The year was 2020. The day was March 17, 2020.
We had seen what I hope will be considered the worst of tumbles in the crypto market, and it coincided with disastrous times in stocks as well. Oh, how short our memories are. Today, people are dancing in the streets with their proverbial fire hydrants popped on full waterfall over 1000X gains on puppy dog tails of blissful pumps and Muskian comedy sketches winking to moons, mars, and beyond.
If you wanna read my early, edgy nudges at the virus and a comparison to exponential growth of the good kind, you can read it here:
But, I'm gonna cover the parts that I want to right here in this post. Instead of having to read massive piles of quotations, I'll simply italicize the originals.
For the purpose of this new post, all excerpts are here to provide you with the contrast of exponential growth, HODLing, and the underlying economics of the all-important liquidity.
This is not 'that' conspiracy thought piece. This is not 'that' article about my strong personal views on right and wrong. This is the most important factual pieces summarized for perspective where we are right now, March 17, 2020.
For the first time since crypto was available to trade on numerous exchanges, there is a stronger correlation to the drastic moves in the stock market. The difference, however, is there is no economic stimulus for crypto. In fact, it can be treated as a speedy triage for everything wrong in the world. The BEST cases for blockchain are needed right now. No matter which outcomes take place, people are going to blame the governments for going that route. Too much money? Central banks and rich old white dudes are the problem. Too little effort, the governments want to kill everybody. Too much worry on testing citizens, it's a police state. Too little response to school closings like in the U.K., careless lack or responsibility.
So, the stock market has opened today. Bitcoin trading took small preparatory action with a tiny pump before hand, and right now is holding in the $5000's. At any point, the wrong response in FUD could take crypto down with the market again. Or, the separation could start to kick in when people realize that holding at $5K this far into panic is remarkably resilient.
Let's look at how dramatically different the scenarios can play out.
Exponential growth, something I'll cover in great detail if we get back to some kind of normal some day.
Let's look at a seemingly minuscule measurement.
Let's say I have $2000 and I want to get rich off of crypto. I am going to pretend I am perfect at trading and no radical market changes can affect me.
I am going to break that down into 20 positions at $100 each. So, I'm going to measure my growth curve of just one of those positions, and I am going to use the access of 20 of them to help buffer my chances to grow.
At just 0.3% profit over fees, one trade earns me $.30. Wooptidoo.
If I increase the trade size by the 0.3% I earn and nothing else, I get exponential growth. It seems unimportant, in the micro-pennies, for a long time. That remains the case, right up until the time it doesn't.
In a linear scale, I would earn as follows:
In 10 trades, I would earn $3. Not terrible.
$100 x 0.3% x 10 = $3.
In 100 trades, I would earn $30.
In 1000 trades, I would earn $300.
I'm not unhappy about this if I'm perfect and can get through 1000 trades and at least one of my $100 trades is always earning, and the others that may get stuck eventually all clear. Remember, in this scenario, just for the math, I am perfect. It works this way for the virus too. Numbers fluctuate by the accuracy of tests, influence of infection and myriad factors.
Now, the exponential version where one trade grows by the profit.
10 trades, I earn $3.04 instead of $3. Again, wooptifreakindoo.
100 trades, I earn $34.92 instead of $30. Wait a second, that is dramatically bigger. $4.92 in the first 100 trades didn't exist by doing exactly the same thing without adding in profit. This is why people who do amazingly well at trading with huge positions, earning a living from the profits will never out earn me at the end of the curve.
1000 trades in, instead of $300 profit, I now would have $1999.55.
How many of you would prefer to make $2000 over $300 from the exact same work?
So, that's the first bit about exponential growth versus linear growth. And now, some reflection on my frustration regarding the HODLer mentality on the long term growth of important, scarce assets like Bitcoin and Litecoin.
People have a LOT of opinions about how all of this stuff works. Most of those opinions are wrong.
There are HODLers and there are investors, there are traders and scalpers. Each of these adds a measure of scarcity and volume, and thus liquidity. The HODLer is the most dedicated and the very least helpful in the bunch, until it matters at the very end. The daily trader is the most valuable to the health of crypto. The more coins that are traded against Bitcoin and yes Tether, the more growth there is for crypto.
You don't believe me if you are in crypto, because you don't understand money or economy. So, let me ask, separate from crypto, is a $1 Billion economy healthier or weaker than a $100 Billion economy? What makes the difference in the two? Volume and liquidity. Money is not just printed, it is transacted.
When you earn $100 and let's say you buy a meal, a movie ticket, gas, and a few supplies, you got the food, necessities and 'stuff' you wanted and needed. You contributed $100 to the economy. Thanks. You got that, let's say, from your employer. They earned it from customers. Those customers all earned theirs from someone or somewhere else. That same $100 was earned, spent, and earned and spent over and over again. It isn't like it gets burned the one time you earned it and spent it. It is still out there transacting with others. Each place you spent that money is doing something else with it. That is how trading crypto works. THAT is how crypto works. There is zero value in the very best coins, that do nothing but sit. The very day that everyone listens to you about buying and HODLing, this whole thing goes away.
Lemme ask you, since you still don't believe me; how much has the crypto world gained from the gazillion coins lost in Mt. Gox? None. Nothing. They will only contribute at the end of the scarcity model when that number of Bitcoins fewer, cannot be traded. That's all. What about the origin address and earlier investors? They will get billions of dollars for their thousands of dollars of investment, but not until the very end, when Bitcoin goes way up in price.
So, let's say the other 13 million Bitcoins or so all get bought and held, instead of traded.
How many people are buying ETH directly from fiat? How many buying TRON without transacting in Tether or Bitcoin first? Not many.
You favor ADA or NANO? You like BAT and that awesome Brave browser? Think a lot of people are living in a 100% BAT token economy? Not a chance.
Volume is the result of coins going from Bitcoin to every other coin and back again. $1 Billion of Bitcoin is easily transacting every hour. There aren't enough Bitcoins to measure that value transacting, and that is because enough people are trading their coins to build value.
Why does that matter?
Well, if value is fixed, then there are only 'x' number of people who can earn 'y' value from Bitcoin, and the growth will be linear based on mining fees, and that's it. Once they're all bought up, no one else gets any Bitcoin. But, if they are traded, each individual has the potential to take their $100 of Bitcoin and earn $2000 from it. You prefer $100 of Bitcoin forever, or $2000 worth of Bitcoin? You may be saying "yeah, but I'll hold mine until it grows to $2000". That's how I know you still don't get it. If everyone does that, it will not get to that point of growth, because it will be only measured by supply, and not by use.
Let's make the world a better place and use this time to be loving, thoughtful, and caring towards one another, learn some new things, get good at new skills that can be accomplished from home, and let's focus on protecting the crypto economy by treating it separate from the stock market. Let's use sound principles that fight FUD and FOMO. Let's shake out the disgusting opportunists that use the fear of death to shill their ridiculous coins, and focus on principles that will help us all build the wealth we so greatly need in the months and years to come.
So, if we take a look at the bigger picture, which in my opinion is the only one that gets us to our goals we hope for, we need for people to understand and appreciate the vast resource of intermediaries in the crypto space. Without liquidity price becomes irrelevant. You cannot buy a coin from someone who is unwilling to sell. This deep into Bitcoin's halvening cycles, believe me the market would already know what it is like to bump up against true scarcity if the only coins available to buy were those yet to be mined. I believe we are going to see something similar to this in a few years. But, parallel choices like ETF's and leveraged derivatives will dramatically slow the value on the way there, and are elements that stem from greed on the side of the Casino AND the Gambler. If you partake, you are partly to blame for the price taking longer to reach ATH's each cycle.
HODLers are smart, long term investors and are important to the crypto ecosystem, but they under-value the liquidity provided them every time they add to their stacks. Example: when MicroStrategy wants to purchase another 100 Bitcoins (revisit 2011 and imagine it being newsworthy for a company to announce adding 100 Bitcoins to their portfolio!!!), if there was literally zero liquidity... everyone following their model to HODL, they would have to fight in line with everyone waiting for the next block to complete, for miner rewards to payout, and for miners willing to sell their newly minted coins. In that system, the miner can literally put ANY price on a Bitcoin that they wish. We could jump from a $54K Bitcoin to a $350K Bitcoin in a matter of minutes. But, when you place 200,000 small-to-medium retail investors in the middle of that scenario, let's say exactly 50% of them wanting to buy, and 50% willing to sell, you will have a nice spread of what price at which people are eager to sell. I promise you there will be solid deals between $55K and $100K long before having to resort to a desperate $350K Bitcoin. The price will drive upwards in a low-volume wave, but only by a few hundred, maybe $1000 at worst. That is because there are traders willing to take profit before re-entry.
HODLers don't worry; Gordon is with you. I believe in the long term investment of sound money, storage of one's long term asset value. But, in my next post I am going to take issue with the very strategy that is currently earning MicroStrategy a firm footing in the fight so you can see what I see.
I will leave this controversy slightly open-ended and end my end with this: what are you trying to earn, and what are you using as a standard of measurement?
And on that heroic note, Crypro Gordon Freeman... out.