In other articles i spoke about a few complex dynamics related to decentralization.
in this I’d like to focus just on distribution and how it relates to Pricing.
Cryptocurrency as a “stock” IPO.
if cryptocurrency was a stock in traditional terms, we could see the distribution as the IPO, for simplicity.
how are cryptocurrencies “IPO” distributed?
well in fact there are a number of ways, and i’d like to explain some of the differences and how they could have a very large effect on price stability.
I will explain how most Cryptocurrency is distributed;
As Bitcoin was the “first of the first” and designed the protocol, it set the precedent on “how a crypto is distributed” essentially, someone, somewhere (a team of code developers we assume) decided to IPO Bitcoin out over many years.
So for example that’s the same as say APPLE deciding to issue stock over 100 years, the problem becomes how to effectively price a stock that is going to be issued over 100+ years?
also that development team decided that there would never be more than around 21 Million of these units.
something that at first light looks very attractive, but lets delve into the dynamics of that a bit later.
So an investor in Bitcoin (and clones) you would need to factor two(2) essential long term parameters:
1. A long distribution and rising difficulty
2. Harsh deflation a solid fixed number that will inevitably drop.
both have a measure of trust that comes with them:
1. A long distribution and rising difficulty
Note above this is the length of time that effective Bitcoin distribution will go out to around 2029~
The left measurement tracks effective inflation, up until around 2019 Bitcoin will have around 8%-9%~ inflation, after that point it drops to 3-4%~ up until around 2022 then downward from there, trickling out until 2029~ it continues on after that point at below 0.5%.
Now the next chart will show Bitcoin difficulty – this is how difficult it is to mine and “IPO sell or exchange” a Bitcoin into the market; so essentially how hard it is to make:
Now if one follows the “1000” number on the right measured as “Million difficulty”, you will follow it across to around the date “Dec 13” here is where all normal “computer users” essentially stopped being effective in being able to mine Bitcoin, and this was where Bitcoin become much more like a traditional IPO than a distributed Crypto currency.
The reason for this is that only specialized machinery can now mine Bitcoin due to its relatively simple algorithm, we don’t know if the Bitcoin developers foresaw this apparent revelation, we can only assume by the general reactions that they did not expect this effect to occur, because this means that the control of the IPO is now in the hands of a relatively few and that IPO now goes out to effectively 2029 with some degree of inflation.
Where this creates risk for a traditional investor is that usually every one knows a lot more details about both the stock and who is controlling the structure of the IPO, with Bitcoin all one can know is that it will be in fewer and fewer hands as that difficulty chart rises.
so an investor has to have a certain amount of trust that if this difficulty leads to just a single nation or a few corporate entities controlling the majority % of distribution (by owning the powerful and expensive machinery to distribute it) they have to trust that this single or few entities do not cause undue volatility or market price manipulation, or a number of other factors that an effective monopoly could have.
Because Bitcoin is so “difficult to mine”, there are fewer and fewer “miners” as the difficulty rises, single human “computer users” can’t IPO or mine Bitcoin only Corporate entities or nation states can mine it.
This was probably not the intention of the original developers, and this causes a certain amount of trust on an investors part as a buyer now has to trust the few entities that have a monopoly over the Bitcoin mining going out to 2029.
As Bitcoin is sudo anonymous it is not generally known who is mining Bitcoin now or in the future, all that can be known is that difficulty is rising and by default that means fewer entities have control.
This makes a long distribution that much harder from a price perspective, because as I spoke about previously “media hype” is only going to take the algorithm so far if many people do not see the benefit of the design my fear is that centralization at a point will cause an ongoing problem of confidence, because the “common man” is not seeing any practical benefit from the asset.
I have noticed the trend of late to “keep Bitcoin relevant” by trying to add “smart contracts” on top of the Bitcoin block chain, I can explain this in simple terms:
designers of this system see Bitcoin as the gold, and / but to keep it relevant, they wish to issue “paper” certificates “iou’s” and hope that others will accept this in lieu of the original entity Bitcoin.
however this will not in my analysis work; as the Crypto market is a new decentralized environment, people or investors will not accept “Bitcoin Paper” or “Bitcoin IOU’s” much more likely they will simply invest in another Crypto altogether.
2. Harsh deflation a solid fixed number that will inevitably drop.
This is quite simple to explain its great that Bitcoin is very rare and will only get rarer, but if that harsh deflation, combined with centralization causes a negative “usefulness” factor then this could mean that Bitcoin is valuable in a Museum but not in everyday use.
What did Quark do differently ?
There was some economic corrections in the Quark design:
it was essentially IPO’s in 6 months and it has a permanent < 0.5% inflation compared to Bitcoin’s 8 – 9 % inflation presently.
I think the idea was to get the “IPO period” out of the way, but do this in the most decentralized way possible, to add stability to the price discovery mechanism of the natural free market.
This means that the all the units predominantly were distributed in a 6 month period, difficulty stayed moderate and was done exclusively by “computer users” of course there were and are large holders, but moving forward the only risks to investors are purposeful malefactors i.e someone trying to “buy up” a huge number to try to move the market.
all these things are factors of a free market, if a single entity wants to “buy up” a certain percentage that means that there is less in the available exchange, all of this is measurable and understandable, because the entity Quark is predominantly already distributed.
I would challenge both the logic or need for a long distribution of any crypto currency, the perceived need comes from miners to a point that feel they are hard done by if they missed the IPO period, but on the up side it adds great amounts of predictability and stability for investors, and if we look at the market to be successful we need investors 1. and miner 2. miners will come with investors.
unfortunately most all of the Cryptocurrencies have gotten the economics wrong in my estimation, this is because I expect they; the original developers knew little about multidimensional sociological economics, and just simply some things can not be tested on paper, and then everyone else copied that general design.
this is an aspect of a “first of a first” or an “unknown unknown” Quark has taken away in my view both the insatiability elements, by being:
1. Mostly fully distributed more like a “traditional IPO”
2. Not being harsh deflationary so having an ongoing <0.5% inflation for miners.
So now that we are only one month into full distribution I will be interested to see how the chart tracks, and i will do updates along the way.
Quark tried to sum all of this up in this video :
** A Word on IPO’s
Ive noticed the fad and trend of late to issue “crypto IPO’s” sadly a crypto currency can never really be IPO’d i use the term here above in this article for explanation and to simplify the writing, Quark was issued by 1000’s of computer users over a 6 months period in full free market fashion, then at its lowest point I essentially introduced it to a larger market.
An actual crypto IPO is sadly just little more than a “gypsy scam” because of the pseudo Anonymous nature of crypto, let me explain how the scam or “trick” works:
- The crypto is fully mined by the “developers” so that is to say all the units are fully generated and distributed to the developers, i.e they own the total of the units.
- They then offer it for “sale” as an IPO say for example at a certain rate per another crypto usually Bitcoin.
We are selling “XXX” Crytpo for 1 BTC per 10,000 please send the BTC to these following address listed “xxxxxxxxxxx” etc.
- They list addresses to send the Bitcoin, so as to receive the IPO crypto.
Then wait for it…
- They send Bitcoin to themselves and issue the Crypto IPO to themselves.
So the Developers own the Addresses they list but they also send the BTC from another address they also own, (but the public obviously doesn’t know they own it)
- this can be done because no one can know who is issuing what where so to make that clear – the Bitcoin addresses can be visible and will show that Bitcoin was sent to “buy” the IPO.
- but actually all that happened was the “Developers” (scammers) sent Bitcoin to themselves.
- they then issued the IPO Crypto out to themselves – which is simple because they just fully mined it for themselves anyhow..
- Now they can trade it back and forth on an exchange to create “fake volume” and “buzz”, they can use trading robots to do this or do it day to day themselves.
- Some Scammers have even created their own exchange to trade with themselves so as to avoid the cost of trading fees, this means they can essentially trade with themselves for free and also “bid” up the price which also increases the appearance of the market cap.
Whats the aim?
- To get real buyers to come into the market so they can sell and make wealth.
- The high market cap and the fake trade volume can cause a “buzz” and make naive people feel like its the “next” big thing.
- This is also similar to how very fast mining (7 day mining) cryptos work with “Proof of Stake”, but i might cover that at a later stage.
Is Nxt a Crypto IPO scam? lets look and learn;
I didn’t want to single any particular “Crypto scam” (as there are so many) out, but a great example of this Gypsy trick is “Nxt” or “Next” let me show you the details:
here is the official NXT Website:
Very impressive isn’t it? “get on board the shuttle is leaving !”
and look at the Market cap? :
A whopping “5th” you will surely be “Rich” if you buy NXT right?
however we have to go to the Wiki and then select “History” then go down to “November 24, 2013” and see that at 13:00:00 time-stamp :
“Nxt is created, and the genesis block reveals that 1,000,000,000 coins were distributed to 73 stakeholders, with the proportion of coins received dependent upon the each stakeholder’s portion of the original funcraising total. Nxt’s original market capitalization was $800,000USD.”
- 1 Billion with a B, “Nxt” units were issued to 73 , yes 73 “Shareholders” and they even made their own exchange https://dgex.com/ to conveniently trade it back and forth so as to not even have to pay pesky trading fees.
- Of course even the “73” shareholders figure is probably a fake number, all this means the “developers” made 73 new addresses to send BTC to themselves, they then issued “NXT” to themselves built a nice looking web page and the rest is history.
A word on “Proof of Work”
Crypto currency is based on “Proof of Work” this means that crypto is a “trust-less” system where people don’t have to try to trust other people to “IPO” (or distribute) the currency, that’s the whole point of Crypto currency.
Nxt is “technically” still a crypto currency as it still does have a block-chain (some don’t even have this), however the (PoW) proof of work period was done all at once and to themselves the developers.
by doing this they then shifted the “trust” from a mechanical system (the point of Crypto currency) to a “Trust us we promise to only give it to charity” type system.
So it only takes a small amount of education to see which system is:
- “Potentially Flawed” and/or
- “Totally flawed”
All PoW has the chance to be “potentially flawed” and most are, this is what allows 100’s even thousands of crypto currencies to exist, the better the PoW (distribution) period generally the better the overall fundamentals.
however a PoW that is “Totally flawed” i.e there was no market participation, such as “Nxt” ( they probably generated the whole 1 Billion in a single super block on a laptop), that is a system that can’t be recovered from, it can be seen as a “Quasi Crypto currency” and is nearly 100% of the time by definition, a Scam.
The better it looks and more effort put in to the appearance,(and more gimmicks) the more likely in % terms that its is in fact a design to take your (or other “mark’s”) wealth.
Here for your reference is where 1 Billion NXT were created in under one second;
BLOCK : 2680262203532249785
Timestamp : 24.11.2013 13:00:00
Height : 0
Next Block : 6556228577102711328
Previous Block : 0
Pay Load Length : 9344 B
Num. Transactions : 73
Total Fee : 0
Base Target : 100.00 %
Total Amount : 1,000,000,000 NXT
Generator Account : 1739068987193023818
Generator RS : NXT-MRCC-2YLS-8M54-3CMAJ
Version : -1
Perma Link : Show
Block SIgnature : 69d426c498b70ac6d1678180356527c1fee030ad732fbf7672c2266d166a4c08cf8fdeb4524fd1b496bbcaab03fa6e67760f6da452251402249015486c487211
Generation Signature : 00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000
Previous Block Hash : n/a
Payload Hash : 72c8a92efffbd8695a866eabb13ca460a2f7cdf3283b82efb163360d6eec9469