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Op-Ed: Bitcoin - A Speculative Vehicle or New Asset Class?
Published on 3/19/2024 by Tenzin Passang
Bitcoin was invented in 2009 as a form of exchange by an anonymous person. Initially valued at $0.00099, today a single bitcoin is worth over $60K. It has gained over 1,415,120,233.33% in value while the S & P 500 has gained 510.15%. So it begs the question - What makes bitcoin so valuable that its growth dwarfs 500 of America’s best businesses? Can it be considered a new asset class or is it a successful speculative vehicle?
Our economy is based around the flow of currency - dollar, yen or euro. The use of currency as a standard form of exchange has facilitated economic progress while setting a framework for prices of services and commodities. Thus, our currency is heavily regulated. The government prints it, it distributes or limits it, they like to know how much money you have, who you are sending it to, how, and why. On the contrary, bitcoin to a certain extent cannot be regulated in the same manner. There is an anonymity aspect to it. It is this unique rebellious feature which makes it attractive to traders and investors. In recent times, some professionals have used that feature as a selling point for bitcoin. Many traders and investors are so drawn to its hype that they have either forgotten or ignored that bitcoin has no underlying asset that justifies any price at all. For an equity to be valued at any price, there has to be an underlying asset. For example, the share price of Amazon can be attributed to the business and its future outlook.
As of now, the only justification of bitcoins value is the hype and anticipation around it. Say I had 100 bitcoins and I had to sell it to you. It would be the hardest pitch of my life because there is no reason for you to buy it. I would have to somehow convince you to find the next person who can pay you more than what you paid me. This is what we call Greater Fool theory, finding the next greater fool. It has no utility to you and provides no intrinsic value to the economy or the society. To quote the late Charlie Munger, “its shitocurrency.” and Warren Buffet added “If you offered me all the bitcoin in the world for $25 I wouldn’t take it because what would I do with it.”
About half of transactions with cryptocurrency are between traders. These are people looking to make quick bucks. And if it's working for you I would advise you to cease, bag the profit and never trade again. Deciding to keep trading is similar to a gambler who wins $25,000 after 10 years of gambling and goes back to the casino to test his luck only to lose all the money over the next few weeks. In that sense, bitcoin is a speculative vehicle that the United States government has allowed to exist. And worse yet, it's not nearly as well studied and regulated like casinos are. However, the rest of the transaction is either untraceable or is being used for its true use cases - money laundering, sex and human trafficking, and bribery. The anonymous nature of bitcoin’s network is ideal for bad actors. These are people who are sanctioned in Cuba, Venezuela, Russia, China, North Korea and Iran. As per the FBI report, North Korea has used cryptocurrency to fund its nuclear research program. So where do we go from there?
Here are a few likely future scenarios -
Scenario #1 - If bitcoin or any cryptocurrency is to have a future then the government will have to regulate it and in the same manner as the currency. This means that each form of cryptocurrency will probably have to register themselves with the government. Here we lose the anonymity appeal. In the case of bitcoin, it is nearly impossible to regulate because we don't even know who created it, and additionally our government doesn’t have the technical capabilities to backtrack and identify past transaction logs. We don’t have a base to work off of in order to regulate it. For example, we know how to regulate the restaurant business because we know the business inside out. Some areas of regulations being kitchen safety standards, food safety, fire exits, the price in the menu, and revenues it generates and taxes. In conclusion, if the government can’t regulate bitcoin then they will probably have to shut it down.
Scenario #2 - Bitcoin reaches 21 million cap either additional bitcoins are added or everything is wiped off the market. No one can say with 100 percent certainty that bitcoin will be capped at 21 million or so. How can investors and traders be sure that the creator isn’t gonna add another 21 million or erase all of it and then disappear again. The argument for bitcoin’s rarity is flawed because of its uncertainty. There is no legally binding agreement that necessitates the 21 million limit. Therefore, we can further debate whether gold and bitcoin have the same nature of rarity.
In conclusion, bitcoin is not an asset class because of the lack of an underlying asset, thus, it is a speculative vehicle. Before investing in a business, the three criterias I use are - 1. Does its management have good character and competence? 2. What is the relation dynamics with its clients and consumers? 3. What is its future outlook? If you answer positively to all of those questions then I recommend you to invest in that business for a fair price. Do not invest in a business that you do not understand, especially a hyped up “asset” of which you don't even know the founder of.
Our economy is based around the flow of currency - dollar, yen or euro. The use of currency as a standard form of exchange has facilitated economic progress while setting a framework for prices of services and commodities. Thus, our currency is heavily regulated. The government prints it, it distributes or limits it, they like to know how much money you have, who you are sending it to, how, and why. On the contrary, bitcoin to a certain extent cannot be regulated in the same manner. There is an anonymity aspect to it. It is this unique rebellious feature which makes it attractive to traders and investors. In recent times, some professionals have used that feature as a selling point for bitcoin. Many traders and investors are so drawn to its hype that they have either forgotten or ignored that bitcoin has no underlying asset that justifies any price at all. For an equity to be valued at any price, there has to be an underlying asset. For example, the share price of Amazon can be attributed to the business and its future outlook.
As of now, the only justification of bitcoins value is the hype and anticipation around it. Say I had 100 bitcoins and I had to sell it to you. It would be the hardest pitch of my life because there is no reason for you to buy it. I would have to somehow convince you to find the next person who can pay you more than what you paid me. This is what we call Greater Fool theory, finding the next greater fool. It has no utility to you and provides no intrinsic value to the economy or the society. To quote the late Charlie Munger, “its shitocurrency.” and Warren Buffet added “If you offered me all the bitcoin in the world for $25 I wouldn’t take it because what would I do with it.”
About half of transactions with cryptocurrency are between traders. These are people looking to make quick bucks. And if it's working for you I would advise you to cease, bag the profit and never trade again. Deciding to keep trading is similar to a gambler who wins $25,000 after 10 years of gambling and goes back to the casino to test his luck only to lose all the money over the next few weeks. In that sense, bitcoin is a speculative vehicle that the United States government has allowed to exist. And worse yet, it's not nearly as well studied and regulated like casinos are. However, the rest of the transaction is either untraceable or is being used for its true use cases - money laundering, sex and human trafficking, and bribery. The anonymous nature of bitcoin’s network is ideal for bad actors. These are people who are sanctioned in Cuba, Venezuela, Russia, China, North Korea and Iran. As per the FBI report, North Korea has used cryptocurrency to fund its nuclear research program. So where do we go from there?
Here are a few likely future scenarios -
Scenario #1 - If bitcoin or any cryptocurrency is to have a future then the government will have to regulate it and in the same manner as the currency. This means that each form of cryptocurrency will probably have to register themselves with the government. Here we lose the anonymity appeal. In the case of bitcoin, it is nearly impossible to regulate because we don't even know who created it, and additionally our government doesn’t have the technical capabilities to backtrack and identify past transaction logs. We don’t have a base to work off of in order to regulate it. For example, we know how to regulate the restaurant business because we know the business inside out. Some areas of regulations being kitchen safety standards, food safety, fire exits, the price in the menu, and revenues it generates and taxes. In conclusion, if the government can’t regulate bitcoin then they will probably have to shut it down.
Scenario #2 - Bitcoin reaches 21 million cap either additional bitcoins are added or everything is wiped off the market. No one can say with 100 percent certainty that bitcoin will be capped at 21 million or so. How can investors and traders be sure that the creator isn’t gonna add another 21 million or erase all of it and then disappear again. The argument for bitcoin’s rarity is flawed because of its uncertainty. There is no legally binding agreement that necessitates the 21 million limit. Therefore, we can further debate whether gold and bitcoin have the same nature of rarity.
In conclusion, bitcoin is not an asset class because of the lack of an underlying asset, thus, it is a speculative vehicle. Before investing in a business, the three criterias I use are - 1. Does its management have good character and competence? 2. What is the relation dynamics with its clients and consumers? 3. What is its future outlook? If you answer positively to all of those questions then I recommend you to invest in that business for a fair price. Do not invest in a business that you do not understand, especially a hyped up “asset” of which you don't even know the founder of.