Thoughts on Crypto and the “imminent” Altseason

I want to share with you what I personally think is the outlook on altcoin markets in the coming weeks and months. This is based on my experience of having traded stocks (and lost almost all my money) in the .com bubble of the 2000s, as well as years as a professional money manager. I want to stress though that none of this is my professional opionion and none of this is financial advice. It is merely my personal opinion and any assets can collapse to zero or rise astronomically in value. I do not know more than you do, but I have been there before.

The crypto market has been in a bubble since at least Q3 2017

At the time (Nov 1st), I posted a long story as to why this is a bubble and all of these reasons are still just as valid now as they were then. You can find the story here.

The signs were obvious and I do hope that we can now agree that the moves of the last 6–12 months were indeed the building of a massive bubble. If we can’t then you won’t like what I write next. But maybe that is a good reason to keep reading anyways.

What I think is important is that we briefly revisit the signs and reasons that crypto is a bubble:

Bitcoin is a technology that represents a lot of promise and no doubt will massively impact the world we live in. However, time and time again, people have made the same exact mistake — overestimate the impact of a new technology in the short run and underestimate it in the long run. We are very much still in the short term for anyone wondering.
Bitcoin has such a large possibility of “final” valuation outcomes that it is hard to put a number to it. Using traditional methods (me here, very unscientifically) or novel methods when applied in a neutral, level-headed way, you get to much, much lower figures than where we are today. A good paper to read is this paper by researchers from engineering school ETH Zurich. So people come up with new methods to explain the current value. We have seen that before in the .com bubble. It is pure hopium. Nota Bene: I still wonder if any of the people claiming “Bitcoin is like owning TCP/IP or SWIFT” have ever done the calculation. I believe neither TCP/IP, nor SWIFT, separately valued is worth $100bn+
Crypto as a whole has largely attracted a completely different group of investors compared to the “traditional” set of investors. This is largely anectdotal in terms of evidence, but the large majority of people that I engage with on crypto have never in their lives invested in equity or bonds. That has important ramifications. Firstly, none of these people has experienced (I mean trading and losing money) the .com bubble and will not be “warned” in that sense. Secondly, there are actual reasons why regulators do not simply allow anyone with some money to trade stocks unless they get a primer from their bank or answer a number of questions regarding experience to the affirmative. This is not an evil plan by evil governments to keep the money away from regular folks, but rather a reflection that there is a certain amount of education and experience that is recommendable when you invest your own money (I am not arguing governments are doing a great job at that education). The result is a market that is full of people investing their life savings due to greed and fear and nothing else. This is also why technical analysis seems to work so well in crypto. When the market matures it won’t anymore. In a way, crypto currently is closer to a cult than to any kind of market. People either believe or they don’t.
There is no discrimination between assets according to quality. Yes everyone understands that bitcoin and ethereum are the top dogs, but after that people get scammed time and again into bidding up frauds like bitconnect. I personally think the Top 20 on coinmarketcap is 50% made up of scams. This was the same in the .com bubble when any company that added .com to their name became an instant favorite.
And maybe last but certainly not least, crypto is void of regulation. Whether it is the tether organization wildly printing fake US Dollars to prop up bitcoin’s price (up until they were subpoenaed…) or spoofing, wash trading, insider dealing and organized pump and dumps — all of them hurt the crypto market. It is vital that the crypto community realizes that regulations like outlawing the above (they are currently LEGAL in crypto) are not evil, they are common sense that people have agreed should prevail in organized markets. Their absence in crypto is making the moves even less connected to any fundamentals.
The Altcoin landscape

Altcoins currently can be split (broadly) into three categories:

a) Coins that act as a platform or as a host for future applications, smart contracts or new developments on the blockchain. Let’s call these “platform coins”. I am avoiding the term “utility token” because that has been pirated by useless coins that pretend to not be securities. Importantly, all coins in this category have a working blockchain and are NOT simply tagging on to the Ethereum blockchain.

b) Coins that simply offer monetary transmission or stores of value in a different manner (for example by offering privacy or by claiming a direct peg to an asset like Gold). Let’s call them asset coins. These also need their own working blockchain (and an audit…).

c) Coins that are supposed to be used for some payment on a product or an app (usually yet to be released) by the users of that product or simply coins that are supposedly somehow tied to a start up that runs them. Let’s call them what they are — security token. It does not in this case matter if the token were ICO’d or airdropped. They are securities. I will not go into detail here or argue this much more, but it is plainly obvious that token such as these are bought for one reason only — price appreciation. Anything that is “betting” on the success of a company and is bought and sold in anticipation of higher prices primarily is a security. Almost all of these coins are token on the Ethereum (or another) blockchain without their own chain.

You can read here which kind of use cases I can see for crypto in the future and therefore you can probably guess why I think only those coins in category a) and b) have any hope for survival. The current generation of security token offer nothing — they do not offer any defendable rights (see the changes in promises by TenX, Monaco, Polymath and a host of others regarding their token since they ICO’d or airdropped) and have absolutely no utility whatsoever. They only exist because there are fools who buy them in the hopes of striking it rich.

The coming Altseason

You may have guessed that by putting that “imminent” part into quotation marks I am not really thinking that the next altseason is near. I am in fact mainly writing this post as I think it is important to consider for those that have put their savings in some collection of “bags”.

Let’s recap what happened in the cryptosphere since basically the end of 2016:

Towards the end of 2016, Ethereum held the world’s first (I know it was not the first…) noticeable ICO in the The DAO which was a VC type set up where people would vote and send their DAOs to projects they wanted to fund via a platform. This was the start of the current ICO boom (I will not go into the issues that ICO had, it is irrelevant for the article).

Due to the (perceived) success of early ICOs, where people who invested in the crowdsale actually 10x their money (in USD terms, usually NOT in btc terms…) quickly, more and more retail investors rushed into Ethereum (making its price rise astronomically) to be a part of the new gold rush.

As Ethereum (and some other platform coins) churned out an average of 3–5 ICOs per day over the course of 2017, more and more of these coins received their own listing on the well-known crypto exchanges and people went mad for the little colorful icons in blockfolio and for the promises by development teams. VC companies saw a legitimate way to divest their worst businesses and joined the party. After all, who would pass up the opportunity to raise a lot of assets for nothing (yes, nothing!) in return. A token has no equity rights, no debt rights and as for perceived legal practice won’t even have to ever be regarded in any kind of future product. It can just die. A perfect opportunity. Especially as there was now the private pre-sale, the public pre-sale and the ICO with falling “discounts” over the time it happened. Three money grabs in a row. Just plain amazing.

With all these coins trading on unregulated exchanges, pump and dump groups (usually paid) or large investors (“whales”) have an easy time moving prices any way they like. Of course when they pushed prices up they created “fear of missing out” (FOMO) on the “next bitcoin” with the huge group of inexperienced retail investors. The fact that little people in the cryptosphere seem to think this is a terrible tragedy that is well worth some poeple going to jail as opposed to constantly arguing against regulation is mind blowing.

Anyways, you now had established a manipulated altcoin market that (after only two of these) seems to definitely go from altseason to altseason without anyone questioning that the next one is just around the corner and with people FOMOing others into their “bags” on twitter.

Well, in my personal opinion, that is extremely unlikely. History is repeating itself and the current set of alts will either be valued much closer to earth (the ones of type a and b above) or simply disappear or go to zero (anything in c category above). That is not to say you cannot turn a profit by actively trading the pumps, but you better be close to the pumper or a very experienced trader. Holding these coins is a recipe for losing money.

It is not a given that the current set of altcoins has to experience another revival. Don’t count on it. The reason is that the bitcoin bubble is bursting. It does not simply re-inflate over night. Everyone who entered crypto in H2 2017 (which is the vast majority of investors) did so in order to become rich. None of these people invested because they have a deep understanding of the technology and can come up with an established valuation method that defends the prices paid. It was pure greed. So for the current trend to turn around you need either 1) a killer app that runs on the blockchain that is not simply moving money which we all use OR 2) prices so low or so high (FOMO) that new investors come in again due to greed. This is a very good write-up by Daniel Jeffries of what needs to happen. I think 2) would be a sad reason for it to happen. None of this is to say the technology itself is not game changing. But maybe pause and think if $130bn in “value” is not a bit beyond game changing at this point.

Nota bene: No, there are no Wall Street “whales” aching to get into bitcoin and quietly accumulating coins over the counter off exchanges — these guys know all of the above and they do not fall for it unless they can be the manipulators themselves (in which case they are likely in breach with their regulatory compliance so that is another no). They likely cannot even raise money for their crypto “hedge” fund right now…

So as bitcoin falls in USD price, by extension so will alts. The more losses people have the more they will want to get out of the toxic assets they hold and the more blockchain technology matures, the more people will realize that if you can buy equity of, say, Amazon on the blockchain (an Amazon security token) that has all the rights of traditional equity, the less any of these will buy the next “network effect” on a security token that is purely hot air, which is the vast majority. And yes, this dynamic is the reason for the falling prices. It is not US tax season, it is not “China FUD” and it is not some other useless reason or candle formation that people come up with. It is plainly greed and now fear.

Always remember: The altcoin that fell 90% is the one that fell 80% and then another 50%…
There actually is an Altseason coming

So is this all bad news? I do not think so. I actually think a maturing of the altmarket and the advent of actual security token will be a positive catalyst. Furthermore, it is not at all doubtful that if platforms such as Ethereum (and I believe bitcoin can actually offer similar tech) solve their scaling problems they will become the backbone of the web 3.0 where we will no longer be hostage to centralized organizations holding our data. Furthermore, there will be applications neither you nor I can think of for the blockchain and the organizations building these will become exceptionally valuable.

However, just like it happened during the .com bubble (and if we cannot agree that blockchain in terms of an innovation is very similar to the net itself then we simply don’t agree), many of these firms (and their TRUE security token) do not yet exist and the current crop of protocols and token has only a moonshot (pun intended) chance of being those token.