Trading

  • The Future of the Blockchain

    Last week, I talked about market performance in 2021.  A decent portion of that article talked about cryptocurrency and the recent downturn (after a stellar 2021).  I'm a skeptic by nature, so it's hard for me to get behind any specific coin (even Bitcoin) at this point in time.

    This week, I had a conversation with good friends, including John Raymonds, about the topic as well.  John is much more active in the space and brought up some good points.  Something I noticed was how the level of discussion is starting to elevate and mature. People are beginning to think about secondary and tertiary value propositions. The conversation even made me think about repurposing some of our underutilized hardware in our server room for some crypto-related purposes.

    So, today, I want to focus on a different aspect of the equation … the potential value propositions of cryptocurrency as a technology – and the blockchain. 

    To start, I want to talk about Industrial Revolutions.  In part because we're at another inflection point. 

    A Look at Industrial Revolutions

    The Industrial Revolution has two phases: one material, the other social; one concerning the making of things, the other concerning the making of men. - Charles A. Beard

    There are several turning points in our history where the world changed forever.  Former paradigms and realities became relics of a bygone era. 

    Tomorrow's workforce will require different skills and face different challenges than we do today.  You can consider this the Fourth Industrial Revolution.  Compare today's changes to our previous industrial revolutions. 

    Each revolution shared multiple similarities.  They were disruptive.  They were centered on technological innovation.  They created concatenating socio-cultural impacts.

    Since most of us remember the third revolution, let's spend some time on that. 

    Here's a map of the entire "internet" in 1973. 

     

    6a00e5502e47b2883301bb096809ce970d-600wi

    Reddit via @WorkerGnome.

    Most of us didn't use the internet at this point, but you probably remember Web1 (static HTML pages, a 5-minute download to view a 3Mb picture, and of course … waiting for a website to load over the dialup connection before you could read it).  It was still amazing.

    Then Web 2.0 came, and so did everything else we now associate with the internet; Facebook, YouTube, ubiquitous porn sites, Google.  But, with Web 2.0 also came user tracking, advertising, and we became the "product."  Remember, you're not the customers of those platforms – advertisers are.  And if you're not the customer, you're the product. And when you're not the customer, there's no reason for the platforms not to censor your thoughts to control the narrative. 

    Putting You In Control

    Web3 (and the blockchain and its reliant technologies) brings the power back to the people. 

    Primarily due to decentralized access with equal treatment for everyone.  Governments are already being pressured by Bitcoin and other cryptocurrencies.  But so are banks and brokerages, due to smart contracts and Ethereum.  Soon, even VCs will be impacted due to OHM fork treasuries or initial DEX offerings. 

    As Web3 gets more mature, so will decentralized finance.  Meaning, big banks, governments, ISPs, and more will have less control over the applications and uses of the technology. 

    If handled correctly, that means competition can discourage the productization of your digital presence.

    Removing Barriers

    There are many practical ways this would impact your life – but let's look at one that's already happening. 

    El Salvador recently made Bitcoin legal tender.  Talking about all the reasons this happened is beyond the scope of this article, but it does make El Salvador an excellent case study for the possibilities. 

    To start, it's now easier and quicker to buy a beer there (with Bitcoin) than it is in the US with cash.  It also stabilizes pricing in a civil war, because it's easy to move both in and out of the country. 

    Consequently, it also means that their currency holds its value as they travel to other places. 

    Let's take this to the extreme.  Let's say someone was to convert all their net worth to Bitcoin, and put it in a hardware wallet.  They could conceivably memorize their seed phrase, throw the wallet in a fire, and fly to El Salvador with only the clothes on their back.  After finding a way to scrounge up the money to buy another hardware wallet through random acts of labor … they would be in a completely new country with their entire net worth and no other footprint.  It's scary – especially for governments and their taxing authority.  But, it creates a new set of potentials and freedom.

    Now, take it a step further.  What would the world look like if you had all your health data, insurance, etc., with you anywhere you travel?  The world becomes your oyster in a way that was almost impossible before. 

    And that's only the beginning. 

    But, to bring it back to my skepticism again, there are a lot of roadblocks, inferences, and time in between today and the decentralization of the internet and finance.  And for now, that thought experiment only really works if you're willing to move to El Salvador.  The larger countries seem to be doing everything they can to discourage the adoption of cryptocurrencies. Though I think the smaller countries view this as a chance to become one of the new hubs of the world.

    However, maybe it's time for this quote by Elon Musk: 

    "Stop being patient and start asking yourself, how do I accomplish my 10 year plan in 6 months? You will probably fail but you will be a lot further ahead than the person who simply accepted it was going to take 10 years."

     

     

  • Here Are Some Links For Your Weekly Reading – February 6th, 2022

    Have you paid attention at all to the Spotify controversy?

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    Here are some of the posts that caught my eye. Hope you find something interesting.

    Lighter Links:

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  • How Much Electricity Does Bitcoin Use?

    Electricity use is one of the common complaints people have when talking about Bitcoin adoption and mining. 

    So, how much energy have we been using to mine Bitcoin?

    More than you might’ve guessed.

    The world is changing.


    Bitcoin-energy-usage

    via Daily Infographic

    I know several people that are getting more into mining as cryptocurrency continues to grow in popularity (despite the downturn). 

    While this amount of energy usage is startling – and bad for the environment – there are many ways to reduce the consumption of electricity by cryptocurrencies. 

    On the other hand, this might be an interesting alternative data source that gives us a different perspective about the ongoing popularity and commitment people have towards a currency.

     

  • Here Are Some Links For Your Weekly Reading – January 30th, 2021

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    Here are some of the posts that caught my eye. Hope you find something interesting.

    Lighter Links:

    Trading Links:

  • 2022 Predictions

    About a month ago, I shared visualcapitalist's 2021 predictions to check how well they fared at the end of the year. 

    Honestly, the list was pretty good. It wasn't perfect, but you wouldn't expect it to be. 

    In that article, I asked this question: 

    What's going to happen as a result of the continuing pandemic, inflation, interest rates, the ongoing supply chain issues, and the growing anxiety and unrest brewing underneath the surface of the new normal? In January, we'll get to see VC's predictions. Before that, what do you expect to happen in 2022? – How'd These 2021 Predictions Fair?

    With that, here are visualcapitalist's 2022 predictions: 

    Prediction-consensus-2022-1via visualcapitalist

    Let's be clear – most predictions are either vague and easily guessed (and therefore not helpful) or random conjecture. 

    But, there's value in prediction, and there's value in analyzing the data before you. The caveat is that prediction is better when it's applied to human nature and not the machinations of fate, and data can be a distraction if it's not being carefully curated and analyzed to remain relevant to your goals. 

    For example, I agree with their general direction for technology. Tech is continuing to grow in influence, and as Web 3.0, the blockchain, and AI mature as platforms for sub-technologies, I think their importance is only going to skyrocket. 

    Prediction can also be entertainment. I certainly catch myself looking for patterns and differentiators for everything from whether my meal is going to come to the table correctly, to who's going to win the Super Bowl. 

    I know the chances are low, but I still think it's going to be the Cowboys … 

  • How Markets Performed in 2021

    2020 was a roller coaster of volatility, and while 2021 was as well, most asset classes saw improvements as the world reopened. 

    But it wasn't all smooth sailing.  There were significant supply chain struggles and rising inflation … not to mention the rising cases of COVID. 

    Regardless, markets are not the economy, and while there are numerous factors to think about, I've always found markets interesting. 

    Maingraphic-asset-class-2021via visualcapitalist

    2021 was a year of rampant speculation, in part because so many systematic traders underperformed.  For example, Renaissance reportedly saw ~15 billion in outflows last year (despite double-digit returns) as their clients likely moved towards more "exciting" opportunities. 

    Of course, some of those "exciting" opportunities were cryptocurrency-related.  Moreover, chasing performance like that is often mean-reverting.  Yet, I've seen a massive increase in interest among various business groups in crypto, Web 3.0, and the Blockchain. 

    Cryptocurrencies

    While crypto generally performed well in 2021, 2022 has seen a drop that erased over $1 trillion in value. 

    Crypto-Performed-in-2021_03via visualcapitalist

    The reality is that crypto markets matured a lot in 2021.  The thousands of coins are mostly a distraction, but there are many interesting coins from various sectors with interesting technology behind them.  There is increased infrastructure and decreased correlation between coins.  Unfortunately, not enough to keep this drop from affecting the whole space. 

    So the question is, is this a "discount" for people to buy into the space, or a sign of future troubles?

    It's no secret that I've always been a fan of Blockchain but cautious of cryptocurrencies. 

    I think there is a lot of money to be made speculating in cryptocurrencies, but how much of that money being made is attributed to luck vs. skill?

    Crypto's are interesting, in part, because they're a digital currency decentralized over a peer-to-peer network.

    The more people are willing to accept it as a medium of exchange, the more valuable it becomes (and the more it becomes a stable store of value).

    Supposedly, decentralization provides it safety from censorship and government interference – meaning it has value as an international currency and as a currency for black-market transactions.  But, in my opinion, that remains to be seen (and I consider it unlikely for most cryptocurrencies).

    However, the worth of a Bitcoin isn't just based on sentiment (on one hand, there are desires to avoid fiat currency vagaries, government interventions, and scrutiny, while having a fair price discovery method, etc.  … on the other hand, there are also the costs to mine a Bitcoin, transaction fees, etc. and crypto has recently been under fire for its huge environmental impact).

    Compared to a reserve currency – whose worth is primarily influenced by trade value and other macroeconomic factors – watching crypto's volatility can be scary. 

    That being said, as adoption increases and more businesses enable it, it's possible that it will continue to legitimize.  For the time being, I remain a long-term skeptic because there is too much working against it. 

    Many of my initial complaints are centered on coins as currency.  I get that there are already many interesting uses of Blockchain that will also help to bring credibility to coins as a store of value. 

    The question for me is, even if cryptocurrency is here to stay long-term (and avoids government control), which coins will it be?  Do they even exist today?

    I'm positive there is money to be made related to the Blockchain, NFTs, and cryptocurrencies.  But, at this point, it's a speculators game, and I think the best way to capitalize on this trend sustainably is to sell picks and shovels for the gold rush, instead of trying to stumble upon gold. 

     

     

  • Betting On The Super Bowl

    Trying to get rich quickly? Want to know if the markets going to be bull or bear this year?

    Look no further than the "Super Bowl Indicator".

    Shutterstock_158031044-1-1

    The theory is a Super Bowl win for a team from the AFC foretells a decline in the stock market and a win for the NFC means the stock market will rise in the coming year. 

    There is one big caveat … it counts the Pittsburgh Steelers as NFC because that's where they got their start. 

    If you accept that caveat, it has been on the money 33 years out of 41 – an 80% success rate. Sounds good, right?

    Come on … you know better.

    Here are some other "fun" stock market fallacies:

    Back to Reality

    Rationally, we understand that football and the stock market have nothing in common.  And we probably intuitively understand that correlation ≠ causation. Yet, we crave order and look for signs that make markets seem a little bit more predictable.

    The problem with randomness is that it can appear meaningful. 

    Wall Street is, unfortunately, inundated with theories that attempt to predict the performance of the stock market and the economy. The only difference between this and other theories is that we openly recognize the ridiculousness of this indicator.

    More people than you would hope, or guess,  attempt to forecast the market based on gut, ancient wisdom, and prayers.

    While hope and prayer are good things … they aren’t good trading strategies..

    As goofy as it sounds, some of these "far-fetched" theories perform better than professional money managers with immense capital, research teams, and decades of experience.

    I have a thought experiment I often ask people that come into my office. 

    What percentage of active managers beat the S&P 500 any given year?

    … Now, what percentage beat the S&P 500 over 15 years?

    The answer is about 5% as of 2019 (and that's in a predominantly bull market), and I have to imagine it's only gotten worse in the past two years.  That's significantly worse than chance. That means something they're doing is hurting, not helping. 

    Screen Shot 2019-01-30 at 1.22.32 PM

    via Gaping Void

    There's simply too much information out there for us to digest, process, rank, and use appropriately.

    Every second you spend looking at a market is a second wasted.

    There are people beating the markets — not by using the Super Bowl Indicator … they're doing it with more algorithms and better technology. 

    There will never be less data or slower markets.

    Onwards.

  • Visualizing Global GDP in 2021

    There are numerous ways to look at or measure the global economy (including trade blocs, big industry movers, or debt). Another way to get a global overview is to compare GDP.

    When trading was slower and more deeply tied to an investor mindset, economics played a more significant role in fundamental analysis. As the holding period (or "time in trade") shrinks, there is less focus on predicting markets over the long term … and more on determining which techniques are making money now.

    Even though markets are not the same as the economy, on a macro scale, many believe that it is possible to create value by understanding and the global economy better.  

    With that, take a look at the $94 trillion world economy, divided by region. 

     

    Global-GDP-by-Country-2021-V15-Mobile-1 via visualcapitalist 

    Some thoughts: 

    • Global GDP was $87 trillion in 2019 and $84 trillion in 2020. So, while COVID did negatively impact GDP initially, it has rebounded and risen again as if 2020 hadn't interrupted the trend. 
    • Since 2018, China has been slowly gaining ground on the U.S.'s lead 
    • Global GDP isn't zero-sum, so countries doing better doesn't necessarily mean other countries are doing worse 
    • The top four countries – U.S., China, Japan, and Germany – make up over half of the world's GDP. 
    • Based on GDP growth, Libya, Guyana, Macao, the Maldives, and Ireland have the world's fastest-growing economies. 

    To put these numbers in perspective, the world economy was approximately $3 trillion in 1970, and GDP is estimated to double again by 2050. 

    Crazy stuff.

  • How’d These 2021 Predictions Fair?

    I write about the future of technology often. 

    But, sometimes, it's fun to see what others have to say as well.

    Every year Visual Capitalist puts together a list of their predictions for the coming year. As we reach the final two weeks of 2021, I figure it's worth taking a look!

    Here was their "bingo card" for 2021.

    Prediction-consensus-2021via visualcapitalist

    Honestly, that was a pretty good set of predictions.  While some of this list didn't pan out, much of it did. We're seeing a growing exodus from major cities (where people lived to pursue opportunities previously available only in such places), movies are recovering, and hybrid work models are all the rage. 

    Could they have predicted how much of an issue COVID would pose throughout the year? Probably not. 

    As we near the end of 2021, there's a lot of uncertainty in the air.

    Global markets have the jitters – and we don't see the increased volatility changing anytime soon. 

    What's going to happen as a result of the continuing pandemic, inflation, interest rates, the ongoing supply chain issues, and the growing anxiety and unrest brewing underneath the surface of the new normal? In January, we'll get to see VC's predictions. Before that, what do you expect to happen in 2022?

  • Here Are Some Links For Your Weekly Reading – December 19th, 2021

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    Here are some of the posts that caught my eye. Hope you find something interesting.

    Lighter Links:

     

    Trading Links: