Content adapted from this Zerohedge.com article : Source
Authored by Peter St.Onge via The Mises Institute,
The value of cryptocurrencies like bitcoin, just like any other kind of money, comes fundamentally from what you can do with it. As a follow up to What Backs Bitcoin, I want to dig into that value.
The idea, which comes from Austrian economist Carl Menger, is that just as a shovel's value comes from its ability to dig, a currency's value comes from its ability to help you do two things: transactions and savings.
Think of transactions as the money you carry in your wallet or checking account, and savings as the rest of what you have in the bank or buried in the yard. It's worth mentioning here that that vast majority of money demand is indeed savings, making up 90% or more of all money demand.
The reason this matters is because if we know what transactions cryptocurrencies are good at, we can estimate how much money demand they'll start pulling from fiat or gold, and therefore how much those cryptos will increase in price.
For transactions, some features that matter are cost and speed of transaction, anonymity, reversibility, counter-party risk, regulatory treatment. For savings demand, those factors are overwhelmed by the specific question of how well the currency keeps its price.
Supply and Demand Determine Price — Always
Price, as always in economics, is simply a matter of demand and supply. When demand is rising faster than supply, the currency will go up in price. And if demand is rising slower than supply, price will go down.
Since bitcoin was born in 2009, it has generally enjoyed demand rising much faster than supply, hence price has soared. While the US dollar, say, has gone down — has "price inflated" — because demand failed to keep up with dollar creation.
Those are the features, now what are the applications: what are people using money for?
When we're looking at a currency's price, because we're looking at total demand we don't care about the number of transactions rather the total amount transacted.
And here, the vast majority of money moving around in the economy is not goods and services — buying a cup of coffee, or a plane ticket — rather financial movements. Paying salaries, buying and selling stocks or bonds, investments and dividends. These occur mostly by bank transfer, which account for 80% of all money moved in the US. Another 15% goes by check, leaving just 3% for credit or debit cards, and 4% for paper cash.
Bitcoin Still under 0.01% of Global Transactions
A final part of the puzzle, what's the competition to cryptocurrencies? Most money payments worldwide are, of course, denominated in fiat currency like dollars or yen — about 99% by amount. With the remaining 1% made in gold.
Note that fiat has both physical and electronic forms, such as credit cards and bank transfers. Even gold payments can be made with paper rather than physically moving the gold, including gold-based securities that trade in financial markets (so-called "paper gold").
Now we're ready to go through those features for each currency. On cost of transaction, bitcoin's fees nowadays average about $1, and don't vary by amount you transfer.
You can send one bitcoin, worth $5,000, or 1,000 bitcoins, worth $5 million, and the fees are still a dollar. In contrast, banks typically charge a percentage of the transaction, which adds up on million-dollar transfers.
Meanwhile, on speed bitcoin is much faster than banks; between 10 minutes and an hour to confirm a transaction, while banks take days.
So bitcoin beats on the most important application of money: financial transfers. The one caveat here is exchange costs. Just as you pay fees and spreads when you exchange your dollars for yen, every time you convert dollars into bitcoin you've got to pay fees and spreads.
This means that bitcoin's low fees only really dominate if both the sender and receiver are keeping the money in bitcoin.
Bitcoin's Exchange Rate Woes
On the other hand, if you have a bunch of dollars and want to buy a house from somebody who likes to keep dollars in the bank, then you'll have to convert your dollars into bitcoin, send the bitcoin for a buck, then the other guy converts the bitcoins into dollars again. You saved on the transfer itself, but you had to exchange the money twice.
So, bitcoin as a technology is superior for the main type of transaction by value, but in reality that advantage is eroded if people are keeping their wealth in fiat. This isn't really a flaw of cryptocurrencies per se, it's just a standard penalty suffered by any minority currency — having to pay for conversion into the dominant currency.
To finish up on cost and speed, obviously physical cash or physical gold are fantastic on both cost and speed, but only if buyer and seller are touching each other. Given paper cash has only a 4% share today, touchable buyers and sellers is a very small part of demand.
For remote orders, then, bitcoin carries lower fees than credit and debit cards, but again with that double-exchange problem unless both buyer and seller are staying in bitcoin.
Bitcoin's Potential to Outperform
Next up are some secondary benefits: anonymity, reversibility, counter-party risk, regulatory treatment.
Briefly, bitcoin is nearly anonymous unless the US government cares enough about you to put some serious people on you. In this sense it's essentially like using cash, but with the advantage you can use it over long distances with those low fees.
In practice, the closest alternative is probably a pre-paid debit card that you buy at 7/11, which can cost several dollars in addition to the merchant fees, and isn't going to work for large amounts nor overseas.
As for reversibility, the question is whether the buyer can cancel his payment. A problem for online vendors who get scammed by people who buy the product, get it in the mail, cancel the order and keep the goodies.
Credit card companies or Paypal famously always side with the customer, which can suck for the honest vendor getting ripped off online. Bitcoin, again like cash, is irreversible once it's confirmed — so about 10 minutes to an hour. That's slower than cash, but faster than Paypal or credit cards where buyers can reverse months later.
Fourth characteristic is counter-party risk; the idea that your bank could go under, taking your money with it. Remember bitcoin was invented in the wake of the 2008 financial crisis, where bank failures were common.
Because bitcoin is distributed across many computers and isn't managed by a central organization, it has no single point of failure. On the other hand, cryptocurrencies do still have potential technical glitches that probably more than make up for that risk.
Regulation: Not If but When
Finally, regulatory treatment. This is where we'll probably see a lot of change over the next couple years, as governments digest cryptocurrencies like bitcoin.
So far cryptos have enjoyed mostly benign neglect from regulators; tolerated, neither discouraged nor encouraged. On the bright side this has meant little regulatory burdens or fees, although this is changing in places like New York.
On the down-side, this regulatory grey-zone has meant a lot of companies and institutional investors are afraid to use, or even to buy, bitcoin. So increasing regulations could actually boost bitcoin demand, as those regulated users become unafraid to play.
As for what happens in the future, countries are gradually drifting into two camps: broadly enthusiastic (Japan, Dubai, Taiwan, Switzerland), broadly skeptical (China, Korea), with the USA and European Union still lurching between the camps.
Cryptos: For now, Only for Adrenaline Junkies
Now, given how much savings dominate money use, the elephant in the room is would you feel comfortable keeping your life savings in bitcoin.
As we mentioned, the key point here is how its price will hold up, meaning will demand grow faster than supply. While bitcoin has knocked the socks off dollars or even gold, rising 800% in the past year alone, even this soaring growth has come with the major downside that bitcoin also fluctuates a lot — easily up or down 50% in a month.
However, as with any product, service, or medium of exchange, the value of cryptocurrencies will depend on the future choices of countless users and consumers — based on their subjective valuations of the currencies themselves. Those who can successfully guess what will become more valuable in the future will become wealthy. But risks always remain.
Hey @zer0hedge thanks for shared a crypto news I appreciate your post 👌 👌
The only thing I have to add to this great article is metcalfs law -
"Metcalfe's law states that the value of a communications network is proportional to the square of the number of connected users of the system. "
I think this applies to Bitcoin as the network that communicates value
It applies to bitcoin and all cryptocurrencies. First the blockchain is a technology and the more people on the blockchain, boom Metcalfe's law. And the more wallets that are open, again we see Metcalfe in action.
Agreed.
Not sure about using wallets as a measure though, as people seem to have more than one wallet. Unless we could somehow figure out the average number of wallets per person.
Yes that is true but the ratio, most likely, would hold no matter what the total.
With 5 million wallets, there are a lot of duplicates...and the same is true for 50M wallets....hence, even though not accurate in a pure sense, it does show the power of the network.
Since a certain percentage are legitimate, probably a large percentage, I would say, overall, the more wallets a token has, the greater its network effect.
I never thought of it that way - that gets you a follow : )
So as long as the ratio holds the number of wallets would be a good measurement. I suppose the challenge is to see if the wallets per person is staying the same or increasing/decreasing
You point to multiple wallets like it is a negative. People could have multiple wallets for a reason. I do.
In bitcoin, I have one that is cold storage....another on my nano....another Xato on my phone....all have differing degrees of money in them and are for different purposes. I am sure I am not the only one.
When you think about it, if a token has usefulness and extreme value, people will have multiple wallets....they arent going to want it all in one place, especially on their phone.
Sorry no I didn't mean to give the impression that I thought multiple wallets were a bad thing. I seem to be collecting more wallets as I do further down the crypto rabbit hole. So for me the wallet ratio is increasing as time goes by.
Fiat, ironically
Bitcoin's value depends on supply and demand. Its advantage is the savings and transaction speed. But the greatest value comes from faith. People believe in it, now Amazon has accepted a payment in Bitcoin, followed by ebaz, facebook. Bitcoin has become unstoppable, all other currencies are escorted and will become worthwhile. Now is the right time to invest, the price is still low, we expect growth to $ 100,000 - $ 200,000 in one year.
I'd like to see Steem that connects to amazon, ebaz and other strong companies. It would be a real boom for all of us who work on steemit. Excellent analysis and details - thank you for useful information @zer0hedge
im throwing every extra dollar i have into crypto. i believe in it. so fuck it. if it wins i win. if it loses then i lose. but atleast i did something with my money that i believed in and thought would change the world.
I think it a wise move and the chance of losing is slim. Just be careful what you put your money into...a lot of scams out there.
Avoid ICOs completely. Get a nice diversified holding of some of the big ones.....also adding some steem is a good idea since you can leverage by upvoting increasing the amount you earn.
@taskmaster4450 i dont bother with ICO's. im a very tech savvy person. i code myself. i invest in a lot of the major cryptos and some lesser known ones depending on the technology and development behind them. i never invest in something i dont thoroughly understand and trust.
the best advice i can give anyone is that if you dont understand it or it doesnt make sense, dont trust it and dont invest in it.
Great...code us up some stores on here to spend our steem so we dont have to turn it into something else after the price skyrockets. :)
I hear you....however, I will keep repeating the mantra because there are a ton of non tech understanding people on their way into this sector.
The tech based, early adopter stage is done....now comes the finance...the overall IQ just went way down.
i still think we're in the early adopter stages. i seen something the other day that btc accounts for like 0.01 percent of monetary transactions and theres something like 75% of the world not even knowing about it yet. so theres still tons of room to grow.
also, funny thing. ive been thinking about working on some sort of marketplace idea. was just talking about it to someone the other day haha.
I agree we are in the very early stages. We tend to get skewed because we are surrounded by people who know and understand crypto. The truth is that most do not even know what it is. Bitcoin is what most heard of, if they heard of anything at all. Steem for example, is known to less than 1/100th of the population.
well read; thnks for sharing
Very interesting article, im gonna bookmark when someone ask me this
Thanks for sharing
Bitcoin does not provide anonymity. Please don't spread false information. With what's already going on with the surveillance state, your Bitcoin transactions can't be expected to remain private.
https://cryptopotato.com/zcashs-encrypted-blockchain-satoshis-vision-interview-zooko/
https://www.dashforcenews.com/charlie-lee-is-right-an-over-caffeinated-rant-on-bitcoin/
Those words are from Charlie Lee. If Bitcoin was miraculously fungible I think he would be one of the first people to know.
I agree! The value does depend on transactions and savings. The one thing I want for my cryptos is for them to work for me. So not only am I looking for longevity in coins but the assets and projects behind them. I have my favorite top 5 just waiting for them to increase their price. Do you think the exponential growth could be the result of current hacks? Im mean, Since BTC was growing slowly in the early days but by 2015 it was taking days to increase in price. Now its taken a few hours.
This article brings up a huge point: People complain about bitcoin being slow and expensive. When compared to the banks, it is lightening quick and cheap.
I like the idea of looking not at transactions but the amount transacted. This is where the action is. Look at the percentage of credit cards....it is nothing. Let something else worry about that. Most money moved is in larger volumes and through banks. That is the sweet spot for Bitcoin. It is not to move $190 for a cup of coffee but to move a companies payroll for its overseas subsidiary.
Thanks as always for the post.
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This crypto thing is really fascinating. Im really exited to see where it is in 10 years from now. Maybe the banks will not even exist anymore!
This post stimulated an idea for a post for me.
I have not seen this discussed much about bitcoin. Everyone likes to point to the transaction time along with the pricing and say it is a negative. Bitcoin is too slow and costly to be money. Wrong. In the financial arena, most money moved is via banks...which is even slower and more costly.
The other coins are fighting to be the ruler of the 3%.
Good Post 👍👍👍
im new plz fallowe me