Saturday, December 23, 2017

Knowledge as a VIRUS metaphor

With the year winding down there is less to write on about pure trades, so here is some more from the general metaphor pile to slather onto your short VIX ideas and maybe even apply elsewhere...

Knowledge as ..... a VIRUS
What? Isn't knowledge a good thing? Isn't knowledge a cure/medicine/salve?  This sounds like the worse metaphor ever-
I may have mentioned this before as it applies to many fields like general econ (paradox of thrift), but it is really slapping me back over the head with the crypto action (but I'll bring it back to short VIX).  Lets think of the spectrum of crypto investors, almost as a 1-10 scale of knowledgeability/awareness.  At the low end we have 1st time coinbase users who are seeing tweets and facebook posts from Tai Lopez, old people who think I can buy bitcoin "shares", all the way up to pure traders who know the underlying asset means nothing and it is just a vessel for volatility/price action.  In between we have all levels of early adopters/true believers/libertarians, and people who read at least some about the pending transactions, transaction fees, tether, different exchange issues.
If we had to break this down though, what percentage of "investors" in the space do you think can actually articulate
1. the underlying blockchain technology- proof of work
2. the purpose of that technology (censorship resistance, decentralized consensus, digital scarcity, anonymity)
3. the market structure they are getting into (unregulated islands of exchanges, structurally difficult arb between them, shutdowns anytime there is volume/price action)
4. longest chain/network effect vs liquidity as the primary value of various cryptos- BTC vs BCH vs Monero for darknet
5. all scaling "solutions" eventually create a more centralized structure (Lightning network, block size increase- defeating the #2 the initial purpose)
6. the ultimate cost users take on by using less efficient structures (blockchain vs database)
7. ICOs as a fundraising regulatory workaround, if any of these projects had real value as a business, then what function does a unique token have besides revenue/marketing.

If I had to guess, I would put 95%+ of "investors" into this  (1) category, and here is where my virus metaphor begins...

If 100% of crypto investors could fully articulate these issues, especially the conflict between the original value proposition and the current centralizing structures, how would that change trade valuation and trading dynamics?  I would suspect that a massive realization that the current crypto ecosystem and future improvements all don't really do what they set out to and are a pure inefficiency for 99% of users would bring the wind out of the sails, as opposed to the current shared hallucination that this is the future of everything on the planet, Dubai as the 1st "blockchain city," etc.

As long as this realization is among 1-5% of the investors/ecosystem, then the entire crypto space is insulated from a massive pop, because the ICOs and possibly ETFs will just keep getting made and everyone will play along.  In this way, the 1-5% of knowledgeable participant are the VIRUS, and if that knowledge spreads to the rest of the organism, it is put at exponentially more risk.
When a population is 99% vaccinated, the risk of a virus spreading through and wiping them out is almost 0.  In a picture, this is called herd immunity:
 So to apply this to the crypto landscape, the red figures are the 5% that see the impending structural issues in the crypto space.  In a population of blue figures (reasonable people, not crypto cult worshipers), then these simple explanations spread, and most of the population then becomes red and understanding.
Compared to our current structure of a few red characters in a sea of yellow idiots (immunized), no amount of pointing out facts will sway the bulk of the population as long as a high percent are immunized.  I think this is the current state of crypto where as long as you see these idiots on CNBC, then the canary is still alive and well.
I would watch out for the middle case where the number of immunized people drop, at which point the population is susceptible to a sudden exponential explosion in understanding.  The herd immunity holds at a high % immunized, but at a certain point- 90%, 75%.. who knows, the virus has enough paths to run rampant through the cracks and kill everything, there is a massive nonlinear tipping point.

Ok ok, back to short VIX and econ-  just like the herd immunity we currently have in crypto, I could easily see arguing we have a similar immunity in normal markets and econ.  What would markets and the world look like if the whole population understood short VIX as an asset class? No one would care about tax votes, elections, hurricanes- binary events.  Would market makers even act as a counterparty?  There would be no long VIX left.  Similarly in a broader econ sense, stuff like the paradox of thrift could lead to systemic issues, what happens when people stop buying new iphones every year? Thats our global economy!

So I started out wanting to shake these people and say WAKE UP! Or at least "please at least try to articulate these crypto issues rather than blindly yelling to HODL."- but maybe now I'm thinking twice..
Maybe the herd immunity of stupidity/ignorance on certain topics is required for bigger structures to continue.  If I want crypto to blow up then maybe I'm really asking for the global economy to blow up next because its not all that different.  Its just people going around and buying stuff to feel good, maybe we should just chill and be happy with that.

So if knowledge really is the virus in all of these structures, then maybe as a planet we are getting more and more healthy and vaccinated.  Could this be what the next phase of evolution looks like?  If we were too smart for our own good the global economy could've blown up a long time ago because there would be no counterparties.

In summary, knowledge is the virus that that is currently held at bay by the vaccinated/herd immunity effect of idiots.  You might notice this in your groups of friends or at work, so for now we just need to sit tight and if structures don't change, maybe we need to mediate on why the human condition is set up like this.

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