Bitcoin – Random Thoughts From A Finance Guy

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Can Bitcoin truly be the future of global currency?

What is Bitcoin? I understand it is both Currency and Commodity Asset Class

The last couple of weeks, I have seen quite a few articles about Bitcoin.  If you search the word “bitcoin” in your search engine, there are more than enough articles that have something positive or negative to say.

What is Bitcoin anyway? Here are couple of introduction videos on youtube that may help to answer that question:

You may also want to check out this white paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.”

From the information I found on these sites (and elsewhere on the internet), I understand Bitcoin to be

  1. currency that does not get centralized during the process of spending it, and
  2. a commodity asset class that “can be traded in the market.”

Bitcoin as Currency

As its name suggests, Bitcoin can be considered a currency. According to the dictionary definition, “currency” is “Money in any form when in actual use as a medium of exchange, especially circulating paper money.”

Additionally, you can spend Bitcoin in order to purchase goods or services on the websites below.

Although Bitcoin is obviously not accepted commonly where you might buy groceries or rent movies, gradually, more places are allowing patrons to make a purchase with Bitcoin. As more people become familiar with Bitcoin, and its community grows, I think that it will become easier for people to consider Bitcoin a currency. In spite of this, at this moment, Bitcoin fulfills the definition of “currency,”  and can be considered one form of currency available globally.

Bitcoin as Commodity Asset Class

Bitcoin can also be considered a commodity asset class. There is actually a market where Bitcoin/USD is traded, although the market is very thin and volatile.

Below are Bitcoin/USD daily charts in two different lengths of time. You can get more information from bitcoin charts.

 

The point that I would like to make here is that, in theory, because there is no central bank printing “Bitcoin money,” in comparison to other currencies that are currently aggressively printed by each central bank, the value of Bitcoin as commodity asset class may rise significantly in coming years of the QE (quantitative easing).

In terms of not being able to print or create this “Bitcoin asset class,” I am reminded of gold and the argument made by many successful legendary investors about the value of gold in comparison to other major currencies.

I would like to share what I consider to be some of the wisest quotes from successful legendary investors.

Firstly by Warren Buffet “Oracle of Omaha” of Berkshire Hathaway, who is not really in favor of gold investment.

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

“The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

Secondly by James Melcher of Balestra Capital, a global macro fund that has achieved more than 20% of CAGR (Compound Annual Growth Rate) since 1999 and returned a significant 199.8% in 2007 and 45.8% in 2008 during the financial crisis.  Melcher is in favor gold investment.

“The long-term case for gold is supported by strong factors. While gold does not pay interest or a dividend, unlike fiat currencies, it cannot be created in infinite amounts. It is also not subject to ratings downgrades and deteriorating sovereign balance sheets. It is not a liability of a company or a country. The skepticism about gold in the developed world is not shared in the developing world. If for no other reason than that the global store of gold is limited while paper money is rapidly proliferating, gold’s role as a store of value is expanding, and its investment profit potential is rising.”

“Since the “Keynesian Revolution” that began in the 1930’s, there has been increasing action on the part of governments to manage economic outcomes. Policy makers and academics rarely question the efficacy of such intervention, and most individuals assume the “experts” know what they are doing. While the crisis of 2008-09 raised doubts in many minds, the subsequent recovery returned everything to business as usual. At some point in the future, there will have to be acknowledgment of the systemic weaknesses in the global financial system. Until that time, central bankers will pursue the time worn path of currency debasement.”

I believe these intelligent arguments can be made from each side, but I also think that the market is a place where intelligence and logic cannot always be realized. Even if the logic is correct, nobody knows the exact timing for when the correct logic will flourish.

Questions about Bitcoin

In spite of what I have written above, there are a couple of basic points that that make me somewhat skeptical of Bitcoin.

A lot of anti-Bitcoin people argue, and I think it makes sense, that somehow the government will come up with some kind of restriction in order to “centralize” the process of spending Bitcoin in the future. This may not be theoretically possible, but I would be concerned that the theory may not be always correct.

Also, I would question if there can be a second or third “Bitcoin.” One of the important concepts that Bitcoin is based on, is that it will not be centralized during the process.  I wonder, then, what if someone else comes up with another type of “Bitcoin” with a different label, that has the same concept of “decentralized currency.” I worry that this could bring down the value of Bitcoin, as it loses its status of being the only decentralized digital currency in the world.

However Bitcoin pans out, I would like to carefully watch its progress.

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2 Comments

  1. usern

    Cheers for the better than average article.

    1 point though. There are already a lot of other crypto currencies available, like litecoin.

    it’s almost 1:1 copy of bitcoin. I don’t think it will have an impact on the long run though.

    Bitcoin has been planted in the media and price is pretty much tied to popularity and success in technological terms (eg no fundamental flaw in the protocol)

    If a better solution will arise bitcoin will be swapped for that.

    Until that, I believe trustworthy alternative coins make the crypto currency world stronger.

  2. Yoshi

    Thanks for leaving a comment!! I did not know about litecoin, and I am glad that you teach me about it.

    I very much agree with you that the price of bitcoin is tied to popularity, but that popularity is also based on some kind of reasons such as how we think bitcoin is going to be in the future, which I feel no different from other commodity asset classes such as gold.

    Now I think about it, you may be right about that even with more kinds of “bitcoin”s. When there are more of them, then there would be more people and places using it, therefore as decentralized crypto currency, the sector as a whole should win the market share compared to the traditional currencies.

    Then, I think the only concern left for me for now, is if government or regulators would not do anything about it or not somehow, in order to restrict the use of bitcoin type of currencies.