A few thoughts - Wednesday, April 23, 2014

[Steve Sokolowski]

A few thoughts:

1. There is a model of psychological development of the lifecycle: https://en.wikipedia.org/wiki/Eight_sta ... evelopment. The theory goes that as people become older, they "graduate" from one big question to another big question in their lives. At each phase, they can fail and be held back in their development, or they can move on to the next life phase.

2. You may know some of the people who failed at particular life phases. For example, there are plenty of 25-year-olds who live with their parents and have yet to start a career. These people are stuck in the adolescent "Fidelity" phase, having not resolved the previous life stage's conflict of choosing what their beliefs and values are.

3. Bitcoins also go through cycles of questions. Each downturn between bubbles seems to bring another major question that gets resolved at the end of the cycle. Of course, in any of the cycles, the negative answer can occur, and development of bitcoins would be stunted or ended.

4. Two cycles ago, the question was whether there was simply any demand at all for the benefits bitcoins provided. As the number of businesses accepting bitcoins grew, the price skyrocketed into a bubble, answering the question. During the last cycle, the constant question was whether bitcoins would be accepted by governments or only be a haven for drug dealers. When that question was answered with the shutdown of the Silk Road and the Senate hearings, the price of bitcoins skyrocketed.

5. I propose that, in order to predict market trends, one needs to understand the core theme of the current cycle. As many have pointed out, new merchants accepting bitcoins no longer move the market - that question was answered several cycles ago. During the last cycle, every action by FinCEN caused 10% drops, as much as $8-$10 per day. When places the Sheep Marketplace imploded, prices plummeted. Now, you don't hear anything about those black markets, nor does the price move on FinCEN, because those questions are settled.

6. I propose that the question for this cycle is whether bitcoins are a tool for serious investors and businessmen, or whether bitcoins will be dominated by shady or incompetent characters like Danny Brewster, Mark Karpeles, Charlie Shrem, the people who run BTC-e and GHash.io, and Chinese market manipulators.

7. If that is the question for this cycle, then the only possible resolutions are going to be are: a big company like Google "adopts" bitcoins as the primary method of payment for all its services, Wall Street opens funds and regulated exchanges that put these other guys out of business, or a government selects bitcoins as their currency. Watch for one of those things to happen, and buy big when it does.

8. Each time, the negative answer to the question becomes less and less severe. Two cycles ago, the negative result would have been the complete collapse of the bitcoin network. Last cycle, failure would have meant bitcoins being the domain of drug dealers and scammers. Now, failure probably means that bitcoins become a specialty Internet payment system that is used by a small number of anonymity-focused merchants like pornographers.

9. In the next cycle, my thought is that the questions upon which bitcoins rise and fall will be technical in nature. For example: if bitcoins can scale past the 1MB transaction limit into a global reserve currency, or whether the high transaction fees resulting from being unable to resolve the problem causes them to become a clearinghouse between centralized off-chain networks like Bitpay, Coinbase, and big banks. While the previous cycles have all been political, the politics will eventually die down, and the technical is going to come to the foreground before the end of the year.