Why Bitcoin is worthless and as well as every other currency you hold

Since the advent of Bitcoin and many others from Ripple to Ethereum, the interest in cryptocurrencies has been sky high. People reminisce about the time when it was essentially worthless back in the days of gamer circles (anyone remembers MapleStory or RuneScape? How about Neopets?) when they were trading game items for Bitcoins to the now almost eye-watering prices of the cost of Bitcoin and Ethereum.

I have no intention to explain what Bitcoin and other digital crypto-currencies is as there has been more than enough articles written online and more than enough explanations of it.

Given the anonymous, non-regulated and even dubious nature of such currencies, it has come under the scrutiny of regulators and central banks around the world.

Video Link to an introduction to Bitcoin:

https://www.facebook.com/techjuicepk/videos/1198638266907361/

Source: Bloomberg

Bitcoin/USD graph

With such a rise in prices since the spilt of Bitcoin and Bitcoin cash, the headlines for crypto-currencies just seems to be never ending, so much so that even legendary investors from the likes of Howard Marks from Oaktree has to admit that he does not know anything or makes sense of it (check out what he says here under digital currencies).

There are many more investors that have come out and have taken a view on it and I have no intention to list out all of them or give voice what they have said. It is easily available online and I do not want to drone on.

However, I do have my own view and I would believe that given the hubbard over this as an ‘asset’ class, or as some other form of investment, I believe there is a great need to head back to the basics of some definitions to ‘get it right’.

So here goes:

The basis of a crypto-currency is at heart a question on what money actually is. So what is money?

Money by most economic definitions is of 3 main things:
1. A unit of Account
2. A medium of Exchange
3. A store of Value

And thus when viewed through such a lens, you can see that crypto-currencies fulfil that role very well; it is divisible (0.001 XBT), it can be exchanged (for arms or drugs?) and it can be stored for future use (via a Bitcoin wallet).

The same does for other types money (USD, EUR, JPY, Gold, Blocks of Salt, Seashells etc). Accordingly, apart from some of the older forms of money (like gold etc) the current unit of money right now is FIAT money and it has no intrinsic value in and of itself. MONEY IS WORTHLESS. It is not worth anything nor is it exchangeable to a hard commodity. However, the true value of money is the value we ascribe to it. That is to say, that using money, we can exchange it for whatever valuable goods, services, labour and assets that we would want.

So if all money is worthless what makes people want to have USD (United States Dollar) over say the ZWD (Zimbabwe Dollar)?

Or would any Singaporean want the old Banana notes? Or the Germans want the Old Weimar republic Deutsche mark? Apart from sentimental reasons that is.

Given now that we have that definition down there is something really intrinsic required for money to ‘work’; for people to be able to accept money in exchange of payments, of labour, or goods and services. That secret is something that again is intangible but very real and that is TRUST.

The believe in the system that accepts and attaches the ‘value’ of intrinsically worthless money to the valuable products/services/labour/assets etc that we are procuring and consuming.

For the money to work, it needs people to trust in it and then to transact in it.

So now where does Bitcoin and its peers stand? That I have no answer to but I do know that it needs to hit a tipping point in the adoption of the technology. There is a reason why fiat money is so entrenched and that is because it has been around for so long (since 1000AD if we count Song dynasty China) that it has been adopted by even the laggards.

The following is a very well known graph know as the Diffusion of Innovation shows the process before something truly gets adopted. It has to be able to bridge the gap between the Early Adoptors (visionaries) and the Early Majority (pragmatists). Or in percentage terms it has to be beyond the 15% — 18% market penetration rates.

Diffusion of Innovation and The Chasm

For such a gap to be bridged, it has to be able to create a network effect where demand side economies of scale comes into play. When a network effect is present, the value of the technology/product/service goes up with every addition to the number of users joining in. A classic example would be the telephone where there is no value in being the only one with a telephone but there is value in joining a thriving ecosystem of telephone users. The same can be mentioned about social media networks like Facebook and Twitter.

Point to note though that increasing user base cannot carry on indefinitely as it will reach a saturation point and networks would then become too congested and would cease to grow.

So despite the current exhorbitant price of Bitcoin, for it to be able to truly become an ubiquitous currency, it has to, not just meet all the economic definitions of money, it too has to be adopted widely and utilized beyond its current state of transactions.

As such, when we understand that crypto-currencies are just another form of currency, we do not get caught up in all the fluff of its valuation. In my opinion in and of itself, Bitcoin is just another currency and not an investment opportunity, it is a medium which is used to transact with and not an asset. Thus I would probably hold some Bitcoin very much like how I would hold some USD or MYR should I be able to find a use for it.

One last point to note with regards to the wild price swings of Bitcoin and its peers; it is a CURRENCY and as such it is inherently volatile like ALL other currencies and they are not ‘regulated’ by any central banks. For course whether central bank regulation and intervention is good or not is for another discussion that is beyond the scope of this opinion post.

Further Readings:
https://medium.com/@intenex/cryptocurrency-101-7197684775fd
https://www.oaktreecapital.com/insights/howard-marks-memos
https://www.sovereignman.com/crypto/the-real-reason-to-own-bitcoin-21892/
https://www.sovereignman.com/crypto/my-friend-emailed-billionaire-howard-marks-about-bitcoin-heres-his-response-22223/
https://innovateordie.com.au/2010/05/10/the-secret-to-accelerating-diffusion-of-innovation-the-16-rule-explained/
https://en.wikipedia.org/wiki/Network_effect

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Song of the Pineapple

Written by

AbsoluteMacro

Casting Nets; Pursuing Opportunities. 放长线,钓大鱼。

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