes over, because the crisis I speak of, is of course not a Cryptocurrency one.
I’m amazed at the fantastic job that the Federal Reserve has done to stave of what was essentially a structural monetary terminal crisis that occurred properly in 2009 (ironically).
But many now in 2014 are finally realizing that the whole actual structure of the monetary system is flawed, due to the currency being issued as Debt and supply irrevocably being linked to Debt.
To this degree many cryptocurrency are going to see value and price increases as they are valued more and more to something that is becoming literally “worth” “less” so they will appear “worth” “more”.
I believe Gold will be a winner but no where near to the degree that some people believe it will be, I can see Bitcoin moving into the 1000’s and Quark being lesser know moving into the 100’s this is all in relation to the degree of the crisis, and the timing in which it takes place.
In this “Crisis” scenario “Price” comes down to confidence in a proposed solution; not if the crisis will occur (as most believe the situation to be non viable), so for example if the proposed solution is an SDR based on a basket of currencies, we can rightly ask the question:
what is the present value of those basket of currencies?
because they may not be valued as high as some may think.
In all these scenarios Cryptocurrency that is designed with superior and secure parameters will move higher, degrees higher than presently.
There are a flood of cryptocurrencies right now, some are serious designs, some are jokes others are plain and simple “ponzi schemes”
Price will be derived in the ones that have a better decentralized score and that the participants have the most faith in as a DAC and these parameters can not be faked, one aspect of that is education and the other is the actual design, algorithm does play a part. * see my other post for more education.
Bitcoin will move higher in price as priced in USD because of the increasing worthlessness of all fiat paper money, Quark will move 100’s of %’s higher as general education spreads and due to a general network effect.
It is easy to see Bitcoin in the 1000’s and Quark in the 100’s in the middle of a disorganized fiat monetary event.
Post “Crisis”, I properly believe that Quark, Bitcoin (and perhaps some others) will meet in the middle with Bitcoin eventually having to either be hard forked (changed in a significant way) > towards Quark parameters or move into obscurity, I believe the political changes that come about post any crisis will allow for that to happen and in which case Quark and Bitcoin will become very similar entities.
What will Bitcoin have to change that Quark has now? the facts:
Deflation; Bitcoin is hash deflationary any economist knows that even if its multi divisible having a harsh deflationary entity is not going to function as a “money” > Quark is fixed with a small 0.5% inflation.
Algorithm; not a necessity but would allow for much large participation if a basic and simple inflation was introduced. > Quark has the only algorithm that is both resistant to specialization and rewards the most of the participants.
Speed; in any hard fork Bitcoin will certainly shift the conformation times, they will close this to probably around 30 to 90 seconds I would estimate instead of the 10 minutes presently > Quark has 30 second confirms.
In this post crisis period is when the true values of these currencies will be found, because both education and decentralization will be at the primacy of their natural effects.