Resisting the Siren Song of Altcoins. Bitcoin Tech Talk #239

Everyone has that friend that brags about their altcoin gains. Sure, they’re currently called DeFi tokens and NFTs instead of ICOs and IEOs, but the dynamic is the same. Such people are enthused because some coin they bought a few months ago has made them a lot of money, at least on paper. They talk about their massive gains on their trades and don’t really care to tell you about anything else. It’s annoying, vapid and… tempting.

Every alt season repeats the same pattern. There’s a celebration among the altcoiners not because they’ve endured through the bear market as Bitcoiners have, but because they’ve made money trading something new. Despite the complete lack of technical understanding, market incentives or even what the coin or product is supposed to do, they seem to make money hand over fist. There’s a huge temptation to start trading and make some extra Bitcoin and glory in your riches.

This is what I call the Siren Song of Altcoins and I’m here to help you resist that temptation. I’m going to give you three reasons why you shouldn’t be playing in the altcoin casino.

The first reason to not trade is because most people are bad at trading. Making some money initially does not make you a good trader. Good traders consistently make money over a period of years. They usually have a proprietary system and are extremely disciplined. Most traders I know are watching the market constantly and usually trade many times a day, usually returning to a cash position before going to sleep.

The bad traders are like bad poker players. They are at the table to get lucky and play anything and everything, hoping to hit the jackpot. Instead of looking at the right signals to get in and get out, they go by feel and they lose money. In traditional markets, bad traders consist of about 90%, while the good ones consist of about 10%. In crypto, my trader friends estimate that the ratio is around 99% and 1%. Trading, like anything is a lot of work, requiring study, analysis and discipline. You don’t make money without putting in the time and effort. In other words, it’s a job and there’s significant opportunity cost in trading and not doing something you happen to be good at.

The second reason is taxes. Every sell order is a taxable event. Not only is this extremely draining on your bottom line, but it’s ridiculously hard to keep track of and a big headache. The general rule of thumb, at least in the US is that you have to beat Bitcoin by at least 40% to make money trading. What’s worse, you may owe taxes even if you lost money overall! So not only is trading a hard job that’s hard to win at, but it’s also heavily disincentivized.

The third reason is that trading forms terrible habits. As my father told me years ago, the best thing that can happen to you the first time you go to a casino is to lose a little bit of money. This is because losing a little bit sets up the right expections. The house wins over the long term and the earlier you learn that, the better it is. Winning a bit or winning a lot unfortunately sets the wrong expectations causing many people to get addicted to gambling and lose a lot more over the long-term.

In the same way, people who make money on their first few altcoin purchases are setting themselves up for long-term failure. They will think of themselves as geniuses, who foresaw the rise of an altcoin before the market did. They will chase altcoins with similar characteristics, ultimately losing a lot of money against Bitcoin going forward.

Altcoin Sirens have swallowed many would-be traders since their inception in 2011. The key to resisting them is to focus on long-term value. Bitcoin has proven its use-case. It’s easy to see why we need it and why the world will need it. Such is not the case for altcoins, most of which are understood by only a handful of people.

Think long term: what will be around 5 years from now? This is the defense against the long term wreckage of altcoining.

Bitcoin

Casa has published a practical overview of Taproot and what it can do. They focus mostly on the benefits to multisig, which is what they specialize in. Lower fees, better backups (3-of-5 that degrades to 2-of-5 after x years and so on), and better privacy are the some they point out. In addition, there’s a bit of education there as well, explaining how Taproot works. Worth reading, especially if you’re a Casa customer.

Trezor blog explains how Taproot benefits hardware wallets in particular. In particular, the benefits of Schnorr are explored, with regard to the processing time being drastically reduced, especially for large transactions. There’s also a bit on the fee exploit that some hardware wallets may be vulnerable to which Taproot patches as well. For hardware engineers that have to work in very constrained environments, this is a great overview of some of the benefits.

Antoine Riard discloses a minor vulnerability for RBF transactions. Specifically, this is in reference to child transactions of an RBF transactions that don’t signal Replace-by-fee. Technically, as long as a parent mempool transaction signals RBF, the child should be replaceable, but currently, that is not the behavior of core nodes. This could be problematic in that an attacker can “pin” any parent RBF transaction by putting a child transaction that doesn’t signal RBF. There are some implications for Lightning in particular. Note the defect has currently not been patched, but isn’t considered that big a deal.

There’s a new multisig guide that goes step-by-step and is very user-friendly. You still need to be an intermediate or advanced user to use it, but the steps are pretty straightforward and teaches the considerations to take into account when doing multisig. The process starts with shopping for components and goes through setup, sending/receiving and practicing recovery. Worth going through if you’re wanting to upgrade to multisig.

Lightning

Lisa Neigut celebrates the first dual-funded channels being opened using c-lightning. As she explains, dual funded channels make the lightning network more efficient. Blockstream has made a lightning node available that will automatically accept dual-funded channels that match whatever liquidity you provide. This is a great model for inbound liquidity as so much of the problem currently is that inbound liquidity is hard to get.

Vlad Costea gives an easy-to-follow explanation of the lightning network and the various options for running a node. He goes through some of the better all-in-one options like MyNodeBTC and Nodl, but also goes through how to set one up for yourself. There’s a nice explanation of what channels are and how the different lightning clients differ.

Jameson Lopp has a guide on how to connect to the Lightning Network using only Tor. He goes through setting up Bitcoin Core on Tor, setting up lightning on Tor and setting up your phone to interface with the node you just set up. This is great for privacy conscious people who want to do Lightning “the right way.”

Economics, Engineering, Etc.

Lyn Alden has written a long article on inflation. Beware, this is very long and really should be a book. She covers all the different measures of inflation, what CPI is, who it benefits and the controversies surrounding it. Just to be clear, there’s nothing about Bitcoin in there, but the shenanigans of fiat money point to why Bitcoin is superior. I thought she was too generous in assessing the current system, but there’s a lot of good stuff in there on how inflation is measured.

Prateek Goorha analyzes Bitcoin in terms of Schumpeter’s business cycle theory. There are three different cycles of varying lengths that Schumpeter identifies which Prateek explains and puts in context to Bitcoin. The Juglar Cycle, in particular was pretty insightful and shows how Bitcoin really does seem to be driving innovation in various areas.

Peter St. Onge argues that fiat money turns a parasitic government into a predatory one. His argument is that governments that have to collect taxes are aligned with the interests of the citizens, although imperfectly. When fiat money enters the picture, governments no longer listen to the citizens and just take resources through money printing. The analysis of fiat money in Song China is spot-on and is to my and my ancestors’ eternal shame.

Robert Breedlove continues his sovereigntism series writing about violence. The essay explores the different game theory around violence given the different technologies available. Bitcoin certainly changes the game as securing Bitcoins is a lot less expensive than securing a physical asset. Violence is not nearly as effective against Bitcoin as it is against physical assets. For those wanting personal sovereignty, the role of technology as laid out in this essay is one to take seriously.

An energy industry blog deep dives into Bitcoin and its implications for that industry. The biggest thing I got out of it was that the current markets for natural gas require a significant amount of infrastructure, which drilling sites are not equipped with. By taking the flaring energy, there’s less emissions, more profitability and better efficiency everywhere in the energy chain. This article shows how for people actually in the energy industry who know how everything works, Bitcoin is a huge plus, unlike the energy alarmists in the mainstream media.

Quick Hits

NYDIG and FIS are going to make Bitcoin available as an option in bank accounts.

DCG isplanning to purchase back shares of GBTC now that the spread is negative.

Another week, another complicated smart contract gets exploited, this time for $30M on Binance’s chain.

Events

I am going to be at Bitcoin 2021 June 4-5. I will also be at The Bitcoin Standard conference on August 12-14 in Mexico.

The Programming Blockchain seminar is fast approaching for June 1-2 in Miami. I will be raising rates again in a week (May 18, 2021). I will also announce scholarships on that date. There will be another seminar on August 10-11 in Mexico. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.

Podcasts, Etc.

On this week’s Bitcoin Fixes This, I talked to American HODL about Film and Entertainment. We talked about Hollywood, the expensive process for producing movies and the role that money plays into the “safe” decisions for big budget projects. We also talked about the influencer economy including YouTube and TikTok.

As usual, I read through last week’s newsletter on clubhouse which you can find here. I was on Tone’s show to talk about the BitGo acquisition, OFAC-compliant blocks and NFL players receiving Bitcoin as their salary.

I was interviewed by Moore’s Law is Dead and Struggle to Strength to give different audiences some insight into Bitcoin.

Bethany Hamilton of surfing fame has good things to say about the new book:

My other books are here.

Fiat delenda est.