Reevaluating How We Value Bitcoin
VP of BD and Blockchain Editor @ Hacker Noon
“I will try to distill down monetary theory help you fundamentally understand how currency and Bitcoin is valued.”
How is the USD valued?
“Quick answer: MV=PQ.
Long answer: With the USD, the government expands and contracts the money supply.
Just remember, the government expands and contracts “M”, the money supply. The Federal Reserve aims for price stability and productivity gains, meaning they hope to increase the money supply in pace with productivity gains.”
How is Gold Valued?
:The trading price of gold on an exchange is determined by 1) the demand of gold in jewelry and other use cases like electronics, and 2) the supply of gold available for such use (i.e. the supply not sitting in reserves). Demand and supply, as simple as that.
What Exactly is Intrinsic Value?
“At this point, it is necessary to clarify what is meant by intrinsic value.
If you knew everything about the future of a company for the next 100 years — its revenue, margins, cash flows, interest rates etc — you would be able to arrive at a perfect valuation.”
Does FIAT have Intrinsic Value?
“Fiat technically has no inherent value. Its value comes from the fact everyone accept it as a unit of exchange, after which point we can value it through MV=PQ. Fiat USD is not that different from tulips, beanie babies, or Bitcoin if not for the sole fact that it achieved acceptance as the way to transact.”
The Fundamental Investor’s Conclusion
“Many of the most successful investors in history have spoken against holding Bitcoin. Among this list include the well-known macro investors George Soros and Stanley Druckenmiller who “broke the Bank of England” betting against the British pound (and earning themselves billions in the process). These are experts in currency, so it makes sense to listen to what they think.”
Bitcoin can still Serve as a Store-of-Value
“Bitcoin is like a Picasso masterpiece. Just as we know Picasso art would never fall to $10, we can be fairly certain Bitcoin won’t fall to $10 anymore given its mindshare and global prominence.”
“The historical track record of old white men crapping on new technology they don’t understand is at, I think, 100%.” — Marc Andreessen
I believe that to invest in Bitcoin is to make a hedge against the chance of fiat’s apocalypse. It will have a place among asset classes as a financial hedge, similar to gold (gold was more or less stable during 2008 while U.S. stocks fell 40%). Of course, I believe that the actual mechanism by which gold is valued is quite different from Bitcoin, as explained above.I can state fairly confidently that BTC will continue to be volatile due to shifting expectations of how and when fiat will collapse. And volatility will make it hard to use as a unit of exchange.BTC will not achieve mainstream transactional use. This is true ever more with the introduction of Facebook’s Libra coin, which will steal Bitcoin’s opportunity in emerging markets. It is a stable, transactional cryptocurrency backed by a basket of fiat currencies.
So should you own Bitcoin?
“My recommendation? Hold 1% of your assets in Bitcoin, and nothing more than you can afford to lose due to volatility. I personally don’t follow my own advice, but that’s for another time.”
Until next time,
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