The Idiocy of the Crowd, and the Danger of Banking on it….
After spending the last 3 years immersed in the World of Cryptocurrency, One thing has become clear… Wisdom of the Crowd is a Fallacy!
It is a beautiful concept. The idea that no single expert is more powerful, or intelligent than the crowd.
The idea that large groups of people are collectively smarter than even individual experts when it comes to problem solving, decision making, innovating and predicting. Investopedia
When applying this concept to Cryptocurrency Markets, the theory goes that, the larger and more diverse the crowd is, the more efficiently priced assets within the cryptocurrency sphere will become.
Well, let’s take a look at what is going on in the world of Cryptocurrency…
This is a very easy place to start. The reverse dutch auction for Gnosis prayed upon the human nature flaw of FOMO (fear of missing out). While the project is very reputable, with Joe Lubin of ConsenSys as a board member, and Vitalik Butrin as an adviser, Crowdsale participants brought in at an imputed $300m Valuation. It’s hard to put a price on a project with no working prototype, no users and no revenue, but let me have a go… In the real world, Gnosis would probably be worth the value of their Ethereum holdings, plus a premium of less than 100% (so, less than 10% of the value that participants paid).
Now if you participated, and you have had enough of being referred to as an idiot, please bear with me. I myself took part in this Crowdsale with fully knowledge of the structure, and idiocy of the valuation.
Banking on Idiocy
I spend my days as a Futures Trader, essentially Trading (..Betting) the future price of a range of commodities. For me, Game Theory is the most important consideration for a financial market traders. Trying to predict what other people will do is far more valuable than trying to predict what will happen to the price of an underlying asset. I spend my days thinking about, what positions the ’Weak Hands’ in the market have, and try to position myself to profit from their misgivings.
Now, I also spend 1-2 hours per day researching and trading cryptocurrency, but recently the most important consideration has become…
Where is the future idiocy?
My investment in Gnosis was banking purely on idiocy. I did the same is Blockchain Capital, which traded 300% higher than ICO price (and NAV), when the fund held 95% cash, and it’s sister funds are barley returning 20% per annum. There really could not be more proof of an ICO and Alt-coin bubble, than the actions of people like myself, in this sector.
Interestingly, I believe the cryptocurrency community is filled individuals of higher than average intellect… which brings me back around to the idiocy of the crowd… How can a group of intelligent individuals, make such bad collective decisions?
Lack of Diversity
The Alt-coin/ICO Bubble will burst, however I believe we have some way to go… The problem is, the market is in agreement, and we lack diversity in actions, and beliefs which are driving crazy valuations. We are in the realm of a self fulfilling prophesy. Everyone expects the market to go up, everyone buys, less people sell, the markets naturally go up.
Just like in Tulip Mania, one day in the not to distant future, no buyers will turn up, and on that day there will Blood on the Blockchain.
My feeling is that, Bitcoin and Ethereum still look cheap (in relative terms). These 2 projects will be the big winners if the market rebalances, and we will see projects like Gnosis, NEM, Augur, Ripple, Stellar, Bytecoin, Siacoin and many more lose 75%+ of their current value. We will see big inflows into Bitcoin especially, which should propel Bitcoin quickly towards $3,000, as in terms of usage, Bitcoin and Ethereum are in a league of their own, and can back up current valuations. My time horizon is sometime in the next 12 months.
Very interested to open up a dialog with the Steemit Community on this topic. Very interested to hear both sides of the argument…