Last week I queried "Is Bitcoin the Undisputed Best Performing Asset Class In the World?". The purpose of that piece and the piece before it was to debunk long standing misconceptions as to the actual investment performance of BTC (bitcoin) as portrayed by respected institutions such as the London Business School and the Financial Times, not to mention Money Magazine.
Now, it's time to get into exactly what value propositions are there to support bitcoin's price.
I've noticed a common thread with many pundits who have erroneously claimed that bitcoin does not have any intrinsic value. That thread is either a distinct lack of knowledge in valuation and/or a misunderstanding of what bitcoin is. Thus, first order of the day is to determine exactly what it is that we are discussing.
What is Bitcoin?
Bitocin (with a capital "B") is protocol-based network. In that regard, it is similar to the Internet - another protocol based network. Bitcoin uses "consensus algorithms" that facilitate network participants in agreeing on the state of affairs in the network. In that regard, it is like a large digital democracy, cum global network computer. This global network computer needs applications to run on it (like the Internet). The first (popular) applications on the Internet were FTP and email. The first application on the Bitcoin network is also (thus far) the most well known. That application is a digital currency called bitcoin (with a lower-case "b"). It is "b"itcoin that many attempt to value and evaluate, but they don't realize it. Because of that misconception, they fail to see the whole value. You see, the full value of bitcoin cannot be separated from that of Bitcoin - at least for knowledgeable investors. See the video below at the 3:10 mark for an explanation.
What is the significance of differentiating between "b"itcoin and "B"itcoin?
You see, the network that "b"itcoin travels on, "B"itcoin, adds significant and material value. It allows bitcoin to be used on a fully automomous basis.
In addition to full autonomy, you can program bitcoins - so much so that you can cause a simple bitcoin transaction to behave as an equity/public stock sale or an interest rate swap or any swap-style transaction using any of over 30k active tickers found on Bloomberg, tracking the underlying basis point by basis point - all without counterparty or credit risk.
Here's a screenshot of our smart contract-enabled bitcoin wallet that is sitting on the same tablet that I'm using to type this article...
In case your wondering... Yes, Bitcoin can replace the prime brokerage function of an investment bank - without the balance sheet exposure. Here's a video of a simple Apple equity exposure trade.
Wow! I didn't know it could do all that? So, why isn't everybody using it?
Well, the FIRE (finance, insurance and real estate) industries are really trying to use it, but they are confused and compromised. They are confused because the word bitcoin has become anathema among the financial elite. Why? Well, because they believe what they read in the pop media and the pop media has attached bitcoin to drug dealing, child porn and all other sorts of underworld murky things (the same things that the USD and the EUR are used for more than any other currency). So, instead of doing their own independent investigation, they jumped to inaccurate conclusions.
But... The underlying technology behind "B"itcoin is so revolutionary, the FIRE sector decided to attempt to co-opt it for their own private label uses. These efforts go by many names, but the most popular are:
- Private Blockchains
- DLTs - Distributed Ledger Technology
- Federated Blockchains
- and the most realistic name of them all, distributed databases.
Now, this can be an entire article onto itself, so let's just suffice it to say that these efforts are doomed to mediocre success at best. Why, you ask? Because:
- The purveyors of these technologies are generally consortiums of large players in the same industry who are direct and often fearsome competitors, and;
- They simply can't benefit from the wide (and increasingly wider) adoption rate of Bitcoin.
Point one is plain on its face. Goldman Sachs does not share trade secrets with Morgan Stanley or JP Morgan. Point two is just as clear once obvious comparisons are made. If you remember when I said the Bitcoin network had some similarities to that other popular network - the Internet. If you were to purchase - of value - two versions of the Internet, one with 30,000 users (roughly the amount of clients of a major US money center bank), and one with 11 million users (the rapidly increasing number of clients for the Bitcoin public blockchain. Which would you consider more valuable? It's like choosing to buy JP Morgan's intranet, versus the entire World Wide Web!
Here are some videos to help drive this point home...
You see, it's the network effect - that byproduct of Metcalf's law - that cements such significant intrinsic value within Bitcoin (in addition to all of the other stuff above).
How much of a value add is the network effect for Bitcoin? I decided to calculate it and plot it out for you...
With that understanding, one should surmise that we believe Bitcoin is a medium term "buy".
Here are some pricing and market depth metrics from today. We will happily assist subscribers in purchasing both bitcoin and bitcoin derivatives, as well as advising on trading, storage/security and strategy.
The next installment will illustrate how to bitcoin into your investment portfolio.
We are now offering consulting services for those institutions are HNW investors who wish to have a deeper dive into this topic, how to monetize it, and handheld guidance along the way.