The Cryptocurrency Thread

[joesxm3]

The speaker made a very convincing argument that the exponential technological advancement is very deflationary. In many cases such as AI and software the marginal cost of production approaches zero. In the case of more material aspects, the cost is rapidly dropping as in the case of computer chip processing power.

The existing financial system is based on several huge debt bubbles. Deflation is very bad for debtors, so the system tries to keep some level of inflation in play.

He puts out the notion that we are actually having a lot of technological-based deflation now, but that the rate of currency debasement more than offsets this deflation. However, he predicts that if the rate of technological innovation hits the hockey stick curve and takes off exponentially, the deflation will come to the fore.

Many have predicted that the technological innovation will increase productivity but will massively eat away at lower and middle level jobs. This could become a very large problem and might lead to the need for some form of universal basic income.

Raoul Pal made a very convincing argument that this sort of societal change is already underway. We are certainly seeing a push for this sort of thing by the very liberal members of congress. Raoul said that he felt that the central bank digital currencies (CDBC) would serve as a mechanism to transition from the current situation to the UBI situation. He felt that the money printing would have to continue but if it was done in the form of CDBC, it could be more precisely controlled and more of the excess money would be directed to the general population instead of being snatched up by the well-connected few as is the case now.

I think the interplay between the potential for technologically induced deflation and currency debasement inflation if very interesting. It is as if we are on the knife edge and can go either of two ways, into a abundant utopia or a scarce distopia.

A lot of this change is probably not going to be really visible for 20 or 30 years, so I suppose a case could be made that it will not affect most of us here, since I get the feeling that the median age on this forum is over 65.

 

[joesxm3]

Not about BTC per se, but also part of the research into crypto.

The speaker was discussing the exponential nature of technological progress. He pointed out that with emergent technology it often seems like it is going nowhere for a long time until it hits the "hockey stick curve" and really takes off. We saw this with the number of covid cases in early 2020. It is hard for people to grasp the exponential nature of things.

He also makes the point that it is difficult for people to predict the form that really significant change will take. The world in 15 years may not look anything like we think it will. If you listen to Cathie Wood from the Ark Invest funds, there are several technological advances that are hitting at the same time and which will enhance each other. We have genomics and related medical. We have artificial intelligence and robotics. We have web 3.0 and blockchain. We are already seeing the overlap of AI and proteomics where the AI is making protein folding models. We are already seeing robots being used to speed up genome sequencing leading to things like liquid biopsies to detect cancerous gene sequences in blood.

In terms of finance and crypto, there is the potential for blockchain technology to be used for applications beyond currency or store of value. One use case that seems interesting is allowing an expensive asset to be offered as fractionalized shares. For example, a penthouse in Manhattan could be offered to smaller investors as fractional ownership. One might say that this is already done by a REIT. However, the REIT has a lot of overhead and counterparty risk that might not be present in the blockchain version. This sort of thing might help to reduce the gap between the super rich and the rest of the investors.

Investigating crypto is a necessary step to being prepared for dealing with this potentially large technological change. This might involve finding stocks to invest in. It is also true that most of the crypto projects that are being traded as coins are really just stocks in disguise. As more regulation comes to the space they may end up as stocks.

 

[Running_Man]

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?

Because Bitcoin by it's nature has a mathematically limited amount of supply. Unlike Rhino Poop, which could easily be infinitely increased by feeding Rhinos laxatives, Bitcoin is engineered.

Younger people in droves are understanding this and yes also attracted by the outsized gains, but Bitcoin and Dogecoin are not the same thing. Bitcoin is nothing but an accounting ledger. This is as old as prehistoric times when they use to keep track of animal kills for the village. To claim you can value any currency is only because it is accepted in trade. Bitcoin is no different.

 

[SecondAttempt]

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.

Yes, I mistated but you get the idea. There are futures on bitcoin but not options.

 

[SecondAttempt]

The existing financial system is based on several huge debt bubbles. Deflation is very bad for debtors, so the system tries to keep some level of inflation in play.

He puts out the notion that we are actually having a lot of technological-based deflation now, but that the rate of currency debasement more than offsets this deflation. However, he predicts that if the rate of technological innovation hits the hockey stick curve and takes off exponentially, the deflation will come to the fore.

Technological innovation is deflationary but did you ever consider the posssibility that offsetting it by expanding the money supply may be intentional? The Fed governors are very smart!

I honestly don't worry much about "money printing" because the data since at least 2008 suggests it has not had the effect that every armchair economist thinks is automatic.

What I do worry about is the very high level of debt held by the US and other governments. But cryptocurrencies are really of no help there.

 

[SecondAttempt]

Because Bitcoin by it's nature has a mathematically limited amount of supply. Unlike Rhino Poop, which could easily be infinitely increased by feeding Rhinos laxatives, Bitcoin is engineered.

I picked northern white rhinos because they are critically endangered. There are only a few left. Laxatives would not significantly increase supply.

To claim you can value any currency is only because it is accepted in trade. Bitcoin is no different.

There are relationships between currencies involving interest rates in the respective countries. I studied them at one time but would have to look them up at this point because I don't tradee currencies. Suffice it to say there are ways to value currencies. George Soros famously made over $1 billion in 1992 on a single bet against the pound sterling obstensively because he recognized traders were mispricing it and the ERM setting political constraints on the underlying math/economics was unsustainable. Not saying I am a Soros fan, just recognizing that he has demonstrated several times including the GBP example above that currencies can be valued.

A limited supply of bitcoin in no way determines its value. It is the expansion in demand driving its value. Once that expansion plateaus and mainstream cash accounts return at decent interest rates, I think the picture will change.

 

[Markola]

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%.

Thoughtful post. 1-3% Bitcoin as part of a well-diversified portfolio seems safe and, yet, nontrivial to me, given the upside possibilities. I haven’t bought any yet but am considering getting started with 1%. And I am not an anarchist or even a libertarian. I am just an investor who is fascinated by the opportunity to participate in a brand new asset class, now that it has shown some staying power.

 

[SecondAttempt]

SecondAttempt,


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.

So, this is the kind of approach I am looking for. Like you said, someone pulled those probabilities out of their butt. I have no problem with that. I can make my own prbability estimates at my own peril.

The rest of this is basically thinking outloud on how one might go about coming up with a plausible value for bitcoin.

Everyone sees to agree that the value is based on supply and demand only.
What we need to do is infer supply and demand from the ledger. This should be doable. Supply only increases when a miner gets lucky and exactly one new coin is created. So those events should be easy to identify, right?

Other transactions could be classified as large, medium, small, and tiny. Small and tiny transactions are likely the ones that will persist if bitcoin is adopted on a wide scale by regular non-criminals although some will be online drug and porn purchases on the darkweb. Large transactions would likely be criminal activity at this point, although I accept that some would be legitimate transactions among a few banks. These can probably be identified. Medium transactions are harder to make assumptions about.

Once we can partition demand we might be able to construct a plausible demand curve and project it forward in time. Then if we know the expected future price of bitcoin based on expected future demand (that we can manipulate with assumptions about whether and how effectively India and China ban it as well as whether it remains a viable option for criminals if it becomes traceable to individuals), we can discount the future cash flows back to today and get a value.

Sounds like an interesting project to me, especially on a rainy weekend with lots of holiday time off coming up soon. But something else will probably distract me. We'll see.

 

[37andhappy]

Once we can partition demand we might be able to construct a plausible demand curve and project it forward in time. Then if we know the expected future price of bitcoin based on expected future demand (that we can manipulate with assumptions about whether and how effectively India and China ban it as well as whether it remains a viable option for criminals if it becomes traceable to individuals), we can discount the future cash flows back to today and get a value.

Sounds like an interesting project to me, especially on a rainy weekend with lots of holiday time off coming up soon. But something else will probably distract me. We'll see.

What I think you mean in quote above is not "we can discount the future cash flows back to today and get a value" (as BTC does not produce a cash-flow) but rather "we can discount the future inflation-adjusted nominal price back to today and get a value".

If so, you get it! Which means we are making progress on this, finally!

I urge you to keep thinking along these lines. Again, in simple terms:

Supply is fixed therefore price is a function demand. Figure out a the future direction of demand, and that will determine whether you buy (with the degree of confidence of your prediction will determining how much you buy).

As Markloa said above, the following is the approach I would suggest anyone with doubts to consider adopting as a starting point:

"1-3% Bitcoin as part of a well-diversified portfolio seems safe and, yet, nontrivial to me, given the upside possibilities. I haven’t bought any yet but am considering getting started with 1%".

It's really just a matter of having a non-zero allocation, and then taking things from there...

 

[SecondAttempt]

What I think you mean in quote above is not "we can discount the future cash flows back to today and get a value" (as BTC does not produce a cash-flow) but rather "we can discount the future inflation-adjusted nominal price back to today and get a value".

No, what I said is correct. The future cash flow is what I get when I sell. Until I sell there is no economic gain. So he future cash flow I was referring to was the proceeds of my sale.

Supply is fixed therefore price is a function demand. Figure out a the future direction of demand, and that will determine whether you buy (with the degree of confidence of your prediction will determining how much you buy).

No, supply is not fixed. It increases everytime a miner is successful. I thik you mean the ultimate total supply is fixed. But a proper analysis requires knowing the current demand as well as the ultimate demand. But bothe of these are known. What I still need is a good sampling of transaction history over time. Hard to find.

 

[37andhappy]

No, supply is not fixed. It increases everytime a miner is successful. I thik you mean the ultimate total supply is fixed. But a proper analysis requires knowing the current demand as well as the ultimate demand. But bothe of these are known.

Correct - total supply is fixed. We know what that is. We know how much exists. And we know the future supply which will be created including the timing thereof (and including the built in halving cycles).

What I still need is a good sampling of transaction history over time. Hard to find.

Not at all hard to find. Every single transaction is recorded on the blockchain, which is a public ledger. 100% transparent and immutable - that's the whole point!

 

[joesxm3]

Well, I guess today will tell the tale on crypto pricing for a while. Definitely shows the volatility. Drops up there with the big stock drop days.

I think second meant a history of the price action, not the ownership swaps. One should be able to find a history of the daily close prices.

There is a thing ca!led the stock to flow model, apparently used previously to measure gold or real estate that is being applied to BTC to estimate price. Was tracking very well until last month.

It will be interesting to hear what the $100,000 my end of November crowd says about today's drop. Scary to say the least.

 

[captain3d]

Shopping day 20% off. Crypto can do much more than this.

 

[37andhappy]

I always have buy orders set at 20% below market for moments like this. None have hit yet but we must be close!

SecondAttempt - even you said in a prior post you would buy on a significant dip. Come on, man up and take the plunge. In my view the best time to first enter, especially if vol concerns you is to buy on a big dip. Over time you will always be up and you just roll with it and see future dips as moments to accumulate. You can sign up with an exchange like Gemini or Coinbase in minutes. Go for it!

 

[ERObjd]

My stepson has a coinbase fund. he only puts about $25 a month in it. His main investment is through his TSP fund since he is a federal employee. I was going to ask him about crypto during thanksgiving but forgot. For now he is only dabbling in it but he said he may ramp up to 100 a month in his coinbase fund. I have zero plans of investing in crypto I have vanguard Wellsley, Vanguard Star fund and Fidelity Total stock market FZROX . The fzrox has over 2500 stocks so maybe it has a small amount of crypto in it I am not sure. I looked down about 300 holdings and did not see any crypto ..but it may have a very small portion.if it does it does. point is if i ever have crypto it will be by proxy (included in one of my funds.

 

[captain3d]

You will own some stocks in your fund where those companies own crypto eg Tesla. It will be a tiny amount of course.

I wonder if it would be more than gold in the same funds?

 

[Markola]

^^^^^ No mutual fund or ETF exists in the U.S. that can hold cryptocurrency directly. However, the stock market already reflects, as proxies, the related technologies and crypto holdings of publicly-traded companies. For example, Tesla, Block (formerly Square), Microstrategy, etc. are publicly-traded companies that hold Bitcoin directly, so their stock prices reflect those balance sheets. And other public companies are forming to serve this ecosystem, like Coinbase, which are also inherent in the stock indices.

 

[MichaelB]

Since the day this thread started, bitcoin has lost around 25% of its value. That’s in the same ballpark as the Turkish Lira, which was mentioned earlier as an example of a failing currency. That does not meet any definition of “store of value”.

I have five points.

It’s clear bitcoin (and all other crypto assets) is a highly volatile risk asset , not a digital currency or substitute for payments systems.

While the supply of bitcoin may be finite, the supply of synthetic digital currencies is infinite. After bitcoin we might have bitcoin1, bitcoin2, ...etc. There’s no limit, no end, no barrier.

Much is made of financial institutions and wealthy individuals investing in crypto assets. That does not mean they believe these assets will soon become part of our financial infrastructure. It only means they all can make money today. They have the means and mechanisms to protect themselves and walk away from that stuff in a heartbeat, leaving people like us holding the bag.

The real technological change that is almost entirely absent from this conversation is stable coins, digital payment systems and central bank digital currency. And perhaps decentralized finance. That’s where the real transformation is happening and will continue.

People are free to invest in these, but there is no need for any of us to include any these risk assets in our portfolios.

 

[Markola]

JoesXm3, Thanks for the Robert Breedlove lead above, who is new to me. I like podcasts more than YouTube and he hosts one I’m enjoying, called “What is Money.” His guests seem “comprehensive”, like a whole series with Michael Saylor, who runs Microstrategy, Inc., the largest holder of Bitcoin in a public company. And many others. I like the macro-economic focus about the nature of money itself, some of which touches down on Bitcoin, but not exclusively so.

 

[joesxm3]

Since the day this thread started, bitcoin has lost around 25% of its value. That’s in the same ballpark as the Turkish Lira, which was mentioned earlier as an example of a failing currency. That does not meet any definition of “store of value”.

MichaelB,

Several good points.

Numbers don't lie.

Since 11/2/2021 BTC is down about 24% and down 30.5% from its all time high.

Since 11/2/2021 NASDAQ is down about 3.5% and down 7.25% from its all time high.

Since 1/4/2021 NASDAQ is up about 15.5%.

Since 1/4/2021 SP500 is up about 17.5%

Since 1/4/2021 BTC is up about 151%.

Where things will go from here, who is to say? BTC is definitely very volatile.

It would seem that the crypto markets are indeed manipulated, either directly or indirectly. There was a guy named Wyckoff back around 1929 who came up with a pattern that was being used by the big money to fleece the man on the street. He wrote a big article about it in the early 1930's. Some have pointed out that the BTC pattern this year matches the pattern of manipulation that Wyckoff described, which is designed to squeeze the maximum out of the dumb money people by buying from them one the way down and selling to them on the way up.

I saw some comments this morning about the potential for FED interest rate increases and its effect on how venture capitalists value tech growth companies. They guy said that the VC currently looks at expected earnings ten years out due to 0% interest rates and comes up with a high valuation. He said if the rates increase, the VC will only look out five years or current year and that would lower the valuation.

That sounds like it might mean that tech growth stocks may not due as well in the next ten years as they did in the last ten years. I think I read somewhere that the index prices are only high because 10% of the companies are propping up the other 90%. So if the big tech growth stocks are repriced, that would seem to affect the indexes as well.

As far as there being no need for crypto in our portfolios, that can be true. But if you accept the idea that the currency debasement is increasing the inflation number, be it 6% or 15%, you will definitely need an asset mix that at least breaks even in real dollar terms.

I seem to recall the FIRE models being based on a 7% average rate of return. Is that a 7% real rate of return over the entire portfolio? If so, that would seem to require at least a nominal return of 13% or so.

Also, I would hope you would agree that even if not something to invest in, this subject represents something that is certainly happening and that is worth our investigating and keeping an eye on, even if only to assess its potential impact on those of us who choose to remain on the sidelines.

 

[joesxm3]

JoesXm3, Thanks for the Robert Breedlove lead above, who is new to me. I like podcasts more than YouTube and he hosts one I’m enjoying, called “What is Money.” His guests seem “comprehensive”, like a whole series with Michael Saylor, who runs Microstrategy, Inc., the largest holder of Bitcoin in a public company. And many others. I like the macro-economic focus about the nature of money itself, some of which touches down on Bitcoin, but not exclusively so.

The Michael Saylor series is interesting but very long and Saylor is probably the biggest proponent of bitcoin ever minted, so I got a bit bored after the 9th or 10th hour. However, his starting with the cave man and working forward to set up his case was interesting.

There is another interview with Raoul Pal that is only a couple hours long. I posted the link to that earlier. I think it is called something like "the metaverse is the new solar system." It is free on you tube, but might be behind the pay wall on real vision.

I thought that was extremely insightful. Raoul spends the entire first hour explaining all of the financial decisions made in the past 50 or so years and how they led us to the mess we are in today. Raoul was working for Goldman Sachs during the 2008 crisis so he had some hands on with that.

That interview changed my view on how the future might play out. I tend to be very conservative, but the discussion that mentioned the book The Fourth Turning and how we are in the middle of a generational shift made me give some serious consideration to just accepting the fact that we might not be able to stop some of the stuff I see going on and feeling that it might be better to just figure how to go with the flow.

You can probably find some interviews with Neil Howe who was one of the authors if you prefer to just listen to discussion rather than read the whole book.

 

[joesxm3]

The real technological change that is almost entirely absent from this conversation is stable coins, digital payment systems and central bank digital currency. And perhaps decentralized finance. That’s where the real transformation is happening and will continue.

Very true.

In the Breedlove interview, Raoul Pal said that he felt that the exponential advance of technology would result in a huge segment of the population being replaced by AI and automation. This group would have to be take care of somehow or else it would get very messy. That would seem to indicate some sort of universal basic income.

He said that the currently process of money printing is not equitable at all, with those who are well connected getting all of the money. He felt that the central bank digital currencies would allow the government to continue printing money but direct where it goes to in a much more equitable manner and serve as a bridge to the eventual universal basic income system.

One area that I am trying to learn about is the "smart contract platforms". These are projects like Ethereum and Solana. You are right that this type of technological innovation is likely to have a huge impact, especially if it takes over even a small percentage of the global financial system market which is huge.

I think this area of discussion has not been included in this thread because there was so much push back around bitcoin, which would seem to be the least controversial of the potential topics.

As I mentioned earlier, the technological innovation in these areas is expressed both in crypto speculation and in early stage tech companies and the line between stock market and crypto exchange is really blurred in some cases.

 

[joesxm3]

I was surprised to see that the United States government has almost as much bitcoin as Michael Saylor's MicrosStrategy company. The U.S. has about $3B to Saylor's $3.3B.

https://www.nbcnews.com/politics/ju...llion-bitcoin-year-ago-value-tripled-rcna7574

 

[Chuckanut]

Today:

Bitcoin, the largest cryptocurrency by market value, was trading at $48,125.67 around 12:30 p.m. Eastern Time on Saturday, down more than 12% in 24 hours, according to data from CoinDesk. Around midnight it had plunged to $42,000 before bouncing back. Ether, the second-largest cryptocurrency, was down more than 7% on Saturday afternoon.

One heck of a way to fight inflation and sidestep the faults in fiat currency.

 

[joesxm3]

Today:

One heck of a way to fight inflation and sidestep the faults in fiat currency.

Yup. I sold all of mine this morning and took delivery in nickles. That way I get the safety of fiat with a call option on the price of copper. The only problem is two floor joists cracked when I brought it into the house.