Saw an interesting question that I'd like to elaborate on a bit more.
"Do I even have the ability to analyze crypto in a way that gives me more security?" @Geerkens96
tl;dr: Yes, you can look at it more closely, but (absolute) security does not exist for a variety of reasons. Olaf is one step ahead of us there again.
As with a stock, you can go more or less deep into the analysis. A major difference with crypto is of course that there is usually little physical value behind it. For a company that claims to have production facilities or service centers, you can check with Google Maps whether they exist and whether the size of these facilities fits the claims. If this is not enough, you can estimate the productivity by looking at the number of trucks coming and going. If the share turns out to be a bucket of shit instead of a pot of gold, then I am still entitled to my fair share of this bucket and its contents. If there are buyers who need fertilizer for their fields and someone who wants to use the bucket as a chamber pot, the proceeds are distributed to creditors. If the proceeds are enough for creditors of the first and second order, then the rest is distributed among the share holders.
If a cryptocurrency falls (permanently) to zero, then one idR has no legally protected claims. [1] The tokens or coins remain intact without a network or ecosystem, however, they presumably remain quasi-useless. How can one determine whether the crypto project is a worthwhile investment?
Besides countless technical indicators, I would ask basic questions: What problem is the project trying to solve? Is the problem worth solving? How is the problem currently being solved and how likely is it that the new project can establish itself as an alternative? Who is behind the project? How is it financed? What is the current status of the project?
Not every one of these questions will have an unambiguous answer, and the answers to these questions may change over time and, of course, so may the evaluation of the project.
If you prefer to look at numbers and charts, you can of course look at how the project has performed so far. What does the price trend look like and what is the trading volume? If it is already older, has it reached / exceeded the 2018 ATH mark again? How was the performance measured against bitcoin? On which trading venues can be traded / are listings imminent or has been delisted (and why)? What is the current liquidity level?
Then, of course, there are questions about general mechanics of the project.
What mechanisms govern the creation / destruction of tokens / coins? Is there an upper limit? Are there any rules for current holdings that prevent holders from simply dumping their holdings on the market? What risks is the project exposed to? Examples would be regulatory, centralization, other projects, general fuckups. If the project has already encountered problems, how has it dealt with them, how has the market reacted, and how do you evaluate that for yourself?
In general, you can also try to get a mood picture, although I think that is quite difficult. It is very easy to find echo chambers where there is only positive hype. Telegram channels or Reddit subs of a project often fall into this category.
If all this is too complicated for you, you can buy dog coins with a cool logo.
So that it's not just empty talk, let's play through this with Bitcoin.
Bitcoin
Probably everyone has heard of Bitcoin. In the course of time, the narrative has shifted back and forth between the positions medium of exchange / unit of account / store of value. Critics say to this day it is none of these things.
For the narrative as medium of exchange, it can be historically argued that Silk Road and subsequent DarkNetMarkets would not have been nearly as successful without BTC. In more recent times, the Lightning Network can also be cited. Through this network, it is now possible to make payments in BTC without incurring relevant transaction costs. Further characteristics for this narrative, which also support the other narratives, are simple portability, divisibility, rarity and verifiability. For the unit of account narrative, it can be argued that the performance of each cryptocurrency is measured against that of Bitcoin. The narrative of store of value depends a lot on the way it is viewed. Nominal value fluctuates wildly in the short term. Similar to gold, it is limited and further growth is very predictable. However, due to the other characteristics already listed, Bitcoin is considered superior to gold by proponents. While gold has a much longer history, it is significantly less divisible, transportable or verifiable.
So who is developing and managing all this junk? After Satoshi Nakamoto
vanished into thin air, the development was carried on by various developers. The Bitcoin Core software has several hundred contributors on Github with widely varying participation. Money for the developers comes from various sources, some developers are paid by the institutions or companies they are employed by. There are companies from the crypto world that "sponsor" developers and generally devfunds are also collected and provided by various organizations. [2] From a proposal to the implementation in the network is a long way, a Bitcoin Improvement Proposal can take several years to be implemented in the network.
Let's move on to what I'm sure many here are familiar with, funny colored candles and some trading numbers. In order not to start with prehistoric primordial slime, let's get one out first. Currently, Bitcoin Mcap is $1.2 trillion and it only took Bitcoin 12 years to reach the 1 trillion threshold. Google took 21 years, Amazon 24. Total silver holdings are estimated at about $1.4 trillion. While certain safeguards prevail in trading on stock exchanges to prevent sharp price fluctuations, almost no comparable rules exist in the crypto world. Bitcoin, as the forefather, is a prime example of this, both positively and negatively. In 2011, there was a >99.9% price collapse from about $17.5 to $0.01. This was an attack on the then dominant exchange MtGox. Although trades on MtGox were partially reversed, an estimated 2000 BTC, well below market value, were withdrawn from the exchange as a result of the attack. Other marketplaces also suffered extreme volatility at the time. Video from the MtGox live feed on this [4]. However, examples of extreme price drops can also be found this year alone be it an 87% flash crash on one exchange [5] or the crash in May. On a positive note, however, even large sell-offs like the trigger of [5] on other exchanges have resulted in minimal volatility. Volatility viewed from 2010 to 2021 has decreased slightly. [6] Similarly, special trading venues, for very large orders, as well as the inherent monetary incentive not to let the market collapse excessively, are likely to play their part in reducing volatility. A legendary example of this is the Bear Whale. On October 6, 2014, in an unprecedented event, 30,000 BTC were put into the market as a huge sell wall. The wall pulled the market price from around $320 to below $300. Within 6 hours, the bulls managed to completely buy out the wall. Video of the chart [7]
The basic mechanics of the network can be seen as a basis for the consistent confidence in Bitcoin despite the violent price fluctuations. The creation of new Bitcoins is linked to the creation of new blocks. The amount of Bitcoins created per block is halved at a fixed interval. This means that an absolute upper limit is reached in the far future, above which no further Bitcoins can be added. This predictability guarantees that it is always known how many Bitcoins exist. Likewise, due to the openness of the blockchain, movements of Bitcoin can be detected and evaluated at any time. Thus, there are several services that deal with the monitoring of large wallets. If someone had the intention to sell large amounts of Bitcoin abruptly, this could be detected beforehand, because these Bitcoin have to be moved to the exchange. Basically, however, there is no mechanism that prevents a renewed scenario like with the Bear Whale. However, I see this more as a short to medium-term risk for the price. Really serious risks have actually been summarized very well by Coinbase in its IPO. [8]
- Identification of Satoshi Nakamoto or the movement of his Bitcoins.
- Disruption of the network through bugs, hacks, splits or forks
- Centralization of the development of the software
- Methods that break Bitcoin's cryptography
- Regulatory policies that severely restrict the trading of Bitcoin
- Problems with scaling or transaction costs
In terms of identifying you know who I think that would certainly bring increased critical consideration. Whether it would do lasting damage to the network then certainly depends on the person(s) behind the pseudonym. The identification of Satoshi's BTC is a rabbit hole of its own. tl;dr there are about 1.1 million BTC attributed to Satoshi. This is slightly less than 6% of all BTC generated to date. Current speculation is that this activity is primarily due to Satoshi's desire to build and protect the vulnerable network at the outset. [9]
An example of a critical bug, in Bitcoin, that was exploited in 2010 is an overflow that resulted in the generation of 184 billion BTC. Good video on this [10]
Forks are the many forks of Bitcoin that were created in 2017 / 2018 (and even before). Here I can also immediately answer a question that was asked regarding my portfolio. Wtf is bitcoin gold? There have always been disputes about changes to the protocol of Bitcoin and from these disagreements, plenty of spin-offs have arisen. Worth mentioning because they still exist are BCH, BSV, BTG, BCD. Those who held BTC at the time of a fork also had the coins of the fork afterwards. Literally free money. Because I was too lazy to sell all forks, as this requires a few extra steps, I still have BTG, among others.
On the subject of breaking cryptography using quantum computers, there is a good analysis by Deloitte. [11] Since Bitcoin is far from the only one affected, there is already all sorts of research in the area of post-quantum cryptography. The main challenge would be the integration of the new methods into the network, as well as the fact that the update would not be backwards compatible, since an attack would still be possible via the old methods if they were supported. However, Bitcoin also shares this with every other affected system.
Because scaling and transaction costs are something that many critics like to tease themselves about, yes Layer 1 Bitcoin will probably never be able to keep up with centralized systems. That's why there are all kinds of concepts to make Bitcoin usable in other ways. Be it BTC as a token on Ethereum or the Lightning Network. Rome was not built in a day either. Why Bitcoin must have perfected everything after 12 years is beyond me. But maybe the critics are all right and Bitcoin will fall to 0 tomorrow ...
... except and now we're getting to the end ... I don't really see that outside of significant bugs or hacks. The significant investment in specialized hardware for mining alone is now a hedge of sorts in my view. Miners would have little application for their hardware, outside of other cryptocurrencies. That is, even if only a small part of the mining, out of idealism, speculation or whatever reasons, continues to run so would develop analogous to the emergence phase of the network again a certain value. Whether that would be 1000$, 1$, 1ct or a fraction of a cent is another matter.
Sentiment is always difficult with crypto and bitcoin is being floated like a pig through every medium, so you will always find an opinion in either direction. Fear & Greed Index is quite nice and tools that measure general mentions as well. Cryptoradar from Bison offers this in a user-friendly way.
Enough for now with obviously worthless Buttcoins. Can anyone recommend a wheelbarrow? My baker does not accept payments in trash bags, for sustainability reasons.
Soon I'll turn this into another crypto project.
No investment advice.
[1] There is now at least one stablecoin that has some kind of guarantee.
https://help.paxos.com/hc/en-us/articles/360041902012-Regulated-Insurance-of-Customer-Assets
[2] https://coinmarketcap.com/alexandria/article/who-are-bitcoin-cores-developers
[3] https://companiesmarketcap.com/silver/marketcap/
[4] youtube[dot]com/watch?v=T1X6qQt9ONg
[6] https://www.buybitcoinworldwide.com/volatility-index/
[7] vimeo[dot]com/273629899
[8] https://www.sec.gov/Archives/edgar/data/1679788/000162828021003168/coinbaseglobalincs-1.htm
[9] https://whale-alert.medium.com/the-satoshi-fortune-e49cf73f9a9b
[10] youtube[dot]com/watch?v=ZI5XzS0SrnY
