Game Theory Group

The Blockchain Brief

The Holiday Special Edition: Tulip Mania and the AltCoin Apocalypse

An attempt at simplifying blockchain concepts, companies, and coins.
Boris Revsin

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If you’re like me, you’ve already had the crypto discussions, debates and disagreements with your friends and colleagues. But coming home for the holidays represents a whole new opportunity for fierce debate with that great aunt still burying gold in her closet. Combine that with the “Red Friday” crash of December 22nd, and you’ve got a recipe for family disagreement. 

But, don’t worry, today's Holiday Special is all about rebutting the standard arguments you’ll hear over the next few days.

I’m going to tackle two common arguments I keep hearing about crypto currency: Tulip Mania and the AltCoin Apocalypse. (If you have something to add, reply to this email and we’ll add it to a follow-up note.)

The Tulip Mania Argument
The first time I heard this argument, I was actually impressed. An Uber driver in late 2015 heard me discussing a Bitcoin transaction, and helpfully referred me to the tulip boom and bust of the 17th century. 

My gosh, I thought, if a random Uber driver has this amazing grasp of historical financial markets, what hope do I really have? So, I Googled.

Super tl;dr: There is literally only one point of comparison: they are both products whose prices have risen dramatically in a relatively short period of time because of speculative interest. They are different in every other way.

Tulip Mania in a nutshell:

  • In the late 1500s, some guy in the Ottoman Empire found some tulips
  • Took them to Europe where everyone thought they looked pretty and had cash to burn
  • Big profits from the initial sale led to more tulip demand
  • A futures market on tulips emerged
  • People eventually realized they were buying one tulip for the cost of a house
  • The Bubonic Plague hit Europe, crushing attendance at public marketplaces where tulips were sold
  • CRASH!

Here is how this is different from Bitcoin:

  1. Scale: At the peak of Tulip Mania, several thousand people were trading the flower. Currently, it is estimated over 25,000,000 people own some portion of a Bitcoin. Clearly, these numbers are incomparable. Far more people are invested in the success and longevity of Bitcoin.
     
  2. Asset class: Tulips were in the market as a luxury item. Bitcoin, used as a long-term store of value, has been anathema to the Wall Street nobility until very recently. Most early Bitcoin buyers were the furthest thing from nobility. Luxury items come and go with the strength of the economy. Bitcoin was the opposite, likely a direct result of the 2008 disaster in financial and real estate markets.
     
  3. Physical properties: Tulips go bad. It's a perishable good. It can't be a long-term store of value. Bitcoins have no expiration date. 
     
  4. Supply: Tulips have a basically unlimited supply. Bitcoin has 21 million coins, and is therefore a deflationary asset.
     

AltCoin Apocalypse
The next major objection I often hear is the “speculative nature” of Bitcoin, and how purchasing AltCoins of any kind is the same as buying penny stocks. 

Bitcoin is only the first Blockchain technology that has seen mass adoption. It is not the only way to leverage blockchain, and it is probably not the best from a pure technology perspective. The first tech stocks to ever hit the market do not remain top equities today, Bitcoin could easily be replaced or joined by other technologies that innovate in certain areas of the space. Innovation will find the easiest path to capital.

In my view, there are four core factors driving tokenization across industries: 

1)  Founders’ desire to maintain equity control over his or her organization (or, in the case of a foundation, maintain freedom from large corporate interests).

2)  Investors desire to maintain liquidity in their investments.

3) The underlying blockchain technology enables trust-less transactions that open up new business opportunities impossible before its invention

4) The scale of capital available during ICO crowd-sales lessening the company reliance on traditional investment paths.

These four factors are perpetuating an ecosystem that incentivizes ICOs across a wide variety of industries. I believe that the vast majority of ICOs in 2017 and those in the near future fall into one of three core buckets:

The Malicious: Outright scams, pyramid schemes and illegal activity. No chance of success.

The Well Intentioned: Decent ideas, poor execution, lack of utility in tokens, pump and dump targets. Low probability of success.

The Game Changers: Amazing ideas, teams and execution. High scarcity and long-term vision. Strong probability of success.

I completely agree that the first two buckets will leave many investors empty-handed. The elusive third bucket, though, represents the future of cryptocurrency technology and investing. It should not be ignored.

Thanks for reading, 
Boris

   

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- Boris & Julian
 

Boris Revsin