“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” – Charles MacKay
For the last roughly twenty years we’ve been in an era where every new technological innovation is met with feverish acceptance and mimicry. Even with a massive systemic market correction conspicuously remembered as “The Dot-com bubble”, investor sentiment has shown no abatement toward the new and dominating creations inhabiting the virtual space today. In hindsight, the aplomb to remain invested with the titans of networks have proven to yield incredible returns. It’s easy to forget that from this same school of titans were many peers that did not make it to the present year, and in fact perished in infancy. It’s important to keep that reality in mind, as this commentary isn’t about the ebullient markets present and past. This commentary is about a part of the next chapter, a review of behavioral trends occurring in a new and innovative kind of asset class, cryptocurrency.
Cryptocurrency, defined as a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. The bitcoin network started January 3rd 2009 when Satoshi Nakamoto mined the genesis block of the chain, embedded in the coinbase of this block was the following text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Bitcoin by now is no secret, it’s meteoric short-term rise in market value has startled lowly retail investors and bank chairmen alike. Bitcoin has matured tremendously, from being exchanged for magic the gathering cards or trading 10,000 bitcoins for 2 pizzas in 2010, to being valued at over 10K for a single bitcoin today. At this point, the new asset class has kicked down the door of our collective consciousness.
For some intelligent analysis on the anatomy and hope of bitcoin in particular see Andreas Antonopoulos.
As you can see or palpably feel, there’s an indelible confidence associated with cryptocurrency, and bitcoin doesn’t have the monopoly. In 2017 alone initial coin offerings (ICO’s) raised $3.8 billion dollars towards the further development of this new asset class and all the variations each coin introduced. There is increasingly a lot of money on the table.
One coin that garnered popularity in the short history of cryptocurrency is Ethereum. Part of the core development team for Ethereum included a young Thiel Fellowship assisted college ghoster, Vitalik Buterin. The exigency behind the coin was to give it the ability to support decentralized applications. The coin, unlike bitcoin, is written in a scripting language that supports application development and so could host financially significant purposes beyond just being a medium of exchange. Incorruptible contractual agreements are – to the laymen – one of the most important features. Vitalik boils it down far better than I could ever hope to:
In the present day we’ve approached a point where cryptocurrency is ubiquitous. It doesn’t seem like it will ever go away, ICO’s appear to be taking the place of even the riskiest OTC equities. Ads on the side of web pages we’re all used to avoiding now tell us about how we can get bitcoin in three easy steps, or about the billionaire that’s sharing the next big cryptocurrency with us! We never paid attention to these ads before, but have their appearance cooled the investment appetite for cryptocurrency, or perhaps unlocked the secret to generating more clicks? Or should we look at ICO’s the way we look at obscure OTC’s?
Earlier this month a concerted fall in cryptocurrencies occurred. Taking Bitcoin from a high of roughly $20K per coin to as low as $6.2K per coin. A drop like this in blue-chip equities would signal sheer pandemonium. Instead, coin holders have adopted the mantra of HODL (Hold on for dear life) and BTFD (Buy the fucking dip). The confidence is strong with these holders, if not hysterical. So it was met with surprise by many of the holders when in a tone of measured modesty, Vitalik tweeted:
What followed is where the commentary of this post is finally picked up again. Respondents to Mr. Buterin’s very common sense statement met with three different kinds of responses. The first comments were suspended because they belonged to thieves and scammers. However, some respondents to those comments have remained on the thread for posterity:
As you can see the names being responded to are Vitalik himself and a handle with a bastardized version of Vitalik’s handle. The fraudster would use Vitalik’s same user image to borrow from his ethos and request .4 -.7 ETH. This request was under the guise of proving the wallet’s existence so that the scammer could then send back several coins to the victim. Obviously the reimbursement was never made. Significantly, scam does not work in a vacuum, in addition to the initial tweet, are the appearance of bots that allege successful payouts from the scheme:
“The great concourse of persons who assembled to do business brought a still greater concourse of spectators. These again drew all the thieves and immoral characters of Paris to the spot, and constant riots and disturbances took place. At nightfall, it was often found necessary to send a troop of soldiers to clear the street.” – Charles MacKay on the Mississippi Scheme
The second respondent is not as reprehensible as the first party:
This is one of many like comments that accuse Vitalik of being irresponsible, or condescendingly brushing off his comment as the ignorance that belongs to youth. Imagine that… The co-creator of a new asset class advises investor sentiment to be cautious and perhaps only allocate a lesser share of their total savings into the new and hyper volatile vehicle and he’s met with obstreperous derision. It would be laughable if it wasn’t a clear living behavioral case study on the hysteria a new financial instrument elicits. Even contemporary gold bugs advise placing only 10% of an investor’s portfolio into the very asset they trust most in the markets, it’s just common sense not to put all your eggs into one basket.
The last type of commentator is on the lighter side as it represents the market exuberance very well, it also represents one of the more honest takes on the valuation of the new and highly volatile asset class:
Trying to find hidden meanings in a benign tweet; bringing Buterin the co-developer of a cryptocurrency to the reverential status of an all-knowing and cryptic sage. Being elevated to that level makes it very difficult to communicate with candor when the response is adorned with scrutiny that focuses on hidden codes. So since we’re but lesser investors tasked with understanding our pantheon of god’s utterances – naturally, we must consult the bones!
At this time he was by far the most influential person of the state. The Duke of Orleans had so much confidence in his sagacity and the success of his plans, that he always consulted him upon every matter of the moment. – Charles MacKay
Buterin is not a financial advisor, but he is clearly sensible.
With this market where it presently is, I do not envy Buterin in his attempts to have modest and restrained dialogue with his twitter followers. Unfortunately, the loudest are driven by unchecked avarice, despite several corrections in the asset class. The hope for these investors are that these currencies will continue their meteoric rise, though many analysts (or currency jobbers) will readily admit, that only a handful of coins will actually be operating in the distant future, depending chiefly on their social and systemic utility. What then will happen to the others? If they all agree that the number of cryptocurrencies will diminish are they all equally certain they’ve chose the right coin to invest in?
Cryptocurrencies aren’t going to disappear overnight, it’s a terrific technological innovation with a plethora of uses, which have been briefly described here. However, the hysteria and mania surrounding these coins are present, and if it hasn’t blinded investors already, it could do so with sudden future mercurial increases (that could have nefarious roots).
Critics have accused Charles MacKay of having a ‘sensationalist style’ to his writing, but if you’re witnessing the markets today – its sensational to say the least.
— M. Rivera