Crypto Market Commentary - Warren Buffet gives us a Road Map - 01/25/17
Bitcoin Options?
Options markets for bitcoin may soon be on the docket as ledgerX is finalizing clearance from the CFTC. Of course this will be a centralized options exchange based on the same old legacy way of doing things in the financial markets. The low hanging fruit will be decenatralized options, futures, and derivatives markets. The fiat hurdle will be difficult to navigate around for those folks who are used to pricing and settlement in fiat. Many attempts at this have been tried thus far with very little success, but I am confident this will become a reality some day.
Bockchain Tokens, not Appcoins
After perusing through Fred Ehrsam's "Value of the Token Model", a few things come to mind.
First, as Fred speculates,
People will prefer to use Ether instead of tokens because it will be more stable in value
This fits the dynamic of a reserve currency. People will potentially default to using ETH instead of the native dapp tokens when using services provided by dapps. Eventually, as people become accustomed to using ETH as a currency, it will be used for other things such as payments beyond the ethereum ecosystem, seeping into other use cases such as settlement for futures contracts like oil, copper, wheat, ect. Finally, the currency may become a globally agreed-upon medium of exchange and store of value, as the governance properties of the currency are superior to that of fiat, lending it to outperform fiat over the long term. We are already seeing this in the crypto space as bitcoin has outperformed all fiat currencies for 6 out of the past 7 years.
This does not mean that Ethereum will be the one. Its such early days. Bitcoin is still the frontrunner while many other systems such as steem, monero, dash, ect. could potentially claim the title of global digital reserve currency, if it ever happens.
For every 1 huge hit there will be 3 minor successes and 100 failures, so we shouldn’t be surprised when some fail
Fred gets it. Here is an excerpt from Carol J. Loomis's "Tap Dancing to Work", in which Warren Buffet describes a similar situation in the early days of the automotive and aviation industries.
Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others.
All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies—themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America—and also an enormous impact, though not the anticipated one, on investors.
Sometimes, incidentally, it’s much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then—it’s better sometimes to turn these things upside down—and that was to short horses. Frankly, I’m disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a short squeeze.
The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane—another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then—we must have been the Silicon Valley of that age—were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.
Move on to failures of airlines. Here [says Buffett in his speech, waving a piece of paper] is a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.
Sizing all this up, I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough—I owed this to future capitalists—to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
Buffet has given us a road map for how the crypto industry should play out over time from an investment perspective. In my opinion, many "blockchain tokens" will fail and ruin investors. Owning the native blockchain reserve currency or currencies of the future could be highly lucrative now but still difficult to get right. A few leading crypto systems exist right now. This is where technical analysis comes in. Being able to navigate the technical landscape of these stronger markets will be essential. The trend is your friend.
Disclaimer: None of this is advice of any kind.
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