THE PROBLEM
As EOS price is falling, this puts many EOS Block Producers below costs of running operations. As recent survey of BPs have indicated - most BP are quickly approaching bankruptcy with EOS price below $2.50 level:
https://medium.com/@altShiftDev/survey-of-eos-block-producers-cf9677561db7
EOS Tribe being a standby Block Producer is going through the same hardship as other BPs and have to dramatically cut our expenses.
THE PROPOSED SOLUTION
The proposed solution is thus to increase inflation paid to Block Producers in order to hopefully prop their revenue above expense levels in order to sustain operations and ensure survival of the Network.
THE IMPACT OF SUPPLY INFLATION ON PRICE
In order to further analyze this issue, lets first examine what makes prices of anything of value or perceived value increase and decrease. The cryptocurrency industry, like the investment industry, is plagued with different methodologies of evaluating price movement. There are methods that use bar charts, Japanese candlestick charts, Fibonacci charts and more. Yet all of these methodologies are impacted by the most compelling concept in economics; the law of supply and demand.
Before one can understand the impact of what we refer to as supply inflation ( as opposed to demand inflation) one must understand the laws of supply and demand. In this case we will discuss the the impact on only commodities as analogous to EOS tokens.
Supply and demand is as easy as it gets because it is part of everyday life. Simply stated, if there are more buyers than sellers willing to sell, the commodity will rise (demand is greater than supply) and if there are more sellers than buyers willing to buy (supply is greater than demand), the commodity will decline. If buying and selling are equal, the commodity will remain the same. It’s that simple, and there is nothing else.
There are fundamental reasons that cause shifts in supply and demand that affect price, but in the end it is the supply-demand-relationships the affect the price of the underlying commodity. So what affects the supply demand relationship? There can be several factors, including but not limited to, innovation of technology, that amount and availability of resources, government regulation, the amount of producers, the scarcity of a good or service and more. But for purposes of our argument, we will limit this discussions to those factors or changes of factors affecting the cryptocurrency market and specifically EOS tokens.
It has been said that In bear markets there are a finite number of buyers, as those who have felt too much pain from economic loss are forced to the sidelines, and often never return. If one accepts that notion, then supply increases in EOS, while the number of buyers are fixed or declining rapidly, as is the case presently (or declining due to other fundamental factors like increased regulation, hacking , a severe bear market etc) can only result in a perfect storm for continued decline in the the price of EOS. Price stability requires equilibrium in the forces of supply and demand in addition to some catalyst to stabilize prices. Increasing supply while buyers continue to exit the market is a recipe for disaster.
Although marginal, BP’s forced to liquidate EOS to pay for operational expenses at depressed EOS prices creates more sellers in market and create more downward pressure on EOS price. This creates a situation when BPs will have to chase a price down the supply/demand curve.
For BP’s and cryptocurrency investors, it is obvious that 2018 could only be described as a market crash comparable to the dotcom bubble bust from the 1999 peak to the bottom of the market in March of 2003. Moreover, the overall decline in price is comparable to the great depression downward spiral experienced in 1929 to 1932 in the US and throughout the world, and much worse that the 2008 housing bubble market crash. The good news is that the world recovered from the great depression , and the dotcom companies that survived the bust through the first decade for the 21st century innovated and scaled and in many cases are now multi billion companies.
What is happening to the crypto market now we have seen before. Here is an excerpt from a historical account form Investopedia:
“The 1990s was a period of rapid technological advancement in many areas, but it was the commercialization of the Internet that led to the greatest expansion of capital growth the country had ever seen. Although high-tech standard bearers, such as Intel, Cisco and Oracle were driving the organic growth in the technology sector, it was the upstart dotcom companies that fueled the stock market surge that began in 1995.
The bubble that formed over the next five years was fed by cheap money, easy capital, market overconfidence and pure speculation. Venture capitalists anxious to find the next big score freely invested in any company with a “.com” after its name. Valuations were based on earnings and profits that would not occur for several years if the business model actually worked, and investors were all too willing to overlook traditional fundamentals. Companies that had yet to generate revenue, profits and, in some cases, a finished product, went to market with initial public offerings that saw their stock prices triple and quadruple in one day, creating a feeding frenzy for investors”
The technology stocks bubbled and finally peaked in March 2000. And over the next three years years, tech shares had lost as much as 80% of their value before beginning a 17 year ascent back to the top of the market. That ultra-slow recovery illustrates how long it can take stocks to come back from investor manias and bubbles like the tech bubble, which burst in 2000, or the housing bubble that began to burst in 2007.
While the tech sector, defined broadly, has taken years to get recover, there is good news: names whose superior technologies and business models scaled, as a result of a few visionaries and great management teams have been on a tear.
The so-called FANG stocks — Facebook, Amazon.com, Netflix, and Google parent Alphabet, on average rose well over 1000% over that same bear market recovering, dwarfing there market value at their year 2000 peak.
Today, the market value of those four stocks plus Apple is greater than the gross domestic product of the United Kingdom. The moral of the story: the strong survive, no different than Darwinian laws of evolution.
As a comparison, The first major crypto bull market was back in 2013, when the price of BTC rose to over $1160. Just like in 2017, it seemed there was no stopping it…then the bubble burst .
Between then and January 2015, the price of BTC dropped 86% down to a only $152. 2 years later, BTC rose back up to $20k. Currently the price of Bitcoin has dropped approximately 83% and EOS over 90%.
There is hope. But as Mark Twain has once said “History doesn’t repeat itself, it rhymes”. Common sense dictates that in order for technology companies to scale , they must be grounded in sensible business practices, superior technologies, and great management.
Conclusion
The proposition on the table to increase the supply of EOS by increasing its inflation rate and thus its supply in a bear market during declining demand while well intentioned is a recipe for continued downslide price movement. If the current Bear market is longer in duration than just few years, many BP’s may not survive the “Crypto Winter” even with increased inflation.
It is paramount importance then to enact more complex policies for price stability while ensuring long term survival of EOS ecosystem.