Merchants Versus Consumers; Ethereum Pre-sale

Hi Everyone,

This week markets took a tumble from $600/BTC to $560/BTC before recovering to $595/BTC today.  There's been a lot of speculation why prices dropped so persistently earlier this week in spite of weeks of good news (with the exception of the BitLicense piece).  As I mentioned in my earlier posts, for the most part, bitcoin markets are no longer sensitive to fundamental news (with perhaps the exception of news at the level of Argentina's default (thought in this case there wasn't much of a reaction)).  Rather most people suspect that the recent price drop was based on the expectation of merchant adoption outpacing consumer adoption in the near term.  With Bitpay announcing free processing for all merchants, it's likely that the market expects incoming sell pressure from new merchant signups some weeks or months down the line thus depressing prices this week (insiders likely sold in front of the public announcement).  There is also a multiplier effect at work.  If the market expects the price to dip $5/BTC due to Bitpay's announcement, those who sell in front of the incoming merchants can drop the price multiple times that amount (say $40/BTC).  Also, there's another propagating effect since Coinbase and other competitors can be expected to follow suit and reduce fees for merchants thus magnifying the number of merchants entering the entire space.  Considering these effects in vacuum, the total drop should be an equilibrium price at which customers would be indifferent to spending the bitcoin to show support for new merchant acceptance and holding it because the BTC price has dropped too much for spending it to be desirable.  Ceteris paribus, and with some handwaving, the price drop can abstractly be thought of as the value of "good will" in the bitcoin community toward new merchants who accept bitcoin.  The more the price drops, the greater the "good will" which must be counteracted by lower price to reach equilibrium.  One argument against this interpretation is that for merchants to sell bitcoin through Bitpay, Coinbase, and other services, the bitcoin had to have been bought somewhere, sometime, by someone.  In fact, if customers immediately replace all bitcoins spent at merchants, the net effect will be zero instead of a drop.  Thus the actual selling pressure is the total bitcoins spent at merchants without buyer replacement minus the BTC collected by merchants and not liquidated into the market (i.e. some merchants choose to hold BTC instead of convert it to USD).  Taking this selling pressure and netting it against buying pressure from consumer adoption and we can get a prediction on short term price.  Of course much more goes into the market pricing mechanism than just merchant adoption versus consumer adoption but at least this is a short term signal to be considered with other signals on direction and magnitude.

News this week:
  • Stellar, a Ripple clone with more transparent and equitable initial distribution and built-in 1% inflation started by Jed McCaleb, founder of MtGox and Ripple, launches:  They also have a partnership with Stripe which can serve as a strong foundational gateway.  I found this slightly funny: a github commit where Jed is replacing all instances of the string "ripple" with "stellar":  It should be fine, of course, since the Ripple protocol is open source.  Ripple XRP tanks 10% on Stellar announcement.
  • Mircea Popescu of MPEX fame offers to sell an ethereum future (5000 ETH per 1 BTC) deliverable March 15, 2015 on #bitcoin-assets:
  • In March, one of the Bitcoin contributers, Peter Todd, wrote a piece on treechains ( which is basically a more elaborate version of sidechains.  It tries to solve the problem with sidechains (2-way) where reorganizations of the blockchain can lead to undesirable situations which may result in inflation and the danger of sidechains being merge-mined with too much hashing power and 51% attacked.  Most of the other core developers like Gavin, Jeff, and Greg are not fans of the treechain idea (though they do like sidechains).  This week Peter Todd joined the Viacoin team as Chief Scientist to work on treechains causing the altcoin to spike 70% on the announcement.  As with all pie-in-the-sky ideas, this will either be really good or really bad.
  • Argentina defaults on interest payments to bold holders.
Regarding the Ethereum pre-sale, I have a slight suspicion that it might be over-bought.  The Ethereum team did such a good job promoting it that a good deal of people think it's a good idea.  That's not to say it's not a good idea, just that investments that are understated and "more hidden" often return more than investments which everyone is aware of and watching.  It's also analogous to the idea that when your oldest relatives are asking you how to buy bitcoin, the bitcoin price is probably peaking on a hype bubble and it's time to sell.  Also, personally, I would never have invested into bitcoin had I not carefully done my research and thoroughly read the Satoshi white paper.  With Ethereum, I doubt that most people buying have read the white paper (, yellow paper (, or genesis sale terms (  In the terms of agreement Section 19.9, it says "Purchaser understands, that while the Ethereum Team will make reasonable efforts to complete the Ethereum software, it is possible that an official completed version of the Ethereum Platform may not be released and there may never be an operational Ethereum Platform".  This is a real possibility.  Also, I'm not sure if the claims on ETH bought in the presale can be traded before the actual genesis distribution.  Not being about to trade out of ETH in the scenario where things are going badly is liquidity risk.  And then there's the question why one of the founders Charles Hoskinson (also a founder of Bitshares) is no longer with them?  So that is why I have very mixed opinions about Ethereum.  But all that being said, I will likely still buy a couple BTC worth of ETH.  For me buying ETH is a bet that Vitalik, Gavin and the rest of the team know what they are doing and will be able to execute.  Even if the project is 90% fated to fail, the scale and the scope of the project is so grand that the net expectation could still be positive.  Finally, given that you want to buy, there is a tradeoff between buying now for a discount and buying later at a higher price.  Right now you get 2000 ETH/BTC and in three days the price changes to 1970 ETH/BTC.  You lose out on 1.5% by waiting.  Alternatively, you can think about it as paying 1.5% for a few days more worth of information.  Just a thought.

Kevin & Team Buttercoin
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