Big numbers don't mean big money

Last week we discussed problems with using really big numbers in cryptocurrencies. This week I'd like to talk about misconceptions surrounding cryptocurrencies with big coin supply as well as inflation in cryptocurrencies.

Coin supply is a joke

Both this and the previous article were inspired by the OneLife Mastermind event, during which the people on stage were gushing about how many coins their system will have and can mine.

"The new blockchain will mine 50'000 coins per minute. [...] I think we are mining about 2'000'000'000 coins now."

In their previous event, they've stated

"Biggest coin out there is Ripplecoin [sic], with 100 billion coins[sic]", and OneCoin will increase its number of coins to 120 Billion to be bigger than Ripple.  

Focusing on the amount of coins you are mining or the coin supply is a joke. It's like praising Zimbabwe for producing 100T dollar notes, or the post WW1 Germany for having so much money you can build toy houses with them.

Market cap is deceptive

A lot of people rely on the market cap to determine which coin is the most valuable and worthwhile. Just have a look at CoinMarketCap. At the moment we have Bitcoin leading the market cap of about $10B, followed by Ripple at $1.2B.

Right at position number 2, we have an issue calculating the market cap - Ripple's available supply is listed at 35B XRP, although its total supply is shy of 100B XRP. If we calculated the market cap blindly, we should take the total supply and multiply it by the current price (0.0035 USD/XRP), which would net us $3.6B, rather than $1.2B.

The market cap is a poor metric for a coin with a highly-centralised supply. As Peter Todd jokingly put it - just mine a large amount of coins, sell a few of them at a high price and you've got a huge market cap.

It would be really hard to create some metric that can measure how valuable a cryptocurrency network is - market cap can be inflated, volume can be faked or hidden, you can't ever know how much of the coin supply is held by a handful of people with a million addresses, etc.

Inflation is not growth

In the past I've seen some deceptive advertising for a proof of stake coin that claimed it was a savings currency. They justified it by essentially saying - "buy our coin, then you can stake it and earn X% per year with it". While on surface it might appear so - if I start with 100 coins and at the end of the year I get 110 coins, then I'm 10 coins richer, right?

That works only on paper. If the market cap for the cryptocurrency remained unchanged and everyone got their 10% more coins, then you're right where you started - you own the exact same percentage of the economy as you used to. The inflation ate your earnings.

In economics, there is an important distinction between nominal and real interest rates. If I take a loan at 5% (nominal) interest rate, but the inflation is at 3%, then I effectively only pay a 2% (real) interest rate on the loan. Each year the principal of my loan has lower and lower purchasing power even if the number remains steady. The same is true for proof of stake inflationary coins - you're not earning anything with them, unless the pace of your earnings is faster than the overall inflation of the network.

A coin will only net you revenue if its equivalent of "real GDP" increases:

If you're not ahead, you're losing money

In an inflationary currency, if your supply of coins is growing slower than the average coin supply, you are essentially losing money. Earning 5% interest in a currency with 10% inflation means you are losing 5% on your investment in an ideal economy. In a real-life scenario, the markets would most likely be swayed a lot more by the speculation on the coin and whatever hype it can muster.

This point usually has low impact on most coins, but it seems to be exemplified with OneCoin's splits and tokens, assuming we would treat the coin as a real cryptocurrency and not a scam. In OneCoin, you can buy different packages that each come with a different amount of tokens and splits. If you buy the cheapest package for 110 EURO you get 1000 tokens and one split, but if you decide to spend 27'500 EURO, you get 300'000 tokens and three splits. This means that not only do you get about 20% discount on tokens when buying them in bulk, buy you can also split them more times (which I'm guessing would give you more mining tokens or something, I'm not sure). Because of this, if you're buying anything shy of the top-tier package, you're already falling behind. I guess that's why you can find a lot of "strategies" for buying the tokens everywhere...

Same goes for the doubling event, wherein everyone's coins got doubled (since 100% inflation equates to 100% growth or something...). If you missed that event, your purchases are only worth 50% of what they would've been before that event in proportion to the entire market. You can't ever catch up.

If you're late, you're paying the early adopters

Unless we're talking about cryptocurrencies with a flexible supply denominated in fiat, anyone adopting late is essentially paying the early adopters. In some cases, that's pretty justifiable - when Bitcoin was still fresh and nobody knew if it had staying power, you needed a lot of people to devote their time and energy into developing the infrastructure everyone relies on today.

However, if you look at something like OneCoin that relies heavily on hype and even pays you in a pyramid-like structure for referrals, you have to be really weary when buying into it.

This is why a lot of people in the crypto world despise premining and fast maturing coins - a few people hold a lot of coins and they get to reap the bulk of the money from anyone buying into the network. When the jig is up, they can cash out and it's the late adopters that get to hold the bags.

If OneCoin was an honest coin, I can see some people getting rich if and when the coin starts getting publicly traded and people can start dumping their coins. As it is now, it is likely that everyone with the coins will be holding the bags while the people behind the coin will be the one with the money.

Conclusions

Coin supply does not matter, market caps can be deceiving, nominal growth does not matter - only real growth, don't buy into scams.

A legitimate reason for premining tokens

In the Bitcoin world, the term "premining" is a dirty word and for a good reason. There have been numerous preminted altcoins out there created with the sole purpose of being pumped and then dumped. Some other premined coins gain slightly more credibility by premining their tokens in order to create fiat-denominated cryptos. Then again, we had some big scams in that realm as well.

Over the last few years we also had a few token presales for various app-coins (Augur, MaidSafe, etc.) and platform tokens (Ethereum, Mastercoin, etc.). While the tokens have mostly been advertised as being sold to give you access to the platform / application (possibly to avoid securities regulations), it is clear that a lot of people purchase those tokens in hopes of speculating on their future price.

And lastly, we have the case of Ripple, a Crypto 2.0 platform that was completely premined and whose parent company still owns a vast majority of the XRP tokens. Some have been sold, some have been given away, but the fact still remains - Ripple Labs owns most of those tokens. Some maintain that it can be a long-term business strategy for the company - to hold onto the XRPs for a long time while building up the network to earn money from the appreciated value of the tokens. While this might be a useful stream of revenue, I think there might be a better use for such tokens for both Ripple and similar systems that might come along.

As we have seen recently, a lot of big institutions are waking up to the idea of "a blockchain" and its usefulness for accountability and so on. Ripple is among one of such blockchains pushing for being adopted by big companies like banks or Western Union.

However, from what I heard chatting with some people in the industry talking to such institutions, the hard sell in a lot of cases is the token / coin. Perhaps this is why we see banks not wanting to adopt Bitcoin but being enamoured with a more bland and generic "blockchain" - you need bitcoins to use Bitcoin, and the price of bitcoins fluctuates wildly. The institutions don't want to get exposed to the price swings, so they opt away from such platform. However, what if we could remove that uncertainty altogether? Well, in some cases we might just be able to...

Imagine we have a company that wants to get onto a blockchain and is weighing its options. One of their concerns would be whether a system they build today will hold up in a few years time, both in therms of technical capabilities (will the system be able to expand to meet the growing needs of the network, or will we have another block size debate) and pricing (will the costs stay the same or go up). While the earlier is always up in the air since you can't predict everything, the latter might have a more concrete solution.

If we took a company like Ripple Labs with their big supply of XRPs, they could possibly offer a good solution to the pricing problem for an important enough customer. All they would simply need to do is offer that company a long-term option to buy the tokens at some fixed price. This way, the company could be certain they won't pay more than X to use the system in the future, no matter where the price of XRPs might go in the future. Whatever Ripple Labs might be losing by entering the option contract and possibly selling a fair amount of tokens at a low price years down the line, it could make up in other areas - either integration fees or the rest of their XRPs appreciating in value due to the high profile of customer they brought on.

So all in all, while there are many reasons why premining is a bad practice and should generally be avoided, there are a few reasons why it might be useful for the growth of the system.