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Is Bitcoin a Crypto-Currency or a Crypto-Asset?

January 27, 2018

 

The first time I got to seriously know about Bitcoin was in 2013, thanks to my friend Dario Pizzato, a so-called long-standing "Miner" (bitcoin miner).

SKEPTICAL

Despite his attempts to convince me of Bitcoin's worth, I was very skeptical, Bitcoin had just reached a thousand dollars and I couldn't understand why a currency (in my head, Bitcoin was only a trading currency) could be worth so much in comparison to the "Currency" with capital C par excellence which is the American dollar (USD).

DRAWDOWN

I was following its progress when I had a bit of time and when it collapsed to 250 dollars, he said to me:" Look, Daniele, you were right", this Bitcoin is nothing more than a meaningless fantasy of a narrow circle of "nerds".

GREAT MISTAKE

I was wrong, I don't need to repeat it, but not so much for the price of Bitcoin (of course, now with hindsight you could say that I was simply a jerk...) because of what Bitcoin represents.

Many people think that Bitcoin is a currency, there are companies that were created to convert Bitcoin into Euro (for puritans you can say it is FIAT currency) instantly at the time of payment with a credit card at a restaurant or even people who have created a wallet to move the Bitcoin cents from one wallet to another and immediately convert them into Euro for those who receive them.

 VOLATILITY

For me, these efforts make no sense, at least as long as Bitcoin will continue to have an annualized volatility of about eighty percent (only the VIX Index has a higher volatility).

It's as if someone wants to pay at a restaurant with a small portion of a shareholding in Apple's stock (just to give an example); theoretically you can create such a thing, technically it's feasible, but nobody cares about it because Apple's stock is an Asset not a currency.

THE WRONG NAME

If when Bitcoin was created, it had been named a Crypto Asset and not Crypto Currency, we would not have probably had all these misunderstandings and I would probably not have made that terrible error of assessment that I made in 2013.

Lately, I have had some very calm discussions on social networks with some traders who considered Bitcoin to have no intrinsic value.

CURRENCY

Actually, giving value to Bitcoin is difficult; if we consider it to be an exchange currency, as many people consider it, then the value of Bitcoin would depend on its relationship with other currencies (as it is seems to be in the exchanges); in this case it would not be justified in my opinion with such a different and disproportionate valuation with respect to the USD and all other currencies because it is not widespread like a payment system and its value would be linked in some way to its circulation ( which on the contrary is absolutely not).

ASSET

However, if you consider it to be an asset, then perhaps you can justify such a high value.

An asset is the shares of a company, an asset is a bond, an asset is an oil barrel or a gold nugget; in short, in finance, it is called asset classes precisely because all these financial instruments are classified differently according to their characteristics.

So is Bitcoin a Crypto Asset?

Of course.

VALUE

Is it a new asset class, Is it a digital that has a value, what is it?

How much can it be worth to free the world from the power of banks?

How much can an asset that distributes wealth more equitably be worth?

How much can an asset that decentralizes and redistributes power be worth?

BLOCKCHAIN

The Blockchain is not only an innovative technology, it is not only a new and safer way to record transactions in an unchangeable way, it is a different philosophy of life, it is based on an open source logic, which means that there is no single ownership but a contribution from everybody; it is a cultural revolution that will undermine hundreds of years of "fiefdoms" and "vegetables" that have characterized the human ego.

How much is this cultural revolution worth?

Is it possible to place a price on this revolution?

Is it worth $300 billion?

Is it worth 21 million Bitcoins?

But how much will these 21 million Bitcoins be worth in the end? It will be worth $1000, $10,000, $100,000, or $1,000,000 as the experts assume (or the deluded ones, only the future which is still unwritten will tell us).

Undoubtedly, the volatility of this instrument is embarrassing and makes it impossible to use it as an exchange currency (try to imagine a restaurant with a menu that changes from when you enter to when you leave by 15%)...

 

In short, among all the values that incorporate Bitcoin, that of being a payment currency is in my opinion the least appreciable.

INVESTMENT

As far as Volatility is concerned, a reduction is however highly desirable, also because even when halved (the volatility, not the price) would remain one of the most variable asset classes (in good and bad times) among those of current investment.

Maybe not everyone knows that the blockchain works a bit like a lung, if you're resting the usage is reduced to the minimum terms, if you are running its usage its amplitude is at maximum; so is the case with the number of "miners" who are trying to win one of the competitions on the cryptation of the last block,  If the price is high, everyone works to try to collect the prize and new miners are always adding, if the price drops (as happened in September 2017 before the current rally) many cars are turned off, because it costs more electrical energy than the chance to win Bitcoins.

 

This photo is an example of "dedicated video cards" to undermine the Bitcoin.

Finally, if we consider Bitcoin as an asset class of investment and we want to estimate its future value, then we need to use quantitative forecasting models; I have tried to estimate its future value and the probability of it happening, but I will talk about it next week.

DB

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