I think everyone with at least half a brain knows we are in a bubble. What's the reason of latest Bitcoin increase? 100s of thousands unconfirmed transactions? How about all these crowdsales and ICOs based on Ethereum? All these "exciting" projects? Why DGB is close to 900 satoshi? DOGE? My personal opinion is that the price of a coin (or whatever) should be justified with usage and I don't think that usage of digital currencies has increased THIS much. Don't get me wrong - I'm also excited with the latest BTC increase and everything, but I'm always thinking about the future and now I think it looks scary...
It took me some time, but I'm getting the feeling that I'm starting to get the picture. Yes, we're in a bubble, but
all of crypto is designed to be in a permanent bubble. In other words, most crypto, and bitcoin as first, is essentially purely designed to be a highly speculative asset, and
its real-world usage is absolutely of no significance in its price setting in the distant future. And the reason for that is simple:
the emission curve.
Bitcoin is based upon a somewhat doubtful theory called "sound money theory", of gold bug/Austrian school origin. Now, the sound money doctrine is not totally ridiculous, on the condition that it is applied to:
1) the *existing*, sole, currency in the economy
2) came from "long ago".
In other words, gold.
The basic tenet of
sound money doctrine is that the ultimate bad, is seigniorage: being able to create monetary value out of thin air. For their proponents, this was OF COURSE a monopoly, because it didn't occur to them that private persons could emit arbitrary quantities of non-covered money, and this money getting any value. If I print my own dollar bills, and I would emit them with nothing against it, sound logic would say that nobody would give a shit. So if we want the state NOT to obtain "value for nothing" by seigniorage, we should adhere to a kind of money of which none can be produced: a collectible.
The problems with the corruption of seigniorage are so problematic by the proponents of sound money, that they want it not to be possible.
However, who says collectible, says price fluctuations. Sound money doesn't have a stable price, because it depends on the economy it buys, and the spending mood of people.
So sound money is volatile. As such, keeping sound money is speculative, and using sound money has a volatility risk.
If one starts with collectibles of low value, moreover they become collector items with enormous speculative value. If they are not exclusive money, they are not necessarily spend, and they will act more and more as "rare paintings", and less and less as "dollar bills". This is why sound money doctrine is not "sound" if the currency under consideration doesn't have the currency monopoly.
This is in contrast to
ideal money - of John Forbes Nash signature - that tries to keep its value as constant as possible, so that there cannot be any speculation, and there is no volatility risk: it is what makes money as a currency fluid. An approximation is slightly inflationary or deflationary money, with predictable inflation or deflation: asymptotic ideal money.
Bitcoin and many alt coins adhere to some sound money doctrine, but baffle on top of that, the basic rule of no seigniorage. Indeed, bitcoins had/have to be made, alt coins had/have to be made. So they ARE created. Usually they ARE created when their creation is really cheap. And when adoption occurs, their creation rate diminishes, to vanish, or to become very small, in the future.
As such they have HUGE seigniorage (for the early adopters). But on top of that, they start with low value, and they pretend to get higher monetary value, so they become precious collector's items of high speculative value.
In other words, most crypto are designed to become highly speculative collector's items, not at all connected to any usage. One could even say that the *less* they are used (spent), the higher is their speculative value because the rarer they get. This is, I think, what we are witnessing: the total decoupling of any "reality of usage" of crypto, and its full transformation in a big speculator's casino.
In fact, they are now abstract betting tokens on speculator's clearing houses: the exchanges. The actual block chain, usage, or technology doesn't matter AT ALL. This is like the complex derivatives games that financial institutions played until it blowed in their face in 2007. I find it ironic, if you know what is in the genesis block of bitcoin, but crypto is now totally a speculator's bar. And if speculators have a lot of money to gamble, this can go VERY VERY high. Like the derivatives market. And has nothing to do with any working block chain or whatever. You only need a token on an exchange.
If the efficient market hypothesis holds, moreover, then it should be totally impossible to predict any long term behaviour of any coin (even though the total market may have a steady trend).
The more improbable the token, the higher it could climb. It should be entirely random, if enough capital flows in, because any clearly predictable trend will be smoothed out by smart traders taking full advantage of it.
