The Cryptocurrency Thread

[37andhappy]

Apparently Fidelity is starting up a bitcoin ETF in Canada.

Case-Schiller housing index showed that the USD dropped 28% relative to real estate up to September 2021.

Correct - same house, costs more and more in USD over time (due to the declining value of the USD). And becomes cheaper and cheaper in BTC over time. BTC is our defense against a declining USD.

 

[37andhappy]

You keep making these factually incorrect statements. My USD buys almost exactly as many AUD, yen, CAD and other major currencies as it did 25-30 years ago. There has been no significant relative decline.

I just calculated the relative decline of the USD against the AUD since 1996. It has declined at an annual rate of about 0.1%. It has appreciated against the yen in that time period.

Bitcoin has declined 12% against the USD in the last month for comparison.

I'll use some concepts to address this.

Image you have 3 cars, all travelling backwards on the motorway. (The cars represent currencies, and the road represents purchasing power).

Imagine the one going backwards at 5mph, a second going backwards at 10mph, and the 3rd going backwards at 20mph.

They are all going backwards (declining), but from a relativity perspective of currencies 2 and 3, the 1st car actually seems to be going forwards (or at least represents the best option in any attempt to go forwards).

This concept can be confusing for some, and indeed that confusion can be visually demonstrated. We probably have all experienced the phenomenon of feeling of our car going backwards when we see a car next to us going forwards. (Indeed this concept to some extent forms part of Einstein's famous "Theory of Relativity").

Now imagine a car actually going forwards. That car looks unusual, shiny, had strange jerky motions as it accelerates, but goes damn fast. (In this example, this car of course represents BTC).

For currencies 2 and 3, the BTC car now represents a far more attractive option. People used to holding currency 1 as the best option, now may feel uncomfortable / confused / disbelief with a currency actually going forwards in purchasing power (as opposed to being the "least slow" in going backwards), but it is what it is. And clearly if you want to go forwards (as opposed to being the least slowest going backwards), you jump on board the new BTC car. At first maybe only a few people notice and/or board the new car (as with anything new) and then over time, as confidence, interest, awareness and acceptance builds, more jump on board.

Or perhaps another example. Image you have 3 pieces of fruit. A slightly bruised apple, a very over-ripe banana with numerous brown patches, and then an entirely moldy strawberry. They are all to some extent rotten, but we would likely choose the apple of the 3 if we had to eat. At least we would until a beautiful pristine perfectly ripe and unblemished peach came along and was presented to us as an option. In this example, you guess what the peach represents.

 

[37andhappy]

No it has not. Here are the median home prices in the US (from https://dqydj.com/historical-home-prices/ which sourced from Robert Shiller and the FHFA)

August 2021 $342,844
August 2017 $240,234

I little math will reveal that the increase has been about 9.3%pa. Yes, that is still high but it is nowhere close to 25%. These things are so easy to check. If you are getting your information from your videos you may want to do some fact checking when you watch them.

Thanks for posting the graph. What you posted is somewhat out of date. See here for a more accurate and up-to-date graph.

https://fred.stlouisfed.org/series/CSUSHPINSA

Either way, you get the concept. AS money is printed, it takes an every increasing amount of USD to buy the same house.

 

[SecondAttempt]

I'll use some concepts to address this...

Don't be condescending. I get what you are trying to say. But you are not supporting it with accurate facts.

I understand that there is inflation and the purchasing power of my dollars (of any flavor) declines over time. But there are stable ways to hedge away inflation risk, notably a basket of common stocks.

If stocks were down 12% in the past month you would probably be telling us how risky they are. But with bitcoin down 12% you are telling us how stable it is. Bitcoin has been a good speculaive gamble for you and many others. But you have still not made a cogent case for it having any fundamental economic value beyond speculation and facilitating criminal activity. And without understanding its economic value quantitatively no one can rationally predict its future value with any degree of confidence.

 

[SecondAttempt]

Thanks for posting the graph. What you posted is somewhat out of date. See here for a more accurate and up-to-date graph.

https://fred.stlouisfed.org/series/CSUSHPINSA

Either way, you get the concept. AS money is printed, it takes an every increasing amount of USD to buy the same house.

I did not post a graph.

But using your data, which is for a housing index rather than median price, the rate of increase for the last 4 years has been 8.6%pa, much lower than your claim that it is over 25%pa. What is the source of your claim of 25% because it sure ain't the St. Louis Fed!

 

[37andhappy]

I did not post a graph.

But using your data, which is for a housing index rather than median price, the rate of increase for the last 4 years has been 8.6%pa, much lower than your claim that it is over 25%pa. What is the source of your claim of 25% because it sure ain't the St. Louis Fed!

The key point to understand here, is that the concept that as money is printed, it takes an every increasing amount of USD to buy the same house.

Here is a good article from the White House, commenting on this topic:

https://www.whitehouse.gov/cea/written-materials/2021/09/09/housing-prices-and-inflation/

 

[SecondAttempt]

The key point to understand here, is that the concept that as money is printed, it takes an every increasing amount of USD to buy the same house.

Again, that is actually not true. When "money is printed" it increases the money supply. That does not necessarily cause inflation unless the growth of GDP does not keep up. The recent period has shown some deviation but it is far from alarming.

Again, let's use some data to analyze your claims.

Extracted from https://fred.stlouisfed.org/data/M2.txt which seems to be asource you trust.

Money supply in August 1996 was 3744.6, assuming that is 3.7446 trillion USD. Latest is February of this year at 19411.9. So money supply has grown by a factor of 5.2 but I can explain almost all of the housing price increase in 25 years from two simple factors - lower mortgage rates and increased wages. I have demonstrated this quanitatively here with my data sources.

You have only offered qualitative statements to support your claims and you ignore any challenge to support your numerical claims. Where did your 25%pa housing inflation data come from I ask again?

In the interest of a constructive dialog I will offer that I agree with you in principle that if the government "prints money" willy-nilly it would seem like that should be inflationary.

But the data shows otherwise so I have focused my efforts on understanding the data. Data does not lie. Youtube people with an interest is selling margin loans to bitcoin that fail to cite their sources speculators do lie.

Most developed world governments have not printed money "willy-nilly." They have adjusted their money supply to address real macroeconomic issues consistent with the size of their enonomy.

The data shows that the US and most of the developed world has effectively managed expansion of their money supply without causing significant inflation for at least 3 decades. If you have data suggesting otherwise I would love to see it and I would give it serious consideration.

 

[37andhappy]

I understand that there is inflation and the purchasing power of my dollars (of any flavor) declines over time.

Good! Yes, you get it.

... with bitcoin down 12% you are telling us how stable it is. Bitcoin has been a good speculaive gamble for you and many others. But you have still not made a cogent case for it having any fundamental economic value beyond speculation and facilitating criminal activity. And without understanding its economic value quantitatively no one can rationally predict its future value with any degree of confidence.

Numerous people have already addressed this - again, [Bw]e should not confuse volatility with a long term trend[/B]. (In financial terms, we often use the so-called Shape Ratio to calculate volatility vs total returns). Basically:

SharpeRatio= Return of asset value - risk free rate divided by the standard deviation of the asset's excess return, and can be a helpful metric to apply to any asset class. (Of course, as you have alluded to, this formula is applied to historical data, and may not necessarily predict the future).

A good article on the role BTC plays in comparison to traditional asset classes, despite it volatility, can be read here:

https://www.bloomberg.com/news/arti...appy-match-in-the-traditional-60-40-portfolio

Some people may be more comfortable with a stably but ever declining USD vs a more volatile but increasing BTC. The key here is to understand that short term volatility is not the same as a long term trend. The logical decision, (unless you are looking at super short time frames), is to store value in a longer term appreciating asset vs a declining one. (See the example provided with the cars on the highway).

As for how to value BTC, that has been discussed too. As supply is fixed, BTC's value is determined by future demand. Future demand is the only metric you need in order to make a prediction on future BTC price.

If you don't feel you are able to comfortably or confidently make a prediction on future demand, then that will obviously play a factor into your investment decision-making process and how much, (if anything) you allocate to BTC over time.

 

[37andhappy]

The data shows that the US and most of the developed world has effectively managed expansion of their money supply without causing significant inflation for at least 3 decades. If you have data suggesting otherwise I would love to see it and I would give it serious consideration.

Here you go: "Purchasing Power of the U.S. Dollar Over Time"

https://www.visualcapitalist.com/purchasing-power-of-the-u-s-dollar-over-time/

 

[SecondAttempt]

Numerous people have already addressed this...

Again, in a few simple sentances, what is the fundamental economic value of bitcoin? You will probably ignore this

 

[SecondAttempt]

Ok, the current Sharpe Ratio for bitcoin is -0.1 meaning bitcoin has severely underperformed real currencies

 

[37andhappy]

Again, in a few simple sentances, what is the fundamental economic value of bitcoin?

With respect, this has been answered here many times.

I think the concept and terminology you are asking about is "intrinsic value". Many intrinsic valuation models require a cashflow (which is then discounted back to a risk free rate of return). Bitcoin (and indeed also pieces of paper with numbers written on them) arguably have no intrinsic value. Such assets have their value entirely dependent on the value others are willing to put on them as mediums of exchange and stores of value.

So, again, in terms of what gives value to Bitcoin, its a simple economic equation of demand (for a perfectly limited supply). If demand does up, price will follow. So what we, as asset allocators simply need to do, it make a likely assessment of the future demand for Bitcoin. Its essentially binary - if demand for an asset limited goes up, then price goes up.

 

[37andhappy]

Ok, the current Sharpe Ratio for bitcoin is -0.1 meaning bitcoin has severely underperformed real currencies

I urge you to make your own calculations. A friend of mine (also an outstanding mathematician) who publishes extensively in this area has detailed examples of how you might apply this formula.

NB - the data you input (and in particular the length of the historical period you choose, will impact the outcome. So, for example, Bitcoin has an average 10-year Sharpe ratio of 1.3.. (By comparison, the Nasdaq index which has performed outstandingly over the last decade, has a Sharpe ratio of 1).

The main thing though is to understand the general concept that short term vol does not equate to a long term trend. Anyhow, do take a read:

https://medium.com/coinmonks/cryptocurrencies-the-sharpe-ratio-8b662aa42af9

 

[joesxm3]

37 already made the point, but I will also point it out. The USD is stable compared to the other currencies only because the other countries are debasing at an equal or greater rate.

One view that took me a long time to become comfortable with is measuring prices in other than USD. For example, your net worth in Big Mac, gold, bitcoin, gallons of gasoline, pounds of beef etc.

One recent interview I saw said that if instead of taking the stock market over the USD, you took the stock market over the Fed balance sheet, the stock market has not risen but actually stayed the same. This is an example of asset price inflation where the amount that the asset (stocks, real estate) has gone up maps to the amount of currency added to the money supply.

This person also pointed out that there are multiple debt bubbles right now and if the collateral (stocks, real estate, bonds etc.) of any of these bubbles were to drop it would crash the entire system. Because of this the Fed needs to keep printing money to prop up all of these collateral types and is trapped into low interest rates.

We need to differentiate asset inflation (due to currency debasement) from price inflation, which requires other factors such as the velocity of money. What we have now is asset inflation where the currency that is being printed goes to those closest to the controlling powers. Those people or organizations get access to the extra currency at very low interest rates and have nothing to do with it except chase the stocks or real estate driving the prices up. This makes the disparity in wealth greater and greater.

What worries me is that the divide between the haves and have nots is growing and will be made greater as technology eats away the jobs of the lower levels. In the past this has eventually led to social upheaval or revolution.

Although this wealth affect has hit all generations, the recent policy actions have protected the boomer generation at the expense of the younger generations. Young people today have a lot of education debt, and are facing extremely high entry cost to home ownership or to initial stock allocation.

So to your question for a simple explanation of the value of bitcoin, I would suggest this possibility.

Money is what people say it is. For you it is the USD. Perhaps the younger generation, who have the short end of the stick via USD, might be saying that we should change the rules of the game and say that bitcoin is money. Money that they will control and have the better side of the game.

This possibility is what got me interested in learning more about crypto. I still think that we are in the middle of a dramatic societal change.

I hope that we can at least agree that the economic situation is dire at the moment even if there is much disagreement on what to do about it.

 

[joesxm3]

One other thought along the lines of money will be whatever people say it is.

When you cut to the chase, the value of an asset is whatever someone is willing to pay for it right now. So, if some large company is willing to buy 1700 BTC at $59,000 on a given day, that is what it is worth that day.

Take for example the current state of the stock market. You can point out all of the accepted valuation metrics such as future earnings, earnings per share etc., but those are just some measures that are commonly agreed upon to explain the price of a stock.

Can you, with a straight face, say that the current market pricing is explained by that type of measurement? It seems to me that the pricing is more driven by what people are willing to pay at the moment given a belief that the FED will not let the market drop.

 

[Running_Man]

Again, in a few simple sentances, what is the fundamental economic value of bitcoin? You will probably ignore this

Bitcoin is the only item of which if the price goes up the supply DOES NOT go up, it stays on it's predetermined path. As stock prices go up the companies that own them issue more shares, if bonds go up in price, more of them are issued. If gold or silver go up more of it is mined. Bitcoin is the only asset in the world that has proven itself that is not effected by inflation. It is the engineering solution of the monetary base in a digital world.

As Michael Saylor so clearly states "I do not think it is an irrational thing to bet on technology in the modern era. That is what Bitcoin is, a great monetary technology."

For myself, I do not think that the monetary solution in the coming decades is going to be the printing of 128% M2 in order to solve problems of the world, nor that a digital dollar with limitless printing will replace bitcoin. As bitcoin adoption increases the limited supply of bitcoin will require the price to go up.

IF you are not comfortable with bitcoin do not buy it, but I am extremely comfortable with bitcoin.

 

[SecondAttempt]

IF you are not comfortable with bitcoin do not buy it, but I am extremely comfortable with bitcoin.

That's my plan - not to buy - and not because I am uncomfortable but because I do not understand how to value it and no one here has been able to explain how to rationally assess its economic value.

I have a more than basic understanding of the math behind bitcoin but that does not help with valuation. The argument seems to be that scarcity drives valuation. Well northern white rhino poop is scarcer than bitcoin but I would not invest in that either unless someone could demonstrate a fundamental value to farmers perhaps as a superior fertilizer.

With stocks I can look at estimated future cash flows, discount them to today, and establish a value. Sure, my estimates and assumptions can be wrong but at least I have some basis.

Same thing with bonds.

Real estate can be valued in a few different ways including expected cash flows from rent. Comps are also used which ties into the "value is what a willing buyer pays a willing seller" but if comps far exceed the other methods for assessing value, good luck getting a mortgage!

How do I establish the value of bitcoin to a drug lord needing to launder money, an entreprenure in African wanting to avoid her own currency because of a corrupt government, and so forth? I submit that those uses do have an economic value but it is not something I can estimate quantitatively.

And how do I quantitatively assess the impact of China and India banning ownership? All I have heard is handwaving arguments that it will never happen. Fine. But if it has a 1% chance but would drop the price by 90%, that would help me make a decision. We've heard that those countries make of somewhere north of 50% of demand so if that evaporates I could see a decline somewhere in that ball park. And I think the probability is much higher than 1%.

It seems like bitcoin is being sold by badmouthing real currencies. No one seems to be making a case for the quantitative merits of bitcoin. If I accept that the USD is crap, why would that automatically make me look to bitcoin? I've got plenty of other alternatives to choose from - dozens of other stable currencies, stocks, bonds, agricultural commodities, gold, silver, white rhino poop...why bitcoin?

 

[SecondAttempt]

When you cut to the chase, the value of an asset is whatever someone is willing to pay for it right now. So, if some large company is willing to buy 1700 BTC at $59,000 on a given day, that is what it is worth that day.

While agree with your statement on a superficial level, companies have lots of reasons for their actions. Maybe Company T buys 1700 bitcoin at $59,000 today, and simultaneously buys a put for the same number of shares at $65, announces the underlying purchase but is silent on the option...maybe bitcoin explodes to $75,000...and T unloads for a nice profit...and bitcoin falls back to $50,000.

Not saying any real company has or would do something like this. Just saying that the lack of any established way to value bitcoin makes investigation difficult which in turn makes it ripe for manipulation.

 

[37andhappy]

As more and more people adopt BTC globally, its interesting to see which countries will be next in the race to adopt. We already see this playing out between Miami, Texas and New York etc locally all trying to establish themselves and outdo themselves in BTC adoption. As for the next country to officially revert to BTC as an official currency (or at least as legal tender), it may well be Chile!

Let's see how things go. These is clearly a "first" mover advantage for early adopters, so I would expect smaller countries with faster declining local fiat currencies to lead on this.

https://decrypt.co/87483/chile-bitcoin-bill-digital-peso-cbdc

 

[RVplusDog]

While agree with your statement on a superficial level, companies have lots of reasons for their actions. Maybe Company T buys 1700 bitcoin at $59,000 today, and simultaneously buys a put for the same number of shares at $65, announces the underlying purchase but is silent on the option...maybe bitcoin explodes to $75,000...and T unloads for a nice profit...and bitcoin falls back to $50,000.

Not saying any real company has or would do something like this. Just saying that the lack of any established way to value bitcoin makes investigation difficult which in turn makes it ripe for manipulation.

Bitcoin is not a stock, so there are no options it - no puts or calls. That said, I think you meant “call” in your statement, rather than “put.” If you bought a 65 put and the underlying went to 75, the put would become worthless.

 

[OverThinkMuch]

Bitcoin is not a stock, so there are no options it - no puts or calls. That said, I think you meant “call” in your statement, rather than “put.” If you bought a 65 put and the underlying went to 75, the put would become worthless.

It's not correct to say only stocks have puts and calls
https://finance.yahoo.com/quote/SPY/options?p=SPY

As to Bitcoin, no ETFs are currently allowed by the SEC to hold it directly. But a few Bitcoin futures ETFs were created in the past couple months, and people can buy puts or calls on those ETFs.
https://finance.yahoo.com/quote/BITO/options?p=BITO

 

[joesxm3]

Plus there have been actual futures contracts on BTC for several years now.

 

[captain3d]

That's my plan - not to buy - and not because I am uncomfortable but because I do not understand how to value it and no one here has been able to explain how to rationally assess its economic value.

I understand your problem. Eg how could we evaluate the potential of the Internet in the early 90’s. How would it ever make money?

I do not have a convincing explanation for you but I consider some things.

Is my portfolio of stocks, bonds, cash, gold and real estate diversified enough?

What risk is there to the current money supply? Gold does not seem to be reacting appropriately. Why is everyone buying Bitcoin instead?

That got me started then

Wow this whole crypto area is much more interesting that I first realized. Not just digital ‘currency’ but a digital infrastructure that can take on many business and financial processes. Financial transaction that can be fast, cheap, secure without the need for a third party!

What if stock trading ended up running on this system. What about property sales? Currency trading? Credit card processing etc

Is the adoption of this system growing? Is the technology stable and developing? Yes.

For me the adoption/growth/market cap is the thing convincing me this is real with great future potential.

Now this is a valid (to me) part of my diversified portfolio roughly equal in size to the other components but growing fast.

I also consider cryptos likelihood of an 80% drawdown in my allocation. But also use this volatility for tax loss harvesting that has allowed me to Roth convert $70k tax free while still making large gains from the crypto asset. There is no wash sale rule on property.

If crypto users continue to grow then the technology will find many business uses to add value.

You are obviously interested in it’s potential or just super dedicated to counter arguing

I say you should buy a little for fun and seek out a few positive stories around the potential.

 

[captain3d]

P.S. as far as I can tell India is regulating crypto and not banning

https://www.google.com/amp/s/www.nd...be-regulated-not-banned-sources-2634414/amp/1

 

[joesxm3]

SecondAttempt,

You make some good points about wanting to be able to value BTC.

Captain3d did a good job explaining, but I will throw in my two cents worth.

There is a guy named James (Invest Answers) who seems to be one of the few sensible crypto guys. He has several degrees, including a masters from the Wharton School of Buisiness and has worked for 30 years in the "risk management" space, trading currencies etc. for large companies in Europe and later for Oracle and Adobe in the USA.

James has developed a lot of quantitative models for evaluating crypto. He has a ten point system for evaluating crypto assets, but it mainly ranks them against each other rather than against traditional assets, so I won't dive into it unless you ask me to.

The most sensible-semi-traditional advocates of crypto say to treat it as another asset class to be part of a well diversified portfolio. The typical advice is to allocate only 1% to 5% to crypto and only from your very speculative portion that you can lose without severely hurting yourself.

I think we have made a good case that currency debasement is happening and that there is a high rate of asset inflation that seems to be leading to price inflation. Accepting that would lead one to seek assets that can match or exceed the inflation or debasement rate.

Since all of the major countries are devaluing their currencies, I would suggest that other currencies are not a good hedge.

Gold has been said to be a hedge against inflation, but maybe is just a portable way to move wealth in a period of hyper-inflation. In the recent past the return on gold has been much less than real estate, stocks or BTC. Gold bugs will say that it is meant to preserve existing wealth not grow new wealth.

Real estate meets the criteria for a good hedge, especially smaller multi-unit or really expensive trophy real estate.

Sensible proponents of crypto also say that market leader disruptive technology stocks are a good hedge and likely to have an excess return over time, if you buy into the claim that technological innovation is about to go very exponential.

I would argue that normal stocks and real estate are tracking the debasement of the currency, and, therefore, will keep up with it, but not provide an excess return.

BTC has historically returned something like 200% annually, far exceeding the other asset classes. Those who model this predict that this return will diminish over due to various factors, but will still handily exceed stocks or real estate. However, it will be very volatile and risky.

The metrics that the proponents put forth are things like increasing adoption rate and "network effect", which is based on Metcalf's Law that says something like technology doubles every 18 months.

However, it seems to me that a lot of the proponents of BTC, especially Raoul Pal, evaluate it as a way of providing alpha and use metrics typically used for things like a poker hand. Not saying that is wrong. They use terms like "the greatest asymetric bet of our lifetime" and use probability logic to calculate the expected value.

For example:

1% to 5% chance that BTC goes to $0.00.
10% chance that BTC goes to $1,000,000.
50% chance that BTC goes to $150,000.
15% chance that BTC goes to $300,000.
15% chance that BTC goes to $100,000.

And then crunch the math to come up with an expected future value. Of course, they are just either pulling the numbers out of their butt or using some other models that they may like to come up with the values.

In any case, I think the strongest argument for BTC is the one that "it is sensible to have a non-zero allocation to BTC". Many of the more traditional advocates of BTC take that line of reasoning and allocate 1% to 3%.