Bitcoin Valuation: $4 Million

I was recently asked about the value of bitcoin.

“What is it backed by,” he asked. To which I replied,

“Currency. Your dollar.”

“So how can I buy shares,” he asked.

“You can just buy bitcoin. You invest by buying and using it.”

“But what is it backed by,” he asked again.

I wasn’t getting through. This post is my attempt at a better argument.

Bitcoin’s Value

Bitcoin can’t be valued by traditional valuation methods like cash flow or P/E (I’ll be publishing an article comparing bitcoin P/E to other cryptos shortly). Bitcoin has a unique business model. There is no CGS, SG&A, EBIT or EPS. There is no bottom line. The work has been fully automated and the process of creating these automated digital systems is done by the “bitcoin miners”.

So what makes the value of bitcoin go up? What drives the value of bitcoin? When people use their local fiat currency to purchase bitcoin the value of bitcoin goes up. The more people that buy and use it, the more the value goes up, which means bitcoin’s value is directly connected to its utility over fiat currency.

Bitcoin: The Value Proposition

Bitcoin’s value proposition depends on the person. I see it as a way to improve the flow of resources around the world. I think of my investments in bitcoin as an investment in the front-runner of an emergent technology. For me, bitcoin is revolutionary and invaluable.

I have heard bitcoin described in many ways. It is many things to many people. For some, it is a global, decentralized banking system. It has no borders or nationality. It serves as a store of value, a digital currency, an off-shore banking account, a peer-to-peer payment system and a payment processor (back- and front-end). To investors, it is the world’s fastest growing asset class. It also serves as a natural hedge against almost all other assets and is available, like gold, in limited supply.

Let’s discuss how the sum of bitcoin’s parts adds up.

Value Proposition #1: Global, Decentralized Banking System, Peer-to-Peer Payment System and Processor

When you swipe your Visa card or iPhone, the data in the magnetic strip is sent to a “front-end processor” (intermediary/checkpoint #1). The front-end processor forwards your information to the “card association” like Mastercard (MA), Visa (NYSE:V) or American Express (NYSE:AXP) (intermediary/checkpoint #2). Your information is sent to the “issuing bank” to verify the balance (intermediary/checkpoint #3). Approval is issued and that approval flows back to the front-end processor as a confirmation. Each intermediary or broker gets a cut. Bitcoin, by contrast, is a transaction from A to B, which greatly reduces the cost of the transaction.

The reduction of costs is a very powerful value proposition. That and ease of use are the hallmarks of disruptive automation technology and it’s about time this kind of technology entered our system of payments. Bitcoin has automated the payments process, from one end of the globe to the other. All you need is a cell phone.

What is this worth? People often compare Visa to bitcoin, suggesting that bitcoin should have the same value. This is like comparing Netflix (NFLX) to Amazon (AMZN). Netflix is a digital powerhouse, but digital content is just one source of revenue for Amazon.

Translation: Bitcoin is a dynamic peer-to-peer payment system, but this is only one piece of the bitcoin value pie.

How do we go about valuing the entire pie? Before I get to that, let’s look at a few other drivers.

Value Proposition #2: Limited Supply

When you increase the supply of an asset with a strong value proposition, the demand goes down, along with price.

When you decrease or limit the supply of an asset with a strong value proposition, the demand goes up, along with price.

You don’t need a degree in economics to understand this relationship. The amount of currency on the market today is not in limited supply – it is created out of thin air when banks make loans. With $2 trillion in excess reserves (courtesy of quantitative easing), banks no longer have to worry about capital requirements.

Unlike our dollars, the supply of bitcoin is limited. The creator of bitcoin placed a cap on the number of bitcoin that can be created at 21 million and we are fast approaching that number. The current number of bitcoin stands at 16.7 million. What happens when we reach 21 million?

Translation: When bitcoin reaches its upper limit, the value will spike.

Limited supply is a powerful value proposition in a market economy.

BRK.A data by YCharts

Value Proposition #3: Currency & Store of Value (Bitcoin is Better Than Gold)

Technically, nations are supposed to pay all debts in gold (GLD). Thanks to the Bretton Woods agreement, dollars (^DXY) became the medium of exchange used to settle debts between nations, which strengthened this relationship and increased the dollar’s supply around the world. The system was only made possible because of a guarantee by the US Treasury to redeem all dollars for gold. If foreign nations wanted to exchange dollars for gold, they could do so through the US Treasury. When this arrangement became inconvenient, the government reneged on its promise and the dollar crashed.

In August of 1971, with dwindled gold reserves, and a long line of budget deficits, President Richard Nixon terminated the convertibility of gold which turned the dollar into a fiat currency. Foreigners held nearly three times as many dollars as the US could redeem and were demanding gold because of lack of confidence in the US economy. The result, foreigners had to sell dollars in money markets at a discount.

When this happened, the US budget deficit was $11.6 billion. Nixon was worried the deficit would climb to $23 billion by year’s end and he felt the need for drastic measures. Today, by comparison, the current budget deficit is $666 billion. The Trump Administration just passed tax cuts that will decrease revenues and push the deficit up even higher.

What we are about to experience is part of an inevitable cycle. This time instead of hoarding gold, people will buy bitcoin as both a store of value and a form of currency. It shares a few attributes with gold in that it is rare and available in limited supply. It is also highly useful in many different applications and you can find a market for it almost anywhere in the world. Unlike bitcoin, gold is heavy and requires a physical custodian so the cost of storage is high. It also doesn’t come with its own payment system.

Translation: Bitcoin is superior to gold and the dollar in many ways which is why bitcoin topped the price of gold per ounce in March of 2017, closing at $1,268.

^NYB data by YCharts

Value Proposition #4: Natural Hedge Against Inflated Assets & Off-Shore Banking Services

As bitcoin gains in popularity, especially as a “first-to-market” technology, banks will lose customers. Bank profitability will decline as the world “unbanks” by switching to a faster, cheaper, autonomous, automated, peer-to-peer payment system. Investors and hedge fund managers are already looking for other places to invest because everything is overvalued. Hedge funds would rather pour billions into bitcoin than over-leveraged, inflated assets. Here’s a video of one hedge fund manager explaining how he values bitcoin:

Perhaps the most salient point to his argument is that institutional buying has just begun. I disagree with him on one point, however. Endowments and pensions are only about six months out from investing heavily in bitcoin, not 18 – a qualified custodian of bitcoin will likely emerge in this space by the end of March 2018.

Translation: Not only is the value of bitcoin going up around the world, but the value of the dollar (and all assets pegged to it) is going down. Investing in bitcoin poses little risk when used as a hedge in a portfolio full of assets that are highly correlated and overvalued.

Bitcoin’s Potential Value: $4 Million/coin

The value proposition is clear and strong, but what is that value? Can we put a number to it?

Imagine we’re sitting in a room together. On my laptop, I pull up the following chart (please go here to view the chart). This is the best illustration of asset values on the web. More specifically, it helps to put bitcoin and the entire crypto-universe into perspective against the world’s assets.

Start at the top with Silver and Cryptocurrency, then work your way down to Derivatives. If that doesn’t make you put bitcoin’s potential value into perspective, I don’t know what will.

How can you quantify this potential?

Bitcoin could take value away from silver and gold valued at $17 billion and $7.7 trillion, respectively. It may take value away from the global stock market (banks in particular) which has a market capitalization of $72 trillion. It may suck up all the world’s currency (coin and bank notes) valued at $7.6 trillion, but this is only 8% of the world’s total money supply. The true money supply, referred to as ‘broad money’, includes coins, bank notes, money market accounts, savings, checking and time deposits. It’s all the money we “think” we have access to. The total amount of broad money in the world is $90 trillion.

It’s hard to say which asset class bitcoin will impact the most. I think the drain will be felt by all, but the global money supply is the most vulnerable. In order to use bitcoin’s other features, you need to convert your local currency, whatever it is, to bitcoin.

In addition to being a store of value, bitcoin also represents a way for people to hide money and protect it against asset seizure. Today, it is estimated that roughly $21 trillion sits in off-shore accounts.

Translation: Bitcoin has a value potential of at least $90 trillion, which we’ll assume includes $21 trillion sitting in off-shore accounts.

We also know that the maximum number of bitcoin available is 21 million, which allows us to calculate the potential value of 1 bitcoin by dividing the total amount of broad money by the total number of bitcoin.

The calculation is $90 trillion divided by 21 million, which is approximately $4.3 million per bitcoin.

After you stop laughing I’ll explain why I think this is an ultra-conservative estimate.

  1. All the money in the world does not capture the value of total assets.
  2. While bitcoin’s volume is capped, the value is unlimited. The more it grows, the more money central banks will print fiat currency, which will be used to buy bitcoin.
  3. Bitcoin production is capped at 21 million, but studies show that 4 million have been lost forever so the true base may be closer to 17 million.

Final Thoughts

One thing is clear, if the rise of bitcoin can tell us anything, it is that people are losing trust in fiat money and other traditional measures of wealth. This is the mark of inflation.

We aren’t seeing a rise in inflation with inflation statistics due to the rise in income disparity. As a result, there are two economies – one is hyper-inflated, the other is stagnant. Stagnant wages guarantees low inflation statistics even in a time when all assets are clearly inflated. It may not be that bitcoin is going up, but that all other assets are locked in an inflationary collapse and bitcoin is capturing that value. Meanwhile, the smartest minds in the world are on board Train Bitcoin. They’re doing everything they can to make this open-sourced technology work. And, it’s working.

Disclosure: I am/we are long BTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Siemens to Invest in Blockchain-Based Smart Grid Builder LO3

Technology conglomerate Siemens has announced it will invest in LO3 Energy, a startup focused on building blockchain-backed “smart grids” for local energy trading. The amount of the investment, and LO3’s implied valuation, were not disclosed.

LO3 has had a relationship with Siemens since late 2016, when the companies teamed up to build a local smart grid in Brooklyn. LO3’s system is intended to let “prosumers” buy and sell energy — such as that generated from rooftop solar panels — with their neighbors.

LO3 users install a high-resolution meter, which can do neat things like track energy usage at specific times of day, or by specific appliances. They also get an app that lets them set buy and sell requests for specific kinds of electricity, such as solar or wind. LO3 gets revenue from the resulting transactions, and also wants to leverage all that rich user data, potentially by connecting its microgrids to major utility operations.

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LO3 wants to use blockchain to make its system work. Specifically, the smart contracts at the heart of second-gen blockchains like Ethereum should make it possible to automate real-time, granular, peer-to-peer energy transactions. It’s an application where blockchain’s decentralization is particularly important, which LO3 CEO Lawrence Orsini highlights by pointing to Enron’s infamous manipulation of California energy markets circa 2000.

In the midst of a crypto-gold rush that has bred widespread scams, wild overvaluations, and sketchy vaporware, LO3’s blockchain application is one that, at least in theory, makes sense both technically and philosophically. But unlike so many companies touting their blockchain applications, LO3 isn’t pumping up an initial coin offering, and Orsini has downplayed the idea that LO3’s blockchain would rely on cryptographic tokens that themselves had market value. Subtracting that element from the blockchain equation might be tricky, though, since financial incentives are key to motivating distributed servers to host blockchain software.

Another potential roadblock, of course, is getting utility companies to play along — they’ve relentlessly pursued a legislative agenda that removes incentives to integrate rooftop solar into the grid, particularly buybacks for excess electricity. LO3’s system could help consumers take back some control, which might be all the excuse legacy providers need to resist it.

UPS Office Staff Called Up to Deliver Packages In Last-Minute Christmas Rush

Faced with unexpected holiday volume in some areas, UPS this year had to draft hundreds of office workers to deliver packages at the last minute.

According to the Wall Street Journal, the staffers included accountants and marketers, who suddenly found themselves hefting boxes. Such switches aren’t uncommon during the company’s hectic holiday season, but they’re usually voluntary and coordinated well in advance.

A UPS spokesman confirmed to the Journal that several hundred office employees have been called on to deliver packages. Some of them reportedly used personal vehicles. Most of the reassignments, according to the spokesman, are now wrapped up.

At least part of the problem was the tight labor market across the U.S., which made it harder for UPS to hire its usual bevy of seasonal workers. Another factor is online shopping, which has grown every year for more than a decade, and peaks sharply in the days before Christmas. This year, in certain locations, the number of packages exceeded even UPS’s projections.

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The unpredictability of that volume has been a challenge for UPS and other delivery services for years, and they’ve experimented with various solutions. Temporary staffing can increase throughout, but expensive overexpansion during the 2014 holiday season highlighted its downside risk.

On the other side of the equation, UPS has floated various approaches to raising prices during the holidays, in part to encourage customers to send packages earlier and spread out demand. This year, the shipper added peak surcharges, mostly under a dollar per package.

Those modest surcharges don’t appear to have done much to encourage customers to plan ahead this year. UPS could make them higher, but then the problem becomes competition — FedEx didn’t implement a holiday surcharge for most packages this year.

That leaves a nearly insoluble problem, as the delivery industry searches for ways to scale massively for a short period every year. Calling up the accountants doesn’t seem like a very sustainable solution.

Space Photos of the Week: When Billions of Worlds Collide

This is what it looks like when two galaxies collide. Those colorful bands of debris are gases being flung out into space as a result of this violent cosmic dance. Galaxy NGC 5256 contains both merging galaxies. Each contains its own galactic nucleus and in between the two is a supermassive black hole that’s quickly sucking up material from the impact.

This bright red star is called ?1 Gruis and its bluish partner to the left is ?2 Gruis. The European Southern Observatory’s Digitized Sky Survey snapped this photo of the space surrounding these stars. To the right, in bright blue, you can see the spiral galaxy IC 5201.

This photo might look a little more familiar—that’s Earth! Little Rock, Memphis, Jackson, New Orleans, Birmingham, and Miami to be exact. This illuminating photo was taken from the International Space Station by current crewmember Mark Vande Hei.

This glowing purple and blue image of a galaxy cluster called Perseus might help scientists solve one of the biggest mysteries in science: dark matter. To understand dark matter, scientists are trying to interpret new x-ray data from the cluster, one the largest objects in the known universe. The sudden jolts of intensity they’re observing might provide answers..

Hubble does it again! This photo is of galaxy cluster Abell 2163. One of the largest galaxy clusters on record, containing around 4,000 galaxies, Abell 2163 is also the hottest ever found. Scientists are studying the material jutting out from inside the cluster to better understand dark matter and phenomena like gravitational lensing.

A peep at our home galaxy is always heartwarming. In this dazzling image, the Milky Way arches over the Very Large Telescope. See those two bright smudges at the bottom? Those are the Large and Small Magallenic Clouds.

The 1 Habit That Prevents Burnout

At the end of every year, I make it a point to do some serious reflecting.

Part of my reflection process this year has entailed taking a hard look at “burnout.”

Burnout feels like you’ve hit a wall.

Every entrepreneur knows the feeling.

Burnout can happen at the end of the day, on Friday at the end of your week, or sometimes it can happen after just a few hours. Burnout isn’t always this big catastrophic event where your life suddenly resembles a one-sided seesaw. It can happen in the small moments too.

One of the things I’ve been thinking about lately is what causes burnout–specifically, what causes it to happen in those small intervals where all of a sudden you feel like you don’t want to do anything at all (even if you need to).

Burnout is the result of a lack of input.

This is my big conclusion.

If I watch myself carefully, I notice that transitioning between activities is what causes the most burnout. 

What I mean is, each activity in itself isn’t necessarily what causes tiredness or a lack of motivation. In fact, it’s quite the opposite. Each activity, once you get into the flow, feels good. You know what you’re focused on, and you have no problem remaining focused for a long period of time.

Where the exhaustion comes in is when you stop doing that one activity, only to immediately move into another.

There is no transition.

If you want to prevent burnout forever, this 1 habit is all you need.

Separate each output activity with a few small moments of input.

After a long grind session, read.

After a client meeting, go sit by yourself for 5-10 minutes and reflect.

After a morning of working, eat lunch without checking your phone. 

When you separate moments of output with small moments of input, the transition becomes a time to recharge. 

Instead, what most people do is they compound activity after activity, until they have no more output left.

Most of our society (especially us entrepreneurs) spend 90% of our days in output mode.

We’re on the phone, and then we’re answering emails, and then we’re having meetings, and then we’re doing the work, and then we’re doing more work, and then we’re catering to other people, and then we’re checking our email again.

On and on and on it goes–never once pausing to give ourselves a moment of transition.

Where’s the input? 

This is the most simple, and yet the most impactful habit of all, this habit of input-focused transitions. Don’t just jump from activity to activity. Don’t book your entire day with output activities. You have to eat lunch, don’t you? What if you never slept either? 

There is a reason we need basic inputs in order to survive as humans.

Apply those same principles to productivity and you’ll never burn out.

This Company Published All Its Employees Salaries 4 Years Ago. Here's What They Learned.

“Robbie, how much do you make?”

Someone asked me this question at a recent job, and I admit, I was thrown off. The reason they asked wasn’t to be nosy, but to find out if they were getting underpaid or not.

Most salaries are private, so my coworker couldn’t find out without asking. It’s a constant issue.

Well, Buffer, a social media management platform company took salary transparency to another level four years ago.

Their salaries are transparent, both internally and publicly. You heard that right. You can go to this Google doc to find out exactly how much everyone in the company makes, including the CEO. They’ve really embraced salary transparency head on.

I was intrigued by this and reached out to Buffer with a few questions about what they’ve learned so far.

The biggest challenges

Buffer’s biggest challenge was its own insecurity, according to Hailley Griffis, PR manager at Buffer. “The team was on board because of our value of defaulting to transparency,” she says. “We already had salaries live internally, so it was just switching it to a larger audience. There were a lot of what-ifs floating around at Buffer.”

What if the made it easy for anyone to poach Buffer employees because they knew exactly how much more they had to pay them? Or what if new people refused to join because they didn’t want their salaries online? None of those what-ifs came to fruition, Griffis says.

I find this really interesting. They were already sharing salaries internally, which is a massive first step for any organization. I’d honestly be happy with just internal sharing.

Taking it public is another story.

The positives and negatives

I can’t imagine that full salary transparency would be be entirely positive. Still, I was curious to see what the impact has been.

Griffis mentioned three positives:

  1. A jump in applications as soon as they went transparent.

  2. The accountability of being held to a higher standard, and the ability to pay people fairly and without bias.

  3. Increased trust among their team.

And negatives?

“We do get negative feedback, comments and such, from the public when we share updates to our salary formula or our pay,” Griffis says. “Pay is something that everyone will always have strong opinions about and we can’t please everyone.”

Based on comments from several social media sites, Buffer receives negative feedback that the salary formula doesn’t account for the individuals who operate at a higher level than their peers in the same category.

Additionally, job searchers are used to negotiating, so when they can’t negotiate, they don’t feel like they’re getting a good deal. This is a common issue for high performers.

Salary transparency isn’t for everyone. My stance is that people should be paid unfairly. If you’re are performing ten times better than your colleagues, then a formula to calculate your salary will leave you disappointed.

What I do admire about Buffer embracing salary transparency is that they really own it. It’s not like the salary spreadsheet is hard to find. They actively market it.

I also appreciate that they created a salary formula–so you can understand what your true worth should be. It’s not foolproof, of course, but I think it’s a start in the right direction.

How would you feel if your salary was not only available to your colleagues but to anyone with an internet connection?

Amazon Acquires Security Camera and Video Doorbell Maker Blink

Highlighting its growing ambitions in Internet-connected home devices, Amazon has acquired wireless security camera startup Blink.

The deal, announced on Friday, gives Amazon a rising star in the emerging and highly competitive field of connected home devices that includes Alphabet’s Nest. In addition to a wireless security camera, Blink makes a video doorbell that lets homeowners glance at their smartphones to see a live feed of who is at their door.

Financial terms of the acquisition were not disclosed.

Blink’s security cameras, first introduced in 2016, are known for their ease of setup and for not needing a plug because they can operate on batteries. The video doorbell, which costs $99, is also battery powered

Amazon push into connected home devices started in 2014 with the Echo, the smart speaker that relies on voice recognition to answer questions and do things like order Uber rides. The company expanded its connected home lineup earlier this year with the Cloud Cam, a security camera that has since become an integral part of Amazon Key, a connected lock that lets Amazon’s delivery workers enter homes to drop off packages when homeowner are away.

Blink said Thursday it would continue to operate as part of Amazon and sell the same products it already does. The companies provided no other information about their plans.

IOTA Is Not The Next Bitcoin

This is an impromptu commentary arising from my reading of the interesting Seeking Alpha article titled “The Next Bitcoin? Take A Hard Look At IOTA” by Quad 7 Capital. I posted a comment to the article with questions about what exactly is IOTA’s value proposition. Some of the reader comments on the article helped me but I still wanted more so I did some more digging and thinking. My commentary below is driven by trying to understand the cryptocurrency phenomenon and the macro-economic implications of the distributed ledger, and “block-chain” or “tangle” type technology as it relates to money.

Background: Bitcoin observations

Bitcoin is the first cryptocurrency that uses block-chain technology and a distributed ledger system to allow individuals to collect and use digital tokens to conduct transactions, and that has obtained extreme notoriety. The hype around Bitcoin and increasingly popular alt-coins and me-to-coins does not appear to match up with actual foreseeable durable practical utility as money. Sound money (currency) should be a stable store of value and efficient unit of account for transactions. So far, the promise of “naked” cryptocurrencies [1] such as Bitcoin do not appear to fit the bill for a new sound money system. Note, those that subscribe to the conventional economic orthodoxy probably are going to have trouble seeing the value of any cryptocurrency system that is adopting sound money principles. Some folks simply are not able yet to acknowledge that current centrally planned monetary policies may be damaging and a significant reason for the cryptocurrency phenomenon.

What I find important about the Bitcoin phenomenon is that it is based on the fundamental human desire of some to innovate and to be free; to be free of financial repression; to be free of financial repression by a sovereign authority [2]. However, the Bitcoin phenomenon appears to have morphed into a speculative mania divorced from economic and practical reality.

My sense is that the current Bitcoin phenomenon is now driven mostly by a speculative greed-based “greater fool” theory and “fear-of-missing-out” (FOMO). It currently is not about more efficient resource allocation or productivity, but rather is essentially an open Ponzi-like scheme where players all believe they are smarter than most of the others; and/or where the players believe they will just get lucky regarding timing for bailing out when there is a loss of confidence. The price of Bitcoin right now does not appear to be linked to a durable commensurate inherent utility of Bitcoin as a unit of account for conducting most transactions or as a long-term store of value. The Bitcoin speculation mania is driven by a positive feed-back loop reflexivity meme. Despite the flawed, unrealistic, fictional aspects of the narrative around Bitcoin there is enough of a resonating message that is reflexively driving the Bitcoin price up. The danger is that many speculators that get into Bitcoin will become addicted to or trapped in this “asset” via powerful psychological confirmation bias when price goes up and/or incapacitated by cognitive dissonance when price goes down.

What is an IOTA token?

The IOTA token is supposedly a layer of crypto technology (naked cryptocurrency) that sits on top of a base technology platform involving the IOTA tangle distributed ledger. The value proposition of the IOTA token is that it allows a user to conduct transactions on the IOTA tangle distributed ledger that assertedly has benefits over other block-chain distributed ledger systems (see above reference SA article). The IOTA user can be a human but for now is mainly autonomous IOTs (“internet-of-things” machines) transacting peer-to-peer transactions. The IOTA platform is designed to allow users to trade IOTA tokens or create their own non-naked tokens and trade the same. The concept of non-naked cryptos trading on a distributed ledger system is very interesting but beyond the scope of this article.

The IOTA token (cryptocurrency) is not a block-chain token and therefore is not created by mining a block-chain. All of the IOTA tokens have been created at inception with the “genesis” transaction site in the tangle ledger. The IOTA platform is based on a distributed “tangle” ledger that is different from a block-chain ledger system. The IOTA tangle ledger was created (started) with a genesis transaction site, that distributed all the tokens at inception to a number of founder site addresses, that then have been expanded upon by users to create the IOTA tangle ledger. Therefore, the activity of users of the system propagates the tangle distributed ledger without fees or miners, or creation of new tokens.

To propagate the Bitcoin ledger miners need to be induced to do computational work, by payment of fees paid in Bitcoin units. One of the problems with the Bitcoin system is that as more people use the system the slower it gets (the scalability problem) and the higher the fees become to process a transaction. In theory the IOTA distributed tangle ledger gets faster (and more secure) as more people use it. The cost of using the IOTA ledger to process a transaction is the cost of the user’s computational effort to verify two randomly selected existing prior tangle ledger sites (transactions). IOTA can be thought of as a flexible cooperative work-to-play platform that enhances the overall value of the system, via second order type network effect, that is the tangle ledger becomes more valuable because it is more secure.

IOTA may have superior utility to a Bitcoin (or other “naked” block-chain) cryptocurrency system because of its proposed costless scalability, among other proposed benefits. IOTA arguably could eclipse Bitcoin as a cryptocurrency because of IOTA’s superior utility for more efficiently processing transactions. My guess is that there are many value propositions that can be (will be) proposed that are based on a network effect, but it does not mean that the system will ever get adopted or displace an existing system/network effect. In any case, as we have seen from Bitcoin price action, there are crypto speculators that do not really care about fundamental practical utility of any specific cryptocurrency.

Right now, the cost of Bitcoin goes up because it becomes more costly to mine Bitcoins as more people mine Bitcoin (because of price escalation reflexivity in connection with the hashing algorithm), and not because more users use Bitcoin to conduct routine transactions. For IOTA tokens there is no cost of production because all the tokens already exist. The cost of IOTA is front loaded and deferred until dilution occurs presumably when the IOTA system founders cash out their stash of undistributed tokens. Bitcoin also has the problem of future dilution from dissemination of a large hoarded stash of tokens that were mined early on at very low costs when the crypto was created. Value of IOTA tokens are linked to the increased utility and become more valuable from first and second order network effects.

It seems to be a stretch to assert that currently Bitcoin value is associated with a true “network effect”. Bitcoin price goes up not because of enhanced use of the system for transactions, but rather because the price trend is steeply up at the moment and FOMO creates speculative demand. The concern for investors is that Bitcoin demand will vanish when speculators are tapped-out and/or lose confidence. There does not seem to be a sufficient base level of competitive practical utility for Bitcoin that will support any value proposition for Bitcoin when speculative price appreciation disappears, and users migrate to the numerous more utilitarian alternative cryptos or other tangible stores of value.

Unanswered questions about IOTA

What still is not clear to me is how the original finite pool of IOTA tokens is distributed and marketed to the public; or what prevents expansion of the pool in the future. And who stands to gain from the selling/distributing undistributed tokens. Also, there does not seem to be a reasonable simple direct trusted system for obtaining and holding IOTA tokens yet.

The above referenced Quad 7 Capital SA article does not explain how token distribution works beyond the genesis transaction, and does not explain how distribution will (or will not) benefit early or new adopters versus providing windfall gains to originators of IOTA. I reviewed the Popov/IOTA white paper and could not find relevant answers to my questions. Here is an excerpt of what I did find (at page 2):

For those readers who are interested I found what appears to be an IOTA video presentation that provides some additional interesting information but also it did not answer my questions.

After writing this article I found a good SA article titled “IOTA – IoT Capable Technology And The Alternative To Blockchain” by Keyanoush Razavidinanithat provides a more technical comprehensive explanation of the block-chain in comparison to the IOTA tangle ledger. Also, the following excerpt from Razavidinani provides interesting comments on how the founder-pool of IOTA tokens may be distributed in the future.

As soon as official partnerships are announced and new investments into IOTA will be declared, a redistribution of IOTA tokens will begin, having major influence on the price. As stated before, all tokens have been mined and at the beginning only a few addresses contained the majority of tokens. It is interesting to follow the distribution of tokens, because one of the main conflict points of anyone reading this may be that the developers of IOTA make a big profit on their IOTA tokens selling them on the market. The market is trading with a fraction of available tokens and distributing all tokens once may seem illogical adding high amount of liquidity and devaluing the token.

Until there is clarification and dissemination of information by IOTA there will be uncertainty about the enterprise, investment risk and the taint perhaps of a Ponzi-like scheme.

The cryptocurrency revolution

The cryptocurrency phenomenon seems crucially linked to the recognition of the power and utility of block-chain and other distributed ledger systems that solve the double-spending problem. Another important driving force is the desire by many to be free – to be free of something – what that is specifically I will leave up to the reader to ponder. The cryptocurrency revolution is giving hope to the idea that via innovation there might be a way to secure a better more equitable, efficient and durable currency system based on sound money principles.

From time immemorial sovereign authorities have resorted to debasing the existing money supply – as a way of expropriating and redistributing wealth from the public [3]. The 2008 financial crisis was a very notable benchmark in exposing what some view to be extant whole sale massive combined governmental and institutional fraud in furtherance of the status quo. The rule of law and legal liability was effectively suspended as it relates to the “too-big-to-fail” financial players. The cryptocurrency revolution appears to be driven in large part by the sentiment that the powers at-be “saved the system” by simply papering over the problem with more printed easy-money.

If IOTA is to attract investors, it probably needs to articulate a clearer value proposition and a logical mechanism for action and adoption, that taps the human desire for freedom, liberty, sound money, and free-markets, and eschews the Ponzi-like modus operandi. An IOTA narrative needs to be compelling, simple and inexorably resonate both cognitively and viscerally with a broad spectrum of stakeholders, and goes beyond simply extolling how great it will be to have autonomous internet-of-things (IOTs) all seamlessly exchanging cryptos while babysitting humans. Just to be clear I think IOTA presents some very interesting concepts and I hope to learn more about how it might work as a practical investment opportunity.


1 A “naked” cryptocurrency as used in this article denotes a crypto that is not linked to tangible property rights or other exogenous bundle of legal rights.

2 The point of this article is not to debate whether there is or is not “financial repression” or debate the mechanism of action for such repression or explain the cause of the same. The intent is to identify that there is a public sentiment about “financial repression” and that it is a perceived reason for the cryptocurrency phenomenon. Obviously, the term “financial repression” might be viewed as unduly pejorative by some who believe in the conventional current economic theories and/or want to maintain the status quo monetary policies – that the organic cryptocurrency revolution might disrupt someday. Identifying and understanding the potential fundamental driving forces behind the cryptocurrency phenomenon is critical to assessing specific value propositions proposed by Bitcoin, IOTA or any other disruptive technology, and the investment potential therein for an investor.

3 I believe the extant debasement of currency is a problem (this is not a novel concern or concept). My concern is that debasement of the currency can result in inefficient resource allocation, unproductive consumption, an inequitable wealth gap, price inflation/stagflation, and/or currency collapse and a financial system reset, but this is beyond the scope of this article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

In Silicon Valley, much-feared tax bill pays dividends for workers

SAN FRANCISCO (Reuters) – The U.S. tax overhaul is a boon to Silicon Valley technology companies like Apple Inc (AAPL.O) and Alphabet Inc (GOOGL.O), which will enjoy big tax cuts and the chance to bring back billions of dollars from overseas at a reduced rate.

And contrary to the dire warnings of California officials, a large swath of Bay Area workers and their families stand to get a tax break as well, even with new limits on state and local tax deductions.

California has the highest state income tax in the nation, and Governor Jerry Brown has called the new tax bill “evil in the extreme.”

Nonetheless, many in Silicon Valley stand to benefit. Startup employees, freelancers and venture capital investors are among those who will get new tax benefits or keep those they already have, tax experts said.

Even some of the middle- and upper-income professionals who form the core of the technology industry workforce will still get significant tax cuts, while most others will see little change, they said.

The new $10,000 cap on state and local tax deductions will have a less dramatic effect than feared because such deductions in many cases had already been rendered moot by the alternative minimum tax (AMT), a mechanism for assuring that the well-heeled pay at least 26 percent of their income in taxes.

“There is a lot of noise about workers in California, New Jersey, New York and Illinois (facing higher taxes), but 80 percent of our clients there were already paying the alternative minimum tax so they don’t benefit from the state and local deductions,” said Jack Meccia, a tax associate at financial planning firm Vestboard, which works with several hundred individuals in tech.

The new law alters the AMT in a way that vastly reduces the number of people who have to pay it, from more than 5 million to an estimated 200,000 next year, according to the Tax Policy Center. The AMT dynamics, combined with reduced overall tax rates and the doubling of the standard deduction to $24,000 should hold most Bay Area tax bills steady, said Bob McGrath, tax director at accounting firm Burr Pilger Mayer.

Estimates by three experts, using roughly similar assumptions, show that a home-owning couple earning a combined $250,000 in Silicon Valley would likely see an increase or decrease in their tax bill of a few hundred dollars.

A married couple with no children who rent a home and make a combined $150,000 would see a $3,900 tax cut, estimated Annette Nellen, who directs the master’s degree in taxation program at San Jose State University.

Low-income workers will see tax cuts too, though the dollar amounts are small.

Bob Emmett, a single, 73-year-old security officer who lives in San Jose, criticized the bill as “designed to help the rich.”

Nellen estimated that Emmett, who rents an apartment, has no children and earns $16 an hour in addition to some social security income, would see a $546 cut in taxes.

FILE PHOTO – The Google logo is pictured atop an office building in Irvine, California, U.S. August 7, 2017. REUTERS/Mike Blake/File Photo

Critics of the tax bill note that the individual tax cuts will disappear after 2025, and that most of the benefits flow to the corporations and the wealthiest individuals, even if lower-income people get some tax relief.

Health insurance premiums for Californians are also likely to rise substantially as a result of the repeal of fines for those who refuse to obtain health coverage under the Affordable Care Act. And even if Bay Area residents mostly enjoy some tax cuts, they gain much less than those in low-tax states.


Employees in Silicon Valley, the world’s startup capital, scored two major victories in the tax bill.

First, startup employees can hold off on paying taxes related to stock options they exercised. That can be a big help if a company is still private, since in that situation employees have to pay tax even before they can earn cash from selling shares.

Startup employees will also have more opportunity to exercise what are known as “incentive stock options” with less chance of being on the hook for the alternative minimum tax, according to Mark Setzen, a long-time certified public accountant in Silicon Valley.

Also coming out ahead are independent contractors, ranging from engineers to marketers to caterers, who stand to benefit from a new 20 percent deduction of business income.

Arun Sood, a freelance software engineer in San Francisco who makes about $150,000 annually, said he accrues few deductions because he rents his home, holds no debt and has no children. Now he gets a big new deduction and a lower tax rate.

“Looking at this selfishly, it’s going to be a positive impact,” said Sood, who has freelanced for Axios, Cisco and Macy‘s.

The tax plan mostly preserves a tax break for venture capitalists that had been in jeopardy. The so-called carried interest provision lets venture capitalists book the 20 percent fee they typically take on a profitable investment as a capital gain, which carries a lower tax rate than ordinary income, even though the venture investors do not put up any of their personal capital.

Now the capital gains rate will apply only to investments held at least three years — a limitation that venture capitalists said would come into play only occasionally.

Silicon Valley executives with high salaries will take home extra money, too, because language in the current tax law known as the Pease Limitation had already limited their deductions, said Andrew Mattson, a tax partner serving technology industry clients at accountancy Moss Adams.

Executives also may see base pay rise in coming years. The tax bill removes corporate tax breaks for performance bonuses, which is already leading companies to reconsider pay packages for chief-level executives, lawyers said.

Reporting by Paresh Dave, Heather Somerville, Jeffrey Dastin and Salvador Rodriguez; Editing by Jonathan Weber and Lisa Shumaker

It's Time to Take Magic Leap Seriously

The last time I visited Magic Leap founder Rony Abovitz at the company’s secretive Florida offices, he told me about the time he met Beaker, the meeping beeping scientist on the Muppet Show. Not the character Beaker, but the real Beaker. The guy was a film director at creator Jim Henson’s studio, Abovitz explained enthusiastically. “He’s tall, he looks just like Beaker and he acts like Beaker! You’re like, ‘How do I know him?’ And then you find out he was the influence behind Beaker, and it all sort of makes sense,” he said. Of the many celebrities Abovitz has met, Beaker was clearly a highlight.

“By the way,” he said. “The Muppet Show plus Star Wars equals Magic Leap in my head.”

In the absence of a product or even a prototype, this is the kind of wacky description we’ve had to work with in our efforts to understand Magic Leap over the last few years. The heavy dose of whimsy makes it almost too easy to write off the startup’s boastful promise to be a leading contender in the race to dominate augmented reality. After all, Microsoft began shipping its HoloLens headset to developers nearly two years ago, in March of 2016. By this point, tech’s big five all have their own version of an augmented reality Manhattan Project on the hunch that the next big computing platform will emerge from the fusion of physical and digital assets through a set of goggles. Why bet on this Florida startup with its quixotic founder when Jeff Bezos, Mark Zuckerberg and their peers are pouring resources into figuring it out?

The answer becomes apparent in this week’s announcement that, at long last, Magic Leap has unveiled a prototype and will make its headset available with developer tools in 2018. The goggles, dubbed the Magic Leap One, come with a controller and battery pack the size of my palm, and have a steampunk vibe. They’re sleek, with bug-eyed lenses, and a Rolling Stone preview suggests they’ll be expensive. Truthfully, there’s not much more information available. Developers haven’t tried them, so it’s impossible to compare them directly to other available prototypes. But what’s distinctive about these glasses is that they exist at all—that Magic Leap has finally come forth with evidence that its technology, which until now has only been seen by those of us who have signed lengthy and complicated nondisclosure agreements, will have form.

Right now, this is enough. As important as this next computing platform will be—Oculus CEO Brendan Iribe has even called artificial reality the final platform—to the way we conduct business, entertain ourselves, and generally communicate, it is many years out. Today’s version of augmented reality is restricted to Snap lenses and Pokemon Go or factory workers reading manuals through Google Glass. For AR goggles to take off, computing power must advance, batteries must shrink, and we must design the new applications that will give us reason to want to purchase a pair for ourselves. Only then will we have a market—or more likely, many types of markets—for this technology.

Magic Leap is among a small group of companies that have the resources and backing to develop products for this future. It has raised $1.9 billion so far, having closed its most recent round earlier this fall. Board members include Google CEO Sundar Pichai and Alibaba executive chairman Joe Tsai. The company has strong ties to Hollywood, and Steven Spielberg is reportedly an investor. It has inked entertainment-focused partnerships like one with Lucasfilm’s ILMxLAB (Magic Leap hired ILM cofounder John Gaeta in October). At the company’s helm is a proven entrepreneur; Abovitz sold a medical robotics company in 2013 for $1.65 billion.

Which brings us back to Abovitz’s office. In addition to a sculpture of Beaker, the room is cluttered with all sorts of toys and games and prizes, like the unicorn head propped atop a punching bag or the many lanyards from past Star Trek conventions. Each memento has a story, which Abovitz tends to recount in Star Wars metaphors and with regular references to Charlie Bucket’s golden ticket. Abovitz is a very different type of leader than the set of California CEOs rushing headlong toward tech’s future. He is gentle—a life-long vegetarian who showed me photos of one of his dogs the first time I met him, and who can always make room for a discarded pet in need of a home. His friends and colleagues describe him as a person with a heart that is big and soft and full. (Sometimes, too much so. As a manager, he shies away from conflict.) The science fiction he’s always spinning has happy endings.

Abovitz pairs this empathy with a grand vision for Magic Leap that extends well beyond the gaming device we saw this week. This prototype is a mere step on the road to an even more powerful computing breakthrough. “As I learn more about how the brain works, it’s just hundreds of thousands of tiny neural connections and each neuron is filled with tiny substructures, and those all might be incredibly powerful quantum computers themselves,” Abovitz told me last year. “Magic Leap is just functioning as training wheels to begin to unlock that.” Someday, he explained, we won’t need goggles to map digital assets to reality; we’ll be able to program our brains directly.

It’s possible that augmented reality will be the most important computing shift of our lifetime. Magic Leap’s position as the kooky outsider ensures that the first iterations of this technology won’t only reflect the limited perspective of already-anointed West Coast oligarchs. Yes, the company’s a little weird. Sure, it’s following an unconventional path. But given what’s at stake—the future of how we interact with our environments and each other—infusing a little Florida and stirring in a dose of Hollywood means we’ll get a technology that stretches beyond the prevailing tech groupthink. With this week’s prototype, it’s clear the company is on track to be a serious contender, en route to one possible version of the future: a Muppets-plus-Star Wars version that sounds damn appealing.