Jimmy Song: Why is cryptocurrency decentralized investment meaning little?

Foreword: This paper proposes that the cryptocurrency is not meaningful at the current stage of decentralized investment. The author's main basis is that the marketing story of most current projects is too exaggerated, and the technical reality is difficult to deliver. Most ordinary investors do not have the ability to review the code. Even with such capabilities, it takes a long time and the cost is high. Few people actually do it. Not to mention, many projects have not delivered the code. It is even harder to judge. This has led most people to rely more on marketing stories to make value judgments. Of course, the author of this article has some opinions that may be controversial. His views only represent his personal views. For most cryptocurrency investors, it is necessary to do their own in-depth and comprehensive research, rather than being influenced by the opinions of opinion leaders. As Bruce Lee said, be water, myfriend. Like water, clear all prejudice stereotypes and go deep into the essence of things. The author of this article is Jimmy Song, this article only represents the author's point of view, not as an investment suggestion. This article was translated by the "Leo" of the "Blue Fox Notes" community.

Anyone who enters the field of encryption quickly realizes that there are too many different cryptocurrencies, such as Bitcoin, Ethereum, Ripple, Litecoin, BCH….. as an investor, how should they decide which one to invest in? ?

Why are there diversified investments?

The reason for the diversification of traditional investments is to optimize the risk/reward ratio. Suppose you buy 10 stocks instead of 1 so you can reduce the risk of volatility and downside because your eggs are scattered across multiple baskets. Its purpose is to reduce volatility and downside to minimize the risk/reward ratio. There is a field that specializes in this matter: the so-called portfolio theory. But the goal of diversification, that is, diversification, is clear: reduce the risk of permanent losses and reduce volatility. (Blue Fox Note: The so-called "permanent loss" here, in the vernacular, is zero.)

When a person chooses 10 stocks as their portfolio, these stocks usually already meet the minimum requirements. For example, they meet some of the SEC's requirements for transparency, and their history can be consulted on the market, and they will be punished if they do false accounting. This is done to ensure that stock marketing stories must meet their potential reality, especially with regard to their prospects and financial situation.

In this case, decentralization is a reasonable choice because there is reason to believe that the story told by the company is at least close to the truth. In other words, the underlying assumption is that investors are aware of the risks and returns of stocks. The error around risk is not too big, and there are good reasons to believe that the company is telling the truth. Therefore, if the risks and returns can be fully recognized by investors, decentralized investment is reasonable in the stock market.

The story and reality of cryptocurrency

The reality of cryptocurrency exists in the code, unfortunately, the code is very dense, hard to read, and most people can't understand. Since cryptocurrencies exist in the digital realm, the code and the network that ensures it is a reality. While the ability to analyze underlying realities also exists, it is unlikely that most people, even experienced developers, will fully understand the code behind cryptocurrencies in less than a few months.

On the other hand, the marketing materials for cryptocurrencies are everywhere. These stories tell what the technology behind the project can do and portray the scenario of the founder's vision. These are usually things that white papers do, trying to show the details of their actual system operation, but not as strict as the code. This is a relatively easy-to-understand document, usually done before writing the code.

In the field of cryptocurrency, because of the difficulty in evaluating the underlying code (also known as the reality), it also requires a certain amount of cost. Marketing stories are often a shortcut to research projects. Some people may evaluate the code (if any), but most people use marketing stories to evaluate it because it's cheaper and easier.

Break the connection between story and reality

This raises the question, how different is the marketing story and the underlying reality? As mentioned earlier, in the stock market, there is not much inconsistency between the two, otherwise they will be punished. In the cryptocurrency market, there is no mandatory mechanism to ensure that the story is consistent with reality. On the contrary, there is a great motivation to make an excessive commitment in the story, but in reality it does not complete the delivery consistent with the promise.

A modified marketing story can lead to higher prices, because most people will use it to make a shortcut to valuation. More importantly, reality does not require immediate delivery, which gives developers of cryptocurrencies a bunch of latent delivery. Given that the difficulty of refuting a story is much higher than the difficulty of storytelling, it is easier for people who are over-committed to “defend” and say “we will do it in the future”. In other words, the cost of exaggerating in marketing is not high, but it will increase many potential token buyers. This is the opposite of the stock market, in which case exaggerating the facts can lead to punishment.

For the development team of cryptocurrencies, the reality of undelivered is another obvious victory. The promise of too much cost is not required to be delivered at all. After all, they usually have money. The services they provide do not have to meet any technical standards. Because of the high cost of evaluating the code they deliver, most people are simply caught up in the marketing story and have no time to take into account the technical reality. Code implementation can be a mess, security is unaudited, testing is not written, and no one is smarter.

We find that in terms of such incentives, there are good reasons for excessive commitment and insufficient delivery. The perceived incentives are essentially a quantification of the quality of the marketing story, which looks high. (Blue Fox Note Note: The author means that the incentives brought by the marketing story itself are directly felt by the project developers. The better the marketing story is, the higher the price. Therefore, the incentive can be felt quickly.) Because this is The metrics used by most people reflect the very optimistic future. As a result, the risk/reward ratio is very high, as permanent capital losses become more and more likely. (Blue Fox Note: In the vernacular, the risk of returning to zero is getting higher and higher.)

In this case, it is no wonder that there are so many scams rampaging.

as a result of

So many people rely on marketing stories rather than technical reality to do things, and given the incentives of excessive commitment, our industry is now a mess. Most tokens are not reviewed outside of the marketing story, which leads the founder to be at the bottom of the huge inverted pyramid of trust.

The technical reality is usually understood by only a few people, and others believe that the founder’s content in the white paper is that it reflects reality. Nothing really strengthens the consistency of story and reality. On the contrary, some of the information related to tokens comes mainly from the few people who create tokens. Zcash may have some incredible technology, but there have been some vulnerabilities. And this is one of the more responsible competitors, so how many loopholes are hidden in other tokens?

This means that most tokens in the industry have very high risks. Most of them are unable to reach the vision of the marketing story. Most have no traceable delivery records and can be considered untested. If these are stocks, they will be sent to the pink market and the price is very low due to their risk premium. Diversifying investments in unsettled stock market stocks does not reduce risk.

How about Bitcoin?

You may ask, isn't Bitcoin the same? This is a fair question. But the answer is no. The reason is that bitcoin technology has attracted thousands, if not tens of thousands. Even when the white paper was first released, it was different from what it is today, with little financing. When Bitcoin was launched, few people ran nodes and mining, not to mention trading for anything of value. There is no incentive to over-commit and modify the story. In addition, the white paper accurately describes Bitcoin and delivers more technical reality than the white paper describes. In fact, the white paper was written after the code was completed.

In addition, since Bitcoin is the first token, it has a more rigorous review of its code base. The obvious evidence is that the creators of competitive coins often check the Bitcoin code base to implement their own tokens. In addition, more than 500 contributors have merged pull requests, making Bitcoin the largest open source cryptocurrency project.

How about the competitive currency that forks out from Bitcoin?

At this point, you may want to know which tokens are comparable to the Bitcoin code. For example, Litecoin, BCH, etc., basically made some adjustments based on the Bitcoin code base.

We are asking two questions here: First, what are they different from Bitcoin? Second, how to maintain the code base?

The first question is usually easy to answer. The main difference is that the coin is usually centralized. Technical differences are usually small, and such tokens do not reduce risk or volatility, thereby rendering diversified investments ineffective.

The second question is the more important one. If these tokens maintain a code base in a different way than Bitcoin, they face greater risks. This may be developed by a smaller development team, with less developer active or merged pull requests of poor quality. Ability to evaluate changes in code since the fork to determine its potential technical reality. However, this is also expensive and slow, and most people will not do so.

Cases including competitive currencies are only of lower quality and do not reduce risk. In other words, these tokens can be said to be “worse” bitcoins, and these features do not reduce risk or reduce volatility for risky portfolios. (Blue Fox Note: This only represents the author's point of view.)

So what does diversity mean?

We know that Bitcoin is much different from other competitors. First, bitcoin is decentralized, and the coin is not. Second, Bitcoin does not have undue incentives when it is created, and there are competitors. Third, Bitcoin has the largest market value.

Therefore, anyone who comes into contact with this field needs at least Bitcoin. So the question is, what tokens do you have in your portfolio?

The specific answer depends on your own research. A lot of the data is mainly marketing materials, full of exaggerated and difficult to achieve commitments. Because they have the risk of a single market stock level, the review needs to be higher, not lower, than bitcoin. Therefore, real research means evaluating the code.

If you don't know how to read the code, or worse, the code is not open source, or has not yet been written, then this is a completely unstarted state. This will not be able to verify its technical reality.

If you can read the code but don't want to take the time to do so, it's also in an unopened state. There is not enough guarantee to confirm that the marketing stories of these tokens are consistent with their technical reality. Depending on anything else, including the opinions of people on social networks, you may not be able to ensure that the code and reality are consistent.

In turn, this means that a lot of research must be done to make investment decisions in cryptocurrency. Given the small market capitalization and liquidity of most tokens, it is not worthwhile to spend time researching these assets, as most of them may not be investable.

in conclusion

Decentralized investment in the field of cryptocurrency is of little significance. Marketing stories have exaggerated motives that are hard to match with technical reality, and the cost of correctly evaluating each token is high. Investing in a competitive currency without reviewing its code is equivalent to diversifying investments in the stock market stocks without any research. Such actions increase risk and volatility rather than reduce risk, which loses the basic meaning of decentralized investment.

Also, considering the incentives, reviewing the code may seem like a waste of time. This is why the trading volume of the pink sheet market is much smaller than that of the Nasdaq or NYSE.

If you invest in cryptocurrencies, investing in bitcoin is reasonable. Because it gained this qualification through its unique birth and continued maintenance for 10 years. Diversification of the portfolio by adding bitcoin can indeed increase upside and reduce risk and volatility. And if you add unexplored coins, the decentralized investment does not make much sense.


Risk Warning: All articles in Blue Fox Notes do not constitute investment recommendations . Investment is risky . Investment should consider individual risk tolerance . It is recommended to conduct in-depth inspections of the project and carefully make your own investment decisions.