December 2, 2020

Cash bonuses: can altcoins compete with Bitcoin?

In the cryptocurrency market with a fixed volume of emission, fierce competition reigns, since all altcoins exist in the shadow of a dominant reputation,liquidity and with the unconditional market dominance of Bitcoin. The pioneering advantage that Bitcoin has and its tight monetary policy, no doubt, make it the leader of a new era of scarce digital assets. The question that continues to occupy investors' attention is whether altcoins with a fixed issue volume and deterministic supply curves have a chance of successful competition or coexistence with Bitcoin. Can these assets become hard currencies or are they just an example of the irrational distribution of capital?

In this article, I compare observed cashBitcoin, Litecoin, Bitcoin Cash, Dash and Decred bonuses in the context of the ratio of stocks to stock-to-flow, S2F asset development developed by PlanB, based in its research exclusively on Bitcoin historical data. This model showed extremely high (up to 95%) correlation coefficients when checking for many subsets of Bitcoin data, as well as in comparison with uncorrelated precious metals markets.

Scarcity

Stock to growth ratio as a measurescarcity is of great interest in relation to both commodity assets (in particular, precious metals) and to cryptocurrency markets with a fixed volume of emission. Sayfiddin Ammus described this concept in detail in the context of the historical evolution of money in a book "The Bitcoin Standard", where it is shown that scarce assets develop a cash bonus as a result of a high ratio of reserves to growth.

Nick Szabo perfectly formulated this idea withusing the concept of “falsifiable value”, which describes the need for the existence of unavoidable and significant production costs in order to achieve an asset monetary premium.

“What do antiques, time and gold have in common? They are expensive, either originally or because of their incredible history, and this high value is hard to fake, ”- Nick Szabo (2008).

"Precious metals and objectscollectibles have non-falsified scarcity due to the high cost of their creation. The same property was once also possessed by money, the value of which by and large did not depend on any third parties, ”- Nick Szabo (2005).

Unfalsifiable value

Unfalsifiable value (value) of an object is rooted in the cost of physical production or in the improbability of its creation.

Here are some noteworthy examples of falsified value:

  • Banksy's shredded “Girl with a Balloon” possesses the artist's characteristic narrative, social and contextual capital, and the moment of its creation is unique. (Uniqueness)
  • The creation and operation of a gold mine requiresSignificant capital investments and operating expenses, as well as large time and human efforts required for exploration and development of the field. Gold as an element is also not very common on the planet due to its atomic properties. (High scarcity)
  • Proof-of-work algorithm ensures that bitcoinsit is impossible to release without spending the necessary amount of computing resources and electricity. Satoshi Nakamoto's impeccable concept combines the falsifiable characteristics of a unique history of origin and the high cost of physical extraction, creating an unprecedented digital scarcity. (Extreme scarcity)

Unfalsifiable value is necessarya condition for creating a genuine cash bonus, since this property distinguishes "hard money", claiming to be a means of preserving value, from currencies whose money supply can be easily and relatively inexpensively manipulated. Fiat currencies cannot be considered scarce, since they do not have a real limit on the volume of output, and a centralized authority can control the rate of inflation at almost zero cost.

For crypto assets, there are several qualitiesthe presence of which logically excludes the consideration of the assets possessing them as scarce due to open opportunities for falsifying the “high cost” of their production:

  • Centralized coins in which a limited number of entities can control the money supply and / or manipulate the rate of inflation.
  • Koyn not having at the time of creation hardprescribed in the code of the volume of issue and a determinate schedule for the issuance of new coins, as this transfers the right of monetary regulation to the hands of one entity.
  • Coins, in which, due to the issue through premining and sale on the ICO, the cost of creating these coins is almost zero.
  • Coins, whose security systems do not require continuous energy consumption and proof-of-work, without which the cost of production is insignificant.
  • Insufficient security boilers to protect against unscrupulous actors who can attack the system and issue coins at relatively low cost.

Altcoins Selected for Analysis

The assumption underlying this article islies in the fact that a cryptoactive asset must have an un falsified coin production cost, at least comparable to that of Bitcoin, given the impossibility of reproducing the immaculate concept of Satoshi Nakamoto.

Therefore, to study this problem, I selectedThe following altcoins with significant capitalization and a fixed volume of issue and having a deterministic release schedule to assess whether unfalsified value is a sufficient condition for creating a competitive cash bonus. The table below provides information on the falsified value required for the extraction of each block (and, therefore, for the creation of coins).

PlanB recently held some greatstudies on the relationship between the ratio of reserves to growth for Bitcoin and the value (market capitalization) of its network. These studies have shown that there is a power-law relationship between cryptocurrencies and precious metals markets with a correlation coefficient of 95%. Further analysis showed that the correspondence of the model was reliable enough so that the substitution of many subsets of Bitcoin data (taking into account lost coins, different time scales, etc.) yielded a comparable distribution in accordance with the law of power dependence.

The results of these studies allowit is certain to assert that scarcity (measured through the ratio of stocks to growth) has a great impact on the human perception of value, which subsequently is reflected in the price of the asset.

Power dependency cases are rare, butThese are important relationships that often describe natural phenomena, such as the relationship between the distribution of earthquake magnitude and the frequency of their occurrence or changes in the planet's orbital velocity with distance and distribution of biological diversity. Power dependence is also traced in many observed distributions of human behavior, in population and demographic density, and even in the distribution of financial well-being.

Power-law relationship between the ratio of stocks to growth and the market value of Bitcoin, PlanB model

Natural phenomenon

Bitcoin is one of the most organic assets.free market as the world has seen. In less than 10 years, it has grown from a cipherpunk party and zero capitalization to an asset worth more than $ 320 billion. Bitcoin has gained value by providing people with a useful service, given its reliability as money, the value of which is supported by an ever-growing deficit (a growing S2F ratio).

Its adoption is not mandatory; users make this choice voluntarily.

In the era of accessible information, Bitcoin is beautiful.managed to attract the attention and investment of millions of people. It seems reasonable to assume that Bitcoin has become a kind of “center of gravity” for the relationship between scarcity and human perception of value. Bitcoin may well be called a natural phenomenon with which other scarce assets can be compared.

Altcoins and cash bonuses

The phase of mania in the cryptocurrency market in 2017 to a large extent, it was the embodiment of the unrealistic desire to create the “next Bitcoin”, which, apparently, influenced (through hype, liquidity events, etc.) the market valuation of these assets, tearing it off from their intrinsic value. In addition, many of these coins do not have data for a sufficiently long period to adequately assess the dynamics of changes in indicators based only on altcoin data.

Therefore, I do not consider that reasonable orthe organic relationship between S2F and market value can be determined for each altcoin individually, using only its data. PlanB in a discussion with Stefan Liver, in which attempts to establish a relationship between the S2F coefficient and capitalization using data from individual altcoins, do not look very confident, defines this as a low correlation.

However, the position that I find moreconvincing, based on a comparison between the raw data of the S2F coefficient, market capitalization data for each altcoin and the Bitcoin “center of gravity”. Altcoin with the best performance in relation to the power dependence of Bitcoin can be considered as having a tangible cash bonus. Conversely, low-value coins, I believe, do not enjoy support in the free market, and their non-falsified value may not be sufficient to maintain sustained demand growth.

For this group of altcoins with a fixedby the volume of emissions, I calculated the ratio of stocks to growth over time based on measured data on the volume of emissions, as well as on market capitalization according to Coinmetrics.io. Taking into account the difference in hashing speed and other natural deviations, I used 28-day averages to calculate the ratio of stocks to growth, in order to get a clearer visualization (which as a result has a slight distortion with respect to the resulting observations and horizontal zones of the data points with halving )

The ratio of stocks to growth (28-day averages) and market capitalization for selected altcoins with a fixed issue volume. (data: coinmetrics.io)

This dataset is interesting in that it is basedexclusively at the registered market capitalization and the estimated daily emission rate (projected for 365 days as a constant value) to determine the S2F coefficient. No additional assumptions.

Several observations can be made from this study by comparing the data points of each coin and fractals with respect to their “center of gravity”:

  • Bitcoin's “Center of Gravity” is indeedit seems to be the very center of gravity, to the trend line of which almost all assets converge, or at least tend throughout their life cycle.
  • Bitcoin hovering around a “center of gravity” ineach market cycle and comes to a close match with the line during halving. The data points are quite organic, and their fluctuations are rounded, which indicates the natural nature of pricing.
  • Litecoin also fluctuates around this line (thoughand less confident) and, like Bitcoin, comes close to the center of gravity at halving. It is worth noting that the behavior of Litecoin seems to be much less organic, with more discrete “events” affecting the price, which leads to sharp changes in values, instead of rounded Bitcoin fluctuations.
  • Bitcoin Cash seems to have undergone the mosta significant decrease in any cash bonus that it could achieve, and a spread in the values ​​of the S2F coefficient indicates the instability of the hashrate, which results in an irregular issue of coins.
  • Dash has a relatively weak cash bonus,market valuation values ​​touched the line at only a few points. Due to approximately monthly masternode payout blocks, the Dash data also has visual outliers, also smoothed by using 28-day averages. The flow of data points looks more consistent compared to BTC, LTC and BCH due to a smoother emission schedule and lack of halving.
  • Decred Cash Bonus Stays Above Centergravity ”to a greater extent and longer (relative to its life) time than for any other coin among the studied ones, even Bitcoin. Thanks to a smooth release curve, the data appears to be more connected during 2019, when Decred consolidated slightly below the midline. This may be due to the constant demand for PoS tickets, ensuring the right to participate in the Decred management system, as well as receiving rewards for PoS mining.

Monetary volatility

To further formalize these observations, Icalculated the number of days during which the market value of each coin was higher than the “center of gravity” to determine how much of the coin’s life, the coin kept an exceptional cash bonus. I also drew attention to the maximum and minimum deviations from this line as an indicator of “monetary volatility”, or the ability of each coin to maintain its cash bonus over time. This study is similar to the S2F coefficient presented by PlanB.

Deviation from the "center of gravity" on the graph of the ratio of stocks to the increase in the number of assets

Dash and Bitcoin Cash were subject to significantdecreases from average values, which indicates an inability to maintain a solid cash bonus for a long time. To date, Bitcoin Cash has shown itself to be the weakest, reaching only 36% growth in relation to average values, and then only once. It would be reasonable to expect that Bitcoin Cash should be traded at a discount as an asset that does not have a cash bonus and, therefore, lacks attractiveness as a form of scarce money with a fixed issue volume.

Bitcoin and Litecoin showed normaldeviations from the average values ​​in the range from 1000% to 2000% during the periods of the bear market and, like other coins (except for Bitcoin Cash), the periods of premium growth were 90% higher than the average values. Given the expected volatility of assets with a fixed issue volume, I consider this a reasonable guideline, especially given the dominance of Bitcoin.

In this study, Decred stands out sharply froma number of other coins. He not only kept his cash bonus more than twice as long (relative to his life) as Bitcoin, but he also kept this bonus for most of the 2018 bear market with a remarkable maximum negative deviation of only -226%. This is 10 times smaller than Bitcoin, with its typical deviation size of -2000%.

This suggests that Decred managed to attractthe strongest cash bonus of all investigated assets. This, apparently, is the result of demand for proof-of-stake tickets and participation in the Decred management system, which will soon be 50% of the available DCR offer. This further confirms that demand for tickets (and, therefore, ownership and participation in the protocol) is a reliable source of demand for purchases and has a great influence on the perceived scarcity of DCR.

This contrasts interestingly with Dash, withits management system through masternodes, which requires masternode owners to lock 1000 DASH on the account (~ $ 81,500 at the time of writing). This can be a significant obstacle to entry into the system of representatives of the widest sections of society, especially in comparison with the system of tickets used in Decred, which requires 120–130 DCR ($ 3600–3900), with the additional possibility of sharing tickets between multiple owners. Further study of this mechanism as a driver of demand for coin and its perceived scarcity may shed more light on such a difference in performance.

Concluding observations

This study is based on the assumption thatthat the organic growth of Bitcoin and a high degree of confidence in this asset created a kind of “center of gravity” for the relationship between the ratio of stocks to growth (scarcity) and the human perception of value, expressed in price. Therefore, Bitcoin should be considered the standard by which all crypto assets competing for a cash bonus should be evaluated.

Altcoin mania 2017 and relatively smallthe life of altcoins, apparently, to some extent distort the data, and, therefore, it is likely that the study of the ratio of reserves to growth for each coin individually is not representative. This assumption should be reviewed periodically as new market cycles pass.

Comparing the data of five large crypto assets withwith a fixed volume of emissions - Bitcoin, Litecoin, Bitcoin Cash, Dash and Decred - we can see how the altcoin money premium is developing relative to the "center of gravity" of Bitcoin.

It can be concluded that Bitcoin today has perhaps the most organic and undeniably important cash bonus of all financial assets.

According to this study, Litecoindemonstrated a dynamics comparable to Bitcoin, but less confidently, and we still have to see if it will be able to maintain this premium in the future. Based on this, there is no advantage in holding Litecoin instead of bitcoins for any purpose other than speculative.

Similarly, I feel insecure aboutDash as a candidate for the role of a means of preserving value, taking into account episodes of a strong decline and the general position on the chart below average values ​​for a power law dependence. Further study of the mechanics of the emission schedule and the structure of Dash stimuli as a deficiency driver can shed more light on the dynamics of changes in this coin.

Bitcoin Cash is clearly not able to hold a cash bonus and, based on this data set and the results of its analysis, can safely be ignored as a monetary asset.

Decred today has demonstratedthe most interesting and promising indicators, coupled with the remarkable ability to keep their cash bonus over time. Most importantly, in all metrics evaluated in this study (duration of staying above average values ​​and monetary volatility), Decred's results significantly exceeded Bitcoin, which, apparently, can be of great interest in assessing potential candidates for the role of a means of preserving value.

Observed High Decredtestify that DCR can develop a convincing cash bonus and I believe that this moment is underestimated by the market today. However, given that the fundamental properties of Decred are extremely close to those of Bitcoin, albeit with noticeable differences, it is likely that DCR will subsequently attract significant interest, provided that the indicators under study do not fall, liquidity increases and the market expects to respond to growth factors .

Disclaimer: Nothing in this article should be construed as investment or trading advice.

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