Monday, January 19, 2015

PayBase and PayFlash: the Problem with New Features

The weekend was rather interesting, as Paycoin actually managed to get back above the market cap of Litecoin late last week...and then GAW decided to roll out a new feature. Stop me if you've heard this one before, but apparently the new feature had some unintended consequences; specifically: it totally crashed the price of Paycoin. Oops. So the new feature, PayFlash, was turned off again "until the market settles". But I don't think that's what's really happening; rather, the feature is off until GAW can be sure that it won't totally kill the price of Paycoin again.

Here's what happened as I understand it. PayFlash was introduced, and it allowed you to buy "usable funds at the largest merchants in the world". I think what that actually means is that you could get gift cards or some equivalent thereof. Imagine what happens when people can actually trade Paycoin directly for currency, though -- they decide to try it for one. So the price is $4 per Paycoin at the start let's say, and the first user comes along and says, "I want $100 to spend at Target." He transfers in 25 XPY and gets the code for his $100 at Target. Other users come along doing the same thing, and suddenly it's like hundreds of people decided to simultaneously sell XPY.

And that's the problem: GAW was using the open market to take care of the orders, which in turn resulted in the price crashing as suddenly there wasn't enough (any) buying pressure. At one point the price dropped as low as $0.10 for certain, though I'm curious if trades were actually being fulfilled at that price. If so, even $10 could have made a killing as it would have bought 100 XPY that would now be worth roughly 30X as much.

This is the frustrating thing with GAW and Paycoin. What they were doing sounded good on paper, but the way they implemented it was bound to cause problems. If you want people to be able to buy products with Paycoin, you need to have people buying Paycoin to buy those products first or it all blows up in your face. If GAW had put a few hundred thousand dollars into supporting the current price of Paycoin first, it would have gone a long way to prevent problems -- those that wanted to try PayFlash could do so, while those looking for higher XPY prices first would hold off.

At some point GAW is basically going to need to buy out most of the existing Paycoin (or at least put in a sufficient amount of funds to support a minimum price to buy all existing Paycoin). There are 12.4 million XPY now, and GAW probably holds/controls at least 75% of those. So if they wanted to support a price floor of $3 with PayFlash, then they need to put about $9.3 million towards that goal. Or put $6.2 million towards a $2 price floor, or even $3.1 million to a $1 price floor. Otherwise, releasing features that allow people to effectively sell Paycoin to buy product will push the price down.

Wednesday, January 14, 2015

How Low Can You Go, Bitcoin?

Wow... I know a lot of people like to point at charts, talk about the cycle of investor emotions, etc. but I generally don't follow those too much. If a technology is good, it will (or at least should) eventually rise to the top, short of a catastrophic failure of marketing. Bitcoin is such a technology in my book, so I don't think it will ever fail and go to zero. The time for that was back in late 2011, and most people were saying, "See, BTC is over -- it was a con from the start. Let's move on." Those that sold at $20+ were patting themselves on the back and those that didn't were feeling sad. Except, there were others accumulating coins at a rapid pace, and just three years later if they're still holding they've reaped nearly 100X returns.

But that's all history now. What's going on today with the BTC price? I was surprised to see us go much below $300, and I figured $250 would be the likely bottom. Now we're sub-$200 again, and some are predicting an even bigger fall yet to come. I'm still skeptical, because for a huge panic to occur you would need the biggest supporters of BTC to start dumping. If they didn't dump at $500+, why would they dump now? We're still heading down, however, and until the trend changes those who like to draw lines on charts and talk about SMAs will continue to make guesses on the eventual bottom, and some of the guesses are bound to be correct.

I wrote in the post two days ago that CEX.io halted their cloud mining, and that was when the price was still at $265. At sub-$200 prices things are even worse. Consider this: ZeusMiner just sent out a newsletter about their latest "no limit bid" on the new Antminer S5. This is supposed to be one of the newest and most efficient SHA256 ASICs around, capable of 1155GH/s with a power draw of 550W -- so basically just over a 2:1 ratio. But how much would you pay for such a miner in today's market?

At the current price and difficulty, you would net about $30 per month (depending on the cost of your power). Think about that: it could take well over a year (500 days) to pay for an ASIC that only costs $500 for 1.15 TH/s. Ouch. The interesting thing is that the prices of ASICs have dropped a lot with the drop in BTC pricing, so really the manufacturers were making a killing and they've had to cut into their profit margins because obviously no one would want to pay $1000 for a miner that could take years to -- or potentially never -- reach ROI.

Of course I don't expect BTC prices to continue down indefinitely. The very reason we have the term "bottom" is because at some point the institutional day traders and investors expect it to rebound. The SNP500 is often cited as a great example of the cycle of investor emotions. Twice it reached ~1500 before dropping to half that value, but now it's at an all-time high of ~2000. Bitcoin could very well mimic that sort of behavior, just on a vastly accelerated time scale.

And here's the thing to remember: Bitcoin is not a stock, bond, or even a commodity (though it bears the closest resemblance at times to the latter). When you try to predict BTC price movements based on tools used for stocks, you will encounter problems. And even when you apply the best technical analysis possible, you are still guessing. I always love seeing TA posts on BTC, as they end up presenting three possibilities: up, down, or stay the same. Rarely do they actually state unequivocally the direction they expect BTC to move, but a week later when there's a big change, rest assured they had that possibility covered the week before: "We were right! BTC went way down!"

Fundamentally, then, nothing has changed. BTC is the same technology today as it was last week, last month, and (mostly -- a few updates have undoubtedly occurred) last year. If it was a killer idea five years ago, it remains a killer idea, and nothing has yet been able to usurp BTC as the top cryptocurrency. The market cap is now down to $2.5 billion, sure, but that will change. The same people profiting from the drop in prices will eventually read their tea leaves and decide it's time to be bullish, and we'll see the inevitable reversal.

When will that happen? No idea, but I can't see any way BTC prices get much lower short of another major hack. $150 is a likely bottom, and double digits seems ludicrous to even consider. In a few years, I still plan to be holding onto the BTC I have, and by then I expect to be back into four digits. In the meantime, enjoy the roller coaster ride.

Monday, January 12, 2015

CEX.io "Suspends" Cloud Mining

It's been an interesting day to be sure, with PayBase announcing ways to improve their price and profitability long-term on the one hand while cloud mining services have been going belly up at a rapid pace. With the falling Bitcoin prices and continued high difficulty, it was inevitable that one of the biggest cloud mining services, CEX.io, would run into problems. Today in a blog post, CEX.io states that they are "temporarily" suspending their mining services. I put "temporarily" in quotes because there are really only a few scenarios that will lead to CEX.io resuming mining:
  1. The price of Bitcoin climbs to the point where it's profitable again.
  2. The difficulty of Bitcoin falls to the point where it's profitable to mine again.
  3. CEX.io gets more efficient hardware that makes it viable to mine even at the current price/difficulty ratio.
I actually noticed the problems with CEX.io over the past month, when I saw that my BTC balance would sometimes drop, and the past week in particular has been bad. Now, I have long since pulled out of CEX.io, so I only had 0.5GH left on the service, but over the past week my balance dropped about 5% (maybe more?) due to maintenance fees. Even worse, selling all hashing power still seems to have only partially stopped the hemorrhaging, as referrals can still result in fees. Nice, isn't it?

The real question is whether the maintenance fees are even reasonable, or if they're just high in order to secure a profit for CEX.io. I've looked at quite a few cloud mining options over the past couple of months, and without fail those focused on Bitcoin mining have looked like they would never come close to ROI. Even the best ASICs are looking rather questionable right now, as the initial cost is too high to justify.

My prediction this round is that we're due for the first real drop in difficulty in a long time for BTC. We finally reached the point where all that hashing power was using too much electricity to sustain, and with falling BTC prices suddenly everyone is in the red. Note that we did see a few small drops in December (-0.73% and then -1.37%), but these were followed by a 3% and 8% jump in difficulty on the next two cycles -- and that last one coupled with a falling price really pushed things over the edge. People who own their own ASICs can keep running them, effectively paying extra in fiat power bills to avoid the trouble of buying BTC directly, but for cloud mining this is a complete loss: you pay maintenance in BTC and you receive rewards in BTC, so effectively it's like paying 1 BTC per day to get 0.9 BTC back (whatever the exact amount is). There's no reason to continue, period.

This is also part of the bigger problem with Bitcoin: ever increasing hashing power is only possible with ever increasing price. If the latter falls, the former must eventually follow. Assuming things get bad enough, we could actually see difficulty and network hashing power drop so far that a 51% attack would be possible, though I think that's unlikely as anyone with any sort of interest in Bitcoin doesn't want that to happen. Not surprisingly, this flaw is what has driven so many alt-coins -- including Paycoin -- to adopt a Proof of Stake distribution mechanism, as there the total power requirements are relatively minuscule in comparison to Proof of Work.

Long block confirmation times and large amounts of "wasted" power are two real issues in Bitcoin. Could we actually see the cryptocurrency collapse? Well, I doubt it, but nothing is certain. If BTC does end up failing, something else will end up taking over, and more likely than not that something will not use a Proof of Work hashing algorithm. Far more likely is that we're at the point where difficulty is going to become a lot more stable. I don't think Bitcoin prices are likely to drop too much further, but if they do you can rest assured that some big ASIC farms will pull the plug while they wait for the next difficulty adjustment to see if it's worth mining again.

Worst-case, we could actually see a huge number of ASICs shut off in the near future, causing a large drop in difficulty that might take a month or more to happen. Then we'll see a huge jump in hashing power for the next cycle thanks to the difficulty drop, and suddenly all the problems alt-coins have experienced with too-long difficulty adjustment cycles will rear their ugly head in a big way with Bitcoin. There are probably enough "believers" that will keep mining come what may that Bitcoin won't have quite the roller coaster that we've seen with alt-coins, but this could definitely open the door for other cryptocurrencies to gain ground on what was once an unassailable position. It could prove to be a very interesting quarter or two....

Paycoin Honor Program Announced - $20 XPY "Guarantee"

Many cryptocurrency enthusiasts have been quite disappointed with the rise and fall of Paycoin prices. (Side note: I'm still unsure as to the proper spelling; is it Paycoin or PayCoin, Paybase or PayBase? I've seen Josh use both; at present, I think Paycoin and PayBase are correct, but I could be wrong.) While the cryptocurrency did hit $22+ when PayBase launched, the price then collapsed... then collapsed some more... and then settled in around $2.50-$5.00, depending on when you look. I should note that Bitcoin has also dropped in price of late, from $380 or so back in early December to a current price of $255-ish -- the lowest BTC has been priced since last March when a hack of an exchange caused a massive drop; otherwise it was November 2013 when we last saw sub-$250 prices.

Anyway, despite a general softness in all cryptocurrencies, Paycoin has been doing reasonably well for a new coin, all things considered. Yes, it spiked up to $22 and then dropped to $2.50, but considering the age of the coin the current market cap of $52 million or so still puts it in fourth place among all cryptocurrencies, not far behind Litecoin. Today, GAW/PayBase has announced that they plan to bring back the $20 floor, with a new proposal called the Paycoin Honor Program. You can read all the details there, but let me give you my take on things.

GAW doesn't object to some users selling off their XPY at $20 each and pocketing the earnings. The issue comes when a "whale" or institutional miner with 100K XPY decides to dump everything at once -- or even worse, when market manipulators continuously try to buy low and sell high on XPY. The result can be chaotic, and the only real beneficiaries are those manipulating the system. What GAW is proposing is to have anyone that wants to sell off XPY at $20 put their coins into a sort of escrow, and GAW will pay out at least $100,000 on the first of each month to buy off the XPY in the escrow.

There's a bit more going on than that, of course. First, the Paycoin Honor Program requires you to enroll during the month of February -- from Feb. 1 to March 2, 2015. If you're bad at math, that means none of this even starts until six weeks from now, so GAW basically gets a respite to work on other stuff. Once you've enrolled, as far as I can tell you put your XPY into escrow and they are locked away, to be paid out when your turn comes up. How GAW chooses to pay out is up to them, but presumably they won't be paying off everyone on a first come, first served basis -- e.g. if one person puts 100K XPY into escrow, everyone else would need to wait 20 months before they started getting paid.

Here's the real catch: if your XPY is locked up tight awaiting for GAW to buy them back, you're guaranteed to be paid at some point in the future, but in the meantime the price of XPY could potentially skyrocket. So let's say all the other features of PayBase come online and XPY goes up to $40. Well, you still get your $20 from escrow and GAW more or less pockets the difference. No complaining, of course -- you decided to take the "sure thing" and you got what you wanted (eventually). If XPY goes down in price, you end up making the "smart move", but I still feel GAW is in this for the long term and that's less likely IMO.

There's a ton of stuff GAW still needs to work on, e.g. the PayBase Debit Cards, PayBase Premier Accounts, perks, shopping, etc. Some of that stuff should be completed within the next 45-60 days, which means right around the first payments are scheduled to go out (I'm guessing April 1, since the Program says the $100K payments are made on the first of each month and the enrollment period ends on the second of March), XPY may already be doing well enough that you'd be having second thoughts.

Worst-case, if XPY were to die and GAW were buying them back (instead of declaring bankruptcy) it would require 100-200 months (!) to buy off all the XPY currently out in the wild. I don't think you can add more XPY after the Feb-Mar 2015 enrollment period, so this is really only for existing XPY, not for future coins (or stuff that's in HashStakers, Prime Controllers, etc.)

Wrapping up, some are calling this a "scheme", which is probably overly harsh. What it really looks like to me is a way to buy time and hopefully slowly increase the value of XPY. Today we saw a brief spike to roughly $6 with the news of the Paycoin Honor Program, but we're now back to $4. GAW ends up with a grace period extending all the way to April 1 before they have to pay even one disbursement of $20, and Josh has also gone on record multiple times saying that the price is going to rebound in a massive way once they get additional features implemented and working. So if you want out right now, GAW is offering to pay you off in 75 days, at which point you could very well be regretting the decision.

If you want my advice: don't put any more than about half of your XPY into the escrow -- hedge your bets if you must, but going "all in" is for gambling, not for investing. (Says the guy who basically went all in on Paycoin.) At worst, GAW will buy back 5000 XPY each month, so given my estimates of 500K to 1 million XPY being "in the wild" it could take a long time to get to bigger orders. GAW might even start with all the small guys (to build good will among the masses) and buy back everything less than 25 XPY or whatever, then pay off some percentage of everyone else. That's what I'd likely do if I were running the show, but we'll see.

Friday, January 2, 2015

PayCoin Price Update: Buy High, Sell Low?

I've been thinking about this quite a bit, and frankly I'm quite perplexed with the prices of PayCoin. There are a lot of people with a vested interest in seeing Bitcoin continue to reign supreme, so obviously an upstart like PayCoin could be seen as a real threat. Launching with a lot of fanfare and then surpassing Litecoin in market cap in just a few weeks is definitely an achievement, and it almost certainly woke up the sleeping giants over in Bitcoin land. Let me just throw this scenario out there:

At present, there are in total 12,375,932 XPY. Of those, only a small chunk is really available for trading -- I talked about this in the previous post, but to recap: 6,885,169 XPY is in the Prime Controllers, and there's another 4,689,646 XPY in the next ten or so "rich list" addresses that's not being traded as far as I can tell. Subtract that from the total coin supply and we end up with... 801,117 XPY basically "in the wild". I'm not sure where coins placed in HashStakers end up going, but some of that 800K might be in HashStakers (unless it's in some of the other addresses already counted), further limiting supply.

Here's where it gets a bit odd. Looking just at the Cryptsy volume of the past two weeks (basically since they first listed XPY), the total amount of XPY traded over there is 660,760 XPY. Cryptsy is basically accounting for 60% of the total PayCoin volume right now, so we could say the total amount of PayCoin traded over that time might be more like 1.1 million XPY. How is it that we're seeing 800K coins trading around and dropping the price from a high of $22 or so down to the current $3-$4?

And here's where you can don your tin foil hat. I'm not a huge conspiracy theory type of guy, but when you look at the trading and the price progression, basically the only way this is happening is if people are buying PayCoin and selling at a loss, and then the new buyers also sell at a loss, and so on. GAW talked about burning through a lot of money trying to keep the price at $20 for a bit, but now that it's down to $4 it would be relatively easy to start buying up coins. If there are only 800K or so XPY that aren't in direct control of GAW and their biggest backers, a $3.2 million buy wall at $4 would absolutely prevent any further slippage. That should be relative peanuts to GAW, but they're not playing right now it seems.

It's possible then that a group of XPY naysayers (i.e. BTC "fanboys" or perhaps even a government backed move) could spend a relatively small amount of BTC or money to essentially drive the price of XPY down. You buy at $12 and then dump it all at once to drive the price down to $8. Then you buy again at $10 and dump it all at once to drop the price to $6. Keep on doing that and no one else is willing to risk buying XPY, leaving the price essentially in free fall. And that's at least one possibility for how we're down to $4 and lower with only a small amount of XPY being publicly traded. And I'm sure the powers behind this move are tickled pink to see XPY back below LTC in terms of market cap.

At some point, GAW or someone else that believes heavily in PayCoin will step in and buy these coins and then refuse to sell them at anything less than $20. Couple that with PayBase getting additional features rolling (which have always been planned for the February-April time frame as far as I can recall) and we should eventually see a nice comeback. In other words, if you do happen to have some spare BTC floating around, I don't know exactly how low the price will go, but I wouldn't expect it to break below $2. But of course, I'm pretty shocked to see it hitting even $3 so take that as you will.

My advice remains to hold your XPY, preferably for at least four to six months if not longer. We're so early in the game right now that about the only thing that could fully derail this train is for GAW to fold their hand and declare PayCoin a failure. Given the apparently rather large investment into the coin algorithm, hardware, PayBase, etc. I really don't think that will happen. If it does, it's a huge blow for cryptocurrency in general and at that point even Bitcoin supporters should be wondering about the future viability of their coin. That's something that would definitely please more than a few governments, but the cryptocurrency community should be doing their best to avoid that scenario.

Ironically, for all the doom and gloom let me also throw this out there. Let's say you bought something like $10,000 worth of Zen Hashlets back in the day (call it 500 MH). The proceeds from mining for the first two months after Zen Hashlets appeared would have paid for a large chunk of the initial investment, so really you'd only be about $4000 in the red. The several weeks of HashPoint Pool mining would have resulted in the accrual of at least 500,000 HashPoints, which in turn would have given you 1250 XPY. Even at the current valuation that would be more than enough to account for the remaining investment... but you still would be way ahead!

You see, if you weren't an idiot, those 500 Zen Hashlets would now be 500 HashStakers. You'd have 750 XPY left over and you'd be staking another 4.86 XPY every day for 180 days. All told then you'd end up with at least 2100 XPY at the end of six months. Alternatively, if you bought Hashlet Primes at $50 each, $10,000 would give you 200 MH and a much smaller initial return, but you'd now have 200 HashStaker Primes ("forever") with an extra 200 XPY in them. It's a longer-term play, but for Zen Hashlet and Prime, things are going quite well IMO.

Or in other words, as bad as the current price might seem at first glance, mining with GAW starting in September still gives you a very definitive ROI. So when GAW says to not get too hung up on the price right now because things will get better, I'm willing to sit back and wait. And it's not like there's a lot I can do with the XPY I have in HashStakers anyway, as it's locked up for the next 170 or so days regardless. If you want to play the waiting game, then, wait five months and see what happens. If PayCoin is still struggling, sell all you can over the five months and get out just before the first round of HashStakers finishes up and probably a few million XPY gets released back into the wild. Or don't in the hope of being able to say, "I told you so" to anyone that cares to listen.

PS: Fun fact: if you bought and kept your Hashlet Primes, they're now valued at around $75, a 50% increase from the initial price. I traded all of my Primes for HashStaker Primes... except for one, which I kept for nostalgia's sake. The income (including double dipping) is currently averaging out to something like 0.00025 BTC per MH, daily, after maintenance fees. That's still 7-8 cents daily, which means you can still break even given enough time. I wonder what the guy still holding on to 1091 Hashlet Primes thinks of his decision?