5 things I learned in crypto this week:5–11 November 2018
Another week gone, another set of ideas and learnings to share. As usual crypto hasn’t been short of drama, not least the impending BCH ABC-SV hard fork and the escalating war of words between their respective proponents. But let’s keep our focus on the bigger picture.
This week I’ve learned…
1. If you build it, will they come?
Nick Tomiano, an early Coinbase employee and founder of crypto fund 1Confirmation (along with its weekly newsletter The Control) wrote a post on the ‘community’ aspect of crypto, which he describes as ‘the most important characteristic of any cryptocurrency’. According to Nick, the challenge for founders, particularly those of a technical or mathematical bend (i.e. most crypto projects), is that building a stable community requires ‘an understanding of the whims of people rather than algorithms and mathematical proofs’. He discusses the key difference between a traditional company and a blockchain startup; in the former users and stakeholders are separate groups with separate incentives, while in the latter that separation doesn’t necessarily exist as a user may also be a token holder, miner, community ambassador, etc. Leading a crypto project therefore requires founders to establish a compelling vision that engages a wide set of community members both to use the product or platform and to participate in the governance aspect. The mantra founders need to adopt, Nick says, is “if you build it in the open, they will help.” His post also serves as a warning to the growing number of projects that are eschewing public token events in favour of private funding as that serves to create a separation between users and stakeholders, potentially to the project’s detriment.
Link: https://thecontrol.co/on-cryptocurrency-communities-f592b5ce6b0b
2. Let the Gini out the bottle
Ok I’ll lay off the poor pun attempts, but this Multicoin Capital post complements my first recommendation well. The article discusses the relevance of ‘Gini coefficient’ in crypto and the need to distribute token ownership across a wide holder base. Multicoin conducted a study of the top 500 addresses of several prominent coins to establish their respective Gini scores. Bitcoin, unsurprisingly, has the lowest coefficient (that’s a good thing) as PoW and wide liquidity helps to put it into many hands. Other coins analysed, including ERC20 tokens such as MKR, BAT and ZRX, performed poorly with over 80% of tokens concentrated in few hands. This forms the basis for their analysis of the flaws in the token sale and other token distribution models we’ve seen over the past year. This includes the failure of high-profile airdrops by projects such as OMG and XLM to broaden their respective communities.
Link: https://multicoin.capital/2018/11/09/new-models-for-token-distribution/
3. Analysing the market cycle
Last week we talked about Howard Mark’s excellent Mastering the Market Cycle, and just this week I found this post from Felipe Gaucho Pereira on indicators for understanding the crypto market cycle. Felipe explains why ‘market cap’ analysis is inadequate in crypto, and explores a series of alternative measure that help to understand how Bitcoin is behaving at a fundamental level based on on-chain data. These measures include Thermocap (focus not on what buyers are paying for BTC on exchange, but how much it’s worth for miners to maintain it), realised value (valuing coins based on the price when they last moved rather than the current market value), and network value to transactions (study of Bitcoin’s strength as a payments network). The piece helps to bring together some of the great work that’s been done by the likes of Nic Carter, David Puell, Dimitry Kalichken and others on establishing valuation models.
- Don’t underestimate the power of order flow
It’s fairly evident that crypto has an obsession with technical analysis. Take a look at Twitter or any traders’ Telegram group and you’ll see an array of charts that try to decipher patterns and signals from market information. It’s less common, however, to see in-depth analysis of what’s going on within the order books. This post on Brave New Coin offers a detailed explanation of how to read order books, what information can be drawn from order book data and how to spot spoof orders (we see you spoofy!).
Link: https://bravenewcoin.com/insights/trading-like-the-flash-boys-reading-order-flow
5. Check your biases
Watching crypto markets is a demonstration of mass psychology in action. Unlike many of the traditional markets, crypto is still weighed heavily towards human participants rather than bots. It follows then that to understand how crypto markets work you must understand human behaviour. Anyone who has read Robert Cialdini’s classic text Influence may already be aware of some of the biases that affect human decision-making. Regardless, this post from Buster Benson (originally from 2016, but recently updated) gives a solid overview of some of the mental factors that influence our decisions. Look out for cognitive traits such as confirmation bias, Gambler’s Fallacy and Halo Effect in particular. So next time you make an ill-advised shitcoin purchase based on a recommendation from a half-witted YouTuber, you’ll know who to blame — your stupid brain!
Link: https://betterhumans.coach.me/cognitive-bias-cheat-sheet-55a472476b18
Next week: I’ve got back into podcasts this week after a hiatus. While I’ve listened to a few, I can’t pick out any distinct learnings. I’ve got some good ones lined up though so expect a wider array of formats in next week’s post!