Understanding Cryptocurrency – Volume 1

This post will discuss a Token Network Effects, learn to understand instead of just take other peoples word for what to invest in. In this series we will explore everything about cryptocurrency and its uses. Much of what I cover will be about topics which I feel there is a large scale lack of comprehension or very little material found elsewhere. The series is not about things like Bitcoin, Monero, ZCash, Bitcoinz, Cardano, Litecoin, etc. That is what everyone talks about and unfortunately has given many involved in cryptocurrency and those just learning, tunnel vision towards replacing banks and fiat. As a result, many people either don’t care for cryptocurrency and don’t see much of a need for it.

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Instagram(Unknown)

Hopefully, as you read these articles they spark a fire in you to think about what is discussed in a new way. It doesn’t matter if you agree or disagree, but that you have thought about what is covered yourself and made your own judgement. Maybe you will think of an application for cryptocurrency much better than what I have presented. I will present many thought exercises in this series and hope that instead of just reading them, you take the time to think about what I am asking you, and then read on. Feel free to share problems with anything discussed, better ideas, or questions.

Question 1: Pretend that you owned a software company that had a software for polling and voting. Think about how you would make money or monetize it. (Google Monetization if you don’t understand or are drawing a blank)

Question 2: Think about what customers you will be able to monetize. For example, would it be smart spending money to market your software to an 8 year old child? Would it be smart spending money to market to a government?

Question 3: If I took 1 million poor people from across the world that don’t have money to buy anything and 1 million people from England who make over $50,000/year, which is monetizeable?

Question 4: There are roughly 3 billion people in the world that are in poverty making $3 per day or less. Would one of these people be worth your while to spend money marketing to?

Question 5: If you cared about those in poverty, wouldn’t it make more sense to market your product to people who have money? I mean you could make a lot of money by making a better business decision, then you can donate it to charities to help those people, right?

Keep your thoughts in the back of you mind as you read through this post.

This post is meant to go over methods for evaluating the value of a cryptocurrency, which is misunderstood by many people. To truly begin understanding cryptocurrency and the future, it is important to understand this area first. Don’t get caught up trying to understand hash pointers, byzantine fault tolerance, or Eliptic Curve Digital Signature Algorithms, etc.

Instead of providing technical details on valuation of a cryptocurrency this post is meant to provide a general idea of my prediction of what cryptocurrency will be in the future and why it requires rethinking many things.

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Cryptocurrency to me is different than what you may see on the news and in many other places. I don’t think I am on the same page as many within the cryptocurrency community. Though I know I am not alone as there are many currently developing cryptocurrencies that are utility based and go beyond simply being able to move money around like Bitcoin and more focused than a broad app development platform like Ethereum.

Bitcoin or Litecoin are not the future for cryptocurrency and I don’t think banks will go anywhere anytime soon. Don’t get me wrong, banks should be very afraid of cryptocurrency. Unfortunately, they are worried about the wrong thing. Big banks are worried about lost revenue because they will be disintermediated (not needed). Instead, they should be worried about understanding cryptocurrency and being able to leverage new data points from it and interact with it. That is what has the power to dislodge current banking giants. I am not talking about decentralized banking movement within the crypto community, but I am talking about some small regional bank turning into the next Chase or HSBC.

What is cryptocurrency?

To keep it simple for this post, I want you to think about cryptocurrency not like traditional currency, but instead think of it like a combination of many elements. Do not worry about blockchain or anything else, cryptocurrency has value on its own and use without blockchain regardless of what you hear on the news. Depending on the design and architecture of the cryptocurrency these elements can vary. In my opinion the interaction of these elements as system is what makes cryptocurrency so powerful.

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One vital element found across all cryptocurrencies is Network Effects. (Google it if you don’t know what this refers to, then keep reading) Most business professionals or marketing professionals use network effects every day. Are you part of your local chamber of commerce? Do you go to networking meetings like Business Network International (BNI)? Both of those are built on the concept of network effects. We will try to understand how these network effects are forcing us to rethink many things.

What gives cryptocurrency value?

Let’s keep this as simple as possible and avoid going into M0, M1, M2, and M3. Let’s not worry about cryptocurrency being a store of value, and lets not worry about the word which I have no clue about that’s thrown around a lot, “intrinsic”. Finally, don’t worry about other factors like regulation, media, scams, etc.

The true value of a cryptocurrency will be determined by the number of people which use it and how much it is utilized. The more people on a cryptocurrency network the more demand there will be for it. Why? Because as the number of users increases so does the number of transactions within the network. Every time there is a transaction the cryptocurrency is out of circulation temporarily decreasing the available supply and making everything in circulation more valuable. If you have 100,000 people on the network using it daily then there will be 100,000 times during the day that the cryptocurrency is sold, purchased, and transferred that it is not available and out of circulation for maybe 2-3 minutes.

Traditional Startup vs Cryptocurrency

A CRYPTOCURRENCY IS NOT A STARTUP! WHEN YOU BUY A CRYPTOCURRENCY IT IS NOT LIKE BUYING A STOCK IN A COMPANY, YOU ARE BUYING INTO THE TECHNOLOGY WHICH FUELS TRANSACTIONS FOR SOMETHING. TO KEEP IT SIMPLE, OWNING CRYPTOCURRENCY DOESN’T GIVE YOU CONTROL OR OWNERSHIP LIKE IT DOES IN A COMPANY. (This is not completely accurate, but simpler way to think about it for those of you who are new to cryptocurrency so you do not fall for a scam)

I am comparing startups with cryptocurrency because the same valuation concepts are often applied to cryptocurrencies when investing.

Traditional startups generally have a problem they are solving or an idea on how to solve it. Many startups today will offer something free to gain as many users as possible. If the problem they are solving is a big problem they will gain many users quickly. The startup will then figure out how to make investors happy and monetize it if they haven’t already. That normally means the selling of user data, advertising to the users, or charging for the product.

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Does anyone remember the early days of Facebook? How many advertisements and promoted click bait was on your feed? How often did you have to watch a commercial to see a video someone posted?

The value of a company like Facebook is heavily based on the number of monetizable users. If a user is not monetizable, then they are useless. That means if the user is a poor person from a third world company that cannot afford to purchase anything, then advertisers will not pay you to advertise to them. Additionally, no one will pay for their data to target them for marketing because they won’t have the money to buy the products or services that are marketed to them. If there is one thing to take away from this post and ponder the implications of, it is the concept of monetizable users and how cryptocurrency will change our understanding of monetizable user.

A cryptocurrency is a token network you don’t have to monetize like a startup would. A traditional startup will not survive without monetizing users they use the data network model.

Every user in the cryptocurrency network has an interest in seeing the price of their holdings increase over time for one reason or another. This is where design and architecture I was talking about earlier come into play. Careful planning is needed not only when designing a cryptocurrency, but forever. There is a careful balance which must exist between users of the network, investors, and software developers. One of the major things which needs to be nourished and adapted to ever changing needs is the network effects of the cryptocurrency system. As the value increases it brings more investors, which give more money for development, which in turns brings in more users. The network will be pulled in many directions and much of its success will be determined by how each element of the system is manipulated to maintain the balanced cycle of the system.

It is a beautiful cycle that differs from a data network like Facebook. Everyone who uses the token network will gain from it being used by more and more people. As a user of Facebook do you benefit directly by more people using it? Yes, you do because they have more money to make improvements. Instead ask yourself if you feel that the exchange was a fair one? Do you feel what you have paid Facebook if fair for what they are providing you? Do you feel the percentage of money they earn is put back into the system for your benefit? Facebook is not evil, but they are a data network like most technology companies end up being today. Data networks were not designed to be fair we just got used to them since the dot com era was born. In their time data networks were much better than a paid subscription service that the world worked on for a long time.

Times they are a changing!

As a steemit user you are experiencing token network effects every day. As you earn money authoring, curating, you are part of the cycle of token network effects which feed steemit’s growth. Now the trillion dollar concept that is missed by most people when it comes to understanding cryptocurrency.

Token networks do not need users that can be monetized like a traditional company does and this has redefined the size of the market in a traditional sense.

Why is that important? Why is this a trillion dollar concept? Let’s go back to the person who lives in a third world country that has no money to spend on your products or services. No one wants his data because he has no money to buy anything anyways. Is he any different as a user of a token network?

The comparison of answers to question at the top of this post show how traditional companies differ from token networks. It also requires us to rethink many things.

“If I took 1 million poor people from across the world that don’t have money to buy anything and 1 million people from England who make over $50,000/year, which one is monetizable?”

In token networks, both of these people increase the networks value. While for a company like Facebook with a data network there is little to no benefit to adding 1 Million poor users with no money.

Changing the world for the better

Someone who makes $2/day could go to a public computer in a library and make money in steemit’s token network. I won’t go into the implications of this within this post, but the implications are far more revolutionary than most people realize. My own projects are aligned heavily with the way steemit works, but expanding it into other use cases. I challenge you to do you to think about how this can change the world. In developing countries how does this change income elasticity for demand of money or determining if it is a luxury, data monetization, the effect of holding different stores of value (gold, currency, crypto, etc)? This is also a part of the reason why I disagree with the media and most people who think without blockchain cryptocurrency is useless. When you remove the cypherpunk and other anarchistic roots there is more to cryptocurrency than simply trying to replace banks and fiat.

Maximum Market Caps & Available Supply

It is important to understand the supply to analyze a cryptocurrency. Understanding that just because Bitcoin can possibly reach $100,000 does not mean that any cryptocurrency could too is important when your new to cryptocurrency. Something like BitcoinZ, which has a total supply of 21 Billion compared to Bitcoin, which has a total supply of 21 Million will have different theoretical maximum prices. For BitcoinZ to hit a price of $100 it would have a market cap of $2.1 Trillion, which is four times that of all cryptocurrencies combined including Bitcoin. Could it hit $100? Maybe, but highly unlikely. What about $10? If it was $10 today, then it would be the #1 cryptocurrency in the world with a market cap of over $200 Million. What about $1 to $5, now that is a more realistic high optimistic expectation.

Market caps can give you a very vague idea of what is realistic and what is not. Unfortunately, they are not made for cryptocurrency and the token network effects. There is a problem using market cap for cryptocurrencies beyond very rough indications of a cryptocurrencies upper limits.

To demonstrate the problem of a market cap applied to cryptocurrency lets shift our attention to something similar. Using the size of a market to determine the maximum possible value of a company. For example, if we know that the total money that is spent around world spend on voting software is $1 Million per year (I made that number up), then I know that the company will never sell anywhere close to $100 million worth of the software in a year, let alone make $100 million of profit in a year. If I was asked to invest in this company and they placed a $200 million valuation on the company I would know they are crazy. If I thought the company could dominate the entire market, then even $100 Million which is 100x the revenue of the company be the upper limit of what a crazy investor might agree to. Using these sorts of valuation methods have the problem of not understanding the underlying technology and its economics when applied to cryptocurrency.

This is the first time in history that so many people on the world are connected regardless of age, race, wealth can make money in a new way. This has far reaching impacts for everyone. Look at Steemit and consider how someone who is at or close to poverty from a country that no one cares about now could have an opportunity they would have never otherwise had. They may be a bright person who has been drawn into MLM and pyramid schemes to make money, maybe not making a lot of money, but its something. That person MUST make money, and it is unlikely that spending a few hours per day on Facebook which is a non-income generating activity or a luxury is not putting food on the table for them. For these people there is no doubt if they do spend time on Facebook the only side which could profit is Facebook, but in an insignificant way. What if they had to walk miles just to access an internet connected machine? What about our company that makes voting software. Would our company pay Facebook to market our product to someone who cannot afford to buy it?

What on earth does this have to do with market caps and valuations? Let’s pretend that our company didn’t just make a voting software. Instead they build a cryptocurrency that was for voting and polling. Let’s go back to that poor person and ask if he matters? The answer is yes, he does matter now. This is just one reason of many that the traditional methods we use will not work. The current methods of calculating the size of a market does not account for situations where the technology is capable of bringing in so many people who previously were useless under the current system, because companies could not monetize them.

Think about that for a minute. The power of aligning the interests of users, developers, investors through a token network are profound. We are solving the same problem with the same piece of technology which just takes polls and helps you track votes on a website. One of them makes money the traditional way by charging for the use of the software or taking your data and selling it to someone. The token network on the other hand makes money by growing its user base which in turn increases the value of the networks currency or cryptocurrency. Can we rely on traditional data about the size of a market when utilizing token based networks? them.

Once upon a time…

Think back before we had the concept of free things like Google, Gmail, Facebook, etc. The model most companies followed was charging for their service. Trying to calculate the market size based on current information for Google in its earliest days would have been very far off. How would you have accounted for all the businesses which were not online yet, all of the information, all the high school kids and college kids researching for a term paper. While we had search engine’s there was nothing which was practical and useful on the scale Google’s founders envisioned. Think about how many of Google’s potential users that would have been missed in valuations when they started because there was nothing to compare it to.

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The Crystal Ball

Now think about the 3 billion people in poverty around the world that cryptocurrency has the power to make relevant. What about the children in the US that live in neighborhoods so bad its not safe for them to leave their house? They get caught up in gangs and for all practical purposes would not be useful to market to them because they couldn’t afford the voting software we want to sell. If our software was instead a cryptocurrency network, that doesn’t require them to pay for anything, then there is an alignment which benefits everyone through their activity on the network.

Therefore, it is almost impossible to understand the impact that the 3 billion people around the world who make less than $3/day would have on traditional valuations. Why? Because those people don’t matter under in the current system and thus the methods which are used for valuing a company will fail. If you walk into Shark Tank and say I have 1 billion users for my free software which helps users vote online and combats bot manipulation, then they will ask how you will make money from those users. If you have 1 Billion users from countries like the US, UK, and Germany, then your rich! If you have 1 Billion users from the poorest countries in the world that make $3/day or less they would laugh at you.

How could the Shark’s be wrong? 1 Billion poor people taking a penny worth of a cryptocurrency out of circulation as they vote means that they have the power to take $10 million worth of cryptocurrency out of circulation temporarily on a single poll. Let’s expand this concept and think about a teenager. How is he/she accounted for in the market size when Mark Cuban on Shark Tank asks about the size of a market for a company which sells voting software. How many high school kids will purchase a license to use something like that? On the other hand, how many of those same high school kids will cast a vote on an online poll on a website?

Cryptocurrency is making the world a smaller place. The entry point for cryptocurrency is low enough that we now have people entering the global economy that were not present before. This will increase the need for traditional currency on a global scale as money no longer becomes a luxury for the poor people around the world. It will change the velocity of money within the countries where they live which will have a global impact. Furthermore, distribution of wealth will begin to change as the individual gains the power to take back control of their data and control its monetization. Those kids who live in poor crime ridden areas in the United States and countless other segments outside of the 3 Billion in the world living in poverty are valuable to token networks. Cryptocurrency is likely to bring us into an age where companies valuations will be entering the trillions instead of billions. Our valuation methods were not made to cope with this magnitude of global change.

The example of a company which makes voting software is just one example of many I could have used where cryptocurrency forces us to rethink many things. The software the voting company made, did not change. Instead the business structure and monetization changed by using cryptocurrency.

So here it is again…

The value of a company like Facebook is heavily based on the number of monetizable users. If a user is not monetizable, then they are useless. That means if the user is a poor person from a third world company that cannot afford to purchase anything, then advertisers will not pay you to advertise to them. Additionally, no one will pay for their data to target them for marketing because they won’t have the money to buy the products or services that are marketed to them. If there is one thing to take away from this post and ponder the implications of, it is the concept of monetizable users and how cryptocurrency will change our understanding of monetizable user.

Missing the Bus

Many people getting started in cryptocurrency don’t understand there are assumptions being made when applying current valuation methodology to cryptocurrency. Many of those assumptions being wrong is causing confusion. In my opinion Ethereum is not easily adopted by everyone in the world right now, but if I had to place a bet on which cryptocurrency from today will still be important in 10 years, then I would put my money on Ethereum. If you are in poverty and make $3/day you will rarely utilize a smart contract or dApps, it is not important to you today. As you start benefiting from token networks, you will gain spending power, and then you would need smart contracts.

(Yes, I know Bitcoin is capable of having smart contracts already and could do everything Ethereum could through improvements, but unless things change drastically that won’t happen. There is a lack of alignment within Bitcoin land amongst all the parties involved. Do you remember Netscape Navigator?)

How will you be paying for that? With my Hooters…coins

Okay, so your telling me that when a company uses cryptocurrency they will make more money?

NO! You missed the bus if that’s what you think. Remember, I said that a token network must be carefully thought out and planned. What problem is the token these companies are putting out solving? Lastly, everyone involved in the network will need to be kept in alignment and benefit from token network effects. What is the method to value a company that is making a cryptocurrency like Hooters or Kodak? Or other ones who announce crypto partnerships? There is none, you need to think for yourself. Many of these companies seem to be joining the crypto gravy train and not making true cryptocurrencies. Many of these are glorified customer loyalty and tracking programs.

Customer loyalty programs in their current form is limited when it comes to solving a problem for the public through token networks. I am not saying it isn’t possible, but nothing I have seen seems to have much substance. It is also not clear if they will be utilizing the network to create a new revenue stream by more easily monetizing the user data or if they will just decrease existing revenue by moving to their token network? I am not going to speculate as to what many of these publicly traded companies are trying to accomplish, but I would measure them by the token network effects of what problem they are solving. Otherwise any idiot at a company can announce there is a cryptocurrency in development with no real purpose. For all practical purposes they will end up like any other shit coin.

Summary

When looking at a cryptocurrency you need to look at it from the perspective of the problem it is solving and the token network effects. Look through the lens that examines utility of the product and how well have they aligned the interests of all parties? As you do this you will begin to discover a new type of cryptocurrencies that are nothing like Bitcoin. What are some examples of utility based tokens that you can apply the concepts of this article to?

IPFS & Filecoin (Inter Planetary File System, this could replace the internet), IOTA, TRON, STEEM, Populous, SiaCoin, and BasicAttentionToken.

What can you find on your own?

Go on www.coinmarketcap.com, click on a coin, then look at a cryptocurrencies website. Go to their ANN (Announcement page on Bitcointalk.org), understand what the coin is about and make your own decision on the future of the cryptocurrency.

Hammer Time?

Unless you’re a virtuoso technical analyst who eats morning star cereal with Doji berries while farting out Fibonacci retracements daily. You need to learn to think about cryptocurrencies for yourself when investing. Don’t follow the hammer unless you want to be broke too.

Nice Article to Check Out

One of the better articles I have seen which explores the concept of token network effects is: https://medium.freecodecamp.org/token-network-effects-a-new-business-model-for-a-decentralized-web-6cde8b4e862. Also, don’t worry about the difference between a token and a cryptocurrency when trying to understand token networks. Token network effects apply to what is defined as a crypto and a token, don’t worry about the difference.

Future Posts

I am hoping to announce an easy to mine coin on Monday, February 26th later in the day, see the following post for more information on that: https://steemit.com/cryptocurrency/@byzantinehash/easy-to-mine-cryptocurrency-series-volume-1.

Don’t forget to follow me @ByzantineHash to not miss anything. I will never post more than 1 time per day, I doubt I am capable of posting on a daily basis based on how long this post took.

Extra Credit – Who says you can’t teach an old Doge new tricks?

Something to think about for those of you who have been involved in cryptocurrency for a while. Look at Dogethereum and think about the impact of what they have accomplished. This will have a profound impact on token networks or cross chain interaction moving forward. Feel free to discuss it in the comments. (Tax attorney’s, accountants, government sponsored crypto’s should really think about the ramifications of the Dogethereum test net)