Bitcoin’s astronomical rise in value is a seminal technological revolution for some and a Tulip-Mania style bubble for others. Glint co-founder Ben Davies, defines the market from the mayhem and explains why gold is the only viable alternative currency
Money is changing for the fourth time in history. First we had cowry shells, then commodity money, then fiat paper money and now today we stand on the verge of alternative money thanks to digital currencies.
The re-introduction of the oldest form of money, gold, into the digital age makes it the viable alternative currency. Gold is now integrated into the financial payment system so that people can spend it anywhere while keeping it in an account that is independent of the banking system.
Gold is the currency of first resort – its unique natural properties underpin it as a store of money, medium of exchange and unit of account. Bitcoin, by comparison, cannot be all of these. It is too volatile and nascent but this is not to discard it – it undoubtedly has value. Bitcoin is not a bubble, although it has all the hallmarks and antecedents that are the precursor to a bubble. But how do you define a bubble?
A bubble defined?
The term ‘bubble’ tends to indicate a price no reasonable future outcome can justify. In price terms bitcoin and the majority of altcoins (those other coins built on the blockchain protocol for other uses) are in a bubble. In value terms bitcoin is not.
A litany of bubble comparisons have been trotted out this past week, mostly by central bankers and financiers; such keen students of history. Perhaps the most often referenced is the ‘Tulip-Mania’ of the 1630s, when the price of tulip bulbs and their flowers, gave the plants a higher premium than gold.
It’s a poor comparison. The price increase in tulips pales into insignificance compared to the cryptocurrency phenomenon. This doesn’t mean bitcoin specifically is in a bubble, however, the other cryptocurrencies are.
The only similarity between the tulip price bubble and cryptocurrencies is the propagation of an array of multi-coloured variants. Tulips harbored a mosaic ‘Tulip-breaking’ virus which created the beautiful striations of colour on the petals. So desirable were these original strains that individuals sought to create even more alluring alternatives. So the bulbs were deliberately cross-bred with new virus strains to propagate more colourful varieties.
Similarly, the elegance of bitcoin and its payment protocol, the blockchain, has been bastardised, as individuals seek to capture more colourful strains of the original cryptocurrency BTC. For many this is merely to profit from issuing free currency to themselves through ICOs and mining incentives. Of course, others have more altruistic ambitions but the net effect is to create too much value that is taken away from the bona fide cryptos.
Value of utility
Just like the new tulip varieties these multi-variant, equally colourful altcoins, have spawned an asset class bubble comprised of over 2,000 different coin “currencies”. Most of these have little utility and without such utility their coins can have no sustainable value. The new supply of tulips cannibalised themselves and, likewise, the altcoins are cannibalising themselves. In doing so they are flooding the market with perishable supplies of worthless value.
Joseph Stiglitz, the Nobel laureate economist, stated of bitcoin: “It’s smoke and mirrors…the value of bitcoin today is based on expectations of its value tomorrow.” Stiglitz claims that “bitcoins do not serve any socially usefully function”. Unfortunately Stiglitz displays a shocking lack of intellectual rigour, which is unbecoming of a man regarded as one of the finest economic scholars of his time. He simply hasn’t done his homework. He is entrenched and inflexible in his thinking. Bitcoin might be a cryptocurrency but, crucially, it has a network and therefore has value.
Millions of individuals across society voluntarily engage in the transactional use of bitcoin everyday and it is growing because it has the utility. Financial agents from accountants, auditors, banks and exchanges are giving bitcoin legitimacy. The Chicago Mercantile Exchange (CME) is to launch a bitcoin reference price futures contract, based on the world private bitcoin exchanges. A derivative contract which is deliverable but cash-settled in the future.
As an aside from my point of view, the CME contract will only encourage institutional leverage and a vast supply of paper bitcoins which will overwhelm and impact the true price discovery of the actual crypto bitcoins in circulation. It will create leverage up and then down in time. Some 16 million BTC have been issued to date. Only 4 to 8 million in ready supply support $5 billion’s worth in daily transaction value. The rest are either lost or in cold storage offline.
No doubt we are seeing speculation and by any measure bitcoin prices are in a bubble; but that is to misunderstand two distinct concepts – price and value. The value of bitcoin is determined by the size of the network and the increase in transactions and fees shows the ecosystem is healthy, notwithstanding the speculation on where that value will go.
The internet exchanges information value
Because of the value of the network, if you bet against bitcoin you are betting against the exchange of value afforded by the internet. The internet exchanges information through various protocols just as bitcoin conveys an exchange of the value of a good or service when it is spent. So, if its utility is increasing the network value will continue to rise.
Bitcoin can legitimately claim to be the “Internet of Money”. Remember the acronyms SMTP – Simple Mail Transfer Protocol – Email to you and I, or HTTP – Hypertext Transfer Protocol – the underlying protocol used by the World Wide Web that defines how messages are formatted and transmitted. These spawned the networks which run commerce today. After much initial suspicion about transmitting data and private information across the internet, people and then global society, wholly adopted them. Imagine if you had sold the value of that network back then….
So, at first no one trusted this exchange of information, then everyone adopted it as it became easier and easier, and thereby trusted, to transmit.
Exchanges and electronic wallets are clothing the internet of money in friendly, intuitive user interfaces making it seamless to use bitcoin and transact without you consciously engaging in some exchange of computer code, something which is an anathema to most.
Bitcoin value is a direct function of the size of the network it supports. Imagine if the Pharmaceutical industry – the legit one – was only transacting using bitcoin. This is a trillion dollar revenue network per annum. The value of a single bitcoin would rise dramatically to support the present and future value of all the transactions that underpin this network of value exchange. That value is somewhat higher than where we are today…..
But bitcoin continues to behave like an asset because it is moving value but not enough goods. This is in comparison to the world’s oldest form of money: gold. Bitcoin has mimicked gold in its scarce nature and “mining” set up. What gold has in addition though is the network, acceptance and spendability worldwide. Now that gold can be spent as money through the world’s digital payment systems, it can transcend all other currencies in utility, including cryptos. The world’s oldest currency has all the benefits of the world’s newest; the reverse is not true.
Because of this gold is the real alternative: A currency based on a natural stable supply, with long-term value. Gold is an equalizer that is accepted universally as a store of value and now can be used seamlessly as a global currency.
Ben Davies is co-founder & COO of Glint
Image top: Jan Breughel the Younger’s Satire of the Tulip Mania c.1640