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A draft study of economical players in a cryptocurrency environment –Another mind map

A draft study of economical players in a cryptocurrency environment –Another mind map
14 de March de 2017 Zwei Arts

A draft study of economical players in a cryptocurrency environment –Another mind map

First, a little history…

After my previous article, several things came to my realization:

  • People don´t like to comment, several private messages with critics and suggestions and questionings (thanks all!);
  • People asked much more about the economics of the so-called cryptocurrencies, even after the last SEC meltdown (the regulators meltdown, BITCOIN is ok, thanks for asking);
  •  It´s too late in this “cryptocurrency wars”. It´s not a new thing anymore, ven we have very few that domain the space, even if it´s market cap is a trace in word quatrillionaire capital markets. They are real, and despite the strange facts we will know few lines bellow, they are a niche market about 25 to 30 billion dollars (only the trading side).

Al this mess deservers another huge mind-mapping style article.

So, here we go again…

Economic models of the strange bitcoin experiment

BEFORE Satoshi´s piece of art there were several other versions of this experiment. On the movie Banking on Bitcoin, we have some excerpts of this previous adventures and some kind of ancestry tree of them.

But at the Satoshi´s original piece, one very interesting thing was created in a very integrated way: Why should I create a computational infrastructure not only to mint those crypto-stuff, but also to make possible to transact it almost on-line, 24×7, globally?

This little interesting equation (given fees on the own cryptocurrency, as “minting remuneration” at first, and later letting the free-floating prices remunerate the “transaction fees” latter) is one of the most powerful economic levers in the process. But not for the reasons one things first…

Side effects

With that simple lever, the bitcoin economy got dormant on its own closed system until the end of 2014, where its use as darkweb currency peaked. After the 2015 FBI Crash, things got down until end of 2015, and since them, up and shining ever, as we can see in this chart.

 

 

 

The first side effect was a curiosity about mining ways. 2015, first amateurs started regular, and later GPUs, and later ASIC tiny mining operations, and in a minute, the actual huge farms were built in mainland China, as we can see in hash power history.

Of course, it as an economic desire, as the paper draft originally. Revenues from mining (mint new bitcoins) and more recently, the all feared spike in transaction fees (fees charged to confirm transactions) approaching US$ 10,00 per transactions at this time, what can make lots of bitcoin-based apps not economic viable.

But all these derivations were part of original plan (were?), at least is what one thinks reading about network remuneration, and the balance that is made on the cost of mining (measured by the increasing capacity / hashrate) , thorough the adjustments of difficult rate (also increasing).

What about the other side effects?

The all mighty miners

I must to say, clearly, that I have positions with a group that hold positions in a miner, but as in capitalism we don´t cry about the money makers, so do I.

Miners are the most powerful player on the criptoeconomics. Period. I will write about it, in details, later.

To understand that, we must understand that right now, there´s a HUGE (and impactful) debate about the core structure of bicoin´s blockchain. Segwit, blockchain unlimited and so. The scores are the new mining blocks.

Economic GDP: (to be discovered, but remember all the energy bill from my first article? It´s only a cost…).

Wallets

First of all, before anything and with a critical piece, despite the fact they also were NEVER expressed in the original paper, we need wallets to keep any kind of monetary asset. Digital assets create a special kind of wallets, and we can know a little on the Wikipedia.  Also, other kind of wallets can be detailed, and some history about its growth (old but good) can be found here.

The main economic impact is that this little services holds the keys (ops) for all the rest, and it is either a point of trust or a point of failure for all the economic model. The way you handle your assets, is the way you handle your security.

In a short form, the wallets are the custodians of all your crypto assets, would it be alone, with a broker, exchange or even a hardware.

Economic GDP: (to be discovered).

Pure, multi-currency, OTC and all kinds of Brokers

Before you can buy openly bitcoins in exchanges, you had the brokers! In plain sight, just like any other intermediaries, they traded millions. The pure ones, simple exchange any fiat money for any cryptocurrency. There’s a plentitude of them!

In a more sophisticated form, they work with multi-cryptocurrency so, not only you can get new assets, but trade among them.

But it´s on the so-called OTC markets you can have lots of leverage, and even run away from some formal government tentative of control (you will end up in jail if you try, not advised).

All the forms brokers can choose, feel free to study all the tiny secret rules in them. Brokerage is not regulated anywhere (except KYC rules), so, at your own risk.

Brokers are the crypto-currency version of dark pools, without any kind of supervision or control. And it´s not a bad thing, neither a good thing. Only a free hidden liquidity source.

Economic GDP: (to be discovered).

Fiat-to-cryptocurrencies exchanges

It´s not so clear to me the great differences between exchanges and brokers, besides the bid/ask frame, since some brokers provides it and some exchanges enable OTC traders, but in a general timeline, exchanges were someday tied with miners or mining pools.

Some guides and comparisons helps to understand, but in my rudimentary ontology, exchanges are the main fiat money to crypto currencies way of change.

Economic GDP: (to be discovered).

Crypto-to-crypto currencies exchanges

Besides bridges to the real and old world, some exchanges are pure virtual players.

Closing the mind gap, there´s no clarity yet about the real business models, besides brokerage and exchange services, but the absence of auditing and regulatory control for sure facilitates gains on liquidity and prop trading. On the dark side, some critics uses heavy fists to say they are just money laundry and tax evasion schemas, that´s not true for the most of it. Even the real world securities exchanges are moving to work on it, so, this is real business. Just not regulated.

Economic GDP: (to be discovered).

Algo / Robo traders

No purism of factual analysts can resist the brute force automation that wiped out former traders from wall street, so the same is real in crypto markets. Practical tools provides mass trading weapons to neophytes in minutes, and when you mix it with other multi venues platforms, you can build your own crypto medallion.

Economic GDP: (to be discovered).

Side-apps brokers (remittances and so)

Special category, the payments networks and services are in a highs and downs all the 2016 year, with startups poping up everywhere.

They are here because you can simple transfer money to another country (legally) and no fees, and this also can enable some forms of trading, specially using arbitrage against one of the 700 exchanges in the word.

Economic GDP: (to be discovered).

Payment service providers

Besides the side apps, there are real global networks (think about a PayPal of cryptocurrencies), that are providing several services around the globe. BitPay is the most prominent, but several new ones are surging every day.

Payment providers also fight to not be involved in another silk road incident, and their marketplaces also shout out loud they aren´t.

Economic GDP: (to be discovered).

The strange oracles (that knows nothing).

Any market moves with information. But, asymmetric information forces and volatility is what fortunes are all about. And in this new new world, there´s no information yet.

When you check all the data, graphics, analytics and so, it´s clear there´s much on concentrated players and much on the shadows. Long road ahead.

Economic GDP: (to be discovered).

The even more strange derivative houses.

And without information, if trading is a complicated and risk business, leveraged trading is a lot worse. But we already have plenty of it. Again, critics use the very strong hand and some bad cases to kill them all, but it´s just the beginning of an new market, as usual.

And the traditional players are in (again), as also former crypto-venues and new players, clearly worried about customer security, even providing insurance.

Economic GDP: (to be discovered).

And here I close some of the “main service players”, or the sell side of the street, to use an old adagio from the city. My friend Tim Swason has a much more rich view in his great wall of numbers, chapter 3.

At the other side, we face the (so far in the last 3 years) bullish players on the buy side.

The traders.

When you see something like the screen bellow, you see trader stations, and you see trading frenetic activities. With all currencies and some more digital assets to be traded, the volumes are spiking every day. And her starts the economic impact of market fees and its implications to the future.

 

 

 

 

But, besides unique keys (in some currencies) we have no clue idea how many traders there are in this market and it´s real trading volumes. So… Another brick in the invisible wall.

Economic GDP: (to be discovered).

Investment crazy horses.

From formal and serious houses to what appear to be Ponzy schemas (some really are), we also have the traditional players placing bets (very risky ones) in cryptocurrencies. Even more, notes and other instruments are starting to be held and planned with this assets as back.

No clear directions now, but lots of action.

Economic GDP: (to be discovered).

The big fund managers game (not yet).

After the famous SEC-Denying on the Winklevoss Bitcoin Trust, besides lots of facebook jokes, we started to a new adagio: To be regulated you must exist as a regulated thing.

But strangely, looks like bitcoin is a new way of hiring and paying a global elite of programmers to sophisticated hedging funds, it may represent another way of thinking about securities.

I can´t talk about the whole new ICO movement and itss implications on the fund area, but we will see lots of news in 2017.

Economic GDP: (to be discovered).

The Nutella investors – ETFs and other institutional buyers

Not found at this moment. Eager to enter.

Economic GDP: (to be discovered).

The sardines.

In any given market, the poor and lost groups of pseudo smart fishes love to shoaling like a dense group. Not exception on the crypto currency word, but in a much smaller number.

To be continued…

Economic GDP: (to be discovered).

A pale blue dot in economic international cash flows. By now.

Looks promising, but with 30 billion volume (13/03/2017 estimative), cryptotrading is a pale blue dash on any global capital markets basket. By now.

In the future, it may growth, it may not, now one knows.

Money markets, or, its “au par” with all currencies.

As a huge topic of discussion (even as a seasoned economist, I will never enter the monetary debates), it’s interesting to see that with all the strange things happening in all those players, BTC as a currency has almost no deviation with local currencies (at least when I was writing this). It brings a lot of ideas, and in special if you like Hayek ideas and want to get lost in some philosophical themes.

The all-vogons regulators.

Regulatory is an inferno I don´t walk on. Never. So…

Hypothesis: The higher the level of trust a network can/does generate for its users, the less regulating said network makes sense. /1 As soon as trust within a network starts to erode, some level of regulation starts to make sense. /2x@pascalbouvier

“I am going to write a blog post soon about the difference between market mechanisms and plutocracy. Very important distinction.” Vitaliki´s promise.

Enjoy ?

And one more thing: The Sapient Market.

Also, we do have the writers, speakers, congress makers, and all the buzzword economic actors doing all the kinds of thesis and so. Again, another inferno I don´t walk, but there is a Black Swan to take the risks for me ?

Where all this may take? To a new economic order? Unintended consequences, next talks.

Next article, let´s try to put some order in so much information!

Courtnay “CognoChain” Guimarães Jr. is a proud and beloved father of 3 shining human beings.

Also, he works as a Digital Business Transformation Architect, futurist, writer and seasoned executive on the technology for financial services market. Those days, he love tos surf technology innovation waves. At the time of this writing, he´s paddling on the gig economy (no big brand behind his ideas).

Courtnay Guimaraes
Financial Systems (Risk, Compliance, Tresury, Basell II, IFRS), Customer Driven Innovation