BTC

My mother just asked me for my opinion on Bitcoin. My initial reaction is that, as with any other trend in recent memory: by the time my mom has heard of it, it is doomed.

However, after some thought, I would like to propose two scenarios:

Scenario one: Bitcoin is just an asset like any other. It should be considered – valued – like any other asset. Under this mode of consideration, it is without much inherent value, and is due for an almost complete price correction – tending towards zero.

Scenario two: Bitcoin is not just an asset like any other. It should be treated as a true alternative currency. It has no inherent value, and this doesn’t matter. In which case it should be treated, not as an asset with a brighter future, but as a backdoor to wealth redistribution of a profoundly unequal nature. It should, most probably, be outlawed.

Here are my thoughts. I’m not declaring them God’s Honest Truth; this is just the view from the cheap seat that I happen to occupy. Also, this is just a rough draft; the price of BTC has moved about a thousand USD since I started this blog post, so forgive me for being eager to click “publish” while I can.

First: Bitcoin as asset.

Let’s just look at its price, and how that price has moved of recent.

I have two general standards for skepticism. Bitcoin meets both – by wide margins.

-I am skeptical of any asset which substantively increases in price over the medium term. In terms of my own risk parameters, I would define ‘substantive increase’ as a price increase of 20%, and ‘medium term’ as the course of a calendar year.

From Pearl Harbor Day 2016 to this infamous day 2017, Bitcoin has increased in price from $400 to $16,000. Note the comma. That is a single-year increase of over 4000%. That is a two hundred fold increase over what it would take for me to arch a skeptical brow.

For purposes of illustration: picture the comparative “20,000%.” If that number doesn’t seem large to you: stop doing things that involve numbers.

-I am skeptical of any asset which substantively outperforms the S&P 500 over the medium term. In this case, I’ll define ‘substantive outperformance’ as a gain of 100% over the same-term gain of the S&P.

Over the last year, the S&P 500 has skyrocketed from ~2200 to 2700 points. That’s a single-year increase of 22%. Which you’ll note puts the S&P 500 itself within eyebrow-arching territory for Yours Truly.

Bitcoin, again, has increased in value by 4000%. That means BTC is trading at a price which is around eighty times my risk threshold.

As a result:  Bitcoin is currently trading at rates that are in excess of my personal threshold for skepticism, both absolutely (as a single asset) and relatively (to the market as a whole)… not just fully, but stupendously.

Think that ‘stupendous’ is a good adjective in a financial context? What? Sorry. I was distracted by that unicorn Beanie Baby prancing in the tulip fields. Man, that guy is everywhere these days.

In conclusion: treating Bitcoin as any other asset yields the almost unbelievably strong conclusion that it is the bubble of bubbles, primed and ready to pop.*

But let’s turn to more substantive analysis.

Does Bitcoin have any inherent value? And, if so, what is a fair valuation?

I can conjure up three different ways in which Bitcoin – or any novel alternative currency – could have value.

A) As an improvement over extant currencies;

B) As a reflection of new wealth otherwise unrecognized;

C) As a result of old wealth – which means, in essence, it’s a Ponzi scheme.

Let’s take these each in turn.

A) Is a Bitcoin better than a dollar?

A lesson in history may be profoundly useful here. Much of the basis for cryptocurrency in the modern mind is the actions of Epiphyte(2) Corp. in Neal Stephenson’s novel Cryptonomicon. Their goal was to create a currency that was digital; secure; and (perhaps) untraceable. Their business plan served as the blueprint for Bitcoin.

The problem is that, by the time Bitcoin came out, traditional currencies had already achieved pretty much the exact requirements of Epiphyte’s digital currency. The dollar – and all other modern currencies – may be digitally held and and digitally transacted, with a very high level of security and privacy. How high? The highest that can be accomplished by for-profit corporations which have direct profit incentives to maximize the levels of privacy and security offered to their corporations – with the only limits being the requirements imposed by governments, thus to prevent… well, the sort of transactions that Bitcoins are often used for.

Let’s break down the arguments, for and against.

Proponents will argue that it makes exchanges (i.e. cash transactions, i.e. purchases) verifiable, through an excellent mix of the public (all exchanges being recorded in a public ledger) and the private (the parties to each exchange are known only by pseudonyms).

Detractors will note that it takes a preposterous amount of electricity and computing power to continue this method of currency (right now Bitcoin mining uses about as much electricity as does the entire nation of Germany), and that the length of time it takes to process and confirm a transaction is increasing geometrically (as much as two hours, whether you are buying a superjacht or a stick of gum).

Neutral economists will note that, as with any alternative currency, it is not backed by the full faith and credit of any government, sovereign entity, or (in the case of Bitcoin) by anything at all; that it is by design not a fiat currency system, preventing it from ever being subject to open market operations by a central bank; which that while every currency derives its value by means of its scarcity, Bitcoin’s great increases in price are entirely synonymous with hyperdeflation – and so while its trading value smacks of 1929, its illiquidity is already more at home in 1933.

Finally, neutral financial analysts might note that the supposed benefits of Bitcoin – a digital currency, secured by encryption, traceable to a single public ledger – are not substantively different from those benefits enjoyed by any modern currency. 

There is almost nothing in this world that a person cannot buy with digital dollars. These transactions – from sticking your Amex in a card reader or Square terminal, to taking out a mortgage to buy real property, to instantly shifting billion dollars blocs of corporate equity or national debt – are facilitated by the world financial system. That is to say, they are facilitated by a series of banks and adjunct industries. These transactions are nigh-on instantaneous, efficient, and secure. And they have reached this point as a result of 1) marginal profit potential on each transaction, spurring 2) huge investment in technology and infrastructure, 3) guided by governmental regulation and public oversight, and 4) strongly limited by competition in what is perhaps the world’s most efficient marketplace.

Bitcoin offers very little improvement upon this system. At best it utilizes some cryptographic and adjunct transaction protocols which can be profitably incorporated by extant financial networks. In this regard Bitcoin is like a small tech startup – it should be valued based upon the potential saleability of its novel technological innovations. And at worst, Bitcoin has to be valued as a currency which, while enjoying not a single iota of legitimate foundation (sovereign or otherwise), offers to consumers no opportunities not offered by a greenback. The new boss is the same as the old.

“But David,” you say, “Bitcoins let me purchase things that I couldn’t currently buy with dollars. Like drugs! And all while evading taxes!” Please boot up Tor, go to Silk Road, drop some Ethereum on a brand-new shovel, and dig yourself deeper into your hole.

“But David,” you say, “Bitcoins are not tulips!” That’s true. You could plant tulips. They had some value apart from their scarcity. (This is why gold – though it lacks many of the benefits of fiat currency, provides no advantages over it, and as such is inferior to it in every way… is still superior to Bitcoin as an alternative currency. As are the Malagasy ariary, Skud Malti, debt issued by a private corporation, or unsecured loans from a guy named Tony).

As a result, I must state that I believe Bitcoin is not generally better than the dollar, and therefore that, in terms of inherent value, it should not be trading at a premium to it.

To be more specific, I would answer the question “Is Bitcoin an improvement over existing currencies?” with a range. That range, unfortunately, goes from “not by much” to “no.”

An aside of a black-board-y nature.

Here. Imagine a Cartesian plane.

The X axis represents different types of transactions – that is to say, of uses of currency.** For purposes of simplicity, let’s say that to the left we find small transactions (retail purchases – a stick of gum), and on the right we have large transactions (wholesale purchases, t-bills, and national holdings of foreign sovereign debt). Let’s say X=0 represents the ‘average’ transaction in cash.

The Y axis represents utility. Let’s have y=0 be the marginal utility of using physical specie – a fistful of dollars, a few dollars more.

Let’s graph dollars. Modern dollars. Digital dollars as they are exchanged. There’s plenty of room to argue over the fine-tuning of this, no doubt, but I’m going to postulate with extremely high confidence that the chart would be pretty close to ‘uniform,’ with every size of transaction reaching up there towards y=1 – that is to say, perfect utility.

No transaction is perfect, of course. Whether it’s Visa taking a percentage of your order, or the unseen overhead on digital exchanges (electricity, upkeep on undersea fiber-optic cables, veritable legions of bespectacled KYC/AML lawyers pouring out of the Exchange Place PATH station every weekday morn), Y never equals 1. Sometimes it might even dip below 0 – which is why I carry cash for making small purchases, or why some merchants impose minimums on credit card transactions. But again, by and large, we are looking at a pretty damned uniform distribution – and with increases in technology and improvements to regulation, getting more uniform every day.

Now let’s map Bitcoin. Again, there’s plenty of argument about each individual data-point. But I expect that at no point would I assign Bitcoin a higher Y score – a higher utility – than a traditional currency. And at many points, I would assign it a lower score – at best a uniform distribution with a peak well below the average of the uniform distribution enjoyed by the dollar. At considering the preposterous electricity costs for Bitcoin mining, the huge time-lag for each transaction, and the unnecessary ‘protections’ of public ledger recording for small transactions, I would expect that Bitcoin’s maximum utility would be for discreet large transactions – so the distribution would be skewed wildly to the right of x=o, while still not straying very high above y=o.

The average utility of Bitcoin per transaction is lower than the average utility of a dollar per transaction. And, the variance of Bitcoin’s utility per transaction is much greater. As a result: I do not think that Bitcoin is inherently more valuable than traditional currency. I think it is inherently less valuable. On its own merits – outside perhaps of some special sorts of transactions (like, e.g., large purchases of drugs) – Bitcoin should be trading at below the cost of traditional currency.

Put it another way: a fair inherent value of Bitcoin is less than $1 USD.

Now let’s turn to the second way that Bitcoin might have value:

B) Does Bitcoin represent new wealth?

I’ve shown why I believe that Coins are inferior to dollars. But this still leaves open the question of whether Coins, as they currently circulate, represent wealth – wealth that could, and should, be represented in dollars, but at the moment is only represented in Coins.

I expect that the answer is “possibly yes” – with the caveat that the answer “yes” may be even worse than the answer “no.”

Can the creation of new currency also create new wealth? 

It is a truism of financial economics that wealth can be created. Money can also be created. But when you create money, you do not create wealth.

I’ll walk you through it. Right now there are… well, there are many different ways to answer the question “how many dollars are there?” but let’s go with M1. Right now, M1 is equal to about four trillion dollars. Each of those dollars, of course, can buy such-and-such an amount of stuff. If you doubled the number of dollars – from four trillion to eight trillion – and distributed the new dollars equally (a 2:1 split), then suddenly every person would have twice as much money. BUT they wouldn’t have any more wealth. There’d be the same amount of stuff to buy, and since everyone had twice as much to spend, suddenly everything would cost… twice as much. If you increase the money supply, you create inflation. More dollars equals less value per dollar… equals no new wealth.

And the opposite is true. A reverse currency split – exchanging every dollar for fifty cents – would halve the amount of money in your bank account. But it would double its value. The result would be deflation. Goods and services would suddenly cost half as much. Net change: nothing. Fewer dollars equals more value per dollar… equals no new wealth.

So again, when you create money, you do not create wealth.

Bitcoin, originally, operated on the idea that a new and superior form of money could, inherently, create wealth. It’s a not entirely unreasonable assertion. As I said, I don’t think Bitcoin accomplishes this superiority, and I think that there are externals to how Bitcoin sought to implement this creation which has turned it from wealth creation to wealth transfer – the implications of which are insane, horrifying, and suggest that if Satoshi Nakamoto is not the creation of the FSB, then brother, they just ain’t tryin’ hard enough. 

However, the assertion “Bitcoin is superior to the USD” can be made with a straight face. I disagree, but it’s not entirely unreasonable.

However, even if this is true, the questions then become: if Bitcoins are in fact superior to dollars, 1) how do we as a people determine this, and 2) isn’t the proper thing to implement a direct and equal exchange of Bitcoins to dollars at a rate of 1:1?

There are two possible answers to the first question: politically, or naturally.

The first method is certainly the safest. The only way for a nation to demonitize its entire currency, and then monitize an entirely new currency, is to do so by consensus. We democracies tend to express consensus through the political process. It’s kind of our thing. Bitcoin has not attempted this. (Nor, as things stand, would it – I will discuss shortly.)

The other way is to do it ‘naturally’. This is by providing Bitcoins as an alternative to dollars and letting nature take its course. If a Bitcoin is equal in face value to a dollar, but there is some inherent superiority to using Bitcoins – if they were (ahem) pound-for-pound superior – then without any political or regulatory interference, the good money would drive out the bad. People would naturally switch to Bitcoins, and pretty soon, dollars would be a thing of the past.

As a result, if Bitcoins were really superior to regular currencies, their value should have been pegged to that of regular currencies. Most likely this would mean 1 BTC = 1 USD. This would mean that there would have to be 4 trillion Bitcoins – either from the inception, or created constantly to maintain the target exchange rate. The latter would almost certainly be preferable, but either would work.

Bitcoin is not a fair replacement for the dollar. Nothing trading more than infinitesimally distant from a ratio of 1:1 could fairly replace the dollar; when speaking of media of exchange, that’s just what ‘fairness’ means. However: Bitcoins do not work like that. They are limited in number. Which is why 1 Bitcoin is not worth 1 dollar – as of today, it is worth SIXTEEN THOUSAND.

What would happen if Bitcoins were to replace dollars?

If suddenly everyone were to switch to Bitcoins, then the price of each coin would be driven up astronomically. You think it’s high now? Right now money, as a medium of exchange, is only fairly scarce – a great accomplishment for our central bank and our financial system. And there are four trillion dollars in the money supply. Suddenly there would be, not four trillion Bitcoins, but 16.4 million.

That would be deflation by orders of magnitude. For every dollar you have, you would suddenly possess approximately 1/243,000 BTC.

As we discussed before, this would not create or destroy any wealth. Something which costs one dollar in the store would just suddenly cost 0.0000411522 BTC instead. Outside of the, ah, computational cumbersomeness of this… there are people right now who own whole Bitcoins. As, what, ‘early adopters,’ their coins would become worth… more. 243,000 times more.

That’s right: each Bitcoin would be worth $243,000.

The largest Bitcoin investors hold, individually, between ten thousand and two hundred thousand coins. The Winkelvoss Twins (of Facebook – or rather, The Social Network, fame) hold approximately one hundred thousand bitcoins. Their investment of $11 million would become worth 100,000 x 243,000… dollars. Their investment of $11 million would earn them over 24 billion. Many other billionaires would be created.

Now, as a capitalist, I am hardly against the creation of new billionaires. But as we discussed above: the creation of new money – or the transition to it – does not create new wealth. So if a person makes 24 billion out of a currency exchange, 24 billion dollars of wealth has not been created. Zero dollars of wealth has been created. Which means that if they suddenly have new money, it means that someone else, suddenly, does not.

Who doesn’t have that money?

You.

The result of a transition from dollars to Bitcoins – either by political means, or by creeping natural switch-over – will result in a huge windfall for Bitcoin investors. That is why they refer to themselves as ‘investors’. They want to make it sound like they are earning money in exactly the same was a person who buy a stock low and sells it high. But they aren’t. Unlike with a stock, there is no wealth being created here. Bitcoin ‘investors’ are hoping that when the majority of the populace accepts the inevitable Bitcoin exchange rate of 243,000:1, they will simply accept that these ‘investors’ are entitled to possession of 243,000 times their fair share of the money supply.

“But David,” they shall say, “we were early investors. We are entitled to profits?” But that is the salient difference: there are no profits. This is a currency exchange. One medium is being exchanged for another. The idea that this generated ‘profits’ for some people is without a single difference from the idea that the total amount of money should be unevenly divided, with literally trillions of dollars being awarded to people based solely on the fact that they started using it a few years earlier than others.

This has absolutely nothing to do with capitalism. This does not reward investment; it simply rewards early adoption. This would be like if Apple Computers suddenly redistributed all its stock based upon who was the first person in line to buy an iPhone. There is a causal relationship between early investing – the allocation of capital that can then be used to create wealth – and later reward. There is no causal relationship between early adoption and later reward. Bitcoin investors just hope that people don’t notice that – whether they themselves understand it is irrelevant – while wealth is taken from the world and transferred to them.

As a result, the idea that Bitcoins are a ‘speculative bubble’ is in fact not the scariest scenario. The idea that they are not is a far scarier scenario. Because in that case, the people of the United States – and of the world – would suddenly be expected to accept a massive transfer of wealth from the majority of the populace to a slim minority, based upon the essentially arbitrary Ponzi-logic of I-was-here-first. It would be no different in scale or zeal than the wealth redistribution of the Bolsheviks – the difference being that they at least paid lip-service to equality while hoarding wealth and power, while in this instance, the unequal redistribution of wealth would be the GOAL.

The only way around this would be for the number of Bitcoins to be increased by means of a split. This would return Bitcoins to a 1:1 ratio with the dollar, and then exchange those new bitcoins for dollars as a 1:1 exchange. The problem here is that it would completely and utterly destroy any value held by Bitcoin ‘investors’. They would go from having $16,000 Coins to $1 coins, same as everybody else. This is clearly anathema to Bitcoin, all Coins, and all who support them. Which proves that Coins are not replacement currencies – they are investment vehicles, pure and simple.

C) Even if Bitcoins do not represent *new* wealth, do they represent *old wealth*?

Quite possibly. And, as I said, this is not necessarily a good thing.

Over the years since Coins have been introduced, this world has created a great deal of wealth. Increasing population, increasing production, the slowly-accreting benefits of the digital revolution: wealth has been created. It is distinctly possible that some or all of the current value of coins is representative of this wealth.

The problem is, here, that if there were no coins, this wealth would be represented in traditional economic instruments: e.g., dollars.

At time of writing, the total value of all Coins is 450 billion dollars. If coins did not exist, that $450 billion… would. It would still be there. It would just reside in the extant media of exchange.

If Bitcoins did not exist, every piece of specie currently in circulation would be worth more. It would have more buying power. Again, follow my logic. Right now people with Bitcoins have a buying power of $450 billion. That means that, since the creation of Bitcoin, there has been the creation of $450 billion in wealth – $450 billion in goods and services that can be bought. Were it not for Bitcoins, that creation of wealth would be reflected in the increased purchasing power of extant dollars. Because of Bitcoins, that increase has not bee reflected. Which means that, at best, Bitcoin owners are skimming the cream that should properly be distributed pro rata to all users of currency – everyone with a savings or an income. Every uptick in the value of Bitcoin is, at best, an uptick which should properly belong to the value of world currencies. AS THEY EXIST NOW, Bitcoins are an unconscionable transfer of wealth away from the people of the world.

Five Hopes:

One: Those who have invested in Bitcoins would otherwise have invested in other things. As a result, their returns are not substantively higher than they would have been otherwise – and those who will be injured by any coming crash will not be injured any more than they would by a general economic downturn affecting traditional markets.

Two: The fact that Bitcoins are skimming the cream of the world economy means that the value of coins is directly tied to the overall health of the world economy. In fact it is probably elastic to an order of magnitude, such that very small corrections in the world economy would lead to massive corrections in the market for Coins. As no bull market lasts forever, this will certainly occur, and probably will do so soon.

Three: The possibility that much of the value of Coins – as expressed through their market price – is illusory. That any attempt to take out a small percentage of the market’s value would collapse the market; that small decreases in value would trigger panic selling that would collapse the value; that the bourses are so artificially manipulated as to be little more than the prelude to a cash-grab, which will occur any day. And, compared to some of the implications I discuss above, I consider these scenarios to be all but rosy.

Four: The possibility that much of the value of Coins results from the purchase of Coins using traditional currencies. IE, their $450 billion value of Coins could result from, say, $449 billion dollars having been invested therein. The exact amount of this is very hard to determine. However, the implication would be that much of the market cap of Coins does not reflect the creation of new wealth, but rather the ‘investment’ of old wealth – and therefore the worst that will happen is that it will be taken from ‘investors’ by thieves-in-the-night, in a form of wealth redistribution that shall not affect anyone but those who lambs who lined up for the slaughter.

Five: It is quite possible that the limitations inherent in Coins would prevent their greater adoption, simply because, as I have said, they are inferior to traditional currencies as media of exchange. This will result in, at best, a natural threshold for the encroachment of coins – and, more likely, a natural bursting of the bubble, even some active force – MSS, or just a humble heir of Ponzi – does not supply the pin-prick first.

One final thought:

I will reiterate that, if someone were to create a perfectly-veiled weapon for striking at the global financial system & the extant distribution of wealth, they could not have done much better than Bitcoin. An alternative currency is itself a profound challenge to the world order; an alternative currency masquerading as an investment is a tool for unequal wealth redistribution that would make a Ferdinand Marcos look like Tomas Piketty in comparison.

While some Coin enthusiasts are the sort of cryptoanarchists who use one-time pads to encrypt their postcards and hand-roll their own tinfoil, this humble narrators does not grant them any more legitimacy in consideration of monetary policy than he does in consideration of any other policy – for the clear reason that desire to live off the grid, and I desire to live on it.

However, the vast majority of Coin users are not of the ranks of the Secret Admirers. They are not trying to create an off-the-grid currency. They are trying to demonitize extant currencies and remonitize them as the Coin. And unlike those nations that have engaged in remonitization, they are doing so, not from economic need, but for simple greed; not so ensure equal transfer of wealth as between all persons, but specifically facilitate the transfer of wealth unequally to themselves, based upon some farcical chimera of cartoon capitalism and secret-society seniority.

At best the Coin-enthusiasts do not realize this. Those that do, don’t care.

As a result, this humble narrator suggests strong legislative action be taken to limit the creation and exchange of alternative currencies as threats both to the established world order and to the holders and users of traditional currencies – which is to say, a threat to everybody.

*

A time traveler recently visited me, and sang me a mournful song. I’m not sure if he was from 2018, 2019, 2020 – or Christmas 2017, come to that. But he says it’s very popular in his time.

They came and told me I could join in the dream
Make money hand over fist
It wasn’t gold but it did glitter and gleam
A chance not to be missed

They used to tell me I was building a dream
And so I followed the mob
I joined the cryptocurrency team
Better than having a job

Once I built a currency. I was first.
I needed something to join
Once I built a bubble. Now it’s burst.
Brother, can you spare a coin?

Once there on Reddit, ah, watching the swell
Posting dankest of memes
A million subscribers. Then it fell.
Watched them leak out the seams.

Say, don’t you remember, I was hodling with you
I’m still hodling, my friend
I thought we had diamonds. You did too.
But we were just hodling sand

Made something from nothing, put food on our plate
Drank Champagne, ate tenderloin
Now we’re hungry. Now it’s late
Brother, can you spare a coin?

**

(In a perfect world, each type of transaction in which a person or entity could engage would be broken down into different variables, such as size; speed; security requirements; etc. – and so the X axis would go from a transaction with a composite of 0,0,0,0, to 0,0,0,1, all the way to 9,9,9,9, or what have you. However, this kind of at-the-intersection-of-the-quantitative-and-the-qualitative is a bit too dissertation-y for a blog post being made at 10AM on a Thursday.)

 

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~ by davekov on 7 December 2017.

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