The opportunities and pitfalls of investing in Bitcoin and Altcoins
We reached out to Tone Vays who is a popular content creator in the Crypto Currency space to get his view on the economic, social and technical dynamics in the Bitcoin ecosystem. Tone was recently featured in a Bitcoin documentary called Magic Money – The Bitcoin Revolution, but prior to joining that world, Tone spent 10 years on Wall Street working for several companies including Bear Stearns and JP Morgan.
Q: Bitcoin is frequently compared to other FIAT currencies, is this a fair comparison?
A: People also like to compare Bitcoin to Gold and that is why it’s often even referred to as Digital Gold, but I think neither is a good comparison. Bitcoin is unique in so many ways that people still have not accepted it as a new asset class and continue to fit it into a current paradigm. Even the regulators are all over the place with FinCen treating it like Currency, IRS taxing it like Property, SEC looking to regulate it like a security and CFTC looking to regulate it like a commodity.
The amazing thing that Bitcoin has brought to the world is a ‘bearer‘ instrument for the digital age that happens to be limited in supply with an ever increasing difficulty of creation of new tokens (similar to how view think of gold and its mining on this planet). This property is not needed nor useful for everyone, but those that realize that this asset solves their problem are very thankful this asset is in existence.
Q: FIAT currencies have had a history of relatively short lifespans. The few that survived such as the Sterling, however, have heinously lost their purchasing power. Inflationary and deflationary currencies have their pros and cons, how do you view this dynamic?
A: The US Dollar has now been the world standard for about 100 years and it is pushing the historical boundary of global dominance as all FIAT currencies eventually collapse. The main reason for this, is actually not artificial inflation but continued Government debt borrowing and liability promises that can’t be met. (like pensions and healthcare to Gov’t employees). From what I see, this problem of Government’s spending other people’s money is not going away anytime soon.
The world has lots of examples of Gold Standard economies which experienced long periods of both inflation and deflation and plenty of FIAT examples where it’s inflationary most of the time with severe periods of deflation like the Housing Crash of ’08 or the Tech sector in ’00. What the world has never had is a true deflationary currency, and while it’s impossible to say if it’s a good thing for the people, it is an economic experiment which needs to be analyzed.
Of course the Bitcoin experiment itself relies on a great deal of trust in the algorithm that controls the creation of coins and the decentralized structure that governs those rules, but assuming it continues to thrive, what i’m most interested is potential of this asset to restrain the Government financial power. Milton Friedman perhaps said it best in 1999 when he was describing the need for something like Bitcoin.
Q: Do you see Bitcoin’s largest challenge as Regulatory?
A: I used to think this but not anymore. I have come to the realization that Bitcoin thrives in an over regulated environment because it provides a path for those being regulated out of prosperity and success. I used to be against the elimination of physical cash bills, but now I can’t wait for that policy to come fast enough because bitcoin will be more popular than ever. I used to be against the ‘drug war’ but now i’m for it because people will just use bitcoin to buy what they need from the comfort of their home and have UPS deliver it to your door.
I feel bad for the people in Venezuela who’s Government is preventing them from even buying food freely, but Bitcoin is there to allow them to buy what they need (via 3rd Party) from Amazon and have it delivered by ship from Miami. So I say bring on the regulation and the more the better, the more they fight the more people will fight back, but under the assumption that confidence in Bitcoin technologically continues to grow.
Q: Bitcoin is going through a bit of a Governance crisis right now, what is the likelihood of a fork when decision time Segwit/Bitcoin Unlimited comes? From the top of your head, can you mention some smart moves that Bitcoin holders can do to prepare for this?
A: The likelihood of a network for (which would be disastrous) under the scaling solution presented by Segwit is highly unlikely which is why I’m in full support of it. This solution was developed by some of the brightest minds in the crypto space and has been thoroughly tested.
Bitcoin Unlimited on the other hand is the complete opposite technologically in my opinion. This is the 3rd large scale attempt to fragment the network (Bitcoin XT & Bitcoin Classic being the other two) and remove the Core Team that has had a great tack record keeping bitcoin code base stable up to this point.
Bitcoin Unlimited has a high probability of creating two bitcoins causing major disruption to the underlying economy that relies on Bitcoin’s stability every day. Both proposals are an attempt to create more than 4 transaction per second which is limiting the Bitcoin payment network to compete with current payment systems but I think Segwit is an actual solution while the Bitcoin Unlimited is a hostile takeover.
I’m not sure there is all that much people can do to prepare for this and most users of bitcoin do not even know this debate is even going on. The best one can do is to educate themselves on the differences between the two and support what I believe is the obvious choice if they care about Bitcoin being a payment alternative to restrain Government, Regulation and Large Stake Holders.
Q: My father always told me “follow the money” and you will understand why people do what they do. Who will benefit most from the implementation of Bitcoin Unlimited / Segwit?
A: I think that the world will benefit under SegWit as it tries to scale bitcoin transaction off the main protocol as it will allow something called Lightning Channels to be built on top of it. I have not seen seen any selfish incentives coming from the developers that worked on this solution contrary to reports that have been put out by the other side.
When it comes to Bitcoin Unlimited, there are lots of other financial motives. For starters we do not know the intentions or competency of the developers that will maintain the code going forward but in my opinion they are not good.
Bitcoin Unlimited’s solution is to create larger blocks to fit more transactions, while SegWit will first re-organize the data inside a block to make some additional room then scale with layers on top leaving block size intact at 1mb. There are lots of potential problems with increasing the block size as it has a significant probability of centralizing the Mining Network that validates transactions and mines for new bitcoins giving current Large Miners (especially in China) an advantage. This was actually one of the reasons that block size was limited to begin with. So yes, there are lots of selfish reason to chose a less optimal solution when you follow the money.
Q: Let me throw a wild one at you. Imagine Bitcoin is still around in 100 years’ time. It;s 2117 Elon Musk who is still alive has taken us to Mars and beyond. Communication between other space trading stations and colonies is more than 10 minutes away. (The assumption is that we will not have broken the speed of light). Which Bitcoin upgrade has the potential to resolve these communication problems Segwit or Bitcoin unlimited and why?
A: Ha, I never even thought about anything like this. I’m sure Nether will be good enough and I’m not sure I even expect Bitcoin to be around that long as a more advanced value transfer system might come along in another generation or two. But if i’m forced to answer I would say SegWit has a much greater chance it’s an actual solution leading us towards infinite transactions per/sec vs a short term size increase (like we hear about from the US Government every 9 months with the Debt Ceiling). Once SegWit is implemented, it might be possible to build an interstellar Lightning channel on top of the Bitcoin protocol that secures your transaction while waiting for the high to hit earth and settle to the Bitcoin Blockchain.
See also : What will be the key challenges of using Bitcoin for inter-planetary transactions?
Q: Are altcoins and the tsunami of ICOs the equivalent to capitalism on steroids or the largest congregation of electronic Madoff’s? Are we witnessing the invisible hand going in overdrive both; crushing the undeserving and delivering gold to those who truly deserve it?
A: In short Yes. I am not a fan of Altcons and simply assume every ICO is an outright scam. The coverage and exposure of these ‘snake oil’ machines is bad (even in the Crypto Media) that I have started a podcast called CryptoScam to expose as many of them as I possibly can.
There is a very small list of Altcoins which have good intentions and several as a potential Test Net, like Monero and their enhanced privacy features or Litecoin and their potential adoption of SegWit as a scaling solution, but even they will most likely not amount to much in the long run.
No one is using them for any real economic activity (just straight speculation), they are very insecure compared to bitcoin and at the end of the day they are competing with Bitcoin for electricity that runs the mining and hardware investment. Most of the other Altcoins and ICO’s fall in the same boat and are only there for the founders to get rich by avoiding regulation with no regard for the consumer.
We can break this down further and try to determine is the founder know they are scamming people vs those that wake up and realize what happened (and some may never realize they were scammers and will always believe their project failed because people just didn’t realize the value). Many of these people just sell these tokens to the greater fool and jump on to another project. I name lots of names in the CryptoScam podcast and will just leave it here on that note.
Q: What are your first rules of thumb when evaluating altcoins?
A: At this point I just assume it’s a scam and I will be right 99.9%. I will wait for the project to prove it to me. Many make fun of that view because that 0.01% was probably the reason I missed out on Bitcoin in the very early days and why i’m not a Millionaire today but that’s OK.
Investing is really for the educated and high net worth individuals that know the risks and can afford to lose the investment. I have not seen much of that at all in the CryptoSpace. It feels like like every 25 year old with a few thousand dollars worth of Bitcoin is trying to be a Hedge Fund or a Venture Capitalist. The end result will probably be them losing all their Bitcoins and then running to the Government for help.
Q: Tone, you are well know for your trading strategies, can you tell us what is the typical day of a cryptocurrency day trader?
A: I first made my name in the Bitcoin Space writing about Bitcoin Trading and while I traded Altcoins for a very short time, I no longer trade anything in that space including Bitcoin vs USD.
I learned pretty fast that I actually want a regulated trading environment with much more liquid markets, so today I focus only on traditional trading for my income. I mostly trade direction-neutral option spreads but have experience in both stock and futures trading.
I also came to the realization that the few bitcoins that I have are too important to my future to gamble it away or even worse, having an unregulated exchange get hacked or run away with your bearer asset. I spend most of my day creating content and keeping up with the crypto economy yet I do try to make a video at least once a week talking about where I see the Bitcoin Price headed along with other traditional assets like Equity Indices, Commodities like Gold and Oil and Global Currencies.
My Option Trading is seasonal/cyclical and positions take weeks to be realized so I always have the broker account running in the background. Being a content creator keeps me pretty busy and I try to travel to as many speaking engagements as I can globally. In addition, I provide consulting services to those looking to learn and understand Bitcoin/Blockchain which has also been keeping me busy since leaving Wall Street 2 years ago.
Q: Thanks for those insights, how can potential traders learn more about your trading strategies?
A: I do not talk about my Option Trading beyond what I already said as I will then lose my competitive advantage in strategies that took years to develop. They are not home runs but have been consistent with low risk so will try and stay patient and stick to them as long as they work.
However, I will be teaching a two day seminar on Trading and Technical Analysis in Acapulco Mexico March 2-3rd. I will not be providing any strategies or selling a “profitable system” (which I do not recommend people buy from anyone as profitable systems are kept private if they want them to remain profitable). What I will be doing is educating people on how to read technical stock charts because it is an important part of being a trader. It will allow you to better complete in the trading shark infested waters.
Q: The information you are providing is pure gold, how can where those interested can hear more of these gems?
If you are new to Bitcoin, I strongly recommend watching Magic Money – The Bitcoin Revolution
I try to cross post my work to my website LibertyLifeTrail.com, you can learn more about me personally in the About section
I am very active on twitter @ToneVays
And of course please check out my podcast CryptoScam on YouTube (as well as audio podcast via iTunes) along with my twice weekly Market Analysis shows.