What is bitcoin worth? Part two

Wednesday, 8 September 2021 — Albert Park

[7 min read]

As you know, your regular editor Vern Gowdie is off this week. I mentioned that I thought I would wind Vern up by asking one of our young research guns to write about bitcoin.

You know Vern’s answer to the question, ‘What is bitcoin worth?’. But to a whole new generation of young adults, who have been let down by a corrupted and broken financial system, the question is much more intriguing.

So to continue on from yesterday, here’s Part Two from Kiryll.

Enjoy…

Cheers,

Greg Canavan

***

Yesterday, we discussed the quandary of figuring out what Bitcoin [BTC] is worth.

We canvassed multiple approaches, including bitcoin’s early history where BTC was priced at the electricity cost to mine it.

And we then profiled Metcalfe’s Law and how network effects can be applied to surmise bitcoin’s value.

However, we ended the story by acknowledging that those approaches were not sufficient on their own to fully account for bitcoin’s worth.

So what does?

Digital gold: bitcoin as a safe-haven asset?

Perhaps a good way to think about bitcoin’s worth is by thinking of it as digital gold.

After all, MicroStrategy CEO and bitcoin advocate, Michael Saylor, described bitcoin as ‘digital gold on a big tech network.’

MicroStrategy now owns more than 100,000 bitcoins, a portfolio worth more than US$3 billion.

Why could bitcoin be considered as digital gold?

For one, bitcoin was designed to have a cap on total supply. The maximum number of bitcoins in existence will not exceed 21 million.

Like gold, bitcoin is partly characterised by its scarcity.

As of February 2021, about 18.6 million bitcoins have been mined, leaving around 2.4 million unmined.

As I covered in yesterday’s article, bitcoin mining is likely to get computationally tougher as the hash rate rises. This is likely to raise the price floor of the coin to match mining costs.

For comparison, data from Thomson Reuters suggests that about 190,000 tonnes of gold have been mined through history.

According to the US Geological Survey, there remains around 52,000 tonnes of minable gold buried in the dirt.

And, like gold, bitcoin can be considered a commodity.

For instance, the US Commodity Futures Trading Commission (CFTC) classified bitcoin as a commodity.

In 2019, the CFTC chairman adamantly asserted that ‘we’ve been very clear on bitcoin: bitcoin is a commodity under the Commodity Exchange Act.’

But there are differences.

Gold is hard to destroy and is constantly recycled. Recycled gold accounted for about a third of total supply on average from 1995 to 2014.

And as we’ve mentioned over at Money Morning, gold and other precious metals, in general, can act as effective diversifiers against the downside risk in stock markets.

And assets that derive their value predominantly as off-setters of market risk will likely be cyclical in nature.

When markets are booming, investors see less of a reason to park some of their cash in gold. A safe haven isn’t as vital if you’re feeling safe.

But is bitcoin perceived as a defensive, safe-haven asset?

It’s unlikely. The volatility of cryptos (bitcoin included) is widely reported.

Just this year, the Wall Street Journal reported that bitcoin’s price swings make the coin as difficult to navigate as holdings of foreign currencies.

Not only that, as professor of finance at NYU Aswath Damodaran noted, if bitcoin becomes ‘gold-like, a fringe currency that investors flee to during crises, its price will be lower.’

And therein lies another difference.

Consider the chart below:

The chart tracks the performance of gold priced in BTC.

As you can see, gold has been getting weaker against bitcoin since 2016. In fact, a single bitcoin was worth about 28 ounces of gold at the start of this month.

If two asset classes were of a similar nature; we should expect their exchange rate to be relatively stable.

That said, we should note that comparing bitcoin’s recent performance with gold may be unfair.

After all, bitcoin was only created in 2008 and is still going through a price discovery phase as the market tries to settle on BTC’s fair value.

Gold, however, is an asset with centuries of price discovery behind it.

But it does seem the worth of bitcoin is not wholly captured by its similarity to gold.

Bitcoin — a currency without government

Bitcoin — as a digital asset — cannot have the same industrial uses as the precious metals it is likened to.

As a digital currency, it does not have an underlying value derived from physical consumption or from its use in production processes (unlike gold and silver).

But that’s not to say it doesn’t have other uses.

As Pedro Franco wrote in Understanding Bitcoin, we should remember that bitcoin is not just a currency, it’s also technology.

Bitcoin is an application programming interface (API) for money and bitcoin — as a currency — is just one of the API’s applications.

As Franco wrote, bitcoin could also be used as an open platform for the exchange of value ‘in much the same way that the internet is an open platform for the exchange of information.’

Bitcoin could become a platform for financial innovation.

Speaking of the internet and innovation, way back in 1999, Nobel Laureate and leading economist Milton Friedman made this prescient comment:

‘I think that the Internet is going to be one of the major forces for reducing the role of government.

‘And the one thing that’s missing, but that will soon be developed, is a reliable e-cash.

‘A method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A, the way in which I can take a 20 dollar bill and hand it over to you and there’s no record of where it came from.’

Bitcoin’s creator Satoshi would then echo Friedman’s sentiments in his 2008 white paper.

Satoshi criticised conventional currency’s reliance on trust: trust of central banks, governments, middlemen.

‘With an e-currency based on cryptographic proof,’ Satoshi wrote, ‘without the need to trust a third-party middleman, money can be secure and transactions effortless.’

That’s what led Nasim Taleb to remark that bitcoin was the beginning of something great: ‘A currency without a government, something necessary and imperative.’

So we could argue that bitcoin’s worth also lies in its transformational power, its potential to change the very fabric of our financial system.

When framed that way, bitcoin’s run-up in price doesn’t look that unreasonable.

After all, what’s a fair price for a potentially life-changing technology?

If the potential of bitcoin and other cryptocurrencies interests you, or you find yourself wondering what it all means and why you should care, check out our new service New Money Investor.

If you want to make sense of this new world of cryptocurrency and how you could potentially stand to benefit, New Money Investor is a good place to start.

Click here if you want to learn how to play the new game.

Regards,

Kiryll Prakapenka,
For The Rum Rebellion

This week, we are looking at some big dots…ruminating, really, about freedom and how it is connected to prosperity…vaccinations…the First Amendment…truth.

What good is freedom, anyway? In our economy? In our lives?

Here at the Diary, we don’t particularly care about freedom. We just don’t like anyone telling us what to do. Especially when the person telling us what to do is an idiot.

Of course, whenever someone tells us what to do, it’s a good bet that he is an idiot. Heck, half of the world’s people have an IQ below average.

The other half are morons. Throw a rock through a Capitol Building window and you’re bound to hit one of them. But it is a certain kind of moron who thinks he has the inside story on God’s ultimate, absolute, and complete truth (GUACT).

Getting vaccinated has become — like wearing a face mask — a sign of secular piety and obedience. The vaccinated person shows his ‘health pass’ proudly, like a war hero with his medals. The medals prove that he has done the right thing.

Irresponsible and immoral

By contrast, the unvaccinated are treated like cowards…shirkers…lepers.

They are unclean…irresponsible…immoral.

Pope Francis says so:

‘I believe that morally everyone must take the vaccine. It is the moral choice because it is about your life but also the lives of others.’

Others — including the American Civil Liberties Union — believe there should be no choice at all. They see ‘no civil liberties problem with requiring COVID-19 vaccines in most circumstances’:

‘In fact, far from compromising civil liberties, vaccine mandates actually further civil liberties. They protect the most vulnerable among us, including people with disabilities and fragile immune systems, children too young to be vaccinated, and communities of color hit hard by the disease. […]

‘COVID-19 vaccine mandates — much like mask mandates — are public health measures necessary to protect people from severe illness and death.’

Yes, the people who gave us the war in Afghanistan, the war on poverty, the war on drugs, and the Wall Street bailout — the great and the good, the elite, the media, the professoriate, the medical/pharmaceutical complex — all now insist that we get vaccinated.

But is forced vaccination really ‘necessary’ as the ACLU claims? Colleague Jim Rickards spells it out:

‘Among all individuals, vaccinated and unvaccinated, the global survival rate is 99.2%. Among those under 70, the survival rate is 99.97%. The survival rate for children is 99.995%.’

And if the vaccines are so effective, couldn’t anyone who is worried about getting COVID-19 protect himself by getting vaccinated? Why make a federal case out of it?

Apparently, the ACLU has reconsidered its mission. It used to be dedicated to protecting Americans’ liberties. Now, it is protecting their health.

Protecting our health and safety is now the desideratum of the entire nation.

Nothing else seems to matter. ‘Screw your freedom,’ says former governor of California, Arnold Schwarzenegger.

Dangerous behaviour

But wait…we still drive our cars. We climb dangerous mountains. We make whoopee with people who may have a communicable disease. We visit Chicago on a weekend. And we buy cryptos!

Hey…you could get hurt doing those things. What gives?

All we have are questions.

Why take chances…? When you’ve got real geniuses who know God’s ultimate, absolute, and complete truth, who needs the freedom to discover it for himself?

Who needs to wander into sin when the saintly path is so clearly marked? Who cannot know the truth about vaccines, when the major media have excised all ‘misinformation’ on the subject?

And why do we let markets set interest rates…employment levels…wages…or consumer prices — when the Federal Reserve, bless its craven little heart, knows exactly what they should be?

Shouldn’t we inoculate ourselves against the rough and tumble, the booms and busts, the ups and downs…of all of life?

Good news; bad news

On Friday, just before the Labor Day weekend, the feds released the latest numbers. For the working man, there was bad news and good news. CNBC reports:

‘Job creation for August was a huge disappointment, with the economy adding just 235,000 positions, the Labor Department reported Friday.

‘Economists surveyed by Dow Jones had been looking for 720,000 new hires.’

New hires fell from 1.1 million the previous month. But wages rose. Alas, they did not rise enough to keep up with inflation. The 4.3% overall annual wage gain was still below the latest 5.4% inflation reading.

At least those people labouring in the leisure and hospitality sector got a real raise. Colleague David Stockman tells us their weekly wages rose at a 12% annual rate — the fastest in 52 years.

But on Monday came more bad news for some people. Those federal unemployment ‘toppers’ came to an end. The Associated Press has the latest:

‘Two critical programs expired on Monday. One provided jobless aid to self-employed and gig workers and another provided benefits to those who have been unemployed more than six months. Further, the Biden administration’s $300 weekly supplemental unemployment benefit also ran out on Monday.

‘It’s estimated that roughly 8.9 million Americans will lose all or some of these benefits.

‘The amount of money injected by the federal government into jobless benefits since the pandemic began is nothing short of astronomical.’

Misery and heartbreak

Oh my…

This is what free-ish markets bring us, isn’t it? Good news and bad news. Wealth and profits…misery and heartbreak.

Maybe that is what freedom gives us in the rest of life, too — flimflam…fantasy…and a brief glimpse of truth.

Stay tuned.

Regards,

Bill Bonner,
For The Rum Rebellion