By now even the mailman can explain why everyone should own some Bitcoin. I always said by the time your neighbor is touting the merits of the latest tech stock, that is a sign you should have been out three months ago. I have read articles from the smartest guys on Wall Street, our top economists of the day, and have read more than I need to about Block-Chain technology. I have seen Bitcoin soar from ten cents to over $7,000 for a virtual coin. I have also heard US deficit hawks argue that Bitcoins make more sense than even US debt because, unlike the government, Bitcoin is limited to issue only 21M coins. It would seem that we have arrived at a stalemate in evaluating this new technology wonder, ie, the magic of cryptocurrency. Imagine the look on your child’s face when you provide your little one a digital code where he can access his piggy bank full of 1/1000th of a bitcoin. We have fake news (according to some) so why not have fake money. After all, I never had a problem paying up for “Park Place” on the monopoly board because I was using fake money.
Is Bitcoin fake or is it real? Sometimes to evaluate an asset that has no logical conclusion, it helps to go back and reverse engineer it’s nearest counterpart and just look at the differences. Sometimes a new path provides a new conclusion. Let’s look at the US dollar, a long time friend that has endured years of inflation, over printing, and yet still manages to be the envy of most of the world. The clear downside of the US dollar is our government uses it like there is no end of it in sight and it is no longer backed by an asset like gold. This seems to be the catch all “go to” solution for Bit Coin loyalist. If you can only make 21M of anything, what happens to its value if 22M people are willing to buy one unit. Well the price has to go up. It makes no difference in the Bitcoin world because the virtual currency is backed by a promise not to produce more of it. The central theme of this theory seems to be that because this coin is tracked by a revolutionary block chain technology, we the people, need to apply homage to the fact that regardless of its intrinsic value, the mere fact that we now posses super computers that can add and subtract millions of transactions in a second, we should all breath some relief in the notion that every penny always lives somewhere in the digital world, and because of it’s relative limited supply, it’s value is mathematically bound to multiply by leaps and bounds. I believe 1% a day seems reasonable. After all, pay day loans have run upwards of one half percent per day so by comparison these seem like cheap loans compared the “CD” rates offered by Bitcoin Banks. The problem is there is no such thing as a Bitcoin Bank so who is paying the interest? The answer logically is the stakeholders who own the coins. Let’s say you own a tech stock and it splits from 100M shares into 200M shares. Who gains and who loses? Well the answer is no one on the day of the split. Since the stock drops in half it results in a zero sum game. The same amount of wealth exist before versus after the split. One might argue the next move up by a dollar creates twice the wealth as before but that ignores the reality had the stock not split the price would have moved $2.00. What happens when Bitcoin goes from 10M coins to 20M coins? Who is absorbing the dilution? This is not the same as a stock split because the price is rising faster than either GNP or earnings in both the short term and the long term. What then justifies the increases that have no P/E checks and balances, no liquidation values on high volumes, and one cannot ascertain book value because a virtual coin is only valued by the belief of the people who stand behind it. Here is a question? How could anyone believe in a Bit Coin and not believe in God? Both are based on faith, doing the right thing, and never selling out your family or spouse. The price is the price because that is what the Bit-Coin Gods say it is. In fact merely questioning the value is grounds for being labeled a non-believer. I believe that both Bit Coin and God will have a second coming. I am just not sure which will happen first.
Unfortunately we will not likely see very many days when you can pay off your payday loan with your Bitcoin portfolio and this is where the logic begins to break down. If something is too good to be true or in the Bitcoin world, a marvel that needs to be believed in like Santa Claus, then one just needs to trust in the North Pole and the world will always be a great place to live, and by logical extension, Bitcoins will continue to thrive in an artificial world with fake news, robotic banking, and virtual coins that pay 1% interest per day while we all live in 2.5% inflationary cycles. If this were true we would all be billionaires inside of two years when the compounded rate of return in the Bitcoin world is factored in. If this were true a hot dog would also cost 1 million dollars in 2019 as well. No more free mustard. One squirt will cost $100,000 but the good news is we take Bit-Coin.
Back to our thesis. The tricky part of this equation is that the US government as currently constitutionally structured has the right to “tax it’s way” out of its own stupidity as long as the US can grow its GNP. One is simply a by-product of the other. If most people like ketchup and mustard on their hot dog, as long as hot dog sales keep going up, the market for ketchup and mustard, should, all things remaining equal, continue to thrive. So, here we have the ultimate standoff. Which is more real? The promise not to produce more Bitcoins or the US promise to always repay its debt? The answer to this question determines the future of Bitcoin when examined by common extension. Is it rationale to assume that Bitcoin, although it will never produce more coins on its initial production run, does by extension produce more supply simply by the rate of interest it pays. This severely reduces the logic of a somewhat limited supply. Limited according to whom and is anyone doing the math here? As I have always said in my company’s, dilution always matters, whether by stock dividend, or issued debt or equity, more shares out means more shares out, end of story. The plain truth about Bitcoin is it is backed by a promise that the market shall stay rational because the supply is limited yet its very own “dividend yield” is mathematically not sustainable unless people see the rational in a $1M Bitcoin. The $1M Bitcoin has no more asset value than a $1 dollar Bitcoin. It does not matter if the process is managed by my daughter counting the coins with a crayon or a super computer that knows how to process every coin in a nano second. The ability to track has nothing to do with the ability to back! The US government at least has the ability to tax, unlike Bitcoin. This is the first wave of crypto technology, and for all its faults, it has been one hell of a good ride. If Bitcoin can find a way to do reverse currency splits and go back to a dime, it might have a future. Otherwise, the mailman is going to get bit and it won’t be with a coin. It might be with his retirement and that is the sad thing about something that is not rational. The Bitcoin surge is based on building a strong pyramid where the bottom stays bigger than the top and their are more buyers in line than sellers looking to liquidate. When over 100M people own Bitcoin the challenge is going to be where to find the next 200M buyers. That is just simple math. The reality is that the whole world is playing this game so unlike the great “Pyramid Meetings” than consumed Los Angeles in the 1980’s, it may take a awhile to get to 500M under the base of Bit-Coin. In the meanwhile, viva la Bit Coin. Unfortunately, like avocados that get overripe, the line of buyers eventually will require smaller and smaller prices to buy that $2.99 avocado. The market will need a way to process the ten cent sale. Bravo the Block Chain. It can add and subtract after all. Who ever knew it could even divide?
John C Botdorf