Morgan Stanley says the true price of Bitcoin might be zero
businessinsider.com
businessinsider.com
The initial reason why BTC took off was pure speculation based on the fact it's fixed supply + unknown but may be bright future.
As speculators started gambling, people who sell drugs and other illegal goods saw a great potential in moving their money as they know they eventually can exchange it to fiats by dumping BTC to speculators.
At this point BTC got its real value as self-fulfilling prophecy.
Following speculators and drug dealers, wealthy people living in countries like China, Russia saw great potential to move money out of their countries.
Self-fulfilling prophecy continues.
If there was no war on drugs and over-regulation of cross-border money transfers, BTC would not be taken off.
As first crypto-currency, BTC didn't need fast transactions, low fees etc, since there was no alternative for these people anyway.
Currently, there are technically better crypto-currencies than BTC but BTC is still alive because of strong network effect and it's safety was tested by time (after all it has longest chain in the world).
The whole story about discussions around BTC showed that you can have Phd in Economics and still suck at economy and simple reasoning beyond standard stuff you've been taught in university.
Watch as middle easterners soon flock to crypto. What's going on in KSA is a great advertisement for crypto to the 1% that live there.
This is a relatively minor problem that big central banks have....they would rather have this problem then the other problem: Create a really tight noose and people stop bothering to even convert back to fiat and simply pay each other in crypto. At that point the game is up and 100 years of deficit spending, political graft, inflation...all of "modern" finance ends.
1) sending drugs ("real" medicine drugs/actual drugs/fake drugs) across state lines. You see, the government doesn't really check the mail very thoroughly, so you can just order heroin and have it mailed to you. (and these people also transact along themselves, for obvious reasons. That used to be a big weak point in the system and a way to trace it)
2) hostaging things (and, I'm sure, people). IT has become critically important for pretty much everything, and can be sabotaged. Properly sabotaged you can demand a ransom.
3) avoiding government scrutiny on things. This can go from tax evasion to just outright being an enemy over the government, or simply protecting what's yours. Now keep in mind that, despite people thinking otherwise, governments are the same type of organisation from a game theory perspective as a mob. Avoiding these might be judged moral, even by you, and may even be a necessity for life (e.g. Venezuela).
You might think "third world country", and mostly you'd be right. But do include Greece, Venezuela, Russia, Ukraine, Turkey and Cyprus as markets where it is seeing very significant usage. For significant portions of the population, governments took away their ability to transact in their local currency (in Greece's case there was at least a plan by mr. Varoufakis to provide a "local" currency, but all others have simply not provided a usable alternative, instead denying there is a problem). So bitcoin has filled a serious and necessary void there.
You see, governments force you to transact in their currency, but they provide no support at all. In reality, dollar transaction either happen in a way that was not even new in 300 BC, and probably was not new in ~4500 BC (ie. cash), or using for-profit institutions of questionable integrity (VISA, ask any online merchant).
The fact that an underground economy like this can exist at all, with people unable to easily defraud each other allows for such economies to exist and grow.
As for the value, it is generally accepted that a currency's value is a direct result from the movement of value (not money) in said currency (so savings destroy a currency's value, and having money go around and not be hoarded anywhere increases a currency's value). This is why the dollar is so much higher than most other currencies. So conveniently, for most altcoins you can get a decent guess for the value of the currencies by counting the transactions. Because transactions aren't free, this can't be scammed for free, so there must be some level of truth in this.
(expressed in USD) https://blockchain.info/charts/estimated-transaction-volume-...
(expressed in bitcoin itself) https://blockchain.info/charts/estimated-transaction-volume
Clearly, bitcoin is comparable in value to many fiat currencies.
Now you might ask if a bitcoin economy is useful or if we should support or oppose it, and of course all bankers will oppose it. Now of course there's 2 reasons for that. They may personally believe or not believe this is a good idea, but keep in mind that most are intelligent enough to understand that their livelihoods depend on bitcoin not growing too large.
Personally I think bitcoin is a very typical early market currency. It is a "gold standard" and it'll crash, for similar reasons the gold standard crashed. Ironically, because bitcoin is a criminals currency, people seem to be very reluctant to actually store value in bitcoin, and this is currently a great strength of bitcoin the currency. There is no other currency where the entire money supply circulates every 2 month (e.g. that's ~12 times as fast as the US dollar), and that's a lower bound in the bitcoin case and an upper bound in the US dollar case, to that factor could and should be larger.
That article seems quite dated (2015). The fees and transaction times for btc today are much worse:
http://money.cnn.com/2013/03/28/investing/bitcoin-cyprus/ind...
* medium for speculation
* payment network for drug trafficking
* international money laundering
Genuinely, what is Morgan Stanley and I missing?
* An alternative for the increasing number of situations where governments have made transacting in the local currency impossible or impractical, usually for political reasons (ironically, bitcoin is losing this function because of transaction fees)
Examples: Greece, Cyprus, Ukraine, Venezuela, Russia and others.
If there is no viable alternative, can you at least understand why bitcoin (or more likely ethereum actually) is superior to a lot of other things ?
* A way to move money internationally (buy on exchange, send bitcoin, sell on different exchange)
* An asset that can be moved internationally freely
* A currency that supports economies that wouldn't be able to exist without a bitcoin currency (which of course includes the drug trafficking thing)
Let's assume bitcoin remains at ~13k USD for 6 months and the exchanges keep going. Don't you think that being paid in bitcoin would be a lot more practical in a number of cases, the most obvious one to me would be cross-border freelancing.
Fun will start when the Chinese government will start to monitor bitcoin transactions and jail people for working around capital control. With the perfect transparency of bitcoin transactions, it looks like a really poor choice to escape China IMHO.
I don't think network effect is the right answer, or at least not from the obvious perspective of the users. Those of us who actually transact with crypto tend to use Bitcoin as a last resort because of the transaction times and fees. A newbie entering the space should learn that very quickly and seek out superior options for transferring value.
The real network effect is on the side of the exchanges. BTC is the universally available trading pair, and many times the only option. So right now, if you want to invest in any other cryptocurrency, you will very likely need to go through Bitcoin to get there.
Someone versed in Econ 101 might say that buying BTC in order to sell it right away for another token should have no net impact on the price of BTC. To counter that, let's look at what happens when I want to invest in token X with USD.
To do so, I most likely need to first buy BTC with USD, driving up the price of USD/BTC. When I go to sell my BTC for token X, the price of X in BTC goes up, or the price of BTC in X goes down. This happens without any immediate effect on the price of BTC in USD.
The ever-increasing price of BTC captures one of the fundamental problems with this space from the perspective of the inventor. It's much easier to get your fiat into crypto than it is to get it out.
Seeking alpha has a better series on the subject which provides charts and sources to back up its analysis.
The above article just cites a Morgan Stanley paper without providing access to it.
This part of the seeking alpha series focuses on btc usage:
https://seekingalpha.com/amp/article/4122695-bitcoin-series-...
If you look at btc usage, it seems like about 97% of blockchain transactions are speculation. I.e buying/selling on exchanges as opposed to it being used to pay for goods and services.
When you factor in transaction costs and the time it takes transfers to go through, it seems pretty safe to say that btc in its current form is not being used as money. This is nothing new.
The question now is what if anything is btc worth as a store of value? I’d love to see an article dig into that question a bit more. All the parent article has to say on this topic is:
“Like digital gold? Maybe. Does not have any intrinsic use like gold has in electronics or jewelry. But investors appear to be ascribing some value to it.”
Which really doesn’t tell you much.
Yes, the value could be zero - if no-one wants to buy it. But currently, some do, and so the "value" is whatever they are willing to pay, either in terms of dollars, or head of cattle, or whatever.
Of course if "value" is defined as "intrinsic usefulness" then it perhaps is actually worth nothing at all, very much like any fiat currency (though in paper form I guess those have some "firewood" or "toilet paper" value).
I'm talking about the Dot.com boom and bust.
The main question is - How do we look at it? Is it a currency, store of value, derivative, medium of exchange, technology?
This valuation seems to focus on the medium of exchange and currency aspect.
But there are other ways to approach it. One of the easiest and maybe amateurish way to look is through the mining and electricity costs. Sure, it is like a self fulfilling prophecy - more you mine, higher the difficulty and hence higher electricity costs, then you mine more, difficulty increases and it goes in circles. Obviously the electricity costs are alone not enough to justify the current value. But it certainly will not be zero.
That said, I think cryptocurrency ought to be cheap, so people don't hoard it. All this speculation hype has been fantastic for awareness, but I hope it dies down so that people can start actually transacting in cryptocurrency.
I've also heard about idea that Bitcoin could mearly be like your savings account at your bank. You would then transfer that into another digital currency to buy stuff.
But that does nothing to address concerns of hoarding. Either people come up with a way to have inflation in Bitcoin, or it's going to be hoarded. This is Gresham's law, and can't be appealed.
To paraphrase AMC's HCF, I believe Bitcoin is not the thing, it's the thing that gets us to the thing.
If $1 trillion worth of transactions happen per year and each transaction lasts a month you need around $100 billion in currency. Ten years between transactions and you need $10 trillion. If there is less than a day between money being received and spent you need maybe $3 billion worth of currency to support a transaction volume of $1 trillion per year.
More importantly it needs inflation. I just don't see how a currency with builtin deflation can ever be used for anything but a value store. I still don't get why this isn't more widely discussed. Am I missing something?
Blockchain is great tech and bitcoin is a wonderful speculation tool/pyramid scheme but the current situation is an anomaly (as the transaction speeds and prices are showing).
You can think of cryptocurrency as an IOU for "an equivalent amount in my home currency".
This is a pretty bad example but if I write a check to you for $10 I have given you a $10 note. It's backed by my promise to you that I have the money. You cannot buy anything directly with the check. It's made out to your name. All you can do with that currency is trade it into a bank for another currency we all use.
Another example may be gold. If I have you a gold bullion I hardly think you'd have an easy time spending it at a store (unless you're in Dubai). This doesn't mean gold doesn't have inherent value and it also doesn't mean gold is not a currency.
Everyone else's saying this: the value of Bitcoin is either zero or infinity[]. This was clear way from the beginning, and while I regret not cashing in on the bubble before.
[] This assuming the normal continuation of capitalism and the global concert of nations where there is openness to commerce and multiple fiat currencies. Of course, in Mencius Moldbug's dream (who first called for something like bitcoin in '08) where strong authoritarian government prevents other currencies from hanging on... it's an utopia. We might as well trade in time credits.
I will grant that both Bitcoin and dollars depend on trust. But both are grounded as well. Bitcoin to physical computing devices and dollars to real estate.
That is, Bitcoin is as real as all of the SHA-256 calculations per second across the network and dollars are as real as the mortgages per square mile across the nation.
The value of the dollar is stable because people trust it to be stable and because there is a financial system that lets people use it for things they want to do. It fluctuates based on (money) supply and demand.
With Bitcoin you are trusting (or speculating) that someone will want to buy it from you in the future. You don't need to trust that no one will suddenly print more though.
One is not necessarily better then the other. You can't force growth in a commodity backed currency by incentivising certain usages by messing with inflation.
GDP, long term economic prospects (of which debt is a part), and political stability are all major factors in fiat currency value.
This is not as bad as the original oversimplification but it’s a pretry incorrect one by itself.
That’s why I don’t like them.
But a cryptocurrency doesn't have to be designed with a deflationary monetary policy hardcoded. Monero, for example has a steadily decreasing block reward that will bottom out at 0.6 instead of Bitcoin's 0. Ethereum is also designed for a steady increase in supply if I understand correctly.
As others have mentioned, these institutions is exactly what Satoshi wanted to supplant.