Posted in Cryptos
The following article covers a token or element in the cryptosphere. The cryptosphere is new and exciting, but changes rapidly and often in ways that do not benefit users. By the time this article is published, changes may have already occurred. Most tokens in the cryptosphere are complete scams that are get-rich-quick-schemes for insiders. Often, we cannot know this beforehand and only later discover this. A person should only trade with money that they’re willing to lose because losses are guaranteed. If you choose to participate in purchasing a token in the cryptosphere, you should do so with the full expectation of a loss and you should also expect it to change in a manner that does not benefit you. There are very few good ideas in the cryptosphere. Finally, by reading this post, you agree that you’ve read our disclosure.
“A fool and his money are lucky enough to get together in the first place.” ~ Gordon Gekko
In the last 24 hours, I’ve been asked about Zcash multiple times, so I’ll briefly discuss my thoughts here. Students in my course retire early with cryptocurrencies will get another look at Zcash, trading and cycles like these, which I won’t discuss in this brief post. Let’s look at some facts first and then discuss my view of these realities.
Yesterday, we saw some fractions of Zcash selling in the millions of dollars. This is not a misprint – people were willing to let go of bitcoins at a rate of over 2000 bitcoins per 1 Zcash. Before anyone accuses Poloniex or the founders of Zcash of a scam, we must remember that market participants were willing to pay this rate – a market is simply where buyers and sellers meet. If a buyer puts in a buy order for 1 ZEC at a price of 2000 BTC, we can all think he’s crazy, but he’s willing to pay that rate and while I strongly believe his price is wrong, ultimately the decision is his. Do I believe in warning people that they’re overpaying? Yes, and if you read this blog, you’ll know that I’ve warned on hyped events – like Synereo’s crowdsale:
Summary: Synereo (AMP is its symbol) hosted a second crowdsale charging a price-per-AMP minimum of $0.20. However, we cautioned people to avoid this crowdsale because (1) exchanges offered a more competitive price at the time and (2) we predicted the price would fall after the crowdsale. The price crashed to $0.03 at one point, meaning that people who purchased Synereo (AMP) during the crowdsale received a poor quality deal – exactly as we predicted.
And look at the results now: a person taking a risk by buying 1000 AMP for $0.20 each paid $200, while another person can take the same risk for $30, and if AMP does well, the person who purchased AMP will get a stronger return based on original principal. My point here is that I have explicitly cautioned people on these hype cycles, yet these generally go ignored because “bright shiny speculation.” This is a choice and I strongly recommend against buying with urgency, unless you’re doing so in a manner that is not hype. Usually, the best trades are not hyped and are not known by most – this is just a reality of trading.
The economics of Zcash is simple: there will be a very small supply of it in the beginning, which means that there is very little value in buying some right now, unless you actually believe that 1 Zcash will be worth millions (and I strongly doubt this). Just because there’s only 100 the first day of release means nothing; we know there will be much more within a year. It will have the same supply as bitcoin – 21 million – in the long run. So let’s check the numbers: if Zcash stays at a price of $1000 and we hit a supply of 1,000,000, while we know that the supply will be growing, this means that Zcash will need to absorb $1 billion in funding to maintain a price of just $1000. Considering the lack of infrastructure behind Zcash and it’s only benefit of privacy, we have to wonder where this billion dollars will come from? It’s possible people could dump bitcoin and Ether to buy Zcash and it’s also possible outside buyers may want it. Still, I don’t see it being able to absorb that much funding to maintain that price over the next year, and remember that’s just $1000. As you can see from the above image, the price then was over $4000.
From a privacy-currency supply standpoint, Dash is still rarer than Zcash in the long run, just like Dash will be rarer than Monero or ShadowCash in the long run (Boolberry might end up being rarer than Dash). The big key here is do you understand the economics of Zcash and if you don’t, why are you trying to buy? In my talk about blockchain and commodities, I mentioned that physical resources are rare and sometimes they deserve high prices because of this, which are signals to find and (or) produce more. However, I was not saying this about cryptocurrencies – even I wouldn’t pay $10,000 for a bitcoin or any other cryptocurrency, because none of them are worth that price in my mind, and that’s a reality. If you believe that Zcash is worth several million US dollars or Euros, goodluck. I think in the long run, you will find that it’s not and I suspect that Zcash will be below $50 within a year. If I’m right, that means the people who lined up to pay several million dollars for 1 Zcash are going to have a strong feeling of buyer’s remorse. But, I could be wrong and Zcash may rise and stay at that price. The economics of Zcash tend to agree with my view, though.
As for Zcash possibly being the second major cryptocurrency behind bitcoin in the long run (right now, it is only ahead of bitcoin due to its supply), I would welcome this. You may remember that I wrote that Ethereum is solving a different problem than bitcoin, thus it’s not comparable to bitcoin in my view and I don’t see it as a competitor. Zcash is. I believe competition strengthens markets, so bitcoin having a strong competitor, like Zcash, will only make both better. After having written that, it’s possible that markets finally realize that Ether was never and will never be the competitor to bitcoin, like the IMF thinks. Zcash could be number two for a while – it’s impossible to absolutely know where it will be in a year, or if people will lose interest. From my view, it lacks any of the infrastructure that bitcoin has and the community is solving a problem that’s already been solved (Dash, Monero, Shadowcash, Boolberry, etc), so they’re late to the party. Even if they later catch up completely on privacy, these other cryptocurrencies are two steps ahead of them and are working on the next innovation. As I said in the Blockchain and Commodities discussion – and people will see that I’m right in a few years – the biggest winners now are the ones who rise to the commodities challenge today because the privacy challenge is already done. However, when it comes to trading, I lead and markets follow, not vice versa, so the markets this year are waking up to what I saw last year – privacy is big. In three years, markets will realize that commodities are big; just look at Egypt right now, they’re facing massive food shortages and you can’t tell someone who can’t eat that they need a bitcoin – they need food.
I will caution readers about three patterns you will see all over social media: people will trash Zcash with speculation, people will hype it with speculation, and people will try to get you to make urgent decisions in buy and sell directions. Ignore all of this. Look at the fundamentals and basic economics behind it and stick with that. If you want to speculate with Zcash, that’s your choice and I wish you the best of luck. For me, my take is that I wouldn’t pay one million dollars for one, or even one thousand dollars for one, and I’ll reiterate what I wrote above this – I believe that within a year of this post, it will be below $50, so I certainly wouldn’t pay more than that price. Like bitcoin, I don’t see the need to own that many Zcash either; with a supply of 21 million, if mass adoption occurs, just owning 1 will be rare. The people who are willing to let go of one bitcoin for one Zcash are literally saying that all the infrastructure in bitcoin doesn’t matter – this is absolutely absurd. Never forget that hype always passes.
The bottom line is that there is a low probability that Zcash is worth thousands of bitcoins at this present time, and I highly doubt it will be able to sustain the price of over 5 bitcoins over the next year.
Update on Zcash: Less than 45 days after Zcash was released, it crashed below $50 – exactly as we predicted in this post. A reader who listened to us could now be purchasing 100x the amount of Zcash as the people who were buying it when this post was written, even though we still think it’s overpriced now. Compare this to our competition, CoinDesk.