Altcoins: Which Are The Best Investment?

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Toaster with an Edison screw fitting, c. 1909

Both Warren Buffet and Paul Krugman believe cryptocurrency, e.g. Bitcoin, is a bubble.  Moreover, these well-respected gurus of the economy and finance say we should expect to see a bad ending.  Sorry to say, they’ve got it wrong.  When and where do cryptocurrencies end? They don’t.

Bitcoin is not a bubble.  Cryptocurrencies will never end.  Taken one at a time, a coin may or may not get the following it needs to thrive.  Some coins will see tremendous support and soar in value.  Still, others may grow and shrink in fits and starts.  But as a basket, you are going to see growth in the never-before-seen-as-an-investment category.  That is where we are at the moment.  New initial coin offerings (ICOs) and token sales are appearing daily.  New currencies are raising tens of millions of dollars in funding in just a few days time.

Having a basket of different cryptocurrencies is a form of diversification within the space, mitigating the risk.  Bitcoin is the most uncorrelated asset there is when compared to the stock market.  That means its movement is unrelated to how the stock market moves.  Fund managers, always looking to diversify, love uncorrelated assets to further reduce risk.  So should you.  Where we are today, however, is at a place where almost any coin with an active development team behind it will go up.  I know how flaky that sounds but I believe you can buy almost any coin and experience large returns in this moment in time.

This is similar to a period of history just after Edison electrified Lower Manhattan.  To supply enough electricity to power his street lighting and then indoor lighting for the Financial District Edison had to patent at least ten new inventions including the dynamo. By the time he had finished, buildings throughout Lower Manhattan were powered by electricity.  Suddenly, all of the ideas that had been floating around for decades that were never taken seriously or mass marketed because they ran on electricity, and electricity wasn’t available, were possible.

There was the idea for fans for moving air, fans for cooling, toasters to bake bread, elevators to lift people, stamping machines for manufacturing, signals for directions and signage, clocks to tell time, clocks to manage industrial processes, illuminated signs at night, musical instruments, mixers in the factory, blenders in the kitchen, washers for clothes, dryers for paint shops, lifts for industry, vacuums, motors, drills, vibrators, and scales for weights and measures, could be electrified and sold, and made available in every office across the city. Bonanza!  Eureka!!! But which idea would sell?  Which would become a viable product?  THEY ALL WOULD!!

Airmiles

Screen Shot 2017-10-03 at 9.52.26 AMDon’t understand cryptocurrency? Think ‘airmiles’.  You know, the premiums given out by various airlines, credit cards and other players as a reward for flying or shopping referred to as airmiles.  Almost every airline gives out some form of airmiles.  Airmiles are virtual.  There’s nothing physical thing you can point to called an airmile.  They exist in computer programs.  For each airline’s airmile program there exists a formula by which you earn and use airmiles.  You might have to spend a dollar on a participating credit card to earn an airmile, for example.  Or, you might have to accumulate 30,000 airmiles to use airmiles to fly from New York to Chicago at no additional cost.  You know the drill.  Cryptocurrencies are similar.  Each cryptocurrency has a specific function and value proposition.

How can something virtual have value?  How do airmiles equal a trip to Chicago worth $250?  Because that is its value proposition.  That’s how it was set up.  That’s what you get if you take the necessary actions.  That is the social contract that has been set up for each individual airmile program.

Cryptocurrencies are the same.  There is a cryptocurrency that is used for online gambling, one for online gaming, and even one for sports betting.  There’s one which is the currency of international money transfers, one for healthcare and one for real estate.  Before we’re done you will see thousands of different cryptocurrencies.  We’re just getting started.  Some will be valuable and worthwhile acquiring.  Some will not be worthwhile at all.  We, as a society, are just now learning how to use cryptocurrencies.  It is only now that they are even being considered a new asset class, a new form of wealth.  There are bound to be missteps and mistakes.

Luddites

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gif by Rollin Bishop, Popular Mechanics

Perhaps, calling someone averse to new technology a Luddite is too harsh a term.  Luddites were trying to stop the advance of technology by destroying labor-saving knitting machines in 19th century England.  Today, we’ve come to use the word to mean a laggard, someone slow to adopt new technology.  There are several friends I consider true Luddites. These are the folks that confess an aversion to technology, only it sounds more like a condemnation. “I can’t even set the clock on my VCR.”

These are the folks that would ask me which PC they should buy, ten years after everyone else already had a computer.  Then, when Apple announced they were coming out with new models in the spring, decide to wait. When I showed off my new Kindle, these same folk would say something like “Nah, I want to feel the texture of the paper in my hands.”  That meant to me electronic books hadn’t come to Main Street yet.  These conversations have helped me gauge where we might be on the new technology adoption curve as I have been wondering about with Bitcoin. When Bobby says “I’m in” I know the technology has hit its cruising altitude.

So it frightens me when one of these same folk (I’m not mentioning any names) calls to find out how to buy Bitcoin. It seems that there is a new vape product he wants to buy but the dealer only accepts Bitcoin. Wow. It hasn’t been thirty days since the Thanksgiving dinner discussion when we had argued over the Bitcoin bubble. Had he purchased Bitcoin then, he’d never have to think about how much pot cost, ever again.

Now, what to think? Are we finished?  Is the run over already? Has Bitcoin reached its fighting weight?  Is this what the future looks like?  Or, is the adoption curve of this new technology so steep that we are going to see explosive growth ahead that will make this past month’s action seem like the calm before the storm?

I’m beginning to think that that is what we are facing. Just in the last few days, I heard about Cryptokitties.io, the online kittens you buy with Ethereum, which are so popular the sales have slowed the Ethereum network to a crawl.  There’s the eSports network switching to Litecoin for its sports gambling.  There’s the CBOE and CME (Chicago Mercantile Exchange) which have been heralded for the past couple of months. Their futures markets will bring Wall Street to Bitcoin.

Each of these is guaranteed to contribute a great deal of new, increased traffic to the world of cryptocurrency. Add to those the coming Ripple ala SWIFT network where banks will sign up to use Ripple to expedite International Wire transfers, Cob coins which will introduce to us fee-free trading of cryptocurrencies, and Electroneum which will replace energy-wasteful mining with mining on smartphones.  The list is seemingly endless.  There are already thousands of new crypto-coins being programmed and introduced.  Some won’t make it.  Many will.  This is going to be huge.

Not a Bubble, a Trend

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My Uncle Harry told me he never had an easier job than selling refrigerators to people who owned iceboxes.

When people see Bitcoin’s meteoric rise in price they fear they might be witnessing a bubble, wide enthusiasm followed by loud explosions, such as the dotcom bubble of 1999.  Remember when every actress with an idea for a website was creating an IPO (Initial Public Offering)? When it was over, they discovered websites aren’t so easy to create or build, and, a good domain name does not a financial success make.  Boom!

What we’re witnessing is the rapid adoption of new technologies, cryptocurrency and blockchain.  Cryptocurrency is virtual money, digital money that appears only on a computer screen but represents a value by virtue of the fact that everyone believes it does.  Say what? People have been doing virtual banking for quite a while.  When you log in to Citibank or Wells Fargo Bank and you see your balance on the screen, that is a virtual representation of the money you have.  Blockchain is something else, entirely.  Blockchain is the technology that makes cryptocurrencies like Bitcoin secure, anonymous and free of government or corporate controls.  I won’t go into an explanation of blockchain here.  There are some very good ones elsewhere on the Internet.

Why do we adopt new technologies?  There is a simple answer to that. We adopt a new technology when it does something for us better than ever before.  By better, I mean faster, smarter, smaller or cheaper. If a new technology does any one of these attributes better than any technology that came before it than it is an improvement that has a good chance of being successful. By successful, in these terms, I mean widely adopted.  If it achieves more than one of these attributes, it can very well become wildly successful.

I remember my uncle Harry describing to me one of the first jobs he had, selling electric refrigerators at a time when everyone had only iceboxes.  He said it wasn’t “selling” at all.  It was signing up people because the improvement was just that compelling.  It was faster, smarter, smaller and cheaper.

We only talk about Bitcoin because it was the first and best known of the cryptocurrencies but there are and will be many thousands.  We will have to bend our notion of currency and cash.  Think coupons.  Remember when you went to the carnival and the first thing you did was buy a string of coupons that you could use to pay for rides?  Each digital currency, each cryptocurrency,  has specific characteristics to be used in specific ways.  They may or may not be fungible as dollars are.  Think Airmiles and Chucky Cheese coupons.  They each have their own specific function and format.

There will be currencies for general spending purposes.  There will be currencies for pocket money.  There will be currencies for healthcare expenses, for virtual costumes for your Avatars, for real estate, for contracts, for international trade, for virtual kitties, for shopping at Walmart (think company store), for air travel, for stocks, for bonds, and, of course, dollars.  There will be currencies which work faster, currencies which are programmable, and currencies which are anonymous.

Cryptocurrencies are specifically designed to work with computers.  By that, I am speaking generally to include smartphones, thumb drives, pads, tablets, and other electronic devices to be included in the concept of computers.  In our future, computers speak to other computers.  They haggle and negotiate.  They invoice and pay one another with our consent and guidance but not necessarily our direct involvement.  For that, computers need cryptocurrencies.  Fiat currency just doesn’t work.  Imagine robotic arms counting out $15 in paper currency at a toll booth.  I don’t think so.

I Seem To Be A Verb

dancer

I seem to be a verb.” — R. Buckminster Fuller

Reading “Bitcoin: Ringing the Bell For a New Asset Class” by Chris Burniske and Adam White, what comes to mind is a quote from R. Buckminster Fuller — “I seem to be a verb.”  Fuller, the inventor of the geodesic dome, an icon of forward-thinking, postmodernism, was one of the most progressive thinkers of the twentieth century. Fuller’s advice to students who wished to apply themselves to solving the world’s problems was to think ahead twenty-five years and figure out what needs doing.  His other, lesser-known inventions included the Dymaxion car (three-wheeled), Dymaxion house (factory-built) and pressurized shower which only used one quart of water.  Fuller was solving problems of over-population, water shortages, and material scarcity long before they were global concerns.   Fuller loved to lecture.  I attended a marathon three-day, eighteen-hour event given at Town Hall in New York City.  He was also a prolific writer.  This quote was also the title of a book he wrote.

Fuller was recognizing that we are, in a sense, a work in progress, that everything we did or hoped to do should be seen as being in motion, in a state of wanting to be.  He coined the word ‘synergy’ to mean ‘the whole is more than the sum of its parts.’

What does all of this have to do with Bitcoin and a new asset class? Burniske and White did an excellent job of using the language of economics to identify and evaluate traditional asset classes, then went on to explain how bitcoin is the same and how bitcoin is different.  The four features used to describe assets were: investibility, politico-economic features (value, governance, and use cases), correlation of returns: price independence and risk-reward profiles (returns and volatility).  Bitcoin’s explosive popularity growth and unique use cases set it apart from other asset types.

geodesicBitcoin’s open-source, non-governmental, communal nature is unusual and largely an unknown for the economists and traditional Wall Street investors.  Bitcoin shows itself to be distinct and separate from any other asset class as far as price independence.  So far, so good.  That’s how Bitcoin is the same and different from other asset classes.  But much like Fuller’s need to express our role in society and in the universe, something still is missing from Bitcoin’s definition, that makes it distinct.  It goes without saying that Bitcoin serves a different purpose than other assets.  In a changing environment, its purpose may well be an essential difference.

We live in a dynamic world;  one in which everything is changing.  Everything is in flux.  Everything is in motion.  We use calculus to determine next steps as much as we once used addition, subtraction, multiplication, and division.  Relationships fluctuate in a continuous dance of ebb and flow.  Fiat currency no longer is able to keep up with these dynamic systems.  We have computerized functions speaking to other computerized functions.  These computers have needs, too.  They need, in addition to behaving in response to one another, to remunerate one another.  We need cryptocurrencies in order to do that.  Fiat currencies no longer work.

For example, my subscription to word-processing software needs to be updated monthly.  Certain very expensive features are only billed when I use them.  I rent processing time from a supercomputer by the micro-second.  My social media advertising budget pays for click-through’s only when they lead to sales.  The list goes on and on.  My financial world is dynamic.  My money needs to be dynamic, too.  Bitcoin wallets can be set up to make payments in fine detail; eight decimal places, to be exact.  Other cryptocurrencies can be designed to make payments as a result of a contractual agreement, then change the terms of that agreement, and then continue to make payments without interruption. If we wish to be part of this future world, we need the currency that is able to live in this world, too. Neither gold, nor dollars, nor stocks nor bonds can do that job.  Bitcoin, on the other hand, is able to live the dynamic life this future world requires.

171202 Bitcoin’s Future

 

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http://www.bitlisten.com creates a bubble for every bitcoin transaction in real time.  The size of the bubble and the sound it makes are proportional to the trade size.

 

Once Bitcoin reaches its fighting weight, we probably won’t notice it.  Bitcoin is just another form of currency.  But the differences between life now and then will be obvious.  Exchanging money will be instantaneous.  There will no longer a need to wait for a check to clear, or stocks to be sold, or an insurance policy to be “cashed out.” Business is conducted between total strangers without a second thought.  Avoiding certain expenses simply because the banking fees are excessive would be a thing of the past.  There are no fees.  At that future time, bitcoin is just as common as dollars and cents are today.  Credit and debit cards disappear.  There’ll be no need for them. You’ll keep your bitcoin wallet on your smartphone.

In the transition from now ’til then, from bitcoin as a curiosity to bitcoin as a commodity, your other assets do not change.  Your house, which may be of average value on an average block in America, continues to be of average value.  Your stocks and bonds go up and down in value as they did before and continue into the future.  Gold and silver do what they have always done in providing safe haven and stability.  What will change is the value of bitcoin, going from zero to its ultimate value, whatever that is.  When it reaches that amount, it should become as stable as any currency can be.  We live in a dynamic world.  Shit happens.

When bitcoin started, it had no value.  The programmers, having fun with it, got the ball rolling.  Ever hear the story about the slice of pizza a programmer purchased for 10,000 bitcoin.  True enough.  From those early times, as people’s confidence grew in the concept and the currency, the value of bitcoin has continued to rise.  As it now ‘goes parabolic’ people liken the craze to a financial investment bubble, e.g. the tulip mania of the seventeenth century in the Golden Dutch Age.  Remember, the dot-com bubble of 1999?  There are similarities to that bubble and what is happening around bitcoin today.  At that time, anyone who could convince a group of investors to plunk down a few hundred grand could make themselves a website and a dot-com IPO.  Today ICOs (Initial Coin Offerings) are appearing almost daily.  Someone has an idea for a cryptocurrency and Bob’s your uncle.  The only thing is, Bitcoin is not a bubble or anything close to it.  Bitcoin represents the birth of a new asset class, cryptocurrency based on encryption techniques and money.

What is happening at the moment with bitcoin is a once in a lifetime phenomenon.  During this transition period, you can take your fiat currency and exchange it for another asset class, cryptocurrency, and ride the wave.  However, these are not tidal waters which ebb and flow.  Bitcoin is here to stay.  The only question is how pervasive it will be in our economy.  Compare it to gold. All the gold in the world weighs about 5.5 billion ounces.  There are 7.5 billion people in the world.  That works out to about 3/4 ounces gold per person.  If the gold were distributed evenly throughout the world, each person would have about $1000 in gold.  There are 21,000,000 theoretical bitcoins.  At present, 16,600,000 have been mined.  The rest will be mined in the coming 100 years as set out by the system’s designer, Satochi Nakamoto.  If Bitcoin came to represent all wealth, as we once used gold, each bitcoin would be about $452,000.

Bitcoin grew 400% from $2450, five short months ago, to $10,929 as of this writing. On the night it hit $11,500 to set a new high, it fell 20% in the next few hours. There is no doubt that the bitcoin market is volatile, no place for the faint-hearted, timid, nervous, easily scared, fearful or afraid.

bitcoin-other-world-coins

171113 Bitcoin’s Next Milestone

MilestonesBitcoin roars back to life after a tumultuous weekend where prices dropped from last Wednesday’s high of over $7800 to this weekend’s low of $5414, a 33% fall. Ouch!  The Bitcoin Gold fork is now behind us.  The Bitcoin Segwit2X fork has been canceled.  Bitcoin Cash struggles to remain afloat after a huge uptick this weekend.  In it’s rise to legitimacy and value, Bitcoin must reach some new milestones before its next leg up.

In the world of patents, inventors know that a patent isn’t worth nearly as much when you first are awarded the patent as when you have won in court against a patent challenger.  As Bitcoin matures with age, as these different challenges come to pass, as Bitcoin expands its use cases and market cap, it becomes more and more a fact of life and less a matter of speculation.  Every day that goes by makes Bitcoin a better investment.  Every challenge it weathers strengthens Bitcoin’s ability to stay.

There was some disturbing information regarding Bitcoin’s use cases.  It seems that after an entire year, Bitcoin’s use cases have not increased.  The only increase has been in speculative Bitcoin investments.  From personal experience, that feels about right.  While there is little information about new uses for Bitcoin, there are thousands of new Bitcoin owners hoping to profit from the investment opportunity.  There have been some very good ideas circulated regarding Bitcoin uses, however.  For example, sending money abroad, safely and fast.  People from Venezuela have been using Bitcoin to send money home without fees or the hassle of VISA or Mastercard.  The people of Catalonia, looking for a new currency in their fight for freedom from Spain, may adopt Bitcoin as their currency.  These would be huge boosts to Bitcoin’s viability.

Here are three milestones we should be on the lookout for. Anyone of these would be a home run.

goldmansachs

  1. Any of the big banks such as Goldman Sachs, Bank of America, or Morgan-Chase accepting Bitcoin to buy, hold and sell for their customers.  That would signify a huge influx of big investor dollars into Bitcoin. Every billion dollars increases the price of Bitcoin by $60.00.  A big bank coming into the Bitcoin market would lead, at a minimum, some $40B into the Bitcoin market.  That would raise the price of Bitcoin by $2400.00.
    starbucks
  2. Any large retailer announcing that they now accept Bitcoin payments such as Starbucks, Subway, or Amazon online.  That would be huge.  Some exchanges have already started offering Merchant services; that is to say, provide resources that a merchant would seek were they to begin accepting Bitcoin.  For example, any merchant that would not want to become a speculator in Bitcoin would want to accept it and sell the Bitcoin without holding onto it for any length of time. Exchanges are offering merchants the ability to convert Bitcoin as soon as it is received.
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  3. A country or region switches from their local currency to Bitcoin, e.g. Catalonia or Venezuela.  Even Catalonia which only represents about 20% of the Spanish economy would generate $200B in GDP.  If Bitcoin were used to represent that economy, the market cap for Bitcoin would rise considerably.
    micropayments

Anything that expands the uses of Bitcoin is a good sign.  We continue to publish Bitcoin application ideas in the hopes of fostering new and exciting Bitcoin opportunities.

 

171106 Frontier Days

Screen Shot 2017-10-18 at 8.45.27 PMWhat’s happening in the world of cryptocurrencies reminds me of the time when the Internet was just becoming known and getting popular.  People were scrambling to understand the Internet, to learn what a browser was, why you would call a web address a URL and other such new phenomena.  You could register a domain name for $9.95 and they were ALL available. “They would be worth good money some day,” someone told me.  Anyone could have registered macdonalds.com, coupon.com, or ford.com if they’d had a mind to but no one could think of what one would do with them, and it wasn’t clear that they would be worth money then.

When the use of blockchain technology and cryptocurrencies spread through our society, there will be tokens or cryptocurrencies for everything.  There’s a good chance that half of all the cryptocurrencies out there already will be valuable at some time in the near future.  We’re at the beginning of virtual money, and as currencies come into being, with a little imagination, all you have to do is put out your hand and grab some.

I founded and managed a small software company for many years that specialized in barcode.  I learned a great deal about barcode during those years.  Barcodes are like languages in that if you print a certain barcode type and your scanner is capable of reading that barcode type you will be understood.  The reasons for different types of barcodes are many.  One barcode type might be capable of being printed smaller than another.  There is a barcode for really bad printers.  There is a barcode just for pharmaceuticals.  There is a barcode that can hold two thousand characters.  There is a barcode just for military purposes.  So, too, are there now cryptocurrencies with special features and applications.  The list is already enormous and keeps growing.  We already need a dictionary of cryptocurrencies to understand the universe of virtual money.

There is no doubt some will be enormously popular and some will disappear.  The world is evolving quickly.  No doubt fortunes will be made and lost during this process.

171105 Month Old Bitcoin Gold ($7535)

Month old Bitcoin Gold does not disappear,
Papa Bitcoin roars ahead, what has it to fear? — Allen Lubow

A fork called Bitcoin Gold happened October 23, 2017, at block 491,407, which had been planned since before the last Bitcoin Cash fork.  There is a very good article telling the whole Bitcoin Gold story here.  Bitcoin Gold tries to solve the problem of Bitcoin mining being too specialized.  A specially designed computer gives professional miners a huge advantage over just anyone with a computer.  That means fewer miners.  Ordinary folk would not attempt to out-compute a miner’s equipment.  If you owned any Bitcoin at the time of the fork you received an equal amount of Bitcoin Gold.  It is still not clear which exchanges honor Bitcoin Gold or help you retrieve it from the Private Key which you have. It would be the same key as the Bitcoin that you owned at the moment of the fork.

Bitcoin continues to do well on its merry path into the stratosphere.  Bitcoin Gold hit a high of $486 and then fell to about $150 where it has remained.  Here’s the real problem, as illustrated by the Bitcoin Gold (BTG) Twitter account.  Eighty-one percent of the world’s Bitcoin mining pools occur in China. Screen Shot 2017-11-05 at 8.50.30 AMWhat happens if China decides to shut down Bitcoin mining? Bitcoin Gold is designed to remove the advantage of special mining equipment in the hope that more mining operations appear around the globe.  China has already shown what it can do with a heavy hand regarding cryptocurrencies.  But will this prove to be enough of an incentive to buy Bitcoin Gold instead of Bitcoin?  I doubt it.  There would have to be some sort of incident that illustrated to everyone just how serious this Chinese monopoly can be.

 

171104 Cryptocurrencies

DQmSdSh23GzGePEJFHc69ADtZS7wXaMctKmTzGzEue1E3wXBitcoin represents between fifty- and sixty-percent of the two-hundred billion dollar market cap of all cryptocurrencies.  It is the first and remains the largest cryptocurrency, by far.  However, rivals to Bitcoin like Ethereum, Litecoin, and Ripple are quickly coming into their own.  If you’re thinking like an investor, any time you share a marketplace with competitors that can’t be good for business.  If you’re considering the altcoin situation like that, you’d be wrong.  Bitcoin benefits by the arrival of these additional tokens, as they benefit by Bitcoin’s acceptance.

The world is an enormous place. While Bitcoin is a good substitute for other currencies, money is not always the best trading medium.  When money is the best trading medium, conditions of the trade may be unfavorable to Bitcoin.  The trade might require vast sums, or high speed, or low bandwidth.  For those situations, other tokens might perform better than Bitcoin ($7486). New cryptocurrencies, facilitating all sorts of interactions, appear every day.  The underlying technology to Bitcoin, called blockchain, is the basis for all of these other altcoins.  It is blockchain that causes the paradigm shift.

Suddenly, strangers can be trusted.  A man comes up to you on the street and says, “That is a lovely hat you are wearing.  I must have it.  I will give you ten thousand dollars for that hat.”  You might run as fast as you can to get away from the dude.  Even though $10,000 is a handsome amount that you would gladly take, there is no way that the man could pay you in a way that could be trusted, even if he gave you what looked like real US dollar bills.  But what if the man said, “I will give you 1.33 Bitcoin (that’s $10,000 at today’s Bitcoin rate) for that hat.” You could take out your Bitcoin wallet on your iPhone and flash the barcode his way.  “Here’s my address,” you say in response, confident that you will either get paid or leave.  Since you cannot compromise a Bitcoin transaction, this stranger can be trusted to give you the Bitcoin or be gone.  That is the result of the blockchain distributed network.  You will know if you receive Bitcoin from that man that the Bitcoin is authentic, that he owns it, and he that cannot use it more than once.  Blockchain creates all sorts of trusted, distributed networks.  

There are altcoins for contracts, real estate, signatures, diplomas, and scientific research.  There is an altcoin to facilitate trademarks and copyrights.  All of these cryptocurrencies may be useful and do well.  All may service in a way Bitcoin is unable to perform.  Blockchain makes it possible.  In fact, the success of one improves the chances for success of the others.