Uncovered: bitcoin is capital, not money

Welcome back to Unhedged. If you have any thoughts (and because today’s topic is bitcoin, many of you will have it), email me: robert.armstrong@ft.com.

Bitcoin is capital, not money

Years ago I was hired, with no financial experience, as an internship analyst in a hedge fund. I asked my next boss how I should prepare. He said: “Get a financial calculator and learn how to use the keys to net present value. That’s really all there is to it. ”

He was right. Since then, I’ve been thinking in terms of future cash flows, terminal values, and discount rates. Every other analytical tool I have acquired since then has been secondary.

That’s why I don’t feel like doing what I need to do today: write about bitcoin, an asset far beyond the comprehension of my HP-12c (now millennials can look up) what is this?). The value of bitcoin stocks fell 29% at one point, with a $ 225 billion drop in value. Below is the price of an individual bitcoin during the day on Wednesday (with the final mark for Tuesday included on the left) (Bloomberg data):

In addition, bitcoin and the general market trend seemed to be related. From Refinitive:

Something needs to be said. So what follows is the best conjecture of this old-fashioned analyst about what’s going on. I’m waiting for your mail (I think?).

Bitcoin is best seen as equity in a company whose only asset is a promising but unproven technology; this is not strictly true, but it is the right metaphor. Many people generally talk about it in these terms. Here for example is Bill Miller, a very famous stock investor, in Barron a few weeks ago:

“Bitcoin is the solution to a problem that affects economies because there were economies, which is the government’s monopoly on the supply of money and banking systems, which leads to serial defaults, confiscation with nationalization, inflation. . . the best way to think about it is like digital gold. Gold is analog, bitcoin is digital. It is far superior to gold as a reserve of value. . . you can’t run away from your country with millions of dollars of gold, because it’s bulky and hard to split, while you can send bitcoins anywhere in a split second at a very low cost and it’s almost infinitely divisible. ”

If bitcoin technology works, that is, it will be a new form of money and superior in the particular function of money as a storehouse of value: safe from inflation, transferable without friction, and out of the reach of government violence.

Here is Marc Andreessen, a very famous technology investor, who wrote a few years ago: to hit similar points:

“The bitcoin ledger is a new type of payment system. Anyone in the world can pay anyone else in the world any amount of bitcoin value simply by transferring ownership of the corresponding slot to the ledger. Enter value, transfer it, the recipient will get value, no authorization is required and in many cases no commissions.”

And if bitcoin becomes money, its value will increase a lot. Miller again:

“There are about $ 10 billion in gold value in the world, some in jewelry, some in central banks, some in ETFs. The Bitcoin market cap is about $ 1.1 million. I am very confident that bitcoin can rise ten times under certain reasonably assumed conditions, that is, it can be as valuable as gold. “

Rational people should agree, however, that Bitcoin technology still doesn’t work. This should be obvious. Current price movements show that bitcoin is too volatile to be money; for now, when really bad things fall apart, I’ll flee the border to Mexico with something other than bitcoins.

Equally important, bitcoin transaction costs are generally high and slow, and are only accepted in some places. Bitcoin is not money, but the idea that it will one day become money is the source of its current value.

When the stock price of a company whose only asset is an unproven technology fluctuates (and they do, a lot), that doesn’t matter. This is just market noise, except when there is new information suggesting that the technology asset is more or less likely to succeed.

This is where many bitcoin believers have made a mistake. They think that when the price of bitcoin goes up, that is himself evidence that technology is closer to working and becoming money. It is not! Many things, from baseball cards to Château Lafite cases, add value. That doesn’t make them money. It makes them active. The assets are good, but the value of said bitcoin comes from the possibility of it becoming a specific type of asset, i.e. money.

Evidence that Bitcoin is becoming money would mean that people trade in it more, in more places, and in a more fluid way (if there is any evidence of this it is an issue for another day).

An end point. The nominal reason for the fall in the value of Bitcoin on Wednesday was that the Bank of China said it “should not be used and could not be used as currency in the market.” Are they proofs that bitcoin technology will not work and turn into money? Perhaps, but remember that an essential part of the appeal of Bitcoin is that it does not assume that the opinions of third parties and, above all, governments matter. Still, current volatility suggests yes.

There is an easy way to resolve this contradiction: by positing that much of the current value of bitcoin is pure, unrelated speculation, with no relation to the fundamental nature of technology.

A good read

If you have followed my writings in the FT, you know that I also wear a non-financial hat, writing regularly column in the masculine style. I always thought my two types of writing were related, as they require close reflection on human behavior. I won’t wear the style hat often at Unhedged, but from time to time I might let it go.

So: last weekend in the New York Times style magazine there was an absolutely outstanding example of style writing, Aatish Taseer piece on how Eastern and Western cultures have been found in the recent history of perfume. If you’re interested in fashion history, read it.