Uncovered: bitcoin is equity, not money

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Bitcoin is equity, not money

I was hired with no financial experience a few years ago as an internship analyst at a hedge fund. I asked the soon-to-be boss how I should prepare. He said, “Get a financial calculator and learn to use the keys to current net worth. That’s all there really is.”

He was right. Since then I have been thinking about future cash flow flows, terminal values ​​and discount rates. All the other analytical tools I’ve acquired since then have been secondary.

So I don’t have to worry about what I need to do today: write about bitcoin, an asset that goes beyond my understanding of HP-12c (millennials can now look up what is that). The value of the Bitcoin balance has fallen 29 percent today, a $ 225 billion decline. Here is the price of the individual bitcoin for Wednesday (included in the last tick on Tuesday on the left) (Bloomberg data):

Moreover, bitcoin and general market trends seemed to be linked. From Refinitive:

Something needs to be said. So below is the best guess for this outdated analyst. I look forward to your email (I think?).

Bitcoin is thought to be the equity of a company with a promising but unproven technology; that’s not entirely true, but it’s a proper metaphor. A lot of people talk about it extensively. Here for example Bill Miller is a very famous investor in Barron a few weeks ago:

“Bitcoin is a solution to an economic problem that once plagued economies, which is the government’s monopoly on money supply and banking systems, serial defaults, confiscation with nationalization, and inflation. . . the best way to think about it is digital gold. Gold is analog, bitcoin is digital. It is much larger than gold as a store of value. . . you can’t escape your country with millions of dollars of gold because it’s so large in size and difficult to distribute, because you can send a binary anywhere in a split second at a very low cost, and it splits almost infinitely. “

If Bitcoin technology works, it will be a new form of money, and one that will prevail in its unique function as a repository of money: safe inflation, a frictionless transfer, and government-free generosity.

Here is Marc Andreessen, a very famous technology investor, who wrote a few years ago: jo similar points:

“Bitcoin is the new type of payment system. Anyone in the world can pay any other bitcoin value to anyone else in the world by transferring ownership of the corresponding slot in the book. Put the value, transfer it, the recipient gets the value, no permission is required and in many cases there is no fee.”

And if bitcoin becomes money, its value will go up a lot. Miller again:

“There is a gold value in the world of about $ 10 billion, some in jewelry, some in central banks, some in ETFs. The market limit for Bitcoin is about $ 1.1 billion. I’m sure bitcoin can rise 10 times under certain sensible conditions, namely that it can be as valuable as gold. “

Rational people should agree that bitcoin technology still doesn’t work. That should be obvious. Current price movements show that bitcoin is unstable to make money; for now, when very bad things come down, I will flee to the other side of the border to Mexico in addition to bitcoin.

Importantly, bitcoin transaction costs are high and slow and are only supported in some places. Bitcoin is not money, but the idea that it will one day become money is the source of its current value.

It doesn’t matter when the share price of a company with unproven technology is the only asset that goes up (and they do a lot). That’s just market noise, except when there’s new information that suggests the technological asset is more or less successful.

That’s where many bitcoin believers have made the mistake. They think when the price of Bitcoin goes up, that is the same evidence that technology is closer to working and converting to money. It is not! A lot of things range from baseball cards to cases like Château Lafite. That doesn’t make them money. It makes them active. Assets are a good thing, but the value of the aforementioned bitcoin comes from the ability to convert it into a specific type of asset, which is money.

Evidence that Bitcoin is becoming money would mean that people are acting more, in more places, and in a lighter way (whether there is evidence for that is a matter for another day).

One last point. The nominal reason for the decline in the value of bitcoin on Wednesday was said by the Bank of China, which was “not and cannot be used as a currency in the market.” Is it proof that Bitcoin technology will not work and that it will become money? Maybe, but remember that the key part of bitcoin’s appeal is that the opinions of third parties and especially governments are irrelevant. However, today’s volatility does just that.

There is an easy way to resolve this contradiction: by saying that a large part of the current value of bitcoin is pure unrelated speculation, with no connection to the basic nature of the technology.

Good reading

If you follow what is written in FT, you know that I also wear a cash hat, as usual writing column male style. I’ve always thought that my two types of writing were related, requiring close thinking about human behavior. In Unhedged I don’t wear a style hat often, but I will slip from time to time.

So last weekend in the New York Times style magazine, he was a perfect example of style writing, Aatish Taseer’s piece to find out how Eastern and Western cultures met in the recent history of perfume. If you’re interested in fashion history, read on.