Misery, Velocity, and the Github for the new financial analysts

Misery, Velocity, and the Github for the new financial analysts 1000 667 Efi Pylarinou

Misery, Velocity, and the Github for the new financial analysts

With or without a Finance 101 course in your history, it is normal to gravitate towards known metrics and analytics for the new asset class of cryptocurrencies and tokens. Technical analysis is being used left and right for long and short-term trends, by all the crypto-exchanges and the new “research” subscription sites. Metrics that can be categorized as fundamental ones are being discussed as we speak on Twitter chats, at conferences and businesses are being built to serve this conventional need. Institutional appetite, the recent surge of M&A between Wall Street incumbents and crypto, increased listings on exchanges of derivative (structured products and futures) is also beckoning for more of the conventional structure.

The market is looking for crypto economists, cryptoanalysts, and all the models, tools and ways that we built over the years for stocks, bonds, derivatives, etc. I shared publicly my thoughts on “A Wall Street perspective of Crypto as an alternative asset class” at the CryptoMountains Rocks unconference in Davos in late March. It had strong elements of a stand-up comedy to make sure that the 40min on stage (stuck in a chair due to my then fresh injury) was not going to put the audience to sleep.

New technical tools from incumbents

From the incumbents’ world, we already have Thomson Reuters that has a developed a Bitcoin sentiment gauge for traders in collaboration with MarketPsych Data, a sentiment analytics company using behavioral economics using NLP and ML. These sentiment gauges will be developed for other cryptocurrencies soon.

Fundstrat Global Advisors, a traditional independent research, and strategy US firm, has developed the Bitcoin Misery Index (BMI) which is designed as a trading tool for investors to take advantage of volatility in BTC exchanges. BMI is calculated on a scale of zero to 100, taking into account factors such as volatility and the number of winning trades out of the total. When the indicator is low, the buying opportunity is at its best, and vice versa. Thomas Lee, the co-founder of FG says “When the bitcoin misery index is at ‘misery’ (below 27), bitcoin sees the best 12-month performance. A signal is generated about every year,” “When the BMI is at a ‘misery’ level, future returns are very good.”

Source: Fundstrat March 9, 2018

Fundamental tools 101

The book of Chris Burniske and Jack Tatar “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond” published last October is a must. The authors cover the basic fundamental framework for thinking about cryptocurrencies.

First, we all agree that their value has a utility component and a speculative component. You can think as the speculative part, as the number of bitcoins that are held out of circulation as an investment.

The utility component can be captured by estimating the actual usage. For example, if 100,000 merchants are using bitcoin for their international trade transactions and those average 100,000USD per trade; then the number of bitcoins needed are 1.25milBTC (at a rounded price of $8,000/BTC). This is an estimate of the current utility value.

Then, we need to consider the velocity of Bitcoin, much like we look at GDP and divide by the money supply. We can start by making assumptions about the remittance market and if we expect that bitcoin may be used for 20% of that market, then say the global remittance market is 500billion then divide by max amount of bitcoin and get a value. Then assume, bitcoin grabs 10% of the gold market as a store of value, you do the same calculations.

Finally, one has to decide a discount rate. Based on this kind of framework, one can get some theoretical boundary valuations.

The one metric that is now floating around (despite its limitations) is the NVT which is seen as a PE analog from the stock market. The NVT ratio measures the dollar value of a crypto asset transaction activity relative to the network value. This is a simple way to compare how the market values one unit of on-chain transactions across different networks. Generally speaking, a “low” NVT indicates an asset which is more cheaply valued per unit of on-chain transaction volume. The main shortcoming of NVT is that it is lagging and it is not a powerful short term indicator (which, unfortunately, now is more in focus since the speculative component is overwhelmingly higher than the utility component in most cryptos). Willy Woo, who analyses crypto assets discusses thoroughly the nuances around using the NVT ratio charts or the smoothed out NVT signals by Dmitry Kalichki.

More on Fundamentals

Digital Asset Research is a startup that wants to become a top independent cryptocurrency research player.

In their standardized research reports, they include many indicators of the new fundamental metrics. These give metrics around inflation, actual usage from developers, the network, and the competitive landscape. Ivan on tech is not the only one, that has been using raw data and stats from the Github to analyze altcoins.

The first decentralized and or crowdsourced fundamental research platform with data and analytics are just being built as we speak. I will cover these in an upcoming post. If you know of any such ventures, please note them in the comments below.

Notes: Next year’s CryptoMountainRocks is on 21-23 March in Davos of course. Skiing in the morning, talks and battles in the afternoon. Watch the recording of my talk here:

Without any permission, experimenting with tech for decision making on a global scale

Without any permission, experimenting with tech for decision making on a global scale 1000 667 Efi Pylarinou

Without any permission, experimenting with tech for decision making on a global scale

The Blockchain Leadership Summit at the Dolder hotel in Zurich last Friday, was an amazing international experience. Immersed in the stunning art installations of the Dolder hotel; amongst an international crowd from Russia, Kazakhstan, Liechtenstein, the Americas,…; and with panel discussions on a variety of short-term and longer-term topics of concern. Organized by Innmind, a global community of all stakeholders in the startup scene, and in partnership with Kickico

I had the pleasure to participate on a panel on the broad topic “Blockchain financial and social implementation and impact. How can the world benefit from the implementation of new technologies?”Even though we had 40min, a wonderful moderator, Tanja Schug from Brand-Trust, and a diverse group of panelists (William Mougayar, Marc Taverner – Bitfury, Olinga Taeed – CCEG, Mauro Casellini – Bank Frick) there was so much more that we could have discussed.

In this post today I will zoom in and zoom out on a few insights that the Blockchain Leadership Summit triggered as I prepared for the panel discussion.

We are already better-off

The impact of blockchain technology has already arrived and can be measured by the mere fact that

an increasing part of human resources are devoted to thinking, experimenting, building upon the seeds of the Bitcoin blockchain, without permission.

The driving force of this reality is

the consensus that “We are not able to make decisions on a global scale”

(simple or big ones like solving poverty, climate even though we have the resources) with the current societal structure. Our civilization to date is based on collaboration processes that are central (e.g. corporations, governments, institutions etc) and even though we have adopted the internet as a global tech enabler for communication at scale, we have not yet found a tech solution to scale TRUST and decision making.

In a nutshell, this is what Blockchain is promising us. And even if the current Blockchain platforms aren’t adopted at mass scale, there are enough futurists, engineers, and entrepreneurs that will figure it out eventually.

This genie is out of the bottle too. We are steadily marching towards a different way of collaborating and organizing our processes as a global society. Luckily, blockchain technology includes a funding solution too and we also have capital increasingly investing and hoping to capture “the decentralized” technology that will be the tech solution to scale TRUST and decision making.

We are already investing in finding the tech solution to scale TRUST and decision making.

Open source innovation at scale

Blockchain is shifting us into a Linux kind of world on multiple fronts. A 10yr old freemium idea, the Github, is now not only a profitable business but a great example of “network effects and a marketplace” that has been growing organically (like in nature). Two massive asset classes are the result of this, (1) a code repository to tap into any kind of project (79mil), (2) a global decentralized social network of computer engineers and private companies that interact (28mil developers, 117k companies) (3) a powerful open-source database for due diligence and analytics on ICOs. The overhead of managing patches, versioning and hosting are all taken care of by GitHub. There is a business offering for developers, teams, and enterprises that offers an efficient way to manage projects and develop software. Ivan on tech and others are using raw data and stats from the Github to analyze altcoins.

Welcome to the new emerging era of low cost, non-chaotic (no versioning, patching, hosting nightmares) open source software a la Github (public or private)!

A de-risking technology for the finance industry and other regulated industries

 Our memory of the structural problems of the financial industry that led to the subprime crisis and its consequences are not fresh but they are painfully present. One of the top five contributing factors was the huge web of complex financial products (like CDOs, CMOs, CLOs) and the related collateral management and counterparty risks that were out of control. When I say “out of control” I mean that issuers, investors, and regulators were unable to have reliable data and thus any risk management capability. Goldman Sachs had at the time its own relational database (graphic database) that gave them a huge advantage in figuring out within a day or two their exposure and managing it better than others.

Imagine a world that international regulatory standards (whether from the BIS or in another way) require all financial institutions to adopt blockchain technology for all over the counter financial structures, all SPVs and trusts. The process has shyly but surely already started with the fairly standardized but still OTC, Swaps and derivatives world.

Last August, ISDA (International Swaps and Derivatives Association) in collaboration with the global law firm Linklaters released a whitepaper with the legal considerations for the application of executable distributed code contracts (EDCCs) (i.e. smart contracts).

Vitalik Buterin himself has touched upon how CDOs (Collateralized Debt Obligations) can be launched on the blockchain so that the risks associated with the “traditional structure” are mitigated. CDOs are tranches created from a pool of similar loans (e.g., mortgages, car loans, student loans). The tranches created have different seniority levels and risk profiles.  In the traditional structure, there were too many intermediaries involved and an opaque structure that resulted in a disaster when the markets turned sour.

The Dharma protocol (covered last month in Bonds & loans on the Blockchain) can be used for CDOs – Building Collateralized Debt Obligations with Dharma Protocol.

CDOs on the blockchain are one example of automating Trust at scale and de-risking the financial system.

Startup pitches

The BLS conference was packed with panel discussions and parallel workshops (PolyswarmByteBallNiceHash) and startup pitches in the afternoon. The winners were (No.1) LiveTree Adept and (No.2) Digipharm. LiveTree Adept, a blockchain use case for the film and TV industry with the mission to empower and reward the creators of such content and the viewers. Digipharm, a healthcare blockchain use case taking aim at the problem the burden on health systems, the risk of patients being denied innovative treatments, and the barriers to reimbursement for manufacturers.

And two special prizes (Lakeside Partners training) were decided by the jury on the spot, for Wunder and PhotoChain. PhotoChain is a blockchain use case for digital stock photography and Wunder is a blockchain use case to build a decentralized art museum for digital art.

Sources of inspiration: (a) Thought leadership from Antonopoulos: The Courage to Innovate Without Permission (b) Use the Github to analyze: Ivan on Tech youtube

Disclosure: I am an advisor to the Wunder project launched out of the IconiqlabGerman accelerator. Wunder will be the token that will allow Artplus (a startup from Belgium) to integrate their business on the blockchain and create a marketplace for digital artists, collectors, galleries, curators, advisors, art fairs and enthusiasts in the new media art industry (video, sound, etc).

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