Unhedged: Bitcoin is equity, not money

Welcome back to Unhedged. If you have an idea (and since today’s topic is Bitcoin, a lot of people will send text messages), please send me an email: robert.armstrong@ft.com.

Bitcoin is equity, not money

Many years ago, I was hired as a trainee analyst for a hedge fund, but I had no financial experience. I asked my upcoming boss how I should prepare. He said: “Get a financial calculator and learn to use the net present value key. It really is all.”

He is right. Since then, I have been considering future cash flow, final value and discount rate. Since then, all other analysis tools I have acquired are secondary.

This is why I am upset about what needs to be done today: writing an article about Bitcoin, an asset far beyond my understanding of HP-12c (Millennials may look up now. what is that). Today, the value of Bitcoin stock has fallen by 29%, and its value has shrunk by $225 billion. The following is the price of a single bitcoin throughout the day on Wednesday (the left side includes the last tick on Tuesday) (Bloomberg data):

In addition, Bitcoin and overall market trends seem to be linked. From Refinitiv:

What needs to be said. Therefore, what follows is the old-fashioned analyst’s best guess of what is happening. I look forward to hearing from you (what do I think?).

It is best to think of Bitcoin as an equity in a company whose only asset is a promising but unproven technology-strictly speaking, this is not correct, but it is the correct metaphor. Many people talk about it extensively in these terms.Here E.g It was Bill Miller, a very famous stock investor who was in Barron a few weeks ago:

“Bitcoin is the solution to the problems that plague the economy, because there is an economy, which is the government’s monopoly on the money supply and banking system, leading to a series of defaults, confiscations, nationalization, and inflation… The best way to think about it is numbers. Gold. Gold is analog, and Bitcoin is digital. As a store of value, it is far better than gold… You cannot escape your country with gold worth millions of dollars, because gold is huge and indivisible, and you Bitcoin can be sent anywhere in a very short period of time, at very low cost, and can be divided almost indefinitely.”

If Bitcoin technology is effective, it will be a new form of currency, and can be used as a store of value in the special function of currency: inflation is safe, transferable without friction, and free from government intervention.

This is how well-known technology investor Marc Andreessen wrote a few years ago: hit Similarity:

“The Bitcoin ledger is a new type of payment system. Anyone in the world can pay any amount of Bitcoin value to anyone else in the world by simply transferring the ownership of the corresponding slot in the ledger. Input value, transfer value , The recipient gets value without authorization, and in many cases, without any fees.“

Moreover, if Bitcoin does become currency, its value will greatly increase. Miller again:

“There are about 1 billion dollars worth of gold in the world, some in jewelry, some in central banks, and some in things such as ETFs. The market value of Bitcoin is about 1.1 tn dollars. I firmly believe that under certain reasonable assumptions Under the conditions, Bitcoin can rise 10 times, that is to say, its value may be the same as gold.”

Reasonable people should agree that Bitcoin’s technology is still not working properly. This should be obvious. Today’s price movements indicate that Bitcoin is too volatile to make money. Now, when the really bad things come down, I will flee to Mexico with something other than Bitcoin.

Equally important, Bitcoin transaction costs are usually high and slow, and only a few places can accept it. Bitcoin is not money, but the idea that it will become money one day is the source of its current value.

It doesn’t matter when the stock price of a company’s only asset is an unproven technology that fluctuates (and fluctuates widely). That’s just the hustle and bustle of the market, unless there is new information that the technology assets will more or less succeed.

That is where many Bitcoin believers make mistakes. They believe that when the price of Bitcoin rises, That is itself There is evidence that the technology is closer to operation and has become a tool for making money. Not! The value of various items from baseball cards to Rafite Castle has increased. That won’t make them profitable. It makes them an asset. Assets are good things, but the value of said Bitcoin comes from the possibility of it becoming a specific asset (ie currency).

The evidence that Bitcoin is becoming currency will involve people in more, more locations and smoother Bitcoin transactions (is there any evidence that this is a topic for another day).

the last point. The nominal reason for the decline in the value of Bitcoin on Wednesday was that the Bank of China stated that it “should not and cannot use it as a market currency”. Is there evidence that Bitcoin technology will not work and become money? Maybe, but remember that an important part of Bitcoin’s appeal is that the opinions of third parties (especially governments) are not important. However, today’s turmoil shows that they do.

There is a simple way to resolve this contradiction: by assuming that much of the current value in Bitcoin is pure, unrestricted speculative activity, which has nothing to do with the basic characteristics of the technology.

A good book

If you follow my writing in the Financial Times, you will know that I also wear a non-financial cap, pillar In the style of men. I always think that my two writings are related because they require careful consideration of human behavior. I don’t often wear this style of hat in Unhedged, but sometimes I might wear it.

So: Last weekend in the “New York Times” fashion magazine, there was an absolutely outstanding example of style writing, Works by Artish Tassel Perfume is the meeting point of Eastern and Western cultures in modern history. If you are interested in the history of fashion, please read it.