Why I broke my 10% rule - Officially an insider into Crypto

When it comes to my eToro account, I normally treat my trading rule as law and not a guideline. Reason is I don’t trust myself.

For Crypto this has become an exception.

But why?

In the past 6 months I have become an insider to the industry. In other words, I have been working full time in the crypto space. This is also why I have less active on eToro both in trading volume and updates.

To me, the bearish tone of the industry is like many critics in the industry is similar to the 2000 dot com bubble. Here where unreasonable valuations and expectations were placed on an industry that was not ready to embrace the industry as yet.

This might be closer to when Gold was $1,800 and dropped till $1,000 per ounce. While this is less of a bubble as prices did not react as egregiously, it was the gold miners that saw the most value. But stock prices fell so low that even at the supressed gold prices, miners were still profitable.

That is slightly easier to spot because of fundamental pricing. For cryptos however, it is less straightforward.

While I have often advocated the model MV = PQ made popular by Burniske (2017), other models such as the demand supply equilibrium model by Mitchnick 2018:

·         D = 𝑋 + 𝐼 &

·         𝑆 = 𝑁 + 𝛾


And the Dynamic Equilibrium model written in the paper Tokenomics: Dynamic Adoption and Valuation, which uses multiple techniques like the stochastic discount factor & geometric Brownian motion, is an interesting thought experiment but is difficult in usage.

I have found myself finding Mitchnick model to be the most accessible combined with the core of each fundamental value of token. (I am not in the position to comment, but in my less valid opinion, I would discount Storage Demand Distribution as it is less in the cases of the tokens/coin I use for my analysis).

But by using this model with modest estimates, I have found that Ethereum’s value is below what would be considered “fundamental” and I dare say, a deep discount. Same with XRP but to a lesser extent.

There are risk factors which I would consider my thesis to be wrong, but given the market dominance of ETH vis-à-vis other tokens, the community built behind the Ethereum foundation, sharding improving TPS and potentially fixing the scalability problem, and Casper moving to a proof-of-stake consensus algorithm, it is hard to phantom the current prices of Ethereum.

While some say that Ethereum is dropping due to the drop in the number of ICOs, this is true, but not to the extent which the market is reacting to. Once again drawing from Burniske latest work, (https://medium.com/@robbiemitchnick/a-fundamental-valuation-framework-for-cryptoassets-e101f1206901t) we can see that although Hash rates have reduced, they were marginally and certainly not indicative of the price drop.

Arguments against

Like all my long form thesises, there are risk factors that I look out for that may prove me wrong,

While I know some argue the purposes of permissioned blockchains over Ethereum and I can attest to that. It does have use cases which expand outside private networks.

1% - 2% of market related to the largest decentralized smart contract system

Cost of mining at what level does it not make sense to keep the 7 TPS level necessary.

Those combined use cases, which I then use to establish part of the Demand side of the Equation then formulates my fundamental analysis.

At current time, at Ethereum under $200, we are well below my valuation targets of conservatively around $400.

For those reasons I have stayed Long ETH and will look to add to this position in the near future.