Cryptocurrency Predictions (2018)

The Executive Summary

The tech under blockchain & cryptocurrency is gorgeous; it solves three problems that Craig Warmke articulates very well in his paper "What is Bitcoin":

1. The Coordination problem — Cryptocurrency can enable thousands of people to coordinate and add information to the blockchain without requiring a central authority such as a bank. Anyone can join this network and contribute. It is permissionless and decentralized.
2. The Copy problem — The obstacles one must surmount in order to tamper with the blocks on a blockchain are colossal. An exorbitant amount of electricity is required to solve cryptographic equations at a much faster rate that the rest of the network so as to "re-write" and "re-publish" the subsequent blocks after the tampered block. Such an attack would also devalue the cryptocurrency in question. These ensure that revising recorded history is a losing battle. Thus, the blocks are immutable.
3. The Credit Problem — No one can claim they are somebody else and conduct false transactions. One can prove who he/she is without revealing his/her identity. She just needs to sign her private key and generate a public address to prove her identity.

These are game theory problems solved by cryptography and computer science.

All currencies face a trilemma between security, scalability, and decentralization, and cryptos still face that as well. Fiat currencies are safe and scalable but are highly centralized, thanks to central banks which print money and change interest rates. Bitcoin is safe and decentralized but not scalable (yet). Ethereum (when they embrace PoS) will be safe and scalable but slightly more centralized. EOS, with their dPos (d for delegated) will be even more centralized, as the fate of each block is in the hands of 20 verifiers. Despite sharding, VDFs, Lightning network and other solutions, the tradeoff with cryptos is still between scalability and centralization/security. The more nodes in the network, the more people needed to verify each block, lowering tps — to make it faster (these days) one must centralize and thus be more vulnerable.

It's uninformed to think crypto is boring, blockchain is bangin. Cryptocurrency needs blockchain, and vice versa. A block verifier struggles so that he can give himself cryptocurrency. Without this incentive, no one would add blocks. Often times you will find business using 'blockchain' as a buzzword to define a glorified database; but where there is real blockchain there is crypto. Crypto is the incentive which allows the blockchain to grow. There is also incentive to add valid blocks... it's all wonderfully self-contained.

But this not to say that blockchain's only purpose is updating each crypto ledger; it has solid use cases outside of that.

Use Cases

Decentralized database: Blockchain technology immutably stores data across nodes — and the data on each new block need not only be ledger info stating things like "address X sends 5ETH to address Z." It could just be any kind of data. There is no mechanism to ensure a similar security measure with MySQL or similar softwares: these centralised databases do not have multiple points of failure for each node, making it easier to tamper with the data.

Smart contracts are another powerful non-crypto related (but still crypto-dependent) blockchain use case. Smart contracts are pieces of code that perform a function of a contract, the conditions and performance of which cannot be tampered with because of blockchain security mechanisms. Contracts are pushed onto the blockchain, and the well-written ones are audited by trusted software engineers and then performed. After that, updates can only be made under certain conditions initially specified in the contract. Moreover, economic incentives are in place to ensure fair participation in the contract both for users and the governing board. The governing board that owns tokens related to the smart contract makes decisions about future updates by casting votes for proposed updates; votes are weighed by the amount of tokens owned. If the board makes poor decisions that ultimately worsen the performance of the contract, the price of the tokens they own will go down and they lost money. Hence, they are incentivized to make good decisions. This can be used for any contract imaginable — the possibilities range wide.

Other use cases include supply-chain management, green energy credits, medical record keeping... our favourite use-case is the grandest one: blockchain as the tech on which we can build libertarian utopias like seasteads.

Stablecoins

Stablecoins have great medium of exchange potential, and may edge big ones like BTC and ETH into store-of-value roles. There are three types of stablecoins: fiat-collateralized (technically USDT), crypto-collateralized (maybe USDT) and non-collateralized (actually USDT). Stability mechanisms are in place to enforce a 1:1 peg with USD. The ultimate dream is mass adoption of stablecoins as a medium of exchange. Stablecoins might be the gateway to this dream, as the speculative volatility of Bitcoin or Ethereum make them relatively inconvenient as a medium of exchange.

An example of a stablecoin collateralized by crypto-assets is DAI which is generated using a smart contract called MAKER built on top of the Ethereum blockchain. It is pegged to USD and the peg is enforced by the Stability Fee. When the Stability Fee is increased, people have to pay more to collateralize their crypto assets, and therefore the demand for DAI decreases, and so does the price of DAI. With a decreased Stability Fee, on the other hand, the price of DAI grows. In addition, every DAI is backed by cryptocurrency; this is ensured by destroying DAI when people decollateralize their assets. And naturally stablecoins benefit from the security and decentralisation of blockchain, along with the potential for scalability.

Trading Philosophy

As liberal artists, our trading style must be interdisciplinary, because we will never outclass the rest on any one angle of investment. Luckily, being decent at sentimental, technical & fundamental analysis can beat a skilled technical analyst. Thus the ideal approach for us is holistic.

Sentimental Analysis is about riding waves well. Reddit pages and twitter are valuable sources of understanding the sentiments surrounding a particular asset. But one must be aware of reddit biases; crypto bears are invisible on r/Cryptocurrency. During the bull market everyone is talking, during a bear market, the silence says a lot. Also note that there are telegram groups which encourage people to collectively pump and dump shitcoins, and take advantage of the price volatility.

Technical analysis refers to using past market data, usually price and volume, to predict the direction of price change. In particular, we found "Bollinger Bands" as being one helpful tool in accessing the market. A Bollinger band squeeze is a signal of future volatility. It might be wise to sell at the upper half of the Bollinger bands and buy at the bottom half. In conjunction to Bollinger bands, we can use the Fibonacci retracement and other technical indicators to analyse the market. It is always important to keep track of the timeframe we are trading in and we should also have a clear entry and exit strategy.

Fundamental analysis refers to analysing the (unique) technology powering the crypto asset. Good examples include Ethereum's promise of enabling smart contracts through the Turing complete language of solidity, Zilliqa's promise of making transactions fast through sharding, IOTA's promise of enabling internet of things through the tangle data structure, BTC's big fat market cap. You don't need to be a coder to get a gauge here: a steady stream of commits on GitHub is a good sign for good fundamentals. Whitepapers are also a useful resource in this regard.

When swing trading, sentimental + technical analysis is the game. Combine bollinger bands with current sentiment, for example. We call this the Bailey Swing Method. Great for scalping. When hodling, look at fundamentals.

The Future

The crypto market is unsafe and profitable — over time it will be less profitable and safer. After all this time, the space is still crawling with scammers who shill worthless coins by pumping & dumping, policing information in telegram groups, making false promises. A distinct lack of safety in crypto trading is tied to the profitability of amateur competition: shorting shitcoins, scalping, taking advantage of irrational swings...

When the pension funds come, three things will happen:

1. Whatever coins are left standing will balloon in value (so make sure you have a cold stash of non-alt)
2. They will likely bring regulation with them (pension funds have no risk tolerance)
3. It will be much trickier for the self-taught solo trader to make money. They will need to be much faster on their swings, shrewder on their sentimentals, harder-working on their fundamentals... or just luckier

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