Things You Know You Will Never Hear

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One of the hottest hot button topics today - seemingly everywhere - is crypto currencies and sub-topics Bitcoin, blockchain tech and gpu’s. Some experts say it’s a fad, it has no value. Some say it’s the second coming of money and not only stores value but actually creates it. I’ll go out on a limb here and say that not many people I’ve talked to are really convinced one way or the other (a sign of intelligence, I suggest.)

But we can always count on the Fool to be conservative. Without taking any direct quotes, my takeaway so far from the Fool in aggregate has been a vague notion of “stay away; that way be dragons.” Yet the published values of crypto currencies are soaring, mining is rampant and the topic is becoming deeply embedded in endless cultural and economic topics.

One of the unspoken, subconscious thoughts scrambled in my head has been “TMF will recommend crypto-currencies when hell freezes over.”

Welcome to the Freeze. I received an email today from David G. I guess it was a promotion for the podcast of Rule Breakers, which I’m ashamed to say I’ve never taken the time to listen to. Anyway, in this email is a partial transcription of an interview between David G and a RB analyst Aaron Bush. I will quote but 2 tiny slices here.

Gardner: Should I today be buying Bitcoin?

Bush: I’m going to say yes. If this does prove to be a legitimate store of value, the $93 billion market cap today can go 10x, 20x, higher just as people believe in it.

Bush: … I think what is exciting about this movement, in general, is that it’s starting to expand beyond that core group of people into new, exciting applications and new people joining and being interested.

Gardner: [There is a] $93 billion value to this asset class. Even if Bitcoin is zooming up and down daily and is somewhat speculative, there’s real value being created out there.

It’s the idea encased in that very last phrase that has so far befuddled me: there’s real value being created out there.

On one hand I have to wonder how putting some 1’s and 0’s in a machine has possibly created value out of the ether. On the other, I’m sure many third world citizens who have never used an ATM are still wondering the same thing in regards to my accounts at Wells Fargo. Maybe the 2 cases are actually similar. But wait. I worked and provided value in exchange for those 1’s and 0’s at Wells Fargo. I thought that was where the “value” part of the equation originated. Was I wrong all this time?

Frankly, I was kind of hoping crypto currencies would fade away like Beanie Babies and Silly Putty; Learning yet another high-tech investing niche is not high on my list of fun things to do right now and I don’t have the time anyway. But if this is indeed going to change the world we live in …

< sigh > Oh well. Looks like I should get started as soon as time allows. Welcome to the Freeze, indeed. We may be experiencing global warming here but I here hell is solid ice. (Can anyone confirm?)

Dan

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Fiat money (as opposed to commodity money – gold and silver) has no intrinsic value, it is NOT a store of value, it is simply the recording of a transaction abstracting everything but the buyer, the seller and the value exchanged. The “value” of fiat money is what someone will pay you for it. If Bitcoin is going up it’s based on the speculation that someone will pay more for it later. The intrinsic value of Bitcoin is the paper it’s printed on. Zilch.

I think the closest analogue to Bitcoins are Tulip Bulbs.

Some people made money off Tulip Bulbs. Some lost money. A zero sum game.

Denny Schlesinger

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A currency, fiat or commodity based is conferred upon it by people who recognize the value and are willing to accept it as a medium of exchange. You might argue that a commodity based currency has intrinsic value. I would argue that is not true. The “intrinsic” value of gold is not in it’s rarity or in its luster, the value resides in mutual agreement that it is valuable. How valuable? Isn’t it interesting that we express the value of the commodity gold in how many fiat dollars it takes to buy a given quantity?

IMO, Bitcoins (Etheriums, etc. there are dozens of cryptocurrencies) is the epitome of a fiat currency. Even so, it’s value is expressed in the number of fiat dollars it takes to buy a unit.

Is it a fad, like the Dutch Tulip craze? I think not. Is it currently in a valuation bubble? I think yes. So, I disagree with Mr. Gardner. But I concede that Mr. Gardner is probably smarter and better informed on these matters than I am, and he has far more influence than I do; his opinion carries more weight. Nevertheless, that doesn’t make him right.

Blockchain, the enabling technology for all cryptocurrencies is powerful stuff. I think I will live to see it disrupt several finance related industries. Think about it, if all real estate transactions were recorded via blockchain there would be no need for title insurance. Poof, and entire (and lucrative) industry wiped out. Don’t confuse this with cryptocurrency being used as the medium of exchange which will most likely remain in national fiat currencies. Despite the fact that their relative values change on a minute-to-minute basis, all currencies are more or less fungible. I’m addressing the legal recording of the transaction, not the exchange of assets.

Even though Bitcoin valuation is exploding, I do not consider it an investment vehicle. For me, an investment must be based on some underlying productive capacity. No exceptions. You might take a currency position, and it may increase in value relative to the currency you used to take that position, but to my way of thinking you’ve not made an investment, you’ve simply come out on the long end of a speculative bet. It makes little difference if the currency is fiat or commodity based.

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there’s real value being created out there. – David Gardner

My immediate reaction when I read this the other day was to shake my head.

On the other hand, what is “value”? Most things that people strive to gather for themselves are perceived as “valuable”. Gold, stocks, cash, etc, etc… are all perceived as having value of some sort. And it’s all perception. In that sense, I may think bitcoins have value. After all, there is a limited supply… and if lots of people want them, there is “value”.

<Cue to a revised scene from The Graduate>

“Two words kid: tulip bulbs!”

Yeah. If someone wants to pursue bitcoins, fine with me. I don’t expect to follow them down that path.

Maybe, however… if bitcoins becomes a really big thing, it’ll set up an opportunity for a massive future financial collapse.

If fiat currency doesn’t beat them to it.

And no, I’m not a precious metals collector either. LOL

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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