Bitcoin is a long term game

While there are no a priori rules about the path a monetary good will take as it is monetized, a curious pattern has emerged during the relatively brief history of Bitcoin’s monetization. Bitcoin’s price appears to follow a fractal pattern of increasing magnitude, where each iteration of the fractal matches the classic shape of a Gartner hype cycle. In his article on the Speculative Adoption Theory, Michael Casey posits that the expanding Gartner hype cycles represent phases of a standard S-curve of adoption followed by many transformative technologies as they become commonly used in society.

The S-curve is the classic adoption curve applied to the advent of new technologies. As a percentage of the population, adoption looks like a lag phase where the technology is utilized by the innovators of said technology, followed by an early adoption phase led by people who often take risks in order to be the first movers in a space. After the early adopter phase (~16% of the population is now participating), there comes a great “tipping point” where the wide use of the technology seems inevitable. The tipping point gives rise to the “Early Majority” joining in on the fun, followed by the late majority and, finally, the holdouts who allow the top of the S to asymptotically approach total adoption. The curve, as a factor of time and adoption, looks sort of like the following:

This curve correlates nicely with adoption of some of the greatest technological innovations in our recent history:

Some important things to note is that this is just U.S. adoption. Much of the world lagged behind the U.S. in the consumer appliance boom of the 1900s. All of these curves, however steep, do follow the same S-curve trend fairly nicely. So why is this remarkable? Bitcoin may be the first “buyable” S-curve. Because this is a capped-supply currency, more users adopting and using it necessitates an increase in price. Whether that correlation is even reflective of the current price action is a practically unanswerable question, and the obvious leaning would be towards there being a speculative additional value. However, with an increase in adoption, there seems to be a floor rising up to catch whatever “bubble burst” might occur, if and when it happens.

Each Gartner hype cycle begins with a burst of enthusiasm for the new technology and the price is bid up by the market participants who are “reachable” in that iteration. The earliest buyers in a Gartner hype cycle typically have a strong conviction about the transformative nature of the technology they are investing in. Eventually the market reaches a crescendo of enthusiasm as the participants who can be reached in the cycle are exhausted and the buying is dominated by speculators more interested in quick profits than the underlying technology. Following the peak of the hype cycle, prices rapidly drop and the speculative fervor is replaced by despair, public derision and a sense that the technology was not transformative at all.

Eventually the price bottoms and forms a plateau where the original investors who had strong conviction are joined by a new cohort who were able to withstand the pain of the crash and who appreciated the importance of the technology. The plateau persists for a prolonged period of time and forms, as Casey calls it, a “stable, boring low”. During the plateau, public interest in the technology will dwindle but it will continue to be developed and the collection of strong believers will slowly grow. A new base is then set for the next iteration of the hype cycle as external observers recognize the technology is not going away and that investing in it may not be as risky as it seemed during the crash phase of the cycle. The next iteration of the hype cycle will bring in a much larger set of adopters and be far greater in magnitude.

Very few people participating in an iteration of the Gartner hype cycle will correctly anticipate how high prices will go in that cycle. Prices usually reach levels that would seem absurd to most investors at the earliest stages of the cycle. When the cycle ends, a popular cause it typically attributed to the crash by the media. While the stated cause may be a precipitating event, it is not the fundamental reason for the cycle to end. Hype cycles end because of an exhaustion of participants reachable in the cycle. It is telling that gold followed the classic pattern of a Gartner hype cycle from the late 70s to the early 2000s. One might speculate that the hype cycle is an inherent social dynamic to the process of monetization.

Tether is not the reason for the recent fall in Bitcoin’s price, despite what today’s news say (the one on Bloomberg in particular). We may just be at the end of this particular hype cycle, the fourth major cycle in Bitcoin’s history. The end of a Gartner hype cycle is not the end of Bitcoin. However, the end of the cycle is when the skeptics will triumphantly claim they have been correct all along. They are no more correct than a stopped clock.

The boom phase of the cycle may be the most exciting but the stable boring low is the most important phase. It is when the most value is created, providing fuel for the next boom. The boom of 2017 was fueled by the important work of 2014–2016 which dramatically improved the security, usability and liquidity of the Bitcoin network. As the price of Bitcoin drops and public interest wanes, the important work of developing Bitcoin will continue uninterrupted.

There are major developments on the not-too-distant horizon: Lightning Network will provide a platform for a true payment system to be developed on the monetary base of Bitcoin; mining will be transformed as Samsung and other major chip manufacturers wrest control from the irresponsible stewards of the mining market; exchanges and futures markets will continue to grow and become more liquid, making Bitcoin more easily ownable for tens of millions of new savers looking to protect the fruits of their labor from debasement; ecc.

The Bitcoin protocol will be improved dramatically with a number of efficiency and privacy improvements added to the Core repository. By the time we arrive at the next halvening, or perhaps much earlier, we will have enough fuel for another major rally, which will make the previous all time high seem cheap. Understand that as we explore the depths of the bear market, HODLers will be faced by an unremitting barrage of “I-told-you-so’s”. Your conviction will be tested both financially but emotionally. Survive and you will be battle-hardened for the next cycle.

It’s normal and natural to feel despair. You will be surrounded by it from people invested in or paying attention to this market because we are at the darkest phase of the hype cycle. But winter will not last forever. The first blossoms of spring will show themselves in the years to come. There will be significant increases and institutionalization of the liquidity channels to Bitcoin in the next year. And remember why we are here. We are transforming the world’s monetary system using a monetary base that is uniquely suited to allow for the flourishing of human freedom and civilization.

But in this cycle something has changed. During the past bear market, no one talked about cryptocurrencies anymore. But now, with the renewed Bitcoin price dump, people still pay attention to it. Who to brag about his/her short positions, who to assert his/her long positions, who for other reasons. But no one is letting go this revolutionary technology, and who is watching it is at the door to enter at affordable prices. The community, the resilience, the resistance, the infrastructure created around cryptocurrencies have generated the value that many skeptics were “looking for”. Bitcoin in particular has acquired that trust from investors and onlookers who have read and studied the underlying protocol, discovering the possibilities that they have through this technology. At this particular moment in history, the non-censurability of this asset is the characteristic that is most appealing to individuals.

What is passing “strangely” quietly, however, is the collapse of Deutsche Bank and its importance at a systemic level is very crucial. In comparison Bitcoin is a drop in the sea. Yet it seems to be something secondary today. The entire European banking sector is hanging by a thread, but people worry about Bitcoin. And perhaps the reason is legitimate: no one thinks of buying shares of DB although they have dropped a lot, but many are at the door to buy at the lows of this cycle an asset that is reserves value for real.

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