When the market stopped caring about the Bitcoin Scaling Debate.
People are under the impression that the lock-in of Segwit and then the following 2MB block-size increase is a fundamental positive for bitcoin. To this point, I agree. However, is this a new event or something that was already priced-in to the price of bitcoin?
Let me provide a easy example for people to wrap their heads around. Imagine if a company said they were going to earn 100% more profit come next year. Then at the end of that year, they announce the final results where they did in fact earn 100% more profit. Most people would think it should go up at the end of that year. But really, in the stock market world, most of the time it will go up just based on the initial announcement so long as the market believes what the company is saying. Meaning, by the time the event has happened, it has already been fully priced into the stock.
The only reason this does not work so well in crypto is that crypto people are actually less sophisticated and not on top of their game as well as the stock world is. You can actually find situations where the market ignores great announcements, and then begins correctly pricing an event afterward. NavCoin has been a great example of this in the past. With a high-profile coin like Bitcoin, though, I do not expect it to be overlooked since this is the most visible coin in the whole market. It actually receives the traditional pricing in advance of events treatment.
According to people who understand bitcoin's tech, and how the market interpreted everything, bitcoin has failed to scale for the past two years. People who really understand Segwit 2x, also understand this will fail to achieve sufficient transaction volume for bitcoin. At best, trusted 3rd parties can open up payment channels such as Coinbase <-> Bittrex, to alleviate some pressure on blockchain transaction volume. 2MB blocks will double the transaction volume, moving us from a measly 4 TPS to 8 TPS. Segwit is expected to be some marginal gain, let's say 20%. After Segwit2X is fully realized, this could bring us to a whopping 10 transactions per second!!!
Investors and traders made their decision about the bitcoin scaling debate some time ago, apart from bitcoin. Over a year ago, we had to decide how this should affect the price of the coin. When Mike Hearn made his announcement that mining was centralized and the scaling debate has failed, ect. ect.
https://blog.plan99.net/the-resolution-of-the-bitcoin-experiment-dabb30201f7
Bitcoin tanked on Mike's announcement. Then it quickly recovered. The market decided that in the end, the scaling that should have happened is not going to limit the price of bitcoin. Market traders and investors including myself began ignoring this factor because it was irrelevant to the price movement higher.
By the time that the Segwit2X had been anounced and fully priced into the market by the end of May 2017, bitcoin's price was under $2400 USD. If you look up a bitcoin chart for the end of May, it will confirm this.
http://www.coindesk.com/bitcoins-segwit2x-scaling-proposal-startups-stand/
Old news, is old news. When the declines in bitcoin began happening along with the rest of the market, an explanation was needed. Segwit2x, the old news, became the explanation. This happened to the point most everyone believes it now, making it an important event due to widespread belief.
"Sell On Good News, buy on bad news"
Then if Segwit2X and the scaling debate is solved, there is a widespread saying and understanding, "Sell on good news", "Buy on bad news". While not 100% true, it is about 90% true. Certain bad news will kill something, but most bad news is just buying opportunities. With bitcoin, I was watching one Youtuber, who was empirically demonstrating this as true, showing articles of bad news events as buying opportunities, and then taking the good news articles and demonstrating those areas of the chart were tops in price.
I do think a pop could happen when the network does not explode come August 1st. I am not sure that pop will be a higher price than we are seeing today, nor be new highs for bitcoin. After that pop, then what?
Then we become realistic, a painful, 2 year long upgrade has improved transaction volume about 20%. If investors stopped caring about the scaling debate over a year ago in terms of it affecting the price of bitcoin, will investors care about an improvement that does not solve the scaling debate?
How is a 20% improvement to the transaction volume of bitcoin, a fundemental factor which is going to drive bitcoin up to 4k?
It is neat, but if the market were pricing bitcoin based on its technology and improvements, I think we would have to say the price after the Mike Hearn crash in early 2016 is what bitcoin deserves for a price. Rather, we just ignored the technological fundamentals of bitcoin and are focused on things like "store of value" and "most popular use". Some scaling does help protect that a little bit long-term, but marginal improvements do not protect bitcoin from competition from other coins.
Just to summarize my thoughts:
Market largely stopped caring about bitcoin scaling, and we decided not to price bitcoin based on this factor, should the market price bitcoin based on its technological superiority in scaling, we would give it an F, and bitcoin's price would have to drop significantly. Rather the market does not view bitcoin in this manner, we stopped a long, long time ago.
Segwit2X is old news. The pricing of bitcoin upon realizing this news event, was about $2,400.
"Sell on good news, buy on bad news", come August 1st, either the network implodes and bitcoin crashes (buying opportunity possibly), or the network is fine which is a good reason to sell!
Obviously, if you are long-term for bitcoin, then holding is fine. I still believe it will break 3k when the market is done working out a consolidation. I am just deflating the argument that, "Nothing can hold bitcoin back now that Segwit is locked-in!" Meaning, bitcoin should have never rallied to 3k in the first place, because scaling is a major determining factor of price. If we can ignore it on the way up, certainly we can ignore a 20% improvement that does not solve any of the core issues of scaling.
Great thoughts and rationale. I see BTCs value in being as it was first to market and is the most widely accepted coin. As my knowledge has increased in this space, I've questioned many times the inherent value of BTC outside of the aforementioned circumstances. To this point in time all other coins simply act as derivatives of Bitcoin. You could almost say the crypto market as a whole acts as sort of a Gold Standard with each token being backed by Bitcoin.
How long this can go on is anyone's guess, but eventually there has to be some separation from Bitcoin by other coins. As other coins are able to be exchanged directly for fiat, the importance of Bitcoin will begin to wane. I just learned of Payza today, a company akin to Paypal that allows you to exchange altcoins directly for fiat. I see this trend continuing and as it becomes more mainstream, the usefulness of Bitcoin diminishing. I know public acceptance of anything new can take quite some time, but nonetheless find this incredibly interesting. I'd love hear your take on this.
Great post and thoughts as always brother!
Public adoption with crypto is multi-pronged. In some places, it's actually just useful as a smart phone currency. That invention alone garners adoption in those areas. In the US, it wont because that is not enough since very few of us are libertarians or volunteerists. In the US, what will drive crypto, it has to be the next social app enterprise.
EOS is going to permit such an app to exist, presently, it cannot exist. With EOS, the average sort of college drop out should be able to code up something like Facebook 2.0 without an issue. The key with any sort of app like this is marketing & delivery, as much as it is whether the code operates or not.
Steemit falls into this category as well and doesn't run on EOS, but the issue with Steemit is that the devs are not running Steemit like a corporation bent on taking over and becoming the biggest ever. It requires more drive to get there, and probably requires we not operate upon decentralized consensus which the STEEM block-chain uses. Dan made a great point in his recent video, it's far easier to implement changes before the blockchain is operational than after it is operational.
Meaning, those projects not yet operational have the advantage going forward, down the road. They can simply innovate, where currently operating projects are going to be left in the world of blockchain 1.0 and blockchain 2.0. EOS is really the first 3.0 blockchain situation then.
It is one of these EOS apps which will have the shot at becoming the next Google / Microsoft / Apple / Facebook... very likely, it will be a traditional corporate structure as well, because a traditional corporate structure implements management to succeed at becoming big.... where as a decentralized group of libertarians / volunteerists and anarcho capitalists, are not financially incentived to behave that way.
Yet the decentralized, open source model produces the best and most reliable software. So with EOS, we get the best of both worlds, open source development with traditional corporate drive to innovate.
It is one of these use cases which will penetrate the US. If that use case runs a currency, both EOS and their token will have a high market cap.
What sort of app this will be, I really have no idea, though. A rehash of facebook with financial tech seems too easy to me. Very likely, it will be a trendier social media network to meet the younger generations. Maybe someone will truly invent something brand new, though... this has to be considered too.
Right on point again. Found you on youtube and giving you a follow.
You are right on point. The market stopped caring about Bitcoin scaling issues a very long time ago. I don't think the market will really care about minor improvements to the scaling issues associated with Bitcoin at this point. I believe their will only be some pull backs based on some bad news along the way but Bitcoin will continue to experience new highs in the future despite the technical fundamental flaws.
Great post. Please read my biggest danger in crypto, would love your feedback -
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The market may be tired of the forking scare right now. But scaling remains an issue, if not now then at some point in the future. My bets are spread over other coins (supposedly without scaling issues) as well.
Thanks for high skills of professional analiz!
Do you think navcoin is ok buy now,or hold to market come down?
Thanks
Hard call, coins that have gone up as much as navcoin, they can sit there a while and do nothing... or the rally can continue. So I guess without knowing your mentality and objectives, I can't say whether it is good or bad right now for you.
Near-term NAV could go down significantly, back to 10 cents even perhaps. Yet, the developers are going to keep chugging along with their system updates and improvements. Eventually, that work gets recognized by the market and NAV becomes valued more appropriately, but that process can take 12 months or more.
Thanks
Aha! One small point, when you scoff at LiteCoin's technical capability, in part you are saying it has the same scaling problems as BTC, and could not carry a much heavier load. Yes?
Basically. LTC by default handled more transactions than bitcoin, then also, LTC did Segwit. There is an ideology that everything aught to go lightning network after Segwit. Makes sense for payment channels, but that never works for a lot of transactions.
Plus, a fundemental premise of mine is that the market prefers transactions on the blockchain. The market can see the transactions and know, people are using the system, also it is a matter of security. That all these transactions get moved into a black box, I do not think the market favors that. Bitshares & Steem are the way forward in terms of handling transactions on the blockchain with high TPS, pair that with privacy tech, diversified PoS, and that is the future in my viewpoint.
Really, in 5 years, major coins need to be able to do 10,000 TPS if they want to get picked up into major worldwide use cases. Only coins I trust to be able to meet that bar so far are: Dash, EOS, Steem, Bitshares. Dash is at like 1,500 TPS, but the DASH people are smart and running it like a business, they know they need to do better and are working on it.
Thanks, that helps clarify things.
Very exciting to catch a glimpse of the way forward.
I wonder was the price volatility related to the possible fork in the block chain markets, in my limited experience, often tend to dislike uncertainty more than bad news.
I'm slightly confused though, is a fork still possible or not?
It's possible but I don't think it would happen. I might get bullish if BTC forks, though. You would have 2 BTC then, and Roger Ver might pick up the alt one and tell everyone it's going to beat bitcoin and scale properly. ETH + ETC was a winning combination.
I think we will continue to see a rapid redistribution of marketcap from Bitcoin to other coins and tokens. When you see things like Stratis getting 800x returns in a single year, storing value becomes redundant. Bitcoin at its current form will be nothing more than an expensive revolving door.
If these things are paid API's. Wouldn't you want variety and more?
You brought up some great points. The stock market as you said typically prices in these types of events ahead of time. It should in theory price this in for major cryptocurrencies as well. However, at this point, I don't think the cryptocurrency market though is as efficient as the stock market typically is.