A great explanatory video from Quartz titled the Future of Money where they compare Bitcoin to literal giant stones that are still used today on the Pacific island of Yap. Crucial to their value is that everyone in their community knows to whom each stone belongs. Relatively basic, but worth watching just to learn about the Yap and their culture.
JC at AllStarCharts asks whether the Bitcoin bubble has already burst and that it’s now performing similar to other assets after a crash. He even makes the case that Bitcoin is underperforming the likes of Nvidia and Amazon.
I think a lot of people are asking the wrong question. To me, it’s not whether or not Bitcoin is in a bubble? It’s whether or not the bubble in Bitcoin already popped?
What we care about when it comes to supply and demand dynamics is how the asset has performed since the bubble popped. In the case of Bitcoin, to me it’s crystal clear that a bubble popped in 2013. Again, it’s not that I’m suggesting it was “the” bubble, but an 86% crash from high to low? Yes, that is the definition of a bubble popping. The bitcoin enthusiasts argue that there were plenty of crashes prior to that, which is fine. Moving forward, from any sort of structural perspective, this 2013-2015 crash is our point of reference. Crashes prior to that led to that run up we saw into 2013.
It certainly seems reasonable to believe after reading this post.
Apparently, Aswath Damodaran faced a lot of backlash for his post classifying bitcoin as currency. His views haven’t changed:
The crux of the disagreements though lay in my classifying Bitcoin as a currency, not as an asset or as a commodity. Since this classification is central to how you should think about investing versus trading, and value versus price, and goes well beyond Bitcoin, I decided to dig deeper into the classification and provide even more ammunition for those who disagree with me to tell me how wrong I am.
On why it’s not an asset:
One reason that people are uncomfortable drawing the line between currency, commodity and asset is that the line can sometimes shift quickly. Take the US dollar, for instance. Its primary purpose is to serve as a medium of exchange and as a store of value, and it is thus a currency. However, you can lend US dollars to a business or individual and generate interest income. That is true, but it is not the currency that is then the asset, but the loan that you make with it, or the bond that is denominated in it. Building further, if I create a bank that takes in deposits in dollars (and pays an interest rate on them) and lends out those dollars as loans, I have a business and that business is an asset.
On why it’s not a commodity:
The essence of a currency is that its primary uses are as a medium of exchange or as a store of value. The key to a commodity is that it is an input into a process that has a utilitarian function. Oil and coal are clearly commodities, since they derive their value from the fact that they can be used to produce energy.
He ends with a thought similar to what we’ve written recently:
I think it is also time for us to separate arguments about block chains/smart contracts from arguments about crypto currencies, since you can have one without the other, and to differentiate between crypto currencies, rather than defend them or abandon them all, as a bundle. To me, Bitcoin, Ethereum, Ripple and ICOs are different enough from each other, not only in structure but also in terms of end game, that they need to be assessed independently
Bernstein report examining whether Bitcoin is money by looking at the history of money.
On the “myth of barter”
The notion of barter evolving to money was a convenient
assumption for thinkers and economists. People did not really try
to exchange chickens for wheat because there were no matching
engines back then to solve the double coincidence of needs.
Instead, people starting storing goods of common use (e.g. salt)
which everyone else finds useful and hence, commodities such
as salt, sugar became convenient alternates to currency. History
is filled with cases of salt, dried cod, sugar, hides, even nails
being used as currency. Thus, currency in simple terms is
something the society believes in to be acceptable universally.
Currency evolved to metals for long distance trading as metals
are durable, portable and divisible.
On what gives Bitcoin value:
Some of Bitcoin’s value does indeed come from its usefulness for
payments or monetary transfer.
Bitcoin is valuable in this regard only for “censorship resistance.
In fact, Bitcoin could be seen as virtual ‘bearer cash’ economy
supported by a decentralized ‘trustless’ network – a new crypto
economy with its own protocol or policy. The faith of its citizens–
software developers, miners, investors, early individual and
sovereign state adopters would drive the value of that network
…for now Bitcoin has only emerged as a ‘censorship resistant’ asset class.
We will delve deeper into Bitcoin and its cryptographic cousins in
the coming editions.
Like many crypto-enthusiasts recently, we’ve gotten a bit caught up in the ICO craze. After publishing a few ICO analysis reports, we noticed the posts were driving a lot more organic traffic that we’d ever had, that people were actually leaving comments. Naturally, that lead us to publishing more ICO reports. In fact, we’ve published over 30 of them. However, it’s time to stop.
The purpose of the reports was to present information in a standardized way. Every token crowdsale is run and presented differently, making it quite difficult to compare. Even leaving the nature of the project out of the discussion, there are so many variations in the method tokens are sold, bonuses, token allocation, usage, etc. that it becomes prohibitively difficult to compare without doing a lot of work. Something as simple as how much money projects are looking to raise is obscured. And determining the value of your specific contribution is often even more difficult with closed private sales at enormous discounts on tokens that are likely to be dumped onto the market post-ICO.
With that in mind, our reports are not sufficient. Though we stopped trying to rate each ICO a while ago, even gathering the information has become too cumbersome and there others doing a much better job of it. As we often cite in our reports, some of our favorite sites for in-depth, single-project analysis include CrushCrypto, Hacked (subscription), Picolo Research (release delayed for all but Astronaut.capital clients), ICO Alert, and ICO Rating (look for the in-depth reports, not the ratings). There are others we’re overlooking at the moment.
None of these allow for comparing multiple ICOs using standardized info, but that’s not necessarily a problem. For one, the ICO landscape is changing so fast that comparing a project from 3 months ago to a new one coming us is virtually meaningless. Second, there are others much closer to what we envisioned originally. TokenData tracks over 140 ICOs currently and TokenReport has comprehensive data on over 700 projects (albeit at $225 per month).
Without a comprehensive solution, it would seem like a good niche too fill. However, the time investment is no longer worth the effort, given the extremely high valuations and waning returns of late. Our bandwith is limited, and it’s simply not worth trying to find the needle in the oversized haystack, especially when the risk/reward ratio is as terrible as it appears now. While we aren’t completely foregoing looking at particular projects in depths, we’ll rely on others to call our attention to it.
Our initial interest in crypto currencies had nothing to do with ICOs. Like most, we were first drawn to Bitcoin and the possibility of a decentralized currency and a finite number of tokens that could be exchanged with anyone in the world nearly instantly. Over the past year, we’ve gotten more interested in the bigger possibilities created by Ethereum and token sales. Beyond funding, there opportunities for new business models, new business structures, automation, anonymity, etc. that will bring more meaningful, macro changes. That’s where our interest lies and where we’ll be focusing here.
If you feel we’ve underestimated the value of our ICO reports, and you’d like us to continue, let us know in a comment.
Each time Warren Buffett makes a comment about Bitcoin, it makes headlines. To be fair, any time Buffett chimes in anything financial-related, it’s considered newsworthy. In 2014, he called Bitcoin a mirage, which as a much more popular opinion at the time. Recently, he commented “You can’t value bitcoin because it’s not a value-producing asset.”
Of course, this is written about mockingly by Bitcoin-proponents, as if Buffett should be expected to suddenly change everything he’s done throughout his career. Perhaps it’s merely others seeking validation, but nobody should be surprised. This is entirely consistent with how Buffett has always operated. Buffett invests heavily in what he knows, concentrates his bets, and looks at the underlying value of an asset with only some regard to price. It hasn’t exactly been a poor formula for success.
His comment may sound harsh, but he’s not even wrong. Though many have attempted to derive valuations methods for cryptoassets, most tend to agree that Bitcoin and Ethereum are more similar to a currency or gold, rather than a security. From that light, he’s entirely right to say it’s not a “value-producing asset.” Businesses produce value. Currencies are a means of exchange; no value is produced.
True believers in Bitcoin are actually quite similar to Buffett in many ways. Rather that getting caught up in the extreme volatility, they believe Bitcoin will be valuable in the long-run and act with that timeframe instead of trading. And while Buffett knows nothing about Bitcoin, those have followed the developments know it quite well and can’t imagine not being involved.
Buffett’s methodology can be extended well-beyond the stock market, but it needs to be adapted to individual situations. In the biography, “The Making of American Capitalist” Roger Lowenstein does an excellent job describing Buffett’s thinking and development.Some of the key takeaways are
- think long term
- don’t pay attention to what others have done
Baseball synonyms are big with Buffett, and he was a big fan of Ted Williams (the greatest hitter who ever lived according to this Red Sox fan). Williams would often let hittable pitches go by early in the count, while he waited for something better in his zone. Likewise, Buffett has no need to swing at every opportunity. He can wait to find things that are obvious opportunities to him. And unlike Williams, there’s no third strike possibility.
Buffet has avoided tech stocks mostly, rarely uses a computer. It would be shocking if he suddenly decided to get into BitCoin. Of course, it shouldn’t matter to anyone involved with Bitcoin.
At Bloomberg, Justina Lee compared the recent Bitcoin Gold hard fork to a stock dividend:
On top of stupendous capital gains, investors in bitcoin are also getting a dividend — if they’re lucky.
A split in the blockchain created a new offshoot in the form of bitcoin gold on Tuesday, with bitcoin holders receiving one unit for every bitcoin they own, according to the offshoot’s developers. The cryptocurrency fell from a record high after the so-called hard fork, just as stocks typically drop after going ex-dividend.
Of course, not all token holders received the dividend. For example. anyone holding BTC through Coinbase missed out. Then there’s the problem of whether a 5% of less dividend means anything when prices can fluctuate 30% in a week anyway.
From Aswath Damodaran’s post The Bitcoin Boom: Asset, Currency, Commodity or Collectible? at Musings on Markets:
I find myself disagreeing with both its most virulent critics and its strongest proponents. Unlike Jamie Dimon, I don’t believe that bitcoin is a fraud and that people who are “stupid enough to buy it” will pay a price for that stupidity. Unlike its biggest cheerleaders, I don’t believe that crypto currencies are now or ever will be an asset class or that these currencies can change fundamental truths about risk, investing and management.
He goes on to describe his process for determining how to classify bitcoin, beginning by describing has his asset class classifications as:
- Cash Generating Asset
After concluding that Bitcoin is a currency, though a weak one currently given how much it is used as a means of exchange currently (which would make it closer to a collectible), he layout out three possible long term scenarios:
- The Global Digital Currency
- Gold for Millennials
- The 21st Century Tulip Bulb
A very practical look at Bitcoin from a more traditional financial perspective.