Yet Again?
Comment of the Day

September 13 2017

Commentary by Eoin Treacy

Yet Again?

Thanks to a subscriber for this memo by Howard Marks at Oaktree which may be of interest. Here is a section on Bitcoin: 

So what’s my real bottom line?

Advocates say if Bitcoin is accepted as described above, you’ll make more than 50 times your money. Thus success doesn’t have to high probably for buying Bitcoin to have a huge expected return. This is called “lottery-ticket thinking”, under which it seems smart to bet on an improbably outcome that offers a huge potential payoff. We saw in in full flower in the dot-com boom in 1999-2000, and I think we’re seeing it in action again today with regard to Bitcoin. Nothing is as seductive as the possibility of vast wealth. 

Several of the “seeds for a boom” that I listed in “There They Go Again…Again” are at work in the Bitcoin surge (a) there is a grain of underlying truth as set out above; (b) there’s the prospect of a virtuous circle: widespread demand will lead to wider acceptance as legal tender, which will lead to widespread demand; and (c) thus this tree may grow to the sky, as there is no obvious limit to this logic. None of these necessarily make Bitcoin a mistake. They merely say elements that contributed to past bubbles can be detected today with regard to Bitcoin. 

Finally, Bitcoin isn’t alone. There are hundreds of digital currencies already – including electric with market capitalisations of over a billion dollars – and no limits on the creation of new ones. So even if digital currencies are here to stay, who knows which one will turn out to be the winner? Hundreds of e-commerce start-ups appreciated rapidly in the tech bubble based on the premise that “the Internet will change the world” It did, but most of the companies ended up worthless. 

Eoin Treacy's view

Here is a link to the full memo.

The key advantage government backed currencies have is the high barrier to entry in created new currencies. However, cryptocurrencies do not enjoy that privilege. It is getting progressively easier to mint new tokens and the number is proliferating. That both increases supply, which is symptomatic of market tops but it also saps demand for the established brands because new entrants are expected to perform better.

This note forwarded by Rory Gillen offers another take on the subject and may also be of interest. Here is a section:

But, unless that technology is going to lead to some revenue flow for owners of bitcoin currency, bitcoin has no intrinsic value, but rather is simply a new medium of exchange for settling trade in goods and services. Yes, it operates outside the banking system - like gold – but, so what? 

When we settle for goods or services using credit or debit cards are we not using digital currency? It seems to me that we are. And there's a cost - the facilitator i.e. Visa or Mastercard, among others. But, ultimately they are part of the wider banking system.  

If bitcoin and blockchain technology lower the cost of settling trades then they represent a positive development. But, the Internet itself was a revolutionary development, yet it makes no money for anyone. Rather, it has changed our lives, lowered costs in many areas, increased choice and spawned new innovations. If bitcoin is going to revolutionise trade settlement then its supply should not be restricted, but rather should be expanded at the same rate as trade. That being the case, why would its price rise other than to offset inflation, similar to the price of gold.

I agree the volatility of cryptocurrencies means they are inappropriate for regular transactions. The value of bitcoins for example is impacted by competition from other tokens but is supplemented by the growth of the blockchain. Perhaps the greatest threat to bitcoin then comes from private blockchains which do not rely on tokens at all. That is what I believe Jamie Dimon was referring to when he attempted to delineate between bitcoins and blockchain. 

Bitcoin has now pulled back by a little more than $1000 from its recent peak which is a similar sized move to the retreat posted between June and July. If the advance is to remain reasonably consistent then it will need to find support in this area. 

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