The Foundation Of The Next Cryptocurrency Bull Market

Authored by Tom Luongo,

Bitcoin is back above $7500 as I write this after an enormous bout of volatility surrounding the failure to implement a protocol upgrade known as “Segwit 2x.”

Segwit 2x was designed to improve Bitcoin’s functioning in real world applications.

There was a classic pump and dump over the next 48 hours that saw Bitcoin spike to nearly $8000 and then collapse to $5500. 

But, as things have shaken out, we’re seeing that those who predicted Bitcoin’s death spiral because of a lack of ‘scaling’ solution, were wrong.

In my last article on Seeking Alpha from a couple of weeks ago, I talked about the ‘thinness’ of Bitcoin’s initial move above $5000.  But, now it’s different.  Coins like Monero {XMR}, DASH and Zcash {ZEC} are at or near all-time highs.  Litecoin has moved up from a low near $50 to $63 dollars.  Bitcoin Cash {BCH} has quadrupled as the main beneficiary of the Segwit 2x chaos.

On the other hand, the Platform Assets have been a mixed bag.  These are the cryptos that issue tokens based on smart-contract platforms that are not necessarily mined into existence.

Ethereum found support near $280 and is trading in the $320’s, still 20% off it’s all-time high.  EOS, however, exploded off of a base near $0.51 and continues to rally past $1.50. NEO is still base-building between $25 and $30. STEEM has collapsed below $0.90.

Segmentation and Maturation

What this means is that the market is segmenting. No longer is money rushing willy-nilly into everything just because Bitcoin put on a 10% up move.  We’re beginning to see maturation and the beginnings of price discrimination enter into the crypto-space.

This has been happening for the past couple of months, much to the consternation of some looking to get rich too quickly.

The market is looking to define where the best place to park capital.  And, in my mind, the first thing that has to be determined is how much of that capital needs to be placed into reserve assets versus circulating cash.

And I define those two things as different market segments.

I discussed this in an eariler blog post that goes into some detail on this and why the push for transaction density for Bitcoin is not all that desirable.

 This is not to say that I’m not a fan of Segwit.  I am.  But, am I a fan of Segwit on Bitcoin?  I don’t know.  In the world of cryptocurrencies I want a reserve asset that sits at the bottom of Exter’s Monetary Pyramid that can be 1) incorruptible and 2) a standard against which all other monetary-like assets, including utility tokens like Ethereum, can be measured.

In short, I want a to see a true analogue to gold to emerge.  And Bitcoin has those qualities.  Compared to its competition like Litecoin or Bitcoin Cash, Bitcoin is slow, expensive and, at times, annoying to use.

For simply moving money around there are at least half a dozen solutions out there that are better than Bitcoin as a medium of exchange.

Just like there are at least half a dozen central-bank issued currencies that are far superior than gold is.

But, that’s the point.  And for the crypto-space to mature into a functional market it needs one or two assets to become the foundational asset on which the crypto-monetary system can be built.

The Colors of Money

Money has three important properties.  They are:

  1. Medium of Exchange
  2. Unit of Account
  3. Store of Wealth

Gold still functions beautifully as the last two.  You can use it to compare the value of assets (Unit of Account) and keep your books in it.  As well it holds its value versus fiat currencies to give you an accurate assessment of your wealth through time (Store of Wealth).

It is, however, a miserable thing to transact in the moment (Medium of Exchange).

Bitcoin is rapidly beginning to look like gold in usage cases.  But, more importantly, Bitcoin looks like gold because it has the oldest and most secure blockchain backing it.  In this analogy the age of Bitcoin’s blockchain is similar to the thousands of years of recorded history where gold functioned not only as a store of wealth but also a real medium of exchange.

Crypto Exters Pyramid

To build a functional monetary system a new version of John Exter’s pyramid will have to be built.  And, if you look at the crypto-space that is exactly what is happening.  Litecoin was originally built to be a slightly better Bitcoin.

But, it couldn’t compete.  As Bitcoin made new highs and Litecoin languished, Litecoin’s developers pushed for short settlement times with an off-chain payment layer, in this case the Lightning Network.  Now, Litecoin is relatively cheap to use and payment confirmation is quick.

But it also now serves only one purpose, a medium of exchange, because it did sacrifice something to gain this functionality.

Other ‘alt-coins’ have stressed privacy (Monero, Zcash) or integrating fiat gateways and the like to add to their USP – Unique Selling Proposition – and gain market share

And this is why I say that those who pushed higher transaction density and lower transaction fees are missing the point of what Bitcoin should be.  It doesn’t need to be the biggest cryptocurrency with the most users.  It needs to be the best, most secure blockchain with a huge amount of hashing power powering it’s security with the most history.  It needs to be this so that it can be the best interface as a unit of account versus the currencies of the real world, the U.S. dollar or the Euro for example.

Without those attributes, there will be a limit of as to how much capital will migrate away from the current security and comfort of today’s government-issued currency system.

Where Losing is Winning

Now that the dust has settled on the failed push to redefine Bitcoin’s future, investors need to be aware of a number of things concerning Bitcoin and its newly-fragmented market.

First, Bitcoin in the long run will likely lose market share as a percentage of the total crypto-asset market cap. As the real world and the crypto-world build more links between each other, the more attributes like short transaction time and low fees will dominate people’s daily behavior.  All of the ‘Alt-Coins’ I’ve labeled above have bright futures in terms of market-cap percentage, where today they haven’t increased market-share at all.

market cap

Second, money will flow more freely into the crypto-space via Bitcoin before dispersing into various alt-coins and utility tokens as more people get on board. Why?  Because the uncertainty of Bitcoin’s future is in the past.  Uncertainty retards investment.

Now that Bitcoin has defined itself as the crypto-world’s reserve asset, capital can be deployed in a much more rational manner.

Third, because of these things, Bitcoin may lose market share but gain market cap because this evolution will continue to attract capital.  Over time the market will decide how much of a true free-market economy should hold as its reserves a pool of real savings versus at-risk liquid capital.

We don’t have this now in the ‘real world’ because central banks distort risk assessment through the manipulation of interest rates, the cost of money.  They do this to minimize the amount of savings to promote money velocity versus wealth creation.

Fourth, a lot of projects will fail.  When making decisions into the space, use the pyramid above to figure out where the project you’re looking at fits. The higher up the pyramid the more likely it will fail as the project may be misaligned with the market’s priorities.

Crypto Exters Pyramid Current

So, in the end, what I’m saying is that right now the crypto-space is the opposite of Exter’s pyramid.  Most of the wealth is stored in Bitcoin, the reserve asset.  And very little, if any, of it is bound up in top-level derivative assets like options, futures, and the like.

Earlier in the year this pyramid would have been mostly black.  This is what I mean by the market segmenting and the maturing. It’s just beginning to see the potential for its own growth as a completely different type of monetary system.

I believe that’s what the Bitcoin Core group was fighting against in their opposition to Segwit 2x.  Whether they saw it in these terms I don’t know.  But, as an Austrian economist I am going to be fascinated to watch how a digital version of the new economy evolves in an environment where property rights and consumer sovereignty are maintained versus sacrificed on the altar of liquidity.

Bitcoin will implement larger block sizes in the future.  But it will do so at a much slower rate than many think it should.

For now, Bitcoin looks like it has survived its initial hostile takeover attempt, in my opinion, and the unintended effect is it just may have kicked off the next wave in its own bull market.


hedgeless_horseman Gap Admirer Thu, 11/16/2017 - 12:38 Permalink


Yep, all 1738 flavors of them. 

About 180 currencies in the world.The three organized stock exchanges in the USA (NYSE, Amex and NASDAQ) have a total of 5,598 companies trading in them.A total of 859 foreign equities trade in the big 3 US exchanges.Then there are other exchanges...… to mention the much larger bond markets.

In reply to by Gap Admirer

nope-1004 Raffie Thu, 11/16/2017 - 13:09 Permalink

Cliff High?  Are you fcking kidding me?  The guy is an absolute sociopath!  He predicted in 2013 that all the bridges in the NW area around Washington state would collapse due to a big earth movement event.  He even went so far in his podcast on that topic to state at the end, "I hope to see you on the other side".He's lives an illusionary life.  I usually read what you type, but when I saw Cliff High, oh man.....  you lost a TON of cred quoting a fairytale sociopath. 

In reply to by Raffie

Buckaroo Banzai nope-1004 Thu, 11/16/2017 - 13:23 Permalink

IMO this is a good article, it squares up pretty well with my personal POV. You see people trying to mock BitCoin as "HighFeeCoin" (tmosley I'm looking at you) but the fact is, paying $10 to transfer money to anyplace on the planet in a transaction that clears within a few hours is actually a really good deal considering that the competing product (bank wire) costs twice as much and takes up to 24 hours to clear for domestic wires. And international wires can take much longer. Would it be nice if the fee was thirty cents and the transaction cleared in minutes instead of hours? Obviously. But there is still huge value in BitCoin exactly as it is right now. People get too tied up in the idea of "One Coin To Rule Them All" but the fact is, there is room in the marketplace for dozens and dozens of cryptocoins, each occupying their own niche. And right now it looks like BitCoin and BitCoin Cash (yes, they both can co-exist side by side, in the same role) will be at the foundation of the monetary pyramid thanks to their first-mover advantage and proven, stable technology.And as far as Clif High is concerned, say what you will about his web bots, while they've been wrong about a lot of things, they have been pretty much right on about BitCoin and cryptos.

In reply to by nope-1004

tmosley Buckaroo Banzai Thu, 11/16/2017 - 13:52 Permalink

>paying $10 to transfer money to anyplace on the planet in a transaction that clears within a few hoursBut where does it end? Transactions were PENNIES a year ago. Before that, they were practically free!Don't you see this trend as a problem? What excuse will you use when it costs $100 on a regular basis to send BTC? When there are a million unconfirmed transactions?

In reply to by Buckaroo Banzai

Womb Service tmosley Thu, 11/16/2017 - 14:34 Permalink

Problem reaction solution. Remove a huge amount of hashing power to slow down the chain, then spam the mempool with tiny fake transactions to jack up fees. Bitcoin is just fine. There are a lot of bad actors trying to fuck with it. On chain linear scaling is a dead end. Layer 2 and layer 3 solutions will take care of this. Patience grasshopper.

In reply to by tmosley

Buckaroo Banzai tmosley Thu, 11/16/2017 - 14:47 Permalink

"Don't you see this trend as a problem?"It only becomes a problem when a conventional bank wire costs less and clears faster than a BitCoin transaction.In fact, in the free market, it makes perfect sense that the cost of a BitCoin transaction would rise to just below the cost of the most established and credible competitor-- which in this case is a bank wire. Bank wires are ridiculous products that cost a fortune, it just makes sense that BitCoin's best use case would gravitate towards just barely undercutting that product in price, while delivering superior performance. Then, once the bank wire has been killed off, and competing cryptocoins apply pricing pressure, the transaction costs of BitCoin will fall accordingly.Remember that unlike bank wire technology, which is maxed out, BitCoin will only become better and better as its network becomes more robust and the core software gets augmented. I'm not a huge fan of segwit, and am frankly concerned that segwit represents an angle of attack that (((trusted intermediaries))) will try to exploit, but hopefully whatever off-blockchain technologies that get implemented will keep the (((banking monopoly))) at bay. The point being is, before BitCoin becomes uncompetitive with respect to bank wires, Moore's law and software development will kick in to bring the costs and transaction times back down. 

In reply to by tmosley

Buckaroo Banzai hmmmstrange Thu, 11/16/2017 - 15:36 Permalink

It isn't at all clear that Lightning will securely scale to where it needs to be to make an impact on day to day BitCoin transactions. IMO it will be adopted in an extremely conservative fashion that will only gradually bring down BitCoin fees and transaction times. In the meantime, other coins will step up that offer much better privacy and speedier transaction times-- Monero, ZCoin, etc.

In reply to by hmmmstrange

Advoc8tr tmosley Thu, 11/16/2017 - 17:24 Permalink

C'mon dude ... lugging your gold bullion to the dealer, getting paid spot minus something and then having to pay the banks to transfer the fiat you are still miles in front !  It costs me $20 in parking just to visit the dealer then another $20 to park near the Private vault where it was stored etc ... Bitcoin is the new gold only much better ... it doesn't need to be viable as a coffeee purchase medium. Litecoin. IOATA, BCH etc can wrestle for that market.

In reply to by tmosley

FreeMarketAnarchist Buckaroo Banzai Thu, 11/16/2017 - 15:06 Permalink

BTC will NEVER hit $20K. It's set to be residual in favour of other altcoins. Focus on Dash, Litecoin. LTC $100 by Q1/18.People want a fast currency for cheap transactions. That is what LTC is right now. It will take $5 fee to buy a $4 coffee from Starbucks with btc. Besides, if CME lauches BTC futures, the price will be suppressed. When users and investors realize this, the shift will be made.

In reply to by Buckaroo Banzai

Buckaroo Banzai FreeMarketAnarchist Thu, 11/16/2017 - 15:47 Permalink

Dash has its own problems, and LiteCoin is just a slightly souped-up version of BitCoin. I'm not knocking LiteCoin, it's a good coin and is well-established, but it represents more of an evolutionary improvement to BitCoin, than a revolutionary new approach. LiteCoin to $100? I could easily see that, but the idea that either it or Dash will displace BitCoin for all use cases is absurd.

In reply to by FreeMarketAnarchist

Consuelo nope-1004 Thu, 11/16/2017 - 14:56 Permalink

  He 'predicted' $13k Bitcoin by Feb. 2018.    That may not be a far-fetched possibility.The other item he has talked about in the past (as have many others) is the return of the Maunder Minimum - and I give him at least some cred for bringing that up as it too is a very real possibility.The other crazed shit he gets into - well, yeah...

In reply to by nope-1004

Full Court Lug… hedgeless_horseman Thu, 11/16/2017 - 13:18 Permalink

Could just as easily argue that cryptos have already more than saturated their organic market (drug dealers, gun runners, human traffickers, cybercriminals, rogue regimes) and are an unknown % of the way to exhausting their supply of short-term speculators (the vast majority of buyers in last couple years).Bitcoin doesn't provide any convenience or new functionality to average people, who already have credit cards, Paypal, bank accounts, etc. People are instead buying it as a lottery ticket. Of course that creates the risk that sooner or later  Ponzi outflows will exceed inflows and the whole thing will go tits up. Lord knows these frequent gut-wrenching 30+ pct swings don't help people's confidence with keeping a meaningful chunk of their savings there.

In reply to by hedgeless_horseman

Kafir Goyim Gap Admirer Thu, 11/16/2017 - 12:48 Permalink

The point of the article is that smarter heads are now prevailing, and money is not thrown at the script kiddies who cut and pasted to create a coin.  The fact that my 6th grade son writes a social network in python does not make facebook less valuable.  Other things make it less valuable, but not that.  Money chases quality, it does not just blindly buy all assets (unless you're a stock market  index investor), so bitching that there are lots of assets for sale is sort of stupid.

In reply to by Gap Admirer