Hacker News Reader

Comment by frgtpsswrdlame | Hacker News Reader

>There was irrational price rise in the last few weeks for certain cryptocurrencies(Ripple, Tron) and this is part of the correction.

What makes their increase 'irrational'?

View on HN

In Tron's (TRX) case, the project's whitepaper is plagiarized [0] from Filecoin's, and the CEO (Justin Sun) dumped 6 billion tokens [1] after pumping the price by announcing "partnerships" that turned out to be him hiring developers. TRX is the literal definition of a shitcoin, yet the price pumped 10x in less than 10 days.

[0]: http://www.trustnodes.com/2018/01/08/trons-whitepaper-copied...

[1]: https://www.reddit.com/r/CryptoCurrency/comments/7oky82/just...

(search page for "buttcoinbanker" to find relevant comment)

>TRX is the literal definition of a shitcoin, yet the price pumped 10x in less than 10 days.

So a "shitcoin" with a 9B$ market cap? We really are living in a brave new world of financial disruption...

Yes. This is also why Market Cap is a problematic metric in the cryptocurrency space.

What's wrong with it? Seems like a perfectly normal metric for coins just like for stocks and bonds.

I'm just guessing that it's because it's not a stock or a bond. I don't ever hear what the market cap is for the yen, or any other currency.

That's because they can always print more. There's no cap.

"Cap" doesn't mean what you're thinking in this context :)

That's not what a market cap means. There are cryptocurrencies too that have no limit on the number of produced coins. Market cap means market capitalization.

Because I can create a cryptocoin with 2B tokens, sell one coin to friend for $100 and have a $200B market cap. It's got nothing to do with reality. Anyone (literally) can create a $200B market cap coin by forking a github repo.

That's just how market caps work in general. The same argument has been made for startup valuations. It's not a problem with the metric at all and doesn't hold for the case being discussed as actual market based transactions in enough volume are happening. It's not just a made up number. Here's an argument that Facebook was not worth 33B$ in 2010 because only 3% of its value had ever been transacted:

https://signalvnoise.com/posts/2585-facebook-is-not-worth-33...

It's worth almost 17 times more than that now. Market cap is not a perfect metric because it doesn't capture the depth of the market willing to buy but coins don't make that any different.

No one measures the marketcap of gold or soybeans. When was the last time someone mentioned the marketcap of the USD?

It's an absurd metric made worse by the fact that more coins are issued every 5 mins. If price remains the same virtually all coins will go up in marketcap regardless.

What company issues new shares every single day?

With stocks, the market cap is the total valuation of the company. Companies can have valuations because they can be bought and sold - either when they're private, like when Google buys a startup, or when they're publicly traded, like when Microsoft bought LinkedIn.

The valuation of a company is determined based on its financial performance and, ultimately, by its ability to generate cash for shareholders. (Keep in mind that, unlike cryptocurrencies, companies generate profit for their owners just from their daily operations).

That overall valuation drives share price. Equity investors consider how valuable they think a company will be in the future and back into a price they're willing to pay per share from there.

Market cap is a meaningless metric for crypto since nobody would ever want to buy all the Bitcoin in the world and hold it for ten years. What would be the point? It won't generate cash flow during those ten years, and it almost certainly won't be worth more in ten years - with one person hoarding all the Bitcoin in the world nobody could use it for any transactions and people would lose interest.

Case in point, nobody talks about the market cap for USD or other currencies. It just doesn't make sense for assets that are only valuable as a medium of exchange.

I mean, even doge hit $2B market cap. And it's the parody cryptocoin.

it's a parody cryptocoin with faster transactions and cheaper fees than the market leader..

Because it is far less used. The techno behind it is the same as bitcoin (with different configuration).

No, dogecoin theoretically caps out at ~30 transactions a second. Bitcoin caps out at ~7 tx/s. This bottleneck increases demand for tx completion and raises tx fees for bitcoin.

The Dogecoin network can handle 4.5x more traffic than the Bitcoin network, meaning the satire cryptocurrency is a better technology at being a currency than bitcoin is.

Of course, since the Dogecoin client software hasn't been updated in the past two years it lacks the rather substantial performance optimisations that Bitcoin has developed over that time period, so it's not clear how well it would actually cope if it ever had to handle a transaction rate anywhere near its theoretical limit. (Or, for that matter, if miners are actually willing to process that many transactions.)

Sure, but there's no reason to believe that the Dogecoin network is not able to handle 30 tx/s.

It was intended as a parody but it is as legit a cryptocoin as any other, right?

They were irrational because if you analyzed all the coins in the top 100-200 you'll realize that it was primarily cheaply priced coins that were making the outsized gains and a lot of it can be attributed to market psychology.

It feels better to own 200 of something you don't understand than 0.00159. But at the end of the day returns are returns and it makes no difference if you have 200 of a coin or 0.00159.

Isn't the worth of any crypto-currency down to market psychology though? By that metric any price movement is irrational.

Economics is a social science. It could be argued very few things have intrinsic value. It could be argued all markets are down to purely human psychology.

Birds, for example, don't really care how much you paid for those 3000 tonnes of wheat, only that there's a hole in one of the train carriages transporting it.

That's mostly true, but it doesn't completely work. 200 of something with a low market cap with the potential to gain 200-4000% is way better than 0.00159 of something with a large market cap and low likelihood of doubling. E.g. a random altcoin vs bitcoin today

When you are betting on Bitcoin or Ethereum, you are betting on the technology, developer community, ecosystem and the adoption. With Tron, there's hardly a product and Ripple while seems to have some successful pilots, is still far from realizing the dream of replacing the FIAT currency among banks.

Your biases are showing. There's no reason someone can't place a bet on Ripple's "technology, developer community, ecosystem and the adoption".

May be.Really, In the current scenario, you can't like avoid any implicit bias, like even if you don't mean it. That's why in my comment, I didn't explicitly comment on Ripple's product or team.

Also, a bet is one thing, but the get rich quick scheme going on in the market with new investors is another. I still hold some Ripple if that breaks any bias, and I think the correction was unavoidable.

>> When you are betting

Full stop. You are trading or investing - if the word "betting" passes through your brain, stop now. The public surge of interest in crypto currencies is a redistribution of wealth from retail speculators to professional speculators. You aren't betting on the technology, developer community, ecosystem, or adoption anymore. At this point, you are betting you aren't the last one to the party.

Do you know what is a bet gone wrong? It is investment.

I think you took his word too literally. When I read it, it simply means you put your hopes into something.

I am betting that my new relationship with be futile and bring me happiness. Doesn't mean I went to see bookie about it.

Buffett calls investments bets all the time. Let’s call it what it is.

When you play the stock market (telling phrase there), are you not making a bet that your stock will increase in value?

Not necessarily, and not in the long term.

You can buy stocks with no expectation they will increase in value (or even maintain value) if the dividend yield is high enough. And stocks have value because of this - the assumption in any stock, even one currently without a dividend, is that eventually it will pay out some form of a dividend to its holders.

You may buy a stock hoping it will will rise in value, but that rise is predicated on the eventual delivery of cash via dividends or some other mechanism of distribution. Contrast that with say, Gold, where in fact it costs money to hold and there's no expectation it will ever generate any kind of dividend.

How is the long term not gambling?

No one knows what going to happen tomorrow let alone in ten plus year.

My bet is: it all comes down to risk tolerance. In the long term some forms of investments have shown, historically, to be consistently less risky, or more risky, than others.

Gambling and investing both involve risk, but they're not the same thing, and there's important differences. In particular, in most gambling, the sum of returns to participants is less than the amount wagered by all parties, whereas in equity investment it's generally / historically the opposite. Additionally, whereas gambling is generally fairly time-bounded, investing isn't, and in fact often rewards longer holds via dividend and coupon yields in addition to the potential difference between purchase and sale.

More to point: most studies show that you do best in investing simply by having money invested for long periods, and being diversified to mitigate secular risk. That wouldn't work in gambling.

You've made some great points, thank you.

There are plenty of stocks that no one ever expects any distribution or dividend from, but they know it represents a claim on real value (assets and incomes) in the business, and that there is a market where they can resell it for more money if the value of the underlying assets increase. All the incomes may go back into the business but that doesn't mean they don't increase real value.

At the end of the day, on even these stocks, the value is still predicated upon either those assets being sold and the value being distributed, or those incomes turning into a dividend or liquidation value. A business that reinvests its income into its own business does to because it believes that the return on that investment in the future exceeds the rate of return demanded by its equity investors. Otherwise, doing that would reduce the value of the stock.

It's impossible to assess, of course, but the true value of any equity is the net present value of the future cash it will generate for its holders. Full stop. Equity holders don't care about value in the business that won't translate into dollars coming out of the stock at some point in time.

> if the dividend yield is high enough

Are you not then still betting that the stock continues to offer dividends / offers them at the same rate?

If you choose a broad enough definition of betting, everything is gambling. But to be more specific, the post I replied to stated that everyone who invests in stocks is betting that their price will go up, which isn't true. There's good stock investments where you know the price of the stock is going to go down to zero, because you have high enough certainty that it will pay out dividends of sufficient value to justify the purchase price. (This would be typical of a "late stage" or "liquidation stage" enterprise.)

Yes but the increase comes from the company having more revenue by producing and selling more cars, iphones, CPUs, GPUs, pizzas, etc.

Cryptocurrencies like bitcoin don't generate an income. Therefore they shouldn't be increasing in value at all beyond the rate of inflation.

They should stay at a stable price adjusted by inflation +/- some volatility. If bitcoin suddenly increases in price there are only two possible reasons. Either inflation of USD is higher than expected (unlikely) or more speculation happens which drives up the volatility.

What makes their increase rational?

Reply on news.ycombinator.com