Friday, December 22, 2017

Bitcoin is worth more than gold

The value of an asset class is measured by the unit price times the total supply of units.  For bitcoin at current prices it is known to the penny ($313B when $18730/btc).  For gold, the total above ground supply is estimated as 187200 tonnes ($7.6T @ $1250/troy oz.).  Of this, $1.63T is the value of the gold private investment sector.  $1.28T is held in central banks.  $3.62T is held as jewelry.  Another $2.43T is held under ground.

Why is price of bitcoin less than gold if it is worth more?
First, what makes it worth more than gold is that there is no investment reason to choose gold over bitcoin even when their values will match.  But to answer the question, it takes time for prices to adjust.  Many people have ended up with 90% of their wealth in bitcoin, and even if they understand that its worth much more than its current price, some diversification, debt paydown, and life changing spending all contribute to supply meeting the adoption demand.  More importantly, bitcoin supply is currently growing by 4% (gold is only 2%), and miners need to take some profit to pay for electricity and equipment.

Also, the complaint that many people are rushing into bitcoin for fear of missing out, actually serves to reduce the volatility of the price, and slow down its price rise.  Most in this group who do not understand bitcoin are happy to get 20% return in a week, and then wait/hope that the price comes back down.

The fear spreading by financial industry deadenders that bitcoin price has risen too quickly can be motivated by hope of buying at a lower price, but its false on several counts.  First, when looking at a parabolic chart it is not appropriate to compare it to stocks (or NASDAQ tech indexes in late 90s), but instead to technology adoption curves.

Not listed on this chart is the deregulation of stock brokerages in the 1980s that allowed self-directed brokerages and lowered trading costs by 90% and increased trading volume by 2500% (just by 2004).  This democratized stock investment to attract people with much smaller wealth levels.  More wrongly than rightly, this allowed exhuberance in penny stocks with players having a few thousand dollars hoping to reach life changing goals with it.  Bitcoin as an investment has the powerful advantage of having large and small investors in the same asset, as opposed to segregating worst scams for small investors than lesser scams for large.  Most ICOs and many alternate cryptocurrencies are unfinished projects that include a portion of coins for management and marketing, and so not only lack the fairness of bitcoin, but the financial industry's mantra of "blockchain not bitcoin" is one of forming the same bribery promotion agreements for other projects.  The ICO markets are more prone to overhype and fraud than is bitcoin, and may lure in the smaller less sophisticated investor.

A little known key adoption metric is that daily crytocurrency trading volume has surpassed that of the NYSE.  Crypto trading is also for 7 days/week not just 5.

The intrinsic investment value of gold and bitcoin
At their core, both have value because they are expensive to mine.  Gold keeps its value (after inflation) because the mining expense mostly goes up with energy and labour inflation.  Bitcoin's mining expense goes up every 2 weeks (20% over last block period), and every 4 years, doubles in cost with a halvening-reward event.  Bitcoin will have a natural tendency to keep increasing in price due to the human nature of trading: Miners being predisposed to accept only prices higher than their cost (and even if out of desperation they'd violate the rule, they would stop producing), and buyers accepting that a reasonable and fair offer should consider those costs.  Once you are willing to accept that a mathematically formulated number is worth more than a penny or a dollar, there's no longer that argument that it should be worth less than a trillion.  You can't wear either price's "object" around your neck.

Other reasons that gold price upside is limited is that as price increases, more supply expanding mining ventures are made, and people with jewelry "cash it in" to also contribute to supply increases.  Even central banks can be net sellers of gold (2016 world bank reserves were 5500 tons below 1965 levels).  They don't yet have bitcoin to sell... only to buy.

The historical case for 10% of wealth in gold
Gold as part of a portfolio offers diversification benefits to stocks and bonds in that the latter's value are highly dependent on strong banks that do not require to withdraw from their client-frontrunned positions to bail out the relatively frequent failures of one of their other scams.  Weak banks can't keep funneling money too prop up the two main financial markets, and they tend to be net sellers of gold (to clients) as they usually seek holdings opportunities for earning interest or fees.

Similar to financial panics, gold is insurance against government failures/panics related or not to financial system failures.  This broadly affects banks, housing, and business throughout a nation, and gold at least goes down much less than the other asset categories, and if the problem occurs in a relatively unimportant far away land, gold will usually go up as it is demanded by those affected.

Gold is insurance against war and uninsurable housing destruction.  War is usually a much worse form of panic than simple government financial collapse.  Gold tends to go up in value due to demand for it being the only form of wealth in the area affected.

Gold is insurance against official asset seizure/freeze.  You might be able to escape bankruptcy or governments without there being an official trace of holdings.

The 10% of portfolio in gold advice is admittedly much higher than the 0.6% of global wealth in private investment gold sector.  It is also advice that is based/suitable for people highly concerned with preserving wealth as opposed to reaching for expected returns under the best case optimistic future scenarios.  The rationality line that separates these 2 groups is whether they consider themselves already rich.  For the latter group, lottery tickets are better investment choices than gold which is appropriate for reducing wealth variance over the broadest range of scenarios.

Bitcoin is a better investment than gold because

  1. It will go up in value in nearly all eventualities, including the eventualities that would propel gold's value.  Any eventuality that is good for gold is even better for bitcoin.   The new supply rate for bitcoin will drop to  2%  1% 0.5% 0.25%  on years 2020 2024 2028 2032.
  2. There is an estimated 4M bitcoins that has been lost foreever.  Gold is always recyclable (cost permitting, but technology can always open options) or findable again when it is lost.  The above supply growth rates do not take account of bitcoins lost due to death or innadequate backup procedures.  Global available supply may thus decrease within 6 years, even as adoption demand continues to increase.
  3. Technological improvements in bitcoin that permit widespread currency/transactibility applications and enhancements are likely.  Not possible for gold.
  4. Currency use is unimportant for value as long as you can "annuitize" your holdings.  Converting a small amount to fiat monthly to cover needs.  This is much easier with bitcoin than gold, and carries less fees/slippage and time costs.  Holding an asset that goes up significantly may not even decrease its remaining balance month to month.  Debit card products for some cryptos are also effective at "conversion on spend" transactions.
  5. Security/storage is cheaper and more effective, though it does require understanding good/best practices.  Its also more portable.  100 pounds of gold is worth under $2M.  You can have an unlimited amount of bitcoin on your phone.
  6. Both gold and bitcoin are better holdings than fiat, when fiat has negative nominal or real interest effects to holding them.  There is a good case for bitcoin being a better holding than long term government bonds.  The lower the interest rate, the better the case.  But also, where a high interest rate indicates default risk, that too is a good case.
  7. The advantages to personal investment are the same as reasons central banks should have bitcoin in reserve.  The most important being #1 (they will go up).  In the event of war or catastrophe, a state can pay soldiers or other payroll/social support in bitcoin.  Gold can be a liability for war, and historically has served as motivation for invasions.  Iraq had 6 tonnes of gold reserves in 2003.  Bitcoin is more flexible and with more long term value than holding individual nations' fiat as reserves. 
  8. Gold has been banned by governments including laws against hoarding in the US.  Transporting cash or gold even within the US is subject to confiscation, but even more opportunities exist to do so at the border.  The transportability feature of bitcoin is especially useful for oligarchs and heads of state that may be vulnerable to revolution or international persecution/war.
  9. Every other reason than #1, increases the expected value appreciation of bitcoin relative to gold, and so strengthens reason #1 which is the only necessary reason to choose bitcoin over gold.
Currency value of bitcoin
While already substantially higher than gold's ability to be used for purchases, and likely to improve, bitcoin has the significant current purchase utility of being able to buy/trade other digital assets and crypto currencies.  Alternative currencies have short term or speculative cases/stories that may create an expectation of higher value increase than bitcoin.  Bitcoin having a market value about equal to all other crypto assets combined , and having the highest trade volume provides liquidity and safe haven stability during market turmoil.

As bitcoin grows even more in value and trade volume it permits trade in digitized/blockchained higher value asset categories such as commodities and companies.  Amazon stock cannot be used as currency for purchases on Amazon (until it is blockchained, that is), yet there is still a value proposition for owning Amazon stock independently of its direct purchase power.

Several governments are planning their own digital currencies.  These will make great transactional mediums and retain value very close to the underlying fiat.  Goods and services will be priced in them.  It will be good for bitcoin in that it will create an onramp from the banking system to direct acquisition.  Some will prefer bitcoin holding to cash equivalents or to Amazon stock.

Bitcoin has greater value or safety than competing crypto currencies
  • Bitcoin was fairly distributed, with the very first miner(s) either losing, abandoning their coins, or potentially waiting to apply them to a large scale philanthropic goal.  There is legitimacy attached to being first as compared to what are mostly copies of it.  Alternate coins have had either pre-mines and/or pre-sales (with proceeds going to preminers) that provide insider benefits.  ETH has an undefined supply limit, and is focusing on utility rather than value.  
  • Bitcoin has the most studied and most certain cryptographic/economic soundness compared to newer claims of smaller projects.
  • Bitcoin has a decentralized governance process.  Coins with premines or backed by large holders have centralized governance.  Governance decisions will benefit the governors.  With centralized development controlled by the governors, for instance, a decision to expand the supply beyond the publicized limit in order to further incentivize development (possibly due to missed timelines) is a power that centralized developers could inflict on their community as leverage over the communitiy's dependence on them.  There is never a reason to buy a coin based on the reputation of its team/investors.  That reputation is currency to fuel scam.
  • Bitcoin has the highest mining costs and fees.  This is the single most important factor in protecting the value (preventing cheating) of the chain.  This makes the chain safer for receiving large transactions.  Low/no mining fee coins may lack incentives to sustain the chain under low activity or when its size increases greatly.
  • The highest valuation and trade volume makes it most suitable for the largest transactions, and wealthy players participating in the investment value.  Circularly, bitcoin should make up the largest portion of the largest portfolios for its liquidity benefit.
  • The suitability of bitcoin as the trading counterpart to other crypto (because its the largest and most liquid) makes bitcoin a safety destination when there is market turmoil, and so the safest crypto currency.  If any alt-coins or ICOs are scams, then their temporary value is a spring waiting to be dumped into bitcoin.
  • The high and rapidly growing cost of creating bitcoin means it has clear intrinsic value independent of its ease of transactibility or adoption.  Though the network effects of having heard of it, knowing how to receive it, or being able to send it do increase its utility and value.
  • The forks of bitcoin (copies that act as a dividend to bitcoin holders) create scaling capacity indirectly (and low fee transactable units) and provide bonus advantages to holding bitcoin.
  • If a competing crypto currency is successful because of a well implemented feature, then a new fork of bitcoin that copies that feature will reward bitcoin holders who bother to collect the new fork's value.  Bitcoin's widest adoption level would permit the fork to leverage the desirable feature more thoroughly than its innovator.  The ecosystem of transactibility services for bitcoin has a naturally easier time including support for one of its forks than a different coin.

Risk of government attack on bitcoin
Though a concern and something lobbied for by those scared of bitcoin, the risk may be overblown.

Stock exchanges and inter-bank remittance/settlement services are not big enough to own the politicians needed to counteract the large bank owned politicians to serve large bank's opportunities in wealth management, ICO marketing, and internal efficiencies from replacing those external services that fear blockchains the most.

There is an established infrastructure for dealing bitcoin off exchanges.  The advanced peer to peer cash network in China makes it especially easy there.  There would be rapid improvement to decentralized exchange technology that exists already, if the KYC/AML regulated exchanges were attacked.

Driving bitcoin underground would not successfully kill it, and in fact, any concerns for money laundering, terrorism financing or other stupidity a bought politician expresses as motivation for attack is increased by driving trade away from tracked and semi-regulated exchanges.

Fear of state/bank bans of crypto currencies is reason to buy in now.  Similar to fear of gun regulations.  Crypto to crytpo trading is much harder to prevent/control than the fiat gateways into the space.  Bitcoin (and drugs) is worth more in locations where capital controls exist or its access is persecuted.

Russia is launching the cryptoruble.  Venezuella a Petro (asset)  backed crypto currency.  France has authorized blockchains for trading securities as a fintech positioning measure.  Japan has taken a leading/enabling policy position on fintech/bitcoin.  For any government crypto fiat to be useful/have value, it must be free of capital controls and exchangeable for bitcoin or alts.  If the only fiat window into crypto is the Ruble or DPRK yuan, then those fiats will be used on the web and throughout world economies even if the only road back to fiat involves an intermediary from that country.  Any one state attack against crypto currencies is an isolationist and economically deprecating/supressing move that benefits those competing societies that adopt/embrace crypto. 

Deceitful bankster fuckfaces that call bitcoin a fraud, while being directly implicated in fraud findings, and promoting blockchain initiatives that are far more likely to be fraudulent insider rewards vehicles can't really do that.  You cannot be pro blockchain and anti bitcoin when bitcoin is the most decentralized blockchain that is free from unfair allocations of tokens.

Catalysts for futher increase in bitcoin's value
  1. Continued adoption as an investment consideration, and money inflows.
  2. Technology that lowers fees per transaction, eases decentralized trade, creates instant settlement channels, and sidechains with new features.
  3. Crypto debit cards and web payment cart options being more widespread.  Rents and taxes payable through web interfaces with banking independent options.
  4. Other applications of technology or adoption improvements include exchanges acting as a low fee banking/settlement network that provides an off chain (or lighting network) visa+ scale commerce platform. 
  5. ETFs on major stock markets that hold/buy bitcoin.
  6. China (and minor countries) unbanning cryptos again.
  7. Central bank reserves and corporate long term asset holdings.
  8. Banking system integration and custody/payment services.
  9. Recognition that bitcoin is a more suitable investment than bonds or stocks up to 50% of a portfolio.
  10. Even after all of the above adoption points/levels mature and level off, price will continue to increase above and beyond fiat inflation as part of the 4 year new supply halvings, and associated increased mining costs.

Next Price level threshold @17M bitcoins: $1.63T = $95.8k/btc
$1.63T is the value capitalization of gold private investment.  The logic for this valuation threshold is simply that if bitcoin is a better personal store of value than gold, then it is stupid not to make that choice, and so eventually all who made the wrong choice will move to the correct choice.  This doesn't imply that the entirety of the value is made up of "store of value private investment" purposes, but rather that this amount is a floor... a component of the total value.  But the number itself is a key milestone.

Unlocking further value increase thresholds
Central banks have gold reserves only because there is a private investment market for gold.  They, or the potential parties it would transfer to, are uninterested in opportunities for supplying the jewelry industry as a reason to hold gold.  The central banks assess the value of their gold reserves based on the private market price settlements.

Once bitcoin's market value reaches the above "gold private investment value" threshold, it becomes stupid for central banks to hold gold instead of the cheaper to secure, easier/faster more liquid to transact, and perpetually-value-increasing bitcoin.  $1.28T in "physical" reserves switching to bitcoin would add another $75k/btc ($170k/btc totalling above 2 "floors").  Further, the slower any one central bank is in adopting bitcoin as reserves, the higher price it will pay to join the club.

I suggest again that this is a "floor" component value based on the interaction of private and state investment consensus value.  I'm reluctant to quantify any competitive interaction between these 2 groups, but if bitcoin is worth more/is better than gold, then I'd expect that both of these groups would demand more of it.  If bitcoin's price is only $170k/btc, then close to 8M coins are to be taken out of private investment circulation (for central bank use).  This competition is likely to make the "floor value" higher.  

Other safe store of value investments
Real estate investment properties and government bonds are stores of value with the appeal of strong expectations of value retention (when no state or banking panic occurs) and a slight beat of expected returns over inflation.  When you (or widespread others) expect that bitcoin volatility is merely a short term phenomenon, and has high expected returns over the next 2 to 100 years, then a high proportion of portfolios should be allocated to bitcoin.  This applies both to short term volatility traders and long term wealth preservation investors.

There is a strong case for a 10%+ portfolio allocation amount for bitcoin, and a strong case for adoption rates to reach that 10%.  I would recommend accumulating bitcoin up to 10% of long term portfolio for any investor, and draw down for lifestyle improvements at 50%+ of portfolio, though debt elimination and food/housing supporting income streams or short term stable assets (cash) should be secured after bitcoin holdings reach 20% of portfolio, for nearly everyone.

Global wealth in 2017 reached $280T.  10% of that would be a $28T market cap for bitcoin.  A 50% of wealth levels in bitcoin would be $140T in 2017 dollars.  With 20M btc coin supply, this represents a price target range between $1.4M/btc and $7M/btc in 2017 dollars.  

Infationary effects of $1M/btc+ valuation
The QE/money printing response to the last global financial crisis is still ongoing, and from 2008-2016, resulted in over $12T new imagined money.  This money was directly gifted to financial institutions and billionaire bond investors, who then funneled it into broader stock market and housing assets.  The low interest rates and bank solvency created by QE further supported the housing and auto and student loan markets and continued broad economic participation even when wages and employment did not change significantly.

If we accept that the real economy has not changed much between the halfway point of 2007 and 2008 (pre/post crisis end of years), global wealth increased 27% over 2007 levels, and 50% over 2008. 33% over the midpoint, and that $12T of monetary stimulus created $86T of wealth inflation with at best minimal real economic growth.  Low interest rates are the most significant contributor to housing and securities price inflation.  The monthly debt payments are more affordable, and business earnings compared to low return bonds are more attractive.

If Bitcoin's value grows by $28T, it will have a similar effect to QE.  A big difference is that the profits will flow to some non-previously millionaires and billionaires.  They will be able to buy stocks and housing and gold without debt driving the price of those other assets up.  It could also keep interest rates low if the overall demand for debt grows down, but on the other hand, those left behind from bitcoin adoption will have to pay for those higher priced homes out of economic effort.

The important point of this section is that bitcoin value is entirely additive to global wealth, and not at all substractive.  Every fiat transaction purchasing bitcoin is fiat received by the seller.  So if 50% ($140T) of 2017 global wealth is added to bitcoin, the total global wealth in 2017 dollars would be $420T (280+140), and bitcoin's share of that $210T. $10M/btc+.

Just like QE (still aggressively ongoing in 2018), bitcoin value appreciation will boost other asset values and so global wealth further.  The key sustainability factor for wealth levels is low interest rates.  All assets including bitcoin, but especially real estate (still by far the largest wealth component), prices are significantly affected by interest rates and mortgage availability.

Even after maturing adoption and a $10M/btc price, there would be continued expected price appreciation equal to fiat inflation (assets and consumer prices) level.  Bitcoin appreciation will still maintain high wealth inequality levels.  But there will be a 2% group even more "unfairly" separated  from the 98% until fairness/UBI is instituted through higher tax rates.

The case for over 50% porfolio allocation to bitcoin
There is a high risk that Stocks, bonds and housing values will reach a high that is not exceeded again for 10+ years in the coming 36 months.  The recent US tax plan is destructive to growth.  Lies that it is pro growth are made for the exclusive benefit of pumping the stock market which this tax plan will have minimal effect on earnings, and as typically occurs, will lead to banking system failure.  The tax plan includes elements that will depress housing prices, and banking loan demand.  The effect on the US banking system will be for it to lower its net interest margins, chasing what little loan demand there is, which will expose the banking system to bankruptcy resulting from housing loan losses, and capital markets crashes.  Enough people can believe the lie a long time, and especially if further deficit fueled infrastructure and other spending does boost growth, interest rates will rise until it likely collapses housing and banks and auto sector.

Its still possible for there not to be a collapse.  More QE is a policy tool the establishment will reach for, and the quid pro quo between banks and central banks if it holds will stabilize the sector.  I can't know if unlimited, or double/triple QE programs are a problem, even if intuitively it should be understood as a shameful gimmick.  The reason the QE levels will have to be much larger to rescue the next financial panic is that government debt levels are insanely higher than in 2008.  QE is a gimmick to erase these.

Even under a no collapse/panic scenario, there is a better than 50% chance that bond prices will not reach the highest levels (lowest yields) seen in 2017 for another 10+ years.  The most likely scenario where that doesn't happen is one of a 2008 comparable panic that fuels more QE and near negative interest rates. There is some risk also that Stock indexes might also top out in 2018 or 2019.  A 5%-10% likelihood/risk of the main scenario I outlined should be appreciated (even if I am concerned the risk is higher).  A 5% chance of a near term 10 year top to stocks is a higher chance than seeing a 10 year top in bitcoin value in the next 100 years.  Under these criteria, bitcoin is a safer long term investment than stocks or bonds.

Collapse/panics will negatively affect the price of bitcoin along with every other asset class.  Like gold, it should be less so.  War and climate change risks will affect housing and banking/economic profits more adversely than bitcoin price..

The case for bitcoin over stocks and bonds with no collapse/financial panic events is that for, the next 10 years at least, while the adoption level is as steep as radio or cellphones were, and ample event catalysts for explosive upside remain unfilled, the expected investment returns are much higher.

Under this expectation, having a paid for house, and financial assets that produce $20k-$40k of income, enough gold to survive a year long electricity outage (5-12oz), and the rest in crypto currencies with a majority in bitcoin is a sensible portfolio regardless of how high the bitcoin percentage is.


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