Expert Meltem Demirors from the project CoinShares told how to stop constantly to check the prices in the conditions of crisis cryptocurrency and love the difficulty as to understand the psychology of the investor, how to find real value in the market and shared his vision of where cryptonote in General.
2018 was a challenging year for all involved in the field of cryptocurrency from issuers (the people that sell the coin) to the exchanges and platform operators (those who provide the possibility of speculation on the value of the coin), and investors (those who buys a coin).
It was a great year for lawyers, accountants, PR agencies and other providers of professional services. They spilled millions – if not billions – ICO-shnyh of dollars because they helped people to understand what is going on and how to deal with it.
Oh that was for the year
Although the price trend last time (hint: down) seems to be something new, in fact, the stock market was in steady sliding downtrend since January 10, when it reached its peak values (total market capitalization). In November 2018 the Cash fork of Bitcoin marks a turning point, where some investors have finally dropped his hands.
In this post we will cover the following topics:
- Understanding investor psychology
- The crisis of the cryptocurrency market
- The beginning of surrender
- How to find the real value (in the direction which move the flow of «smart money»)
- Where is the industry as a whole
Buckle up, this will be a fascinating journey.
Understanding investor psychology
To understand this, we must understand the past. In order to understand how the ICO have managed to raise billions of dollars with ridiculously bad «white papers», let’s deal with the psychology of investors.
Investors are essentially interested in how to maximize profits and minimize risks.
If you argue from the standpoint of the perceived risks, the white paper of Bitcoin recently celebrated its tenth anniversary. Every day, the results of which Bitcoin not only survived but continues to increase the functionality and methods of use, it becomes a day when this asset becomes a little less risky. The application of this logic in relation to other, newer assets and management models may seem a tempting idea, but it is a great folly.
Recent events have shown that networks with trusted and/or centralized models of governance and a long history, tend to acquire greater value due to investor confidence or perhaps a feeling of less risk.
Moreover, well-known investors (we won’t name names) are actively «legitimized» cryptocurrencies like bitcoin and cryptocurrency assets by collecting funds through ICO and STO, thereby reducing the level of risk perception.
From the point of view of compensation and imputed capital cost ICO for some time indeed seemed very attractive option.
If you look at the average yield of the mentioned below classes of assets and incorporate a certain degree of pressure, coupled with the investment strategies of high risk kind of venture or private equity capital, it’s easy to see why some groups of investors with some appetite for risk scriptactive seemed a reasonable bet. The investor could risk a few percent of equity capital for the opportunity to increase the yield tenfold.
I think that many investors, hedge funds and family offices, making a choice in favor of funding the ICO, on the basis of this model of thinking.
Speaking of cryptocurrencies, it is impossible not to take into account financial performance. Do not rush to be annoyed and to get to the light of the counterarguments that the price is not a perfect measure of the value and growth potential. Let’s just be honest with yourself:
At the moment the best measure of value on the main market still is the price.
The value of the three currencies with the highest market capitalization – BTC, XRP and ETH, which accounts for 3/4 of the market over the past year fell by 72%. Bitcoin, occupying more than 50% of the market, fell by 58%.
According to data from 15 Nov 2018
If we look at crypto-currencies with an average market capitalization of not losing sight of the overall downward trend of approximately 60% over the past year, you will notice that some crypto currencies retain their value far more confident than ETH and XRP. Then you should consider about the following factors:
- Many investment funds have made long bets on such protocols, seeing them as a kind of «Bitcoin 2.0» or «Ethereum 2.0» (and when I recently heard about «Ethereum 3.0», I felt so old).
- Many of these projects grew up in the shadow of the aforementioned leaders by market capitalization, less «drama» but more of communications and marketing (and better quality), they have a base of loyal stakeholders, collected through airdrop or ICO, but also a real focus on unique and specific methods of applying the underlying technology.
- And forgive me cryptologi for such blasphemy, but these projects do benefit from their «centralization» – at least, in coordinating their work and communication. They have their own funds, issuing grants, one spiritual leader, consistent branding and messaging, etc.
According to data from 15 Nov 2018
As for the currencies with the smallest market capitalizations, the rate of decline in their prices over the last year ranges from 75% to 98%, and, despite the constant media coverage and expanding the list of exchanges on which they can be purchased, these assets cause mixed feelings. Their price has undergone the most significant growth, however, in the first quarter of the year it collapsed… and since then continues to decline steadily. The project team are working in crisis mode and facing a change of leadership, cuts and problems with the laws, taxes, and shipping the product to the end user. Some projects gave up the Ghost and converted their tokens in share capital, guarantees, services or securities.
According to data from 15 Nov 2018
A I would argue that the price of, say, a bad measure of «growth». Well, let’s look at other indicators. More than 80% of cryptocurrencies include the following:
- trading volume for the 30-day period is less than $ 10 million;
- the number of commits on Github for the quarter is measured in double digits, if not single digits;
- only a few hundred active addresses in the last 24 hours.
(Statistics taken from OnChainFX – highly recommend it).
The level of activity of developers and users will not lie. Many assets outside of the list of the top 250 projects (as well as many members of this list), went into a deadly tailspin.
The beginning of surrender
Cryptocurrencies do not exist in a vacuum. Investors who have invested their funds also own other assets, and how much we wanted to believe that «all we need is a crypto», we still live in a world where everything is counted in dollars.
The global macroeconomic environment can have a big impact on what is happening with cryptocurrencies.
The forces that made cryptocurrency attractive concept – centralized powerful corporations, political instability, trade wars, a departure from globalisation, totalitarian regimes, etc. – those same forces that inspire fear and doubt in relation to other asset classes and markets. In fearsome situation as investors react to the risk reduction by reducing the share of borrowed capital.
We begin to notice the reduction efficiency in the global investment community. The world’s largest investment company Blackrock, which manages assets worth 6.4 trillion dollars, just gone through its first three years, the quarterly outflow of funds.
Price quotes swept volatility, and investors have no need to access the cryptocurrencies – all imaginable and unimaginable amount of adrenaline they receive today and in traditional markets.
However, many investors have put himself at risk, paired with investments in cryptocurrencies. We see how they cease to inject new capital into them and, more importantly, to keep the cryptocurrencies already invested funds.
The inflow of capital into the cryptocurrency has ended. Fundraising via the ICO has become a very unfashionable thing, that with the big share of probability can lead to coercive measures. Ambitious new protocols, difficulties arise even with raising capital through private accommodation. Investors have doubts whether selling tokens best tool for the ultimate goal, which is to create a useful and potentially valuable protocols.
More importantly, investors who put their money in the cryptocurrency market has brought with it a certain amount of capital. Most of the present year they spent in anticipation of the bullish trend or some extraordinary event which would entail more significant changes in prices in comparison with standard oscillations, to increase the value of their portfolios and to have an opportunity for sales.
In preparation for the closing of the year, last week many members of both camps – token issuers and investors decided to exit the game, registering losses, and dropped off of my chest.
With regard to issuers, many cryptocurrency projects that have gathered the money through the ICO, faced greater challenges in order to remain relevant and create real value. It usually occurs in the absence of real financial services, and this aspect of cryptocurrency projects, unfortunately, is still (C), muddy and undefined. Just take a look at the following «balance sheet» that characterizes many cryptocurrency firms, raised funds through ICO.
I can’t criticize the creators of these projects for their choice in favor of raising funds via ICO. If you compare the cost of capital for the stock and for the tokens, the capitalization of the company without having to dilute their share or take on the legal liabilities (see note in table above) seems much more attractive option.
Investors (not all, but too many) wills belonging to them as partners with limited liability, the billions of dollars under vague and questionable legal agreements and structures, contrary to all the laws of the Universe.
In reality, anyone who for some time acted as investor, knows that the balance in the ledgers should podnimatsya. The capitalization of the company entails real responsibility, and eventually it will come. It may look like this:
We see this scheme implemented: companies have to sell stocks tokens to pay taxes, they need money to pay for legal bills or potential compensation, they need to discharge their obligations to holders of tokens and other members of the ecosystem who have spent their money, time and energy.
As for the investors, the people who sponsored the ambitious multimillion ICO, did it with the expectation of a return in the form of growth of the market rate of their scriptaction.
I love investors. They are the most important part of the ecosystem, because new ideas often need capital, and the cryptocurrency world is full of thoughtful investors. However, we should not forget that investors – fiduciary: they’re not just sitting here in my office with the desire to sponsor a great ideas simple because they have the opportunity – they need to earn money to survive. Investors, users, and speculators.
Sell all your tokens of financial speculators – a great way to ensure that they will have no practical use.
There are funds, experimenting with a hybrid model «speculator.» These include and CoinFund, whose members call such activity «network interaction». I’m not sure these models will work exactly as intended.
As I mentioned in my article «The Tezos Experiment» («Experiment Tezos»), the sale of management rights through tokens is a slippery slope. The cryptocurrency world is too small, and its participants are still quite close in spirit. The growth will appear and new categories of investors who are not so friendly. When on the horizon looms the real money and the vultures grasps the rules of the game, we will see how the market burst in much more ruthless investors in search of any potential vulnerabilities in systems that allow them to maximize their profits.
The majority owning tokens of investors resigned to the fact that in the best case, the ICO will enter the market at cost, i.e. the price of the sale of these tokens is equal to the purchase price at the stage of ICO. In addition, the market has yet to «digest» billions of dollars in tokens. These projects will delay your entry into the market for as long as I can, and the funds will try as long as possible to keep these assets at cost to avoid reducing the value of the portfolio.
I believe that 2019 will be fatal for some funds, so how’s life in the scheme «2 + 20» in which the funds earn 2% per annum of the investment amount as a fee for management and 20% of profits is complicated in itself. When available capital is reduced by 50%, and no twenty percent of the above scheme in the foreseeable future is not expected, the game is simply not worth the candle.
Here’s how I see the situation in the next 1-2 years in terms of crypto-currency crisis:
What is likely to make issuers?
Sell all assets you can, and will save money, as the last time.
Which most likely will make investors?
Sell all assets you can, will suffer losses and will free up mental and emotional energy to concentrate on making a profit for its investors.
Fold these two results, we get the capitulation – the act of refusing to continue the fight.
Acceptance is the last stage of grief.
I know, I know: the first part of the article probably looks very depressing, sorry. However, all is not so hopeless.
During a frantic and rapid growth, when the money flow like water, like champagne in a rap clip of the 90s, the capital is not always allocated according to the logic. We are, after all, only mortals, and again, and again fall into the same psychological trap.
I missed the dot-com bubble, but this article by CNN, published in 2000, could be devoted to the current situation with cryptocurrencies:
NEW YORK (CNNfn). Consider it a lesson investing in the dot coms for 1,755 trillion dollars. It is difficult to imagine is traded in the market the Internet company, which have fallen in price at least 75% compared with the peak value for the year not to cut their spending or reduced to employees. On wall street, an industry group always kept themselves in favor or have fallen out of favor, but still no one industry had disappeared as quickly and completely as it happened with the shares of Internet companies.
Technologies that can change industries and markets, not born in one day: this process involves testing starts and failures, and the creation of added value not always happen where we think it should happen.
The course of history have proved wrong those whom the above words led to believe that the Internet died. The first generation of companies has evolved, many companies have disappeared and a new industry was born. Now in the global markets ruled FAANG (Facebook, Apple, Amazon, Netflix and Google). The combined capitalization of these companies is $ 3.5 trillion, and evaluation of some of them in recent months has reached 1 trillion.
Scriptactive and blockchain technology to create added value. It is an axiom.
The main question that we are trying to understand is where and how this added value will be retrieved. Investors of all stripes are trying to clarify their hypotheses about where they will be able to capture the profit opportunity. In 2017 and early 2018, many supported the idea that the extraction of added value will occur at the Protocol level, i.e. directly from scriptaction, however, the recent decline in their value showed that investors have started to doubt this thesis.
I offer my prediction as to where will the growth in the value:
- at the asset level, especially in networks with a well-established management model;
- in new companies, involved in the creation of infrastructure and provision of services;
- in market quoted companies – as in already traded, and in those who it is yet;
- at the level of funds and asset managers, providing interaction with scriptactive.
If we talk about assets, it is still some time, investors will not buy them directly. They will work with cryptocurrencies through existing, traditional markets strategy, easy to understand, reporting, and management through existing infrastructure. This practice involves passive interaction via the exchange of goods and long-term cryptophony, and actively managed the interactions through the system opportunistic funds under the guidance of well-known and respected portfolio managers.
As for the private companies serving the class of scriptaction, the most valuable of them is aimed to encourage speculative trading. In this sense, the following should be noted:
- The most valuable of the company occur outside of the United States and virtually funded by investors from Silicon valley. For example, the exchange BitMEX quite a bit of outside investors (if any), and she’s never been attracted to venture capital (probably because in the early stages of the work simply could not do it).
- New and rapidly developing companies are flexible, so they can quickly create value. So, the exchange Binance appeared only in 2017, but has already become one of the financial locomotives of the industry – the project was created quickly, and they offered simple functionality, and the focus was the work in jurisdictions with friendly regulators and softer conditions.
- Such companies are more valuable than most of the cryptocurrency assets and protocols, and to build their business, they have attracted minimal capital in comparison with the large ICO-projects. As of 19 November there were only three Protocol with a value of over $ 6 billion.
- These companies have funds, which is funded by both organic and non-organic growth through new product lines and attracting talent, users and intellectual property.
For publicly-traded companies, I will not stop – many experts have repeatedly covered the topic of IPO. I will concentrate on the traditional financial institutions who view cryptocurrencies as a way to create new streams of income, the opportunity to play in innovation, and improve enterprise value.
All of these companies less than a year! Their work can be already incorporated in the price, but much more to come…
Square, perhaps, be called the most striking example. The company began trading cryptocurrencies through the app $cash last fall, and since then, her income does not cease to grow, and quotation of its shares on the stock exchange increased more than two times. Square has secured a huge market capitalization due to business in the field of retail payments, and shifts in the direction of cryptocurrency technologies for consumers was enthusiastically greeted by investors, who invest in stocks.
The market rewarded many companies operating in the financial services industry and beyond, for their desire to become part of the cryptocurrency ecosystem. Get ready and continue to watch this trend, even if the cost of scriptaction will continue to decline. Corporate players operate on annual planning cycles and changing course is not as fast as it can do startups.
Finally, funds and asset managers have historically shown good results thanks to long planning horizon and the ability to survive and to endure market cycles. I think that this trend will continue, especially for large managers with extensive experience, able to manage Finance and distribution strategies so as to benefit from short-term price fluctuations, but while in the long term.
To summarize, we can say that, as the market digests new information and revising your thesis, themselves scriptactive lose some of its value. And in parallel with the increasing value of the companies serving cryptoamnesia.
Where are we going: the long road to real use
One quick glance at today’s cryptocurrency market is in crisis may be enough to categorically reject any interaction with him. In my opinion, this is a huge mistake. Bitcoin, scriptactive and blockchain technology has reached critical mass.
Bitcoin went through all the stages of the path: he was obscure and unknown, and hated, and the legendary and globally known. Blockchain praised as a panacea for all world problems and demonized, calling just a normal Excel-table.
Such a polarity of opinions demonstrates why these ideas and technologies will continue to grow and evolve. The cryptocurrency community has attracted the attention of every audience – both positive and negative.
Just take a look at the industry. Thousands of people continue to spend their time, energy and money to support the growth of the ecosystem: they write, conduct research, carry out educational work, create projects, develop or simply hold the purchased scriptactive.
Expert Ryan Radloff calculated that today there is a demand for at least half has not released the bitcoins. People are still interested in Bitcoin, take their money or Vice versa to change them at the end of November, so this situation is unlikely to change.
Returning to the subject of macroeconomic environment, I suggest you look at the world in which we live. Around, there are much more global things that will have a significant impact on further developments.
Cryptocurrency is a story not only about technology but also about social, political and economic changes. In fact, we are experimenting with new models of management. They are still not Mature enough and not without flaws, but very important and valuable.
Projects working on the protocols, companies and investors will have to work hard to get to the bottom. They will need to adapt their operations to plans to create added value in the long term. If the next five years will be anything like the previous one, then get ready to see how the cost will continue to move from centralized corporate structures towards less centralized networks and applications. Being a complex and stressful job. It takes time, and growth is rarely found in pure form and does not occur linearly.
We CoinShares can’t exactly say when it happens this shift, but I believe that it is inevitable. The future looks promising, but there is still a lot of work.