So Bitcoin will be the next bubble?

[Jimmy Higgins]

Bitcoin has been doing its thing for a while. Goes up crashes never to be seen again... then goes up crashes never ... well, it has been going up a lot recently. At over $100,000, it just keeps inflating. The reason... no clue. But this isn't about Bitcoin, as much as we are seeing a frightening transition of some companies into purchasing Bitcoin. Gamestop, DJT, Strategy are mostly looking to the future based on the inflation of Bitcoin. And it feels like this is becoming a fad. According to CoinDesk, 61 publicly traded companies have it on their portfolio.

The obvious problem is that with Bitcoin having no viable basis for its value... a sudden crash could erase hundreds of millions in value for individual companies. We are effectively seeing an equivalent of Mortgages coming about via loopholes founded on the belief that that growth is constant and inevitable. Which is true, when it is true, but things get messy when it stops being true.

I would venture that the existing climate globally isn't an entire banking system leveraged in investments for Bitcoin. Obviously if DJT and Gamestop are crushed with Bitcoin dropping to 30% its value, the world will move on. The problem would start when major institutions start and then using that alleged value to borrow against, which then fails in the crash that seems inevitable with Bitcoin.

 

[Swammerdami]

I don't see a question mark in OP; that's just as well as I wouldn't have the answer. I think a diversified portfolio SHOULD have some percentage of Bitcoins, but what percentage? I've never owned any.

There are about 20 million bitcoins in existence, for a $2.1 trillion total "value". The next dozen or so crypto-coins have a total value of about $1 Trillion. By comparison less than $24 Trillion of gold (at current price) has been mined in all of history. The total U.S. money supply (M2) is about $21 Trillion. Total U.S. Treasury debt held by the public -- a key competitor to Bitcoin for storing wealth -- is $29 Trillion. The total capitalization reflected on all the stock markets in the world is about $120 Trillion, with about half of that in U.S. stock markets.

Based on those numbers I'd say that the Bitcoin frenzy might continue for a while. Do we all regret we didn't buy in 2023 when it was selling for only one-sixth of its present price?

"Hard" currencies, especially the Dollar, are likely to lose value over the next several years, especially with an ignorant psychotic now in control of the super-power. For that reason the liquid part of one's wealth should be at least partly hedged, with gold and Bitcoin being the two logical choices. Bitcoin is likely to outpace gold, but I'm content to indulge in the calmer and soberer choice.

 

[Jimmy Higgins]

Bitcoin could be worth $1 million in 2027. It could be worth $50,000 in 2027. It could be worth $10k in 2027. My problem is that corporations are starting to look at it now as if it is an actual investment instead of being fake money.

 

[Swammerdami]

Bitcoin could be worth $1 million in 2027. It could be worth $50,000 in 2027. It could be worth $10k in 2027. My problem is that corporations are starting to look at it now as if it is an actual investment instead of being fake money.

Emotionally I totally agree with you. Bitcoin was invented as a weird sort of money of little use except to hide transactions from the prying eyes of governments and banks (and it doesn't really succeed at that); but what Bitcoin has become is NOT a form of money (for which, weird or not, it's not particularly well suited) but a weird sort of "investment" reminiscent of Dutch tulips during the 1630's. Emotionally I'd love to see the value of Bitcoin disintegrate (possibly by the world's governments banding together to enforce that) and see that "fake" trillion-dollar jackpot disappear.

But instead of treating Bitcoin trades emotionally, one can approach them as a gambling puzzle. This is what professional portfolio managers, and even retail investors should do. Once you have estimated the relevant parameters, a gambling puzzle becomes an exercise in arithmetic.

Suppose you have a retirement account you will cash in after exactly ten years when the rest of your income and bankroll is exhausted. You follow Kelly's Criterion, i.e. you want to maximize the weighted geometric mean of your result. Suppose your only investment choices are the S&P500 index which you estimate will always exactly double during the ten years, and Bitcoin which has a 50% chance of increasing from $100k to $600k and a 50% chance of going to zero. (This is a highly simplified set of outcomes just for easy arithmetic; in practice the timings, estimations and arithmetic would be much more complicated.)

In the example, 50% of the time you finish with a bankroll that has increased by 2p, where p is the portion invested in S&P500; and 50% of the time you finish with 6-4p. The geometric mean is is (2p)^½(6-4p)^½ and this is maximized when p = 0.75; i.e. by spending 75% of your bankroll on the S&P500 and 25% on Bitcoin. No emotion; just arithmetic.

Now, what's the chance that the Bitcoin frenzy will produce a $600,000 price in 2035? And what's the chance the world will come to its senses instead and Bitcoin will zero out? I don't know: I'm not even sure what I'm eating for lunch tomorrow.

 

[Bronzeage]

Bitcoin is and always has been a bubble. It's value is dependent on only one thing and that is whether someone else is willing to pay more money for it than the last guy who bought one.

It's known as the "Greater Fool" investment principle. Basically stated, "I'd be a fool to buy this thing, but if I can find a greater fool, I can profit from it." The bizarre thing about Bitcoin is its longevity. Most bubbles burst fairly quickly in the cycle. Those who bought in early do fairly well, if they correctly time their departure.

Another bizarre feature of Bitcoin is the sales pitch about it being independent of government manipulation. For the most part, access is completely dependent on the internet. Any government has the ability and the power to throttle the internet, or shut it down, A Bitcoin billionaire could find themselves bitless if they fall out of favor.

I've spent the last three decades in the antique business, which is closely associated with the "collectibles market". I've seen almost every popular collectible rise in value for a while. I've known some people who thought their Beanie Babies or their Disney Cels would fund their retirement. In the end, they have a collection of junk. Despite the claim that there's a sucker born every minute, the supply is actually finite.

 

[Loren Pechtel]

In the long run an investment trades for the net present value of the total expected future earnings. This is why Wall Street is so sensitive to interest and inflation--they influence the discounting to net present value.

What's the expected future earnings of a Bitcoin? Zero. It has no way to earn anything. Thus the fair market price is also zero. Thus it is not possible to invest in Bitcoin, anything which you call "investing" is really just gambling against the other "investors."

(Note that this does not apply to gold--gold is widely used in high quality electronics and thus does have a market.)

 

[bilby]

In the long run an investment trades for the net present value of the total expected future earnings. This is why Wall Street is so sensitive to interest and inflation--they influence the discounting to net present value.

What's the expected future earnings of a Bitcoin? Zero. It has no way to earn anything. Thus the fair market price is also zero. Thus it is not possible to invest in Bitcoin, anything which you call "investing" is really just gambling against the other "investors."

(Note that this does not apply to gold--gold is widely used in high quality electronics and thus does have a market.)

Note that the amount of gold used in high quality electronics is such a minuscule fraction of the total refined gold in storage worldwide as to be completely negligible.

The world market for non-bullion gold is massively dominated by jewellery, and even that use is tiny compared to bullion. Electronics and optical coatings are utterly irrelevant to the price of gold, and still would be if gold fell in value by a factor of 10,000.

 

[Swammerdami]

... Electronics and optical coatings are utterly irrelevant to the price of gold, and still would be if gold fell in value by a factor of 10,000.

Did you deliberately specify the price change that would make copper and gold almost equally costly? I think gold's ductility and resistance to corrosion would make it preferable to copper in many applications.

Anyway your visceral aversion to gold bullion is misplaced. The trillions of dollars in gold wealth owned by central banks is one of the few things hindering a free-fall of the world's currencies.

 

[bilby]

... Electronics and optical coatings are utterly irrelevant to the price of gold, and still would be if gold fell in value by a factor of 10,000.

Did you deliberately specify the price change that would make copper and gold almost equally costly?

No.

I think gold's ductility and resistance to corrosion would make it preferable to copper in many applications.

Probably.

Anyway your visceral aversion to gold bullion is misplaced.

It's non-existent. I have no aversion to gold bullion; I merely recognise that gold's value as money is due to it's lack of usefulness for anything else.

To be good for money requires that your chosen thing should have little or no purpose other than as money. That's why gold, bitcoin, and US Dollars are (still) money, but platinum, cigarettes, and silver dollars are not.

The trillions of dollars in gold wealth owned by central banks is one of the few things hindering a free-fall of the world's currencies.

Is it? I don't care whether the RBA has any gold or not; I want Australian Dollars not because I could buy gold with them, but because if I don't send some AUD to the Australian Taxation Office when asked, they will throw me in jail. Most Australians are in the same boat.

 

[Loren Pechtel]

... Electronics and optical coatings are utterly irrelevant to the price of gold, and still would be if gold fell in value by a factor of 10,000.

Did you deliberately specify the price change that would make copper and gold almost equally costly? I think gold's ductility and resistance to corrosion would make it preferable to copper in many applications.

Yeah. The good connectors are gold plated for a reason. The lower the price of gold the more places it would be used.

 

[Jarhyn]

Honestly, the idea that gold is valued because it has industrial applications is so fucking trite, it's scarce to be believed.

Gold is valuable because it is the most basic and accessible ingredient to make shiny baubles that do not rust and bend before breaking.

Gold was worshipped as of the gods in ancient times, before electricity was broadly understood, when it was know to be useless for weapons and industrial applications.

The value of gold is in its rarity, and it's usefulness in making shiny long-lasting baubles, and in its rarity, although it has a lot of detractors as a currency too.

The thing is, if you don't want your gold tied up on trade use, you might as well just switch to a pure currency that has a reasonable supply control on it and favorable transfer ledger mechanics. It's not "much" different simply not being able to actually make baubles with the trade currency.

If I was to go about designing a currency to function like cash, Bitcoin wouldn't be my first choice of architecture, but you could do WAY worse.

 

[Jimmy Higgins]

Honestly, the idea that gold is valued because it has industrial applications is so fucking trite, it's scarce to be believed.

Gold exists. It is pretty, has unique chemical properties due to being a noble metal. It has an incredible amount of historical inertia of being the go to for default value. Being a commodity, it was susceptible to volatility, even intentionally caused volatility. It isn't the best thing to base a currency on.

Bitcoin is an algorithm. It's value is based on an alleged scarcity, but because it can be decimal'd to the cows come home, that scarcity is misleading. Bitcoin volatility makes gold looks like Large Cap stock. The alleged value of Bitcoin is only a number. You can't salvage value from physical Bitcoin as it is only digital 1's and 0's. Bitcoin is starting to get an essence of fait accompli solid investment, when in fact it's value is dangerously unbased in anything in reality.

If I was to go about designing a currency to function like cash, Bitcoin wouldn't be my first choice of architecture, but you could do WAY worse.

You can't do any worse than Bitcoin for a currency. Currency that deflates in value is the absolute worse currency to have, as no one would ever spend it!

 

[Elixir]

You can't do any worse than Bitcoin for a currency. Currency that deflates in value is the absolute worse currency to have, as no one would ever spend it!

Hmmm. That’s like saying nobody would ever sell real estate because it (almost) always increases in value. Yet it remains a very active market.
People “spend” it when they want or need things other than dirt and sticks, despite knowing it will be worth more tomorrow.

 

[Jarhyn]

Gold exists. It is pretty, has unique chemical properties due to being a noble metal.

And none of those properties were known or cared about when gold was used as a trade currency, other than "shiny baubles".

It has an incredible amount of historical inertia of being the go to for default value

Thats not "intrinsic". It's rather the other thing

Bitcoin is an algorithm

Bitcoin is a ledger. It is a ledger currency, as much as dollars or any other ledger currency. It has far more utility than a credit card, in terms of function, because I don't need to pay for a credit card or apply for a bank account to securely hold and trade it.

The value of Bitcoin is, in fact, that it is a number with a widespread system which prevents corrupt beliefs about trades from reaching the ledger.

All monies and currencies on an international level are ledger currencies, their ledgers just suck balls because of how many fingers can corrupt, lie, cheat, and steal in the margins of those currencies.

Cryptocurrency is secure enough for criminals to transact with it.

It's just ridiculous watching idiots cling to bearer currencies over ledger currencies, pretending their bearer currency has intrinsic value.

 

[Jimmy Higgins]

You can't do any worse than Bitcoin for a currency. Currency that deflates in value is the absolute worse currency to have, as no one would ever spend it!

Hmmm. That’s like saying nobody would ever sell real estate because it (almost) always increases in value. Yet it remains a very active market.

No, that isn't like that at all. One is an asset, the other is capital. The economy is based on the fluid transfer of money. A good portion of that is the GDP.

People “spend” it when they want or need things other than dirt and sticks, despite knowing it will be worth more tomorrow.

I'm not talking about what they are buying changing in value, but their bank account. If your dollar is worth 2x more in a month, why would you spend any of it on unnecessary things today? Deflation is the most feared economic malady.

 

[Elixir]

One is an asset, the other is capital.

My point was that deflationary doesn’t mean un-spendable. That doesn’t mean deflationary currency is desirable on a macro level.

 

[Elixir]

If your dollar is worth 2x more in a month, why would you spend any of it on unnecessary things today?

Because you are confident that the unnecessary thing you spent it on is of durable value, and offers utility as it appreciates.
The property I sold in Boulder County is worth several times what I sold it for 30 years ago. I knew it would appreciate when I sold it. The "unnecessary" property I bought with the proceeds of that sale has appreciated even more, but the point is that I have enjoyed it much more than I'd have enjoyed the property I sold, had I not sold it. "Unnecessary" doesn't equate to frivolous or of "only transient value".
Most transactions in a functioning, wealthy economy are "unnecessary".

 

[Jarhyn]

If your dollar is worth 2x more in a month, why would you spend any of it on unnecessary things today?

Because you are confident that the unnecessary thing you spent it on is of durable value, and offers utility as it appreciates.
The property I sold in Boulder County is worth several times what I sold it for 30 years ago. I knew it would appreciate when I sold it. The "unnecessary" property I bought with the proceeds of that sale has appreciated even more, but the point is that I have enjoyed it much more than I'd have enjoyed the property I sold, had I not sold it. "Unnecessary" doesn't equate to frivolous or of "only transient value".
Most transactions in a functioning, wealthy economy are "unnecessary".

Yeah, and on that note, let's consider the drugs I
Someone was buying in 2014 with Bitcoin: yes, the buyer knew those bitcoins would appreciate in value, but they choose to buy the drugs because the drugs have more value in them in that moment than the bitcoins or even their future value; their present value depends on people wanting to buy those drugs with them and considering the drugs to be the thing they want, and the fact that more people will want to buy more drugs with those coins.

If not for people actively exchanging those drugs for those coins, the value wouldn't be realized in the first place.

 

[Jimmy Higgins]

If your dollar is worth 2x more in a month, why would you spend any of it on unnecessary things today?

Because you are confident that the unnecessary thing you spent it on is of durable value, and offers utility as it appreciates.

Nothing appreciates in value in deflation. In August the Washer Machine is 0.0013 Bitcoin. In October it is 0.0011 Bitcoin. If you bought in August, your washer isn't worth more in October. It isn't worth anything really. It is durable good that cost you more in August than in October.

The property I sold in Boulder County is worth several times what I sold it for 30 years ago. I knew it would appreciate when I sold it. The "unnecessary" property I bought with the proceeds of that sale has appreciated even more, but the point is that I have enjoyed it much more than I'd have enjoyed the property I sold, had I not sold it.

This isn't relevant when talking about a broader economy when people are slowing down spending because tomorrow their holdings are worth more... or a week from now... or their holdings suddenly drop and they want to wait for it to rise up again so they can spend less to get the same thing. This is the inherent problem with volatility.

Which does make think of another problem. What is Bitcoin worth without another currency to trade it for? It is like Bitcoin usurps the regulated benefits of a standard currency, because without Euros or Dollars or Renminbi, what is the basis for the value of Bitcoin and all other digital currencies?

 

[Elixir]

Nothing appreciates in value in deflation.

Not true; by definition MONEY is worth more.

In August the Washer Machine is 0.0013 Bitcoin.

By October it’s a USED machine, and worth LESS than it was - even less than .0011 or whatever you said.
But you got USE out of it so - money well spent.
The house it was installed in might be worth 2 bitcoin in August. By October it might be worth the same (due to appreciation) or even a little less bitcoin, but in deflation you’d be able to buy more with that ~2 bitcoin if you sold the house, than you could have in August.