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What is the “real” price of bitcoin?

Even before Bitcoin was part of the zeitgeist for the digerati, people have been guessing what the price of a bitcoin should and should not be.

For example, a duo days after version 0.1 was announced on the Metzdowd mailing list (back in January 2009), Hal Finney posted a possible script:

As an amusing thought experiment, imagine that Bitcoin is successful and becomes the superior payment system in use across the world. Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With twenty million coins, that gives each coin a value of about $Ten million.

So the possibility of generating coins today with a few cents of compute time may be fairly a good bet, with a payoff of something like one hundred million to 1! Even if the odds of Bitcoin succeeding to this degree are slender, are they truly one hundred million to one against? Something to think about…

Hal Finney, brilliant engineer and the world’s very first Bitcoin price divinator.

Over the subsequent weeks, months and years there has been no shortage of guesstimates and “technical modeling” that gauge what the price will be.

For example, a year ago (in February 2014), Founders Grid asked fifty Bitcoin “experts” what their bitcoin price predictions were over the next year. The end result — all but a duo were downright, very wrong (see this spreadsheet for a line-by-line itemization).

Later, in May 2014, CoinTelegraph asked (movie above) more than thirty Bitcoin “experts” as to what their bitcoin predictions were for the end of 2014. Once again, all but a duo were totally, very wrong.

How could sultry enthusiasts who pay attention to Bitcoin-related news be so insanely off on what some consider a “sure-bet” moon shot?

The brief reaction: just because you are domain experienced in one area does not mean you are a price modeling experienced. (Disclosure: I attempt not to give price predictions because I know I am not a price modeling experienced)

Let’s look at a few examples.

A duo days ago CoinDesk interviewed Denis Hertz, a project manager at ALFAquotes who has created the “Fair Bitcoin Price indicator.” And that according to its calculations, the current fair price is $518.

How has he calculated it?

Very first, it calculates the switches in the cost of mining equipment and its spectacle. Next, it attempts to assess the switch in difficulty of production, factoring in the tens unit costs faced by miners on the network.

In particular, Hertz indicated that the fair value contraption should be embraced by miners, as the price today is lower than the fair price – a factor he attributes to the latest string of bankruptcies and closures in the sector.

There are a few mid-to-late 19th century German economists that would be glad to see — what is effectively — the Labor Theory of Value as back en vogue. But it is disingenuous to attribute value based on inputs because it wholly disregards the subjective valuation of the request side of the equation.

It is not a valid way to measure value of a widget (or virtual commodity in this example) for the same reason that the value of a Renoir or Matisse painting is not based on the value of the inputs (oil paint, canvas, brush, framework, etc.).

Speaking of art: David Andolfatto, a marbleized personification of Marcus Aurelius, also disagreed:

It is unclear where this theory very first commenced in relation to bitcoin, perhaps it was from Curtis Yarvin, who writes at Unqualified Offerings as Mencius Moldbug (he shortly discussed this idea four years ago).

The main thrust of this idea is that because some market participants buy and perma-hold an asset, it eliminates supply from the market, thereby ceteris paribus — assuming the same quantity demanded — it should eventually shove market prices higher because less supply is available. Or in brief, if people hoard bitcoins, their price will somehow rise.

Their are numerous problems with this theory:

1) Financial history is littered with corpses of people, organizations and countries that attempt to corner supply to artificially boost an asset price. And in bitcoin, the hoarders are collectively attempting to do what the Hunt brothers attempted to do with silver, what Malaysia attempted to do with tin and what China attempts to do with uncommon earth elements. It doesn’t work because cornering supply has never ensured long-term price rises and if everyone hoarded, it would make bitcoin have zero economic value because there would be no circular flow of income (see also the coordination problem below in #Four).

I spoke with George Samman, co-founder of BTC.sx and frequent writer on Bitcoin-related topics. In his view:

Hoarding does not help the bitcoin economy at all, in fact it stifles its growth as its clamoring for traction and mass acceptance. It locks up bitcoin in a place where its not being cycled back and forward making it scarce and therefore making it economically unviable as a currency and as a means of transaction. Hoarding in no way makes bitcoin a viable solution in the medium to long term. Not to mention if hoarding is done to manipulate price, it may work short-term, but cornering supply has never been a superb wealth strategy especially as people and/or governments sniff out manipulation and “switch the rules of the game.” Its more of a going bust strategy.

Two) It does not account for and seems to disregard both transactional request and speculative request. Because price discovery presently takes place in relation to national currencies on exchanges, it is the liquidity at exchanges and the switching request of this liquidity which directly impacts prices. Perma-holding (“hodling”) likely makes it more difficult to get into and out of positions (due to slippage). One

And what impacts the request on exchanges?

The volatility in request (switches in request) likely comes from the fact that the “fair value” of bitcoin is permanently fluctuating. For example, every time a fresh “big adopter” rumor is posted on reddit, a professional exchange opens, an exchange gets robbed, a fresh central bank paper is released, or a regulator gives a speech — the expected future value of bitcoin switches.

For example, last February, when the market learned up to 850,000 bitcoins may have been permanently eliminated from circulation (simply did not exist), skill that became public due to the bankruptcy of Mt. Gox, prices rose but then fell a duo weeks later when it was announced that perhaps 200,000 coins may have been located in a disused wallet. The market was incorporating switches in supply relative to existing speculative request.

Robert Sams, co-founder of Clearmatics and a former interest rate trader, has a good explanation (pdf) of this phenomenon:

If a cryptocurrency system aims to be a general medium-of-exchange, deterministic coin supply is a bug rather than a feature. This is because switches in coin request get translated into switches in coin price, making price volatility proportional to request volatility. But that is only a very first order e ffect, for expectations of future levels of coin request give rise to speculation. If the expectations of the long-term rate of coin adoption are signi cantly greater than the rate of coin supply growth, people will buy and hold coin in anticipation of future adoption, driving up the current price of coin.

It is the nature of markets to thrust expectations about the future into current prices. Deterministic money supply combined with uncertain future money request conspire to make the market price of a coin a sort of prediction market on its own future adoption. Since rates of future adoption are very uncertain, high volatility is inescapable, as expectations paraffin wax and wane with coin-related news, and the coin market rationalises high expected comebacks with high volatility (no free lunch).

Or in another example: if Satoshi’s alleged one million coins embarked moving around, it would also likely drive down the price as this supply has largely been considered eliminated from circulation, specifically at exchanges. Two

Three) While bitcoin’s creation rate is motionless, perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry. Sure those planes may one day appreciate in value to become very assessed museum lumps, but this overlooks the utility of flying entirely.

This is a similar problem with most tokens in the “Bitcoin Two.0” world which purportedly give you access to networks (e.g., pre-paid bounty cards). In this case it would be akin to going to the Fresh York subway in the 1980s, removing a handful of subway tokens and storing them in a lock box with the belief that their value will rapidly appreciate.

They may eventually become a valuable collectible or antique, but all that happens in the latter situation is that the subway token minter will just create more to substitute those eliminated from circulation; the intended utility is railing the subway, not perma-storing value in the token itself (in December 2014, residents of St. Petersburg “hoarded” subway tokens for a different reason).

Four) It likely runs into a coordination problem. Each individual has different time preferences and horizons for how and when they will sell their assets at (in this case, bitcoins). Empirically we have seen this story before with OPEC, in which participants “cheat” and do not go after their internal “Honors Program” — producing more oil than their quotas. And as a consequence, it increases downside pressure on the price.

Organizing individuals and jawboning them into selling or holding as frequently occurs on social media with relation to bitcoin and other altcoins. This is what Josh Garza has attempted to do with Paycoin, who has promised a diversity of price floors (notably $20). Yet because the market is decentralized, he has ended up resorting to tactics such as an ad hoc “Honors Program” in which he (and his employees) attempt to coax other holders/traders not to all sell at once because this drives down the price below the promised price floor (due to a lack of extra request). In fact, despite these hopes and fantasies, as of this writing Paycoin is toughly at an all-time low hovering around $0.60 per coin. Maybe that will switch, but then again, that could be wishful thinking (note: Garza’s GAW mining is likely some type of fraud).

In order for bitcoin to reach and maintain a stratospheric price level (greater than $Two,000 a coin) in the face of similar coordinated and uncoordinated sell-side pressure, at least an equal amount of speculative (and/or transactional) request would need to be brought on board to absorb a similar sell off of bitcoins. Three

What happens if such request does not materialize to absorb it? Prices drop.

For example, last September I provided some comments to CoinDesk about why prices fluctuate which touch on the request side on exchanges and OTC facilitators:

And in other cases, an OTC buyer can affect exchange via “buy pressure.” If he starts buying directly from an OTC provider, avoiding an exchange, the exchange loses its buy wall thus affecting price. The sell pressure coerces the price down and once a large buyer goes “off-market,” he is weakening the buy pressure. If all the buyers and sellers are “off-market,” we can say that exchange price and price discovery is twisted. As my friend Raffael Danielli recently said, “Information is never off-chain and ultimately information makes the price.” Consequently today information spreads very quickly and if a broker can make money because he facilitates “off-chain” transaction and knows “better” what the real price is then game theory dictates he should take advantage off this (investment banks do the same with OTC).

So in addition to partnership agreements, they very likely also sell somewhere else to mitigate exposure to this volatility. In addition, many miners have to finance their operations and at current prices of $410, harshly $1.6 million is created every day via block prizes and it has to go somewhere. Fewer people buying? Down we go.

On almost a daily basis there is a discussion on reddit or Twitter about merchant acceptance and how the increase in adoption of bitcoins for payments by merchants should eventually be reflected in higher market prices of bitcoin itself. This reasoning is problematic for a multiplicity of reasons but most importantly: empirically it has not happened because it doesn’t account for any switches in consumer request for the token.

Why haven’t consumers enhanced their request of cryptocurrencies for retail transactions?

In August last year, Wedbush, an equity research rock-hard, made the claim that:

Volatility in the price of bitcoin should not impede retailer acceptance of bitcoin, in our opinion, as merchants and payment processors are entirely shielded, and we expect consumers will be shielded in the future.

This is a bit of wishful thinking. While there are an enhancing amount of products and services that can hedge against volatility (such as Hedgy or Tera Exchange), in each example, this costs a customer both time and money — which the average consumer very likely is not interested in becoming experts at (e.g., airline fuel hedging strategies). Consumers want stable currencies, not friction-full hobbies they have to fiddle around and hedge against every day. Four

Why does this matter?

In its February two thousand fifteen analysis (pdf), the European Banking Commission looked at a diversity of opportunities and challenges of “virtual currency schemes.” One area that it looked at was:

Is Bitcoin establishing itself as a successful payment method?

In general, a buyer and a seller can agree on anything to be used as money (both regulated and unregulated payment methods) in a specific transaction. Consequently, virtual currencies may also be used as a payment method if both sides agree. The basic problem for every two-sided market is, however, that it needs “critical mass” on both sides for it to function. For payment cards and other payment instruments, reaching critical mass requires having enough merchants who accept the payment instrument and enough users who want to use the payment instrument so that it becomes attractive for other merchants and other users to join, thereby accelerating the network effects.

There are now over 100,000 merchants that now accept bitcoin for payments, up from

20k last January. At this rate, by the end of next year, there will very likely be more merchants that accept bitcoins than actual on-chain users of bitcoin.

While any number of reasons are stated for why merchants could and should proceed supporting bitcoin, unless consumers use it on a regular basis, continuing to train employees on how to accept it at point-of-sale consumes is an chance cost for merchants as those resources could be used for other purposes (there have been several latest threads on reddit from Wholly Hemp on this issue).

Why is that? Recall that there has likely been no switch in aggregate retail usage by consumers this past year. That is to say, while nominal on-chain transaction volume may have enlargened, the aggregate, the total amount of bitcoins used altogether for retail commerce has stayed toughly the same (the rest is evidently superfluous activity). If you are a merchant, why should you proceed to support a foreign currency that costs more to support than you save by accepting it? Again, maybe this will switch in the future and more merchant adoption does, for some reason, spur consumer usage.

Percent of precious metals and transaction volumes

The basic idea of this argument, from among many organizations such as Pantera Capital (a fund dedicated to Bitcoin-related investments), is that if bitcoin is the digital equivalent to gold or silver — or is even in fact superior to gold and silver — then should it not go after that its market cap should absorb some percentage of these metals?

For example, last October, Pantera provided an assessment (pdf) related to the price per bitcoin relative to the market capitalization of a multitude of assets (including gold, remittances, payments and global money supply (as measured by M2) itself:

From Pantera Capital

While some of their two thousand fourteen predictions haven’t panned out (recall “interest” versus “adoption”), perhaps future events will sway their way and switch with the advent of fresh investment vehicles like GBTC or ETFs.

Again, that chart above states that if bitcoin absorbed the market cap of gold, each bitcoin would be worth as much as $550,954. And what would happen if bitcoin somehow absorbed the market cap of the world money supply (and payments, remittances, gold, etc.)? It would purportedly reach as high as $Four,291,060 a chunk.

However, under such a script, not only does this run into the logistical exergetic issues of the “Million Dollar Bitcoin” (pdf) but variations of this argument also involve supplanting some percentage of a payment rail. For example, if the Bitcoin network captured X% of the daily transaction volume of Visa or ACH then it should create extra request for bitcoin, bidding up the market value to fresh highs. But this could be a non sequitur. Just because supporters find value in this “virtual currency scheme” does not mean the rest of the market will. Perhaps they will, but in this circumstance, this tech is not being built in a vacuum so maybe not.

For example, presently listed on AngelList:

While many of these startups will burn out of capital and fail to build up traction, there may be a handful that do find significant consumer adoption — and it may or may not involve a cryptocurrency. Five

One extra challenge with the X%-of-incumbents market share argument (and this occurs in every industry) is that it assumes that market participants (Alice and Cathy) are willing to go through the frictions to use Bitcoin, the network instead of existing rails or products like Apple Pay. Or that Alice and Cathy perceive bitcoin, the asset, the same way as some backers do. It could happen but is conceivable that it may not as well (to be even passed, there are any number of investors and entrepreneurs that have bullish views, Pantera was just used as an example).

For balance I spoke with Raffael Danielli, a quantitative analyst at ING Investment Management and proprietor of Matlab Trading, and in his view:

In terms of pricing bitcoin, equity models do not work (no dividends, no predictable cash flows) and forex models also don’t work. At this moment I would value Bitcoin somehow like gold, meaning lots of speculative value and little intrinsic value. When people make those comparisons with precious metals they usually assume that “what if Bitcoin became as big as the market cap of xyz”. More realistically would be to assume “what if Bitcoin became x% as big as the market cap of xyz” with x being (a lot) smaller than one hundred because both are challenging for the same market share (not entirely true but to some degree).

This also touches on the binary outcome argument: that bitcoin will either go to the moon or fall to zero. This is a false dichotomy. Just as it would be fallacious to assume that a fresh car marquis will absorb all of the market share from the rest of the industry (or none at all), or that a fresh computer company will similarly displace all incumbents (or none at all), so to is it incorrect to assume that a cryptocurrency only has two directions to go: vaulting into geosynchronous orbit or crashing on the launch pad.

What happened to something in the middle; remain-a-viable niche?

To cut to the pursue, all bitcoin technical analysis has about as much scientific predictive power as phrenology does. Not only is the market illiquid and manipulable (see Willy Bot) but there is (very likely) still no real fundamental value beyond the transactional request floor set most likely by the request generated through the trade of illicit goods and services. Perhaps that will switch in the future, but maybe not.

For example, Ryan Selkis (“Two Bit Idiot”) recently performed a back-of-the-envelope calculation to create an estimate for “transactional request” — dialing down to a figure of $0.25 per bitcoin.

A year and a half ago, when the market price of a bitcoin was $143, Rick Falkvinge put together perhaps the only analysis of transactional request generated by illicit trade (e.g., online gambling, dark markets, Silk Road, etc.). Based on his own break down of the velocity of coins it amounted to toughly $1.12. Everything on top of that is based on speculative request.

In his words, “[…] the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is toughly one US dollar and twelve US cents. And that’s still a generous estimate.”

Interestingly enough, Falkvinge reached out to Automattic, parent company of WordPress (a CMS developer and web host) to find out what kind of payment volume they had observed (they originally announced support for bitcoin payments in November 2012). According to Falkvinge:

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The reaction came quickly – “a duo of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is presently no measurable bitcoin economy outside of drugs and gambling.

Last July I also reached out to Automattic to find out if the volume had switched. In an exchange with Chris L., from customer service (ticket #1886104), he stated:

We will not disclose that type of information since we keep our financial information private, as well as any information as it relates to our users. If you have any go after up questions, or concerns, please do not hesitate to reply back.

Swift forward to last week, Matt Mullenweg, co-founder of WordPress explained that bitcoin was recently dropped as a payments option (it may be added again later). Why?

The volume has been ripping off since launch, in two thousand fourteen it was only used about twice a week, which is vanishingly puny compared to other methods of payment we suggest.

The takeaway should not be seen as “bitcoin does not have value” or that “bitcoin will not increase in value” or that even “bitcoin will not displace gold as a store of value.” It clearly does have some kind of value to thousands, perhaps enormous value and utility to hundreds of thousands of traders, merchants and consumers of all stripes.

But in almost every case above, as well as many more often stated on forums, the argument is typically from a supply-sided viewpoint and not the request (see Steve Waldman’s comments from the Cryptoecon event). Historically most of the speculative request seems to originate from a diversity of investors with high risk tolerance and low time preference, with the expectation that prices will eventually go up (for a diversity of reasons).

While it could switch, empirically, we see that in general most participants are still holding coins and not using it for trade or commerce. Six And without any extra actual use-cases that generate transactional request or extra aggregate request from outside investors, it is likely that the bitcoin price will largely stay within the range it has seen this past year. After all, why would it increase just because a large whale has moved a significant quantity to a cold wallet?

How then, can the market value of bitcoin — with a marketcap (or money supply) similar to that of the M1 of the Bolivian boliviano (according to the same ECB report above) — switch in the future? Seven

Every bitcoin holder benefits from any kind of “good” news. So there is an incentive to pump and manufacture as much good news as possible (e.g., astroturfing). This seems to have culminated in an effort announced last week by the Bitcoin Foundation:

The Bitcoin Foundation announced today a partnership with Bitcoin companies BitFury, BitGo, Tally Capital, ChangeTip, and Bitcoin Foundation lifetime member Bruce Fenton to engage theAudience – one of the world’s largest multi-channel publishers of social and digital content. theAudience’s team of digital storytellers will work closely with these groups to launch a multi-faceted social and traditional media campaign to educate businesses, consumers, and society at large about Bitcoin.

Is this the same type of payola that “Tom Butterfield” investigated last summer? The downside of this “educational” shove is now any time there is “good” news, we may have to consider the source to find out if it is organic or just a sponsored puff lump.

However in the end, it very likely doesn’t indeed matter what we think or publish, what matters is — like all markets — is what the actual traders on markets think. And as an aggregate of their request relative to the available supply on exchanges, the value is around $270 today. Perhaps future expectations of utility and value will dramatically switch once the BitLicense is fully resolved and professional exchanges such as Gemini and LedgerX come online.

Is there a way to model prices?

Future research could look at violating down a cryptocurrency into consumption segments/tranches just as gold is typically done: (e.g., jewelry, investments, industry, etc.).

One reviewer suggested another way to model the future price of bitcoin:

Let v(t) denote the purchasing power of bitcoin (or USD) at date t.

Let R(t+1) = v(t+1)/v(t) denote the (gross) rate of comeback on (zero interest) money.

Since money (BTC included) is an asset, it must earn an expected rate of comeback E[R(t+1)] that competes with other forms of wealth. We might make adjustments based on liquidity premia etc, but to a very first approximation, let’s just say that the expected rate of comeback from holding BTC must be about the same as holding any other asset. This is basically the EMH. And it is a compelling argument (just do the counterfactual).

So, for those people expecting thick capital gains from holding BTC… they may turn out to be correct ex post but, if they are, they would just be fortunate. The same holds true for any other asset.

Moreover, the EMH tells us that the value of BTC v(t) must go after a random walk with drift — the best forecast for tomorrow’s BTC price is today’s BTC price (plus a modest drift term).

The EMH above only pins down the expected rate of comeback on an asset — it does not have anything to say about the *level* v(t), only its rate of switch.

It is unclear what, if anything, pins down v(t) for BTC, or any fiat object. There are some theories, but in general, I think that v(t) may be indeterminate (i.e., the equilibrium v(t) could be a self-fulfilling prophecy).

If this conjecture is correct, then one could imagine discrete leaps in v(t) that happen for no good reason at all (unspoiled psychology), without altering the expected comeback properties of the asset.

So, for example, the BTC price could all of a sudden drop from $300 to $100 and at the same time be a very good investment because if you buy it at $100, it is still expected to generate a competitive come back. But this does not mean that the price might not hop down again to $50, or, indeed, up to $150.

One limitation to this treatment is that EMH most likely more appropriately applies in a normal, more very liquid market with professional traders that are better informed and have equal access to information (there are presently a number of information asymmetries) and in which financial controls are the norm and not the exception — recall that there is no “neutral” exchange in the cryptocurrency world, all “exchanges” are effectively broker-dealers.

So the treatment above assumes that insiders and operators of large exchanges are segregated from financial information of their customers, which they are not (e.g., because of a lack of financial controls, some exchange operators can presently front-run and ‘naked brief sell’ their own customers which then distorts price discovery and the overall market).

Researchers may also be able to build a short-term sentiment index of large traders and market makers. For example, “accelerating merchant adoption” is typically mentioned as a bullish catalyst. Maybe that’s true in the long-run but in the short-run it very likely isn’t (as described above). In a very first step someone could create a plain regression model to measure the coefficient of “one unit of market adoption” on the market price. Then in a 2nd step make some assumptions about market adoption for all of two thousand fifteen and use the estimated coefficient to derive (one petite part) of the future price.

If someone does it like this for the most significant market actors and factors, you could be able to derive a future price that is more than just a gut feeling.

  1. As we have also seen with altcoins it could also reduce liquidity on exchanges amplifying volatility. One reviewer suggested that with traditional equities, in such a script the influence is likely on liquidity and not on value since traditional calculations always take all outstanding shares into account when calculating value, not just the ones traded on an exchange. [↩]
  2. See also: Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims [↩]
  3. See How do Bitcoin payment processors work? [↩]
  4. In one respect, a similar problem faced Linux F/OSS adoption twenty years ago: end-users wished a desktop OS, not a full-time hobby. [↩]
  5. See Is the adoption of blockchains and consensus ledgers a foregone conclusion? [↩]
  6. It is arguably rational to hold with the expectation of price appreciation; spending may actually be irrational [↩]
  7. See also Why Bitcoin does not have a market cap [↩]

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two thoughts on “ What is the “real” price of bitcoin? ”

The “argument” that “if people hoard bitcoins, their price will somehow rise” is not an argument. This is how monetary request for a good is defined and this is what constitutes the medium of exchange function. Of course, there are other factors influencing the price. Hoarding also has a positive effect on liquidity, thus contradicting your argument that this causes slippage.

The term “transaction request” does not represent request from economic point of view, it’s a misnomer. It’s a consequence of request, not request itself.

And it’s not like the Austrians insist on having a different treatment here than other schools. Just look at Wikipedia (https://en.wikipedia.org/wiki/Demand_for_money):

“The request for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.”

The takeaway should be that hardly any pundit (pro- and con-) understands the request for Bitcoin, and waste their time on collecting empirical data and squeezing them into meaningless conclusions.

BTW Cointelegraph interviewed me as well, but I said I don’t know what the price would be so they didn’t put my part into the movie.

The only part of this post that strikes me as obviously wrong is “perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry.”

Bitcoins don’t have a use-value other than exchange, like airplanes, so by holding them you’re not truly missing out on anything.

When you spend bitcoins, you don’t get value aside from the value of their market price at the time. But you also get that value by holding them.

What is the – real – price of bitcoin, Fine Wall of Numbers

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What is the “real” price of bitcoin?

Even before Bitcoin was part of the zeitgeist for the digerati, people have been guessing what the price of a bitcoin should and should not be.

For example, a duo days after version 0.1 was announced on the Metzdowd mailing list (back in January 2009), Hal Finney posted a possible script:

As an amusing thought experiment, imagine that Bitcoin is successful and becomes the superior payment system in use via the world. Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With twenty million coins, that gives each coin a value of about $Ten million.

So the possibility of generating coins today with a few cents of compute time may be fairly a good bet, with a payoff of something like one hundred million to 1! Even if the odds of Bitcoin succeeding to this degree are slender, are they truly one hundred million to one against? Something to think about…

Hal Finney, brilliant engineer and the world’s very first Bitcoin price divinator.

Over the subsequent weeks, months and years there has been no shortage of guesstimates and “technical modeling” that gauge what the price will be.

For example, a year ago (in February 2014), Founders Grid asked fifty Bitcoin “experts” what their bitcoin price predictions were over the next year. The end result — all but a duo were downright, very wrong (see this spreadsheet for a line-by-line itemization).

Later, in May 2014, CoinTelegraph asked (movie above) more than thirty Bitcoin “experts” as to what their bitcoin predictions were for the end of 2014. Once again, all but a duo were fully, very wrong.

How could sultry enthusiasts who pay attention to Bitcoin-related news be so frantically off on what some consider a “sure-bet” moon shot?

The brief response: just because you are domain pro in one area does not mean you are a price modeling pro. (Disclosure: I attempt not to give price predictions because I know I am not a price modeling pro)

Let’s look at a few examples.

A duo days ago CoinDesk interviewed Denis Hertz, a project manager at ALFAquotes who has created the “Fair Bitcoin Price indicator.” And that according to its calculations, the current fair price is $518.

How has he calculated it?

Very first, it calculates the switches in the cost of mining equipment and its spectacle. Next, it attempts to assess the switch in difficulty of production, factoring in the electro-therapy costs faced by miners on the network.

In particular, Hertz indicated that the fair value contraption should be embraced by miners, as the price today is lower than the fair price – a factor he attributes to the latest string of bankruptcies and closures in the sector.

There are a few mid-to-late 19th century German economists that would be glad to see — what is effectively — the Labor Theory of Value as back en vogue. But it is disingenuous to attribute value based on inputs because it wholly disregards the subjective valuation of the request side of the equation.

It is not a valid way to measure value of a widget (or virtual commodity in this example) for the same reason that the value of a Renoir or Matisse painting is not based on the value of the inputs (oil paint, canvas, brush, framework, etc.).

Speaking of art: David Andolfatto, a marbleized personification of Marcus Aurelius, also disagreed:

It is unclear where this theory very first began in relation to bitcoin, perhaps it was from Curtis Yarvin, who writes at Unqualified Offerings as Mencius Moldbug (he shortly discussed this idea four years ago).

The main thrust of this idea is that because some market participants buy and perma-hold an asset, it liquidates supply from the market, thereby ceteris paribus — assuming the same quantity demanded — it should eventually shove market prices higher because less supply is available. Or in brief, if people hoard bitcoins, their price will somehow rise.

Their are numerous problems with this theory:

1) Financial history is littered with corpses of people, organizations and countries that attempt to corner supply to artificially boost an asset price. And in bitcoin, the hoarders are collectively attempting to do what the Hunt brothers attempted to do with silver, what Malaysia attempted to do with tin and what China attempts to do with uncommon earth elements. It doesn’t work because cornering supply has never assured long-term price rises and if everyone hoarded, it would make bitcoin have zero economic value because there would be no circular flow of income (see also the coordination problem below in #Four).

I spoke with George Samman, co-founder of BTC.sx and frequent writer on Bitcoin-related topics. In his view:

Hoarding does not help the bitcoin economy at all, in fact it stifles its growth as its clamoring for traction and mass acceptance. It locks up bitcoin in a place where its not being cycled back and forward making it scarce and therefore making it economically unviable as a currency and as a means of transaction. Hoarding in no way makes bitcoin a viable solution in the medium to long term. Not to mention if hoarding is done to manipulate price, it may work short-term, but cornering supply has never been a fine wealth strategy especially as people and/or governments sniff out manipulation and “switch the rules of the game.” Its more of a going bust strategy.

Two) It does not account for and seems to overlook both transactional request and speculative request. Because price discovery presently takes place in relation to national currencies on exchanges, it is the liquidity at exchanges and the switching request of this liquidity which directly impacts prices. Perma-holding (“hodling”) likely makes it more difficult to get into and out of positions (due to slippage). One

And what impacts the request on exchanges?

The volatility in request (switches in request) likely comes from the fact that the “fair value” of bitcoin is permanently fluctuating. For example, every time a fresh “big adopter” rumor is posted on reddit, a professional exchange opens, an exchange gets robbed, a fresh central bank paper is released, or a regulator gives a speech — the expected future value of bitcoin switches.

For example, last February, when the market learned up to 850,000 bitcoins may have been permanently liquidated from circulation (simply did not exist), skill that became public due to the bankruptcy of Mt. Gox, prices rose but then fell a duo weeks later when it was announced that perhaps 200,000 coins may have been located in a disused wallet. The market was incorporating switches in supply relative to existing speculative request.

Robert Sams, co-founder of Clearmatics and a former interest rate trader, has a good explanation (pdf) of this phenomenon:

If a cryptocurrency system aims to be a general medium-of-exchange, deterministic coin supply is a bug rather than a feature. This is because switches in coin request get translated into switches in coin price, making price volatility proportional to request volatility. But that is only a very first order e ffect, for expectations of future levels of coin request give rise to speculation. If the expectations of the long-term rate of coin adoption are signi cantly greater than the rate of coin supply growth, people will buy and hold coin in anticipation of future adoption, driving up the current price of coin.

It is the nature of markets to thrust expectations about the future into current prices. Deterministic money supply combined with uncertain future money request conspire to make the market price of a coin a sort of prediction market on its own future adoption. Since rates of future adoption are very uncertain, high volatility is unpreventable, as expectations paraffin wax and wane with coin-related news, and the coin market rationalises high expected comebacks with high volatility (no free lunch).

Or in another example: if Satoshi’s alleged one million coins embarked moving around, it would also likely drive down the price as this supply has largely been considered eliminated from circulation, specifically at exchanges. Two

Trio) While bitcoin’s creation rate is immobilized, perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry. Sure those planes may one day appreciate in value to become very assessed museum lumps, but this disregards the utility of flying entirely.

This is a similar problem with most tokens in the “Bitcoin Two.0” world which purportedly give you access to networks (e.g., pre-paid bounty cards). In this case it would be akin to going to the Fresh York subway in the 1980s, removing a handful of subway tokens and storing them in a lock box with the belief that their value will rapidly appreciate.

They may eventually become a valuable collectible or antique, but all that happens in the latter situation is that the subway token minter will just create more to substitute those eliminated from circulation; the intended utility is railing the subway, not perma-storing value in the token itself (in December 2014, residents of St. Petersburg “hoarded” subway tokens for a different reason).

Four) It likely runs into a coordination problem. Each individual has different time preferences and horizons for how and when they will sell their assets at (in this case, bitcoins). Empirically we have seen this story before with OPEC, in which participants “cheat” and do not go after their internal “Honors Program” — producing more oil than their quotas. And as a consequence, it increases downside pressure on the price.

Organizing individuals and jawboning them into selling or holding as frequently occurs on social media with relation to bitcoin and other altcoins. This is what Josh Garza has attempted to do with Paycoin, who has promised a diversity of price floors (notably $20). Yet because the market is decentralized, he has ended up resorting to tactics such as an ad hoc “Honors Program” in which he (and his employees) attempt to woo other holders/traders not to all sell at once because this drives down the price below the promised price floor (due to a lack of extra request). In fact, despite these hopes and desires, as of this writing Paycoin is toughly at an all-time low hovering around $0.60 per coin. Maybe that will switch, but then again, that could be wishful thinking (note: Garza’s GAW mining is likely some type of fraud).

In order for bitcoin to reach and maintain a stratospheric price level (greater than $Two,000 a coin) in the face of similar coordinated and uncoordinated sell-side pressure, at least an equal amount of speculative (and/or transactional) request would need to be brought on board to absorb a similar sell off of bitcoins. Three

What happens if such request does not materialize to absorb it? Prices drop.

For example, last September I provided some comments to CoinDesk about why prices fluctuate which touch on the request side on exchanges and OTC facilitators:

And in other cases, an OTC buyer can affect exchange via “buy pressure.” If he embarks buying directly from an OTC provider, avoiding an exchange, the exchange loses its buy wall thus affecting price. The sell pressure coerces the price down and once a large buyer goes “off-market,” he is weakening the buy pressure. If all the buyers and sellers are “off-market,” we can say that exchange price and price discovery is twisted. As my friend Raffael Danielli recently said, “Information is never off-chain and ultimately information makes the price.” Consequently today information spreads very quickly and if a broker can make money because he facilitates “off-chain” transaction and knows “better” what the real price is then game theory dictates he should take advantage off this (investment banks do the same with OTC).

So in addition to partnership agreements, they most likely also sell somewhere else to mitigate exposure to this volatility. In addition, many miners have to finance their operations and at current prices of $410, toughly $1.6 million is created every day via block prizes and it has to go somewhere. Fewer people buying? Down we go.

On almost a daily basis there is a discussion on reddit or Twitter about merchant acceptance and how the increase in adoption of bitcoins for payments by merchants should eventually be reflected in higher market prices of bitcoin itself. This reasoning is problematic for a diversity of reasons but most importantly: empirically it has not happened because it doesn’t account for any switches in consumer request for the token.

Why haven’t consumers enhanced their request of cryptocurrencies for retail transactions?

In August last year, Wedbush, an equity research hard, made the claim that:

Volatility in the price of bitcoin should not impede retailer acceptance of bitcoin, in our opinion, as merchants and payment processors are entirely shielded, and we expect consumers will be shielded in the future.

This is a bit of wishful thinking. While there are an enlargening amount of products and services that can hedge against volatility (such as Hedgy or Tera Exchange), in each example, this costs a customer both time and money — which the average consumer most likely is not interested in becoming experts at (e.g., airline fuel hedging strategies). Consumers want stable currencies, not friction-full hobbies they have to fiddle around and hedge against every day. Four

Why does this matter?

In its February two thousand fifteen analysis (pdf), the European Banking Commission looked at a multiplicity of opportunities and challenges of “virtual currency schemes.” One area that it looked at was:

Is Bitcoin establishing itself as a successful payment method?

In general, a buyer and a seller can agree on anything to be used as money (both regulated and unregulated payment methods) in a specific transaction. Consequently, virtual currencies may also be used as a payment method if both sides agree. The basic problem for every two-sided market is, however, that it needs “critical mass” on both sides for it to function. For payment cards and other payment instruments, reaching critical mass requires having enough merchants who accept the payment instrument and enough users who want to use the payment instrument so that it becomes attractive for other merchants and other users to join, thereby accelerating the network effects.

There are now over 100,000 merchants that now accept bitcoin for payments, up from

20k last January. At this rate, by the end of next year, there will very likely be more merchants that accept bitcoins than actual on-chain users of bitcoin.

While any number of reasons are stated for why merchants could and should proceed supporting bitcoin, unless consumers use it on a regular basis, continuing to train employees on how to accept it at point-of-sale consumes is an chance cost for merchants as those resources could be used for other purposes (there have been several latest threads on reddit from Wholly Hemp on this issue).

Why is that? Recall that there has likely been no switch in aggregate retail usage by consumers this past year. That is to say, while nominal on-chain transaction volume may have enhanced, the aggregate, the total amount of bitcoins used altogether for retail commerce has stayed harshly the same (the rest is evidently superfluous activity). If you are a merchant, why should you proceed to support a foreign currency that costs more to support than you save by accepting it? Again, maybe this will switch in the future and more merchant adoption does, for some reason, spur consumer usage.

Percent of precious metals and transaction volumes

The basic idea of this argument, from among many organizations such as Pantera Capital (a fund dedicated to Bitcoin-related investments), is that if bitcoin is the digital equivalent to gold or silver — or is even in fact superior to gold and silver — then should it not go after that its market cap should absorb some percentage of these metals?

For example, last October, Pantera provided an assessment (pdf) related to the price per bitcoin relative to the market capitalization of a multiplicity of assets (including gold, remittances, payments and global money supply (as measured by M2) itself:

From Pantera Capital

While some of their two thousand fourteen predictions haven’t panned out (recall “interest” versus “adoption”), perhaps future events will sway their way and switch with the advent of fresh investment vehicles like GBTC or ETFs.

Again, that chart above states that if bitcoin absorbed the market cap of gold, each bitcoin would be worth as much as $550,954. And what would happen if bitcoin somehow absorbed the market cap of the world money supply (and payments, remittances, gold, etc.)? It would purportedly reach as high as $Four,291,060 a chunk.

However, under such a screenplay, not only does this run into the logistical exergetic issues of the “Million Dollar Bitcoin” (pdf) but variations of this argument also involve supplanting some percentage of a payment rail. For example, if the Bitcoin network captured X% of the daily transaction volume of Visa or ACH then it should create extra request for bitcoin, bidding up the market value to fresh highs. But this could be a non sequitur. Just because supporters find value in this “virtual currency scheme” does not mean the rest of the market will. Perhaps they will, but in this circumstance, this tech is not being built in a vacuum so maybe not.

For example, presently listed on AngelList:

While many of these startups will burn out of capital and fail to build up traction, there may be a handful that do find significant consumer adoption — and it may or may not involve a cryptocurrency. Five

One extra challenge with the X%-of-incumbents market share argument (and this occurs in every industry) is that it assumes that market participants (Alice and Cathy) are willing to go through the frictions to use Bitcoin, the network instead of existing rails or products like Apple Pay. Or that Alice and Cathy perceive bitcoin, the asset, the same way as some backers do. It could happen but is conceivable that it may not as well (to be even transferred, there are any number of investors and entrepreneurs that have bullish views, Pantera was just used as an example).

For balance I spoke with Raffael Danielli, a quantitative analyst at ING Investment Management and proprietor of Matlab Trading, and in his view:

In terms of pricing bitcoin, equity models do not work (no dividends, no predictable cash flows) and forex models also don’t work. At this moment I would value Bitcoin somehow like gold, meaning lots of speculative value and little intrinsic value. When people make those comparisons with precious metals they usually assume that “what if Bitcoin became as big as the market cap of xyz”. More realistically would be to assume “what if Bitcoin became x% as big as the market cap of xyz” with x being (a lot) smaller than one hundred because both are contesting for the same market share (not entirely true but to some degree).

This also touches on the binary outcome argument: that bitcoin will either go to the moon or fall to zero. This is a false dichotomy. Just as it would be fallacious to assume that a fresh car marquis will absorb all of the market share from the rest of the industry (or none at all), or that a fresh computer company will similarly displace all incumbents (or none at all), so to is it incorrect to assume that a cryptocurrency only has two directions to go: vaulting into geosynchronous orbit or crashing on the launch pad.

What happened to something in the middle; remain-a-viable niche?

To cut to the pursue, all bitcoin technical analysis has about as much scientific predictive power as phrenology does. Not only is the market illiquid and manipulable (see Willy Bot) but there is (very likely) still no real fundamental value beyond the transactional request floor set most likely by the request generated through the trade of illicit goods and services. Perhaps that will switch in the future, but maybe not.

For example, Ryan Selkis (“Two Bit Idiot”) recently performed a back-of-the-envelope calculation to create an estimate for “transactional request” — dialing down to a figure of $0.25 per bitcoin.

A year and a half ago, when the market price of a bitcoin was $143, Rick Falkvinge put together perhaps the only analysis of transactional request generated by illicit trade (e.g., online gambling, dark markets, Silk Road, etc.). Based on his own break down of the velocity of coins it amounted to harshly $1.12. Everything on top of that is based on speculative request.

In his words, “[…] the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is harshly one US dollar and twelve US cents. And that’s still a generous estimate.”

Interestingly enough, Falkvinge reached out to Automattic, parent company of WordPress (a CMS developer and web host) to find out what kind of payment volume they had observed (they originally announced support for bitcoin payments in November 2012). According to Falkvinge:

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The reaction came quickly – “a duo of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is presently no measurable bitcoin economy outside of drugs and gambling.

Last July I also reached out to Automattic to find out if the volume had switched. In an exchange with Chris L., from customer service (ticket #1886104), he stated:

We will not disclose that type of information since we keep our financial information private, as well as any information as it relates to our users. If you have any go after up questions, or concerns, please do not hesitate to reply back.

Quick forward to last week, Matt Mullenweg, co-founder of WordPress explained that bitcoin was recently dropped as a payments option (it may be added again later). Why?

The volume has been pulling down since launch, in two thousand fourteen it was only used about twice a week, which is vanishingly petite compared to other methods of payment we suggest.

The takeaway should not be seen as “bitcoin does not have value” or that “bitcoin will not increase in value” or that even “bitcoin will not displace gold as a store of value.” It clearly does have some kind of value to thousands, perhaps enormous value and utility to hundreds of thousands of traders, merchants and consumers of all stripes.

But in almost every case above, as well as many more often stated on forums, the argument is typically from a supply-sided viewpoint and not the request (see Steve Waldman’s comments from the Cryptoecon event). Historically most of the speculative request seems to originate from a multiplicity of investors with high risk tolerance and low time preference, with the expectation that prices will eventually go up (for a multitude of reasons).

While it could switch, empirically, we see that in general most participants are still holding coins and not using it for trade or commerce. Six And without any extra actual use-cases that generate transactional request or extra aggregate request from outside investors, it is likely that the bitcoin price will largely stay within the range it has seen this past year. After all, why would it increase just because a large whale has moved a significant quantity to a cold wallet?

How then, can the market value of bitcoin — with a marketcap (or money supply) similar to that of the M1 of the Bolivian boliviano (according to the same ECB report above) — switch in the future? Seven

Every bitcoin holder benefits from any kind of “good” news. So there is an incentive to pump and manufacture as much good news as possible (e.g., astroturfing). This seems to have culminated in an effort announced last week by the Bitcoin Foundation:

The Bitcoin Foundation announced today a partnership with Bitcoin companies BitFury, BitGo, Tally Capital, ChangeTip, and Bitcoin Foundation lifetime member Bruce Fenton to engage theAudience – one of the world’s largest multi-channel publishers of social and digital content. theAudience’s team of digital storytellers will work closely with these groups to launch a multi-faceted social and traditional media campaign to educate businesses, consumers, and society at large about Bitcoin.

Is this the same type of payola that “Tom Butterfield” investigated last summer? The downside of this “educational” shove is now any time there is “good” news, we may have to consider the source to find out if it is organic or just a sponsored puff chunk.

However in the end, it very likely doesn’t truly matter what we think or publish, what matters is — like all markets — is what the actual traders on markets think. And as an aggregate of their request relative to the available supply on exchanges, the value is around $270 today. Perhaps future expectations of utility and value will dramatically switch once the BitLicense is fully resolved and professional exchanges such as Gemini and LedgerX come online.

Is there a way to model prices?

Future research could look at violating down a cryptocurrency into consumption segments/tranches just as gold is typically done: (e.g., jewelry, investments, industry, etc.).

One reviewer suggested another way to model the future price of bitcoin:

Let v(t) denote the purchasing power of bitcoin (or USD) at date t.

Let R(t+1) = v(t+1)/v(t) denote the (gross) rate of come back on (zero interest) money.

Since money (BTC included) is an asset, it must earn an expected rate of comeback E[R(t+1)] that competes with other forms of wealth. We might make adjustments based on liquidity premia etc, but to a very first approximation, let’s just say that the expected rate of come back from holding BTC must be about the same as holding any other asset. This is basically the EMH. And it is a compelling argument (just do the counterfactual).

So, for those people expecting enormous capital gains from holding BTC… they may turn out to be correct ex post but, if they are, they would just be fortunate. The same holds true for any other asset.

Moreover, the EMH tells us that the value of BTC v(t) must go after a random walk with drift — the best forecast for tomorrow’s BTC price is today’s BTC price (plus a modest drift term).

The EMH above only pins down the expected rate of comeback on an asset — it does not have anything to say about the *level* v(t), only its rate of switch.

It is unclear what, if anything, pins down v(t) for BTC, or any fiat object. There are some theories, but in general, I think that v(t) may be indeterminate (i.e., the equilibrium v(t) could be a self-fulfilling prophecy).

If this conjecture is correct, then one could imagine discrete hops in v(t) that happen for no good reason at all (unspoiled psychology), without altering the expected come back properties of the asset.

So, for example, the BTC price could all of a sudden drop from $300 to $100 and at the same time be a very good investment because if you buy it at $100, it is still expected to generate a competitive come back. But this does not mean that the price might not hop down again to $50, or, indeed, up to $150.

One limitation to this treatment is that EMH most likely more appropriately applies in a normal, more very liquid market with professional traders that are better informed and have equal access to information (there are presently a number of information asymmetries) and in which financial controls are the norm and not the exception — recall that there is no “neutral” exchange in the cryptocurrency world, all “exchanges” are effectively broker-dealers.

So the treatment above assumes that insiders and operators of large exchanges are segregated from financial information of their customers, which they are not (e.g., because of a lack of financial controls, some exchange operators can presently front-run and ‘naked brief sell’ their own customers which then distorts price discovery and the overall market).

Researchers may also be able to build a short-term sentiment index of large traders and market makers. For example, “accelerating merchant adoption” is typically mentioned as a bullish catalyst. Maybe that’s true in the long-run but in the short-run it very likely isn’t (as described above). In a very first step someone could create a plain regression model to measure the coefficient of “one unit of market adoption” on the market price. Then in a 2nd step make some assumptions about market adoption for all of two thousand fifteen and use the estimated coefficient to derive (one petite part) of the future price.

If someone does it like this for the most significant market actors and factors, you could be able to derive a future price that is more than just a gut feeling.

  1. As we have also seen with altcoins it could also reduce liquidity on exchanges amplifying volatility. One reviewer suggested that with traditional equities, in such a screenplay the influence is likely on liquidity and not on value since traditional calculations always take all outstanding shares into account when calculating value, not just the ones traded on an exchange. [↩]
  2. See also: Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims [↩]
  3. See How do Bitcoin payment processors work? [↩]
  4. In one respect, a similar problem faced Linux F/OSS adoption twenty years ago: end-users wished a desktop OS, not a full-time hobby. [↩]
  5. See Is the adoption of blockchains and consensus ledgers a foregone conclusion? [↩]
  6. It is arguably rational to hold with the expectation of price appreciation; spending may actually be irrational [↩]
  7. See also Why Bitcoin does not have a market cap [↩]

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two thoughts on “ What is the “real” price of bitcoin? ”

The “argument” that “if people hoard bitcoins, their price will somehow rise” is not an argument. This is how monetary request for a good is defined and this is what constitutes the medium of exchange function. Of course, there are other factors influencing the price. Hoarding also has a positive effect on liquidity, thus contradicting your argument that this causes slippage.

The term “transaction request” does not represent request from economic point of view, it’s a misnomer. It’s a consequence of request, not request itself.

And it’s not like the Austrians insist on having a different treatment here than other schools. Just look at Wikipedia (https://en.wikipedia.org/wiki/Demand_for_money):

“The request for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.”

The takeaway should be that hardly any pundit (pro- and con-) understands the request for Bitcoin, and waste their time on collecting empirical data and squeezing them into meaningless conclusions.

BTW Cointelegraph interviewed me as well, but I said I don’t know what the price would be so they didn’t put my part into the movie.

The only part of this post that strikes me as obviously wrong is “perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry.”

Bitcoins don’t have a use-value other than exchange, like airplanes, so by holding them you’re not truly missing out on anything.

When you spend bitcoins, you don’t get value aside from the value of their market price at the time. But you also get that value by holding them.

What is the – real – price of bitcoin, Superb Wall of Numbers

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What is the “real” price of bitcoin?

Even before Bitcoin was part of the zeitgeist for the digerati, people have been guessing what the price of a bitcoin should and should not be.

For example, a duo days after version 0.1 was announced on the Metzdowd mailing list (back in January 2009), Hal Finney posted a possible screenplay:

As an amusing thought experiment, imagine that Bitcoin is successful and becomes the superior payment system in use across the world. Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With twenty million coins, that gives each coin a value of about $Ten million.

So the possibility of generating coins today with a few cents of compute time may be fairly a good bet, with a payoff of something like one hundred million to 1! Even if the odds of Bitcoin succeeding to this degree are slender, are they truly one hundred million to one against? Something to think about…

Hal Finney, brilliant engineer and the world’s very first Bitcoin price divinator.

Over the subsequent weeks, months and years there has been no shortage of guesstimates and “technical modeling” that gauge what the price will be.

For example, a year ago (in February 2014), Founders Grid asked fifty Bitcoin “experts” what their bitcoin price predictions were over the next year. The end result — all but a duo were downright, very wrong (see this spreadsheet for a line-by-line itemization).

Later, in May 2014, CoinTelegraph asked (movie above) more than thirty Bitcoin “experts” as to what their bitcoin predictions were for the end of 2014. Once again, all but a duo were fully, very wrong.

How could sultry enthusiasts who pay attention to Bitcoin-related news be so insanely off on what some consider a “sure-bet” moon shot?

The brief response: just because you are domain experienced in one area does not mean you are a price modeling accomplished. (Disclosure: I attempt not to give price predictions because I know I am not a price modeling experienced)

Let’s look at a few examples.

A duo days ago CoinDesk interviewed Denis Hertz, a project manager at ALFAquotes who has created the “Fair Bitcoin Price indicator.” And that according to its calculations, the current fair price is $518.

How has he calculated it?

Very first, it calculates the switches in the cost of mining equipment and its spectacle. Next, it attempts to assess the switch in difficulty of production, factoring in the tens unit costs faced by miners on the network.

In particular, Hertz indicated that the fair value contraption should be embraced by miners, as the price today is lower than the fair price – a factor he attributes to the latest string of bankruptcies and closures in the sector.

There are a few mid-to-late 19th century German economists that would be glad to see — what is effectively — the Labor Theory of Value as back en vogue. But it is disingenuous to attribute value based on inputs because it wholly disregards the subjective valuation of the request side of the equation.

It is not a valid way to measure value of a widget (or virtual commodity in this example) for the same reason that the value of a Renoir or Matisse painting is not based on the value of the inputs (oil paint, canvas, brush, framework, etc.).

Speaking of art: David Andolfatto, a marbleized personification of Marcus Aurelius, also disagreed:

It is unclear where this theory very first commenced in relation to bitcoin, perhaps it was from Curtis Yarvin, who writes at Unqualified Offerings as Mencius Moldbug (he shortly discussed this idea four years ago).

The main thrust of this idea is that because some market participants buy and perma-hold an asset, it eliminates supply from the market, thereby ceteris paribus — assuming the same quantity demanded — it should eventually thrust market prices higher because less supply is available. Or in brief, if people hoard bitcoins, their price will somehow rise.

Their are numerous problems with this theory:

1) Financial history is littered with corpses of people, organizations and countries that attempt to corner supply to artificially boost an asset price. And in bitcoin, the hoarders are collectively attempting to do what the Hunt brothers attempted to do with silver, what Malaysia attempted to do with tin and what China attempts to do with infrequent earth elements. It doesn’t work because cornering supply has never ensured long-term price rises and if everyone hoarded, it would make bitcoin have zero economic value because there would be no circular flow of income (see also the coordination problem below in #Four).

I spoke with George Samman, co-founder of BTC.sx and frequent writer on Bitcoin-related topics. In his view:

Hoarding does not help the bitcoin economy at all, in fact it stifles its growth as its clamoring for traction and mass acceptance. It locks up bitcoin in a place where its not being cycled back and forward making it scarce and therefore making it economically unviable as a currency and as a means of transaction. Hoarding in no way makes bitcoin a viable solution in the medium to long term. Not to mention if hoarding is done to manipulate price, it may work short-term, but cornering supply has never been a excellent wealth strategy especially as people and/or governments sniff out manipulation and “switch the rules of the game.” Its more of a going bust strategy.

Two) It does not account for and seems to overlook both transactional request and speculative request. Because price discovery presently takes place in relation to national currencies on exchanges, it is the liquidity at exchanges and the switching request of this liquidity which directly impacts prices. Perma-holding (“hodling”) likely makes it more difficult to get into and out of positions (due to slippage). One

And what impacts the request on exchanges?

The volatility in request (switches in request) likely comes from the fact that the “fair value” of bitcoin is permanently fluctuating. For example, every time a fresh “big adopter” rumor is posted on reddit, a professional exchange opens, an exchange gets robbed, a fresh central bank paper is released, or a regulator gives a speech — the expected future value of bitcoin switches.

For example, last February, when the market learned up to 850,000 bitcoins may have been permanently liquidated from circulation (simply did not exist), skill that became public due to the bankruptcy of Mt. Gox, prices rose but then fell a duo weeks later when it was announced that perhaps 200,000 coins may have been located in a disused wallet. The market was incorporating switches in supply relative to existing speculative request.

Robert Sams, co-founder of Clearmatics and a former interest rate trader, has a good explanation (pdf) of this phenomenon:

If a cryptocurrency system aims to be a general medium-of-exchange, deterministic coin supply is a bug rather than a feature. This is because switches in coin request get translated into switches in coin price, making price volatility proportional to request volatility. But that is only a very first order e ffect, for expectations of future levels of coin request give rise to speculation. If the expectations of the long-term rate of coin adoption are signi cantly greater than the rate of coin supply growth, people will buy and hold coin in anticipation of future adoption, driving up the current price of coin.

It is the nature of markets to thrust expectations about the future into current prices. Deterministic money supply combined with uncertain future money request conspire to make the market price of a coin a sort of prediction market on its own future adoption. Since rates of future adoption are very uncertain, high volatility is unpreventable, as expectations paraffin wax and wane with coin-related news, and the coin market rationalises high expected comebacks with high volatility (no free lunch).

Or in another example: if Satoshi’s alleged one million coins commenced moving around, it would also likely drive down the price as this supply has largely been considered liquidated from circulation, specifically at exchanges. Two

Trio) While bitcoin’s creation rate is immobilized, perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry. Sure those planes may one day appreciate in value to become very assessed museum lumps, but this disregards the utility of flying entirely.

This is a similar problem with most tokens in the “Bitcoin Two.0” world which purportedly give you access to networks (e.g., pre-paid bounty cards). In this case it would be akin to going to the Fresh York subway in the 1980s, removing a handful of subway tokens and storing them in a lock box with the belief that their value will rapidly appreciate.

They may eventually become a valuable collectible or antique, but all that happens in the latter situation is that the subway token minter will just create more to substitute those liquidated from circulation; the intended utility is railing the subway, not perma-storing value in the token itself (in December 2014, residents of St. Petersburg “hoarded” subway tokens for a different reason).

Four) It likely runs into a coordination problem. Each individual has different time preferences and horizons for how and when they will sell their assets at (in this case, bitcoins). Empirically we have seen this story before with OPEC, in which participants “cheat” and do not go after their internal “Honors Program” — producing more oil than their quotas. And as a consequence, it increases downside pressure on the price.

Organizing individuals and jawboning them into selling or holding as frequently occurs on social media with relation to bitcoin and other altcoins. This is what Josh Garza has attempted to do with Paycoin, who has promised a multiplicity of price floors (notably $20). Yet because the market is decentralized, he has ended up resorting to tactics such as an ad hoc “Honors Program” in which he (and his employees) attempt to persuade other holders/traders not to all sell at once because this drives down the price below the promised price floor (due to a lack of extra request). In fact, despite these hopes and desires, as of this writing Paycoin is harshly at an all-time low hovering around $0.60 per coin. Maybe that will switch, but then again, that could be wishful thinking (note: Garza’s GAW mining is likely some type of fraud).

In order for bitcoin to reach and maintain a stratospheric price level (greater than $Two,000 a coin) in the face of similar coordinated and uncoordinated sell-side pressure, at least an equal amount of speculative (and/or transactional) request would need to be brought on board to absorb a similar sell off of bitcoins. Three

What happens if such request does not materialize to absorb it? Prices drop.

For example, last September I provided some comments to CoinDesk about why prices fluctuate which touch on the request side on exchanges and OTC facilitators:

And in other cases, an OTC buyer can affect exchange via “buy pressure.” If he commences buying directly from an OTC provider, avoiding an exchange, the exchange loses its buy wall thus affecting price. The sell pressure coerces the price down and once a large buyer goes “off-market,” he is weakening the buy pressure. If all the buyers and sellers are “off-market,” we can say that exchange price and price discovery is twisted. As my friend Raffael Danielli recently said, “Information is never off-chain and ultimately information makes the price.” Consequently today information spreads very quickly and if a broker can make money because he facilitates “off-chain” transaction and knows “better” what the real price is then game theory dictates he should take advantage off this (investment banks do the same with OTC).

So in addition to partnership agreements, they very likely also sell somewhere else to mitigate exposure to this volatility. In addition, many miners have to finance their operations and at current prices of $410, toughly $1.6 million is created every day via block prizes and it has to go somewhere. Fewer people buying? Down we go.

On almost a daily basis there is a discussion on reddit or Twitter about merchant acceptance and how the increase in adoption of bitcoins for payments by merchants should eventually be reflected in higher market prices of bitcoin itself. This reasoning is problematic for a diversity of reasons but most importantly: empirically it has not happened because it doesn’t account for any switches in consumer request for the token.

Why haven’t consumers enhanced their request of cryptocurrencies for retail transactions?

In August last year, Wedbush, an equity research rigid, made the claim that:

Volatility in the price of bitcoin should not impede retailer acceptance of bitcoin, in our opinion, as merchants and payment processors are entirely shielded, and we expect consumers will be shielded in the future.

This is a bit of wishful thinking. While there are an enlargening amount of products and services that can hedge against volatility (such as Hedgy or Tera Exchange), in each example, this costs a customer both time and money — which the average consumer most likely is not interested in becoming experts at (e.g., airline fuel hedging strategies). Consumers want stable currencies, not friction-full hobbies they have to fiddle around and hedge against every day. Four

Why does this matter?

In its February two thousand fifteen analysis (pdf), the European Banking Commission looked at a multiplicity of opportunities and challenges of “virtual currency schemes.” One area that it looked at was:

Is Bitcoin establishing itself as a successful payment method?

In general, a buyer and a seller can agree on anything to be used as money (both regulated and unregulated payment methods) in a specific transaction. Consequently, virtual currencies may also be used as a payment method if both sides agree. The basic problem for every two-sided market is, however, that it needs “critical mass” on both sides for it to function. For payment cards and other payment instruments, reaching critical mass requires having enough merchants who accept the payment instrument and enough users who want to use the payment instrument so that it becomes attractive for other merchants and other users to join, thereby accelerating the network effects.

There are now over 100,000 merchants that now accept bitcoin for payments, up from

20k last January. At this rate, by the end of next year, there will most likely be more merchants that accept bitcoins than actual on-chain users of bitcoin.

While any number of reasons are stated for why merchants could and should proceed supporting bitcoin, unless consumers use it on a regular basis, continuing to train employees on how to accept it at point-of-sale consumes is an chance cost for merchants as those resources could be used for other purposes (there have been several latest threads on reddit from Wholly Hemp on this issue).

Why is that? Recall that there has likely been no switch in aggregate retail usage by consumers this past year. That is to say, while nominal on-chain transaction volume may have enhanced, the aggregate, the total amount of bitcoins used altogether for retail commerce has stayed harshly the same (the rest is evidently superfluous activity). If you are a merchant, why should you proceed to support a foreign currency that costs more to support than you save by accepting it? Again, maybe this will switch in the future and more merchant adoption does, for some reason, spur consumer usage.

Percent of precious metals and transaction volumes

The basic idea of this argument, from among many organizations such as Pantera Capital (a fund dedicated to Bitcoin-related investments), is that if bitcoin is the digital equivalent to gold or silver — or is even in fact superior to gold and silver — then should it not go after that its market cap should absorb some percentage of these metals?

For example, last October, Pantera provided an assessment (pdf) related to the price per bitcoin relative to the market capitalization of a diversity of assets (including gold, remittances, payments and global money supply (as measured by M2) itself:

From Pantera Capital

While some of their two thousand fourteen predictions haven’t panned out (recall “interest” versus “adoption”), perhaps future events will sway their way and switch with the advent of fresh investment vehicles like GBTC or ETFs.

Again, that chart above states that if bitcoin absorbed the market cap of gold, each bitcoin would be worth as much as $550,954. And what would happen if bitcoin somehow absorbed the market cap of the world money supply (and payments, remittances, gold, etc.)? It would purportedly reach as high as $Four,291,060 a chunk.

However, under such a screenplay, not only does this run into the logistical exergetic issues of the “Million Dollar Bitcoin” (pdf) but variations of this argument also involve supplanting some percentage of a payment rail. For example, if the Bitcoin network captured X% of the daily transaction volume of Visa or ACH then it should create extra request for bitcoin, bidding up the market value to fresh highs. But this could be a non sequitur. Just because supporters find value in this “virtual currency scheme” does not mean the rest of the market will. Perhaps they will, but in this circumstance, this tech is not being built in a vacuum so maybe not.

For example, presently listed on AngelList:

While many of these startups will burn out of capital and fail to build up traction, there may be a handful that do find significant consumer adoption — and it may or may not involve a cryptocurrency. Five

One extra challenge with the X%-of-incumbents market share argument (and this occurs in every industry) is that it assumes that market participants (Alice and Cathy) are willing to go through the frictions to use Bitcoin, the network instead of existing rails or products like Apple Pay. Or that Alice and Cathy perceive bitcoin, the asset, the same way as some backers do. It could happen but is conceivable that it may not as well (to be even passed, there are any number of investors and entrepreneurs that have bullish views, Pantera was just used as an example).

For balance I spoke with Raffael Danielli, a quantitative analyst at ING Investment Management and proprietor of Matlab Trading, and in his view:

In terms of pricing bitcoin, equity models do not work (no dividends, no predictable cash flows) and forex models also don’t work. At this moment I would value Bitcoin somehow like gold, meaning lots of speculative value and little intrinsic value. When people make those comparisons with precious metals they usually assume that “what if Bitcoin became as big as the market cap of xyz”. More realistically would be to assume “what if Bitcoin became x% as big as the market cap of xyz” with x being (a lot) smaller than one hundred because both are contesting for the same market share (not entirely true but to some degree).

This also touches on the binary outcome argument: that bitcoin will either go to the moon or fall to zero. This is a false dichotomy. Just as it would be fallacious to assume that a fresh car marquis will absorb all of the market share from the rest of the industry (or none at all), or that a fresh computer company will similarly displace all incumbents (or none at all), so to is it incorrect to assume that a cryptocurrency only has two directions to go: vaulting into geosynchronous orbit or crashing on the launch pad.

What happened to something in the middle; remain-a-viable niche?

To cut to the pursue, all bitcoin technical analysis has about as much scientific predictive power as phrenology does. Not only is the market illiquid and manipulable (see Willy Bot) but there is (most likely) still no real fundamental value beyond the transactional request floor set most likely by the request generated through the trade of illicit goods and services. Perhaps that will switch in the future, but maybe not.

For example, Ryan Selkis (“Two Bit Idiot”) recently performed a back-of-the-envelope calculation to create an estimate for “transactional request” — dialing down to a figure of $0.25 per bitcoin.

A year and a half ago, when the market price of a bitcoin was $143, Rick Falkvinge put together perhaps the only analysis of transactional request generated by illicit trade (e.g., online gambling, dark markets, Silk Road, etc.). Based on his own break down of the velocity of coins it amounted to harshly $1.12. Everything on top of that is based on speculative request.

In his words, “[…] the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is toughly one US dollar and twelve US cents. And that’s still a generous estimate.”

Interestingly enough, Falkvinge reached out to Automattic, parent company of WordPress (a CMS developer and web host) to find out what kind of payment volume they had observed (they originally announced support for bitcoin payments in November 2012). According to Falkvinge:

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The response came quickly – “a duo of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is presently no measurable bitcoin economy outside of drugs and gambling.

Last July I also reached out to Automattic to find out if the volume had switched. In an exchange with Chris L., from customer service (ticket #1886104), he stated:

We will not disclose that type of information since we keep our financial information private, as well as any information as it relates to our users. If you have any go after up questions, or concerns, please do not hesitate to reply back.

Rapid forward to last week, Matt Mullenweg, co-founder of WordPress explained that bitcoin was recently dropped as a payments option (it may be added again later). Why?

The volume has been pulling down since launch, in two thousand fourteen it was only used about twice a week, which is vanishingly petite compared to other methods of payment we suggest.

The takeaway should not be seen as “bitcoin does not have value” or that “bitcoin will not increase in value” or that even “bitcoin will not displace gold as a store of value.” It clearly does have some kind of value to thousands, perhaps enormous value and utility to hundreds of thousands of traders, merchants and consumers of all stripes.

But in almost every case above, as well as many more often stated on forums, the argument is typically from a supply-sided viewpoint and not the request (see Steve Waldman’s comments from the Cryptoecon event). Historically most of the speculative request seems to originate from a multitude of investors with high risk tolerance and low time preference, with the expectation that prices will eventually go up (for a multitude of reasons).

While it could switch, empirically, we see that in general most participants are still holding coins and not using it for trade or commerce. Six And without any extra actual use-cases that generate transactional request or extra aggregate request from outside investors, it is likely that the bitcoin price will largely stay within the range it has seen this past year. After all, why would it increase just because a large whale has moved a significant quantity to a cold wallet?

How then, can the market value of bitcoin — with a marketcap (or money supply) similar to that of the M1 of the Bolivian boliviano (according to the same ECB report above) — switch in the future? Seven

Every bitcoin holder benefits from any kind of “good” news. So there is an incentive to pump and manufacture as much good news as possible (e.g., astroturfing). This seems to have culminated in an effort announced last week by the Bitcoin Foundation:

The Bitcoin Foundation announced today a partnership with Bitcoin companies BitFury, BitGo, Tally Capital, ChangeTip, and Bitcoin Foundation lifetime member Bruce Fenton to engage theAudience – one of the world’s largest multi-channel publishers of social and digital content. theAudience’s team of digital storytellers will work closely with these groups to launch a multi-faceted social and traditional media campaign to educate businesses, consumers, and society at large about Bitcoin.

Is this the same type of payola that “Tom Butterfield” investigated last summer? The downside of this “educational” thrust is now any time there is “good” news, we may have to consider the source to find out if it is organic or just a sponsored puff chunk.

However in the end, it most likely doesn’t indeed matter what we think or publish, what matters is — like all markets — is what the actual traders on markets think. And as an aggregate of their request relative to the available supply on exchanges, the value is around $270 today. Perhaps future expectations of utility and value will dramatically switch once the BitLicense is fully resolved and professional exchanges such as Gemini and LedgerX come online.

Is there a way to model prices?

Future research could look at cracking down a cryptocurrency into consumption segments/tranches just as gold is typically done: (e.g., jewelry, investments, industry, etc.).

One reviewer suggested another way to model the future price of bitcoin:

Let v(t) denote the purchasing power of bitcoin (or USD) at date t.

Let R(t+1) = v(t+1)/v(t) denote the (gross) rate of comeback on (zero interest) money.

Since money (BTC included) is an asset, it must earn an expected rate of comeback E[R(t+1)] that competes with other forms of wealth. We might make adjustments based on liquidity premia etc, but to a very first approximation, let’s just say that the expected rate of come back from holding BTC must be about the same as holding any other asset. This is basically the EMH. And it is a compelling argument (just do the counterfactual).

So, for those people expecting ample capital gains from holding BTC… they may turn out to be correct ex post but, if they are, they would just be fortunate. The same holds true for any other asset.

Moreover, the EMH tells us that the value of BTC v(t) must go after a random walk with drift — the best forecast for tomorrow’s BTC price is today’s BTC price (plus a modest drift term).

The EMH above only pins down the expected rate of comeback on an asset — it does not have anything to say about the *level* v(t), only its rate of switch.

It is unclear what, if anything, pins down v(t) for BTC, or any fiat object. There are some theories, but in general, I think that v(t) may be indeterminate (i.e., the equilibrium v(t) could be a self-fulfilling prophecy).

If this conjecture is correct, then one could imagine discrete hops in v(t) that happen for no good reason at all (unspoiled psychology), without altering the expected come back properties of the asset.

So, for example, the BTC price could abruptly drop from $300 to $100 and at the same time be a very good investment because if you buy it at $100, it is still expected to generate a competitive come back. But this does not mean that the price might not leap down again to $50, or, indeed, up to $150.

One limitation to this treatment is that EMH most likely more appropriately applies in a normal, more very liquid market with professional traders that are better informed and have equal access to information (there are presently a number of information asymmetries) and in which financial controls are the norm and not the exception — recall that there is no “neutral” exchange in the cryptocurrency world, all “exchanges” are effectively broker-dealers.

So the treatment above assumes that insiders and operators of large exchanges are segregated from financial information of their customers, which they are not (e.g., because of a lack of financial controls, some exchange operators can presently front-run and ‘naked brief sell’ their own customers which then distorts price discovery and the overall market).

Researchers may also be able to build a short-term sentiment index of large traders and market makers. For example, “accelerating merchant adoption” is typically mentioned as a bullish catalyst. Maybe that’s true in the long-run but in the short-run it most likely isn’t (as described above). In a very first step someone could create a ordinary regression model to measure the coefficient of “one unit of market adoption” on the market price. Then in a 2nd step make some assumptions about market adoption for all of two thousand fifteen and use the estimated coefficient to derive (one puny part) of the future price.

If someone does it like this for the most significant market actors and factors, you could be able to derive a future price that is more than just a gut feeling.

  1. As we have also seen with altcoins it could also reduce liquidity on exchanges amplifying volatility. One reviewer suggested that with traditional equities, in such a screenplay the influence is likely on liquidity and not on value since traditional calculations always take all outstanding shares into account when calculating value, not just the ones traded on an exchange. [↩]
  2. See also: Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims [↩]
  3. See How do Bitcoin payment processors work? [↩]
  4. In one respect, a similar problem faced Linux F/OSS adoption twenty years ago: end-users wished a desktop OS, not a full-time hobby. [↩]
  5. See Is the adoption of blockchains and consensus ledgers a foregone conclusion? [↩]
  6. It is arguably rational to hold with the expectation of price appreciation; spending may actually be irrational [↩]
  7. See also Why Bitcoin does not have a market cap [↩]

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two thoughts on “ What is the “real” price of bitcoin? ”

The “argument” that “if people hoard bitcoins, their price will somehow rise” is not an argument. This is how monetary request for a good is defined and this is what constitutes the medium of exchange function. Of course, there are other factors influencing the price. Hoarding also has a positive effect on liquidity, thus contradicting your argument that this causes slippage.

The term “transaction request” does not represent request from economic point of view, it’s a misnomer. It’s a consequence of request, not request itself.

And it’s not like the Austrians insist on having a different treatment here than other schools. Just look at Wikipedia (https://en.wikipedia.org/wiki/Demand_for_money):

“The request for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits.”

The takeaway should be that hardly any pundit (pro- and con-) understands the request for Bitcoin, and waste their time on collecting empirical data and squeezing them into meaningless conclusions.

BTW Cointelegraph interviewed me as well, but I said I don’t know what the price would be so they didn’t put my part into the movie.

The only part of this post that strikes me as obviously wrong is “perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry.”

Bitcoins don’t have a use-value other than exchange, like airplanes, so by holding them you’re not truly missing out on anything.

When you spend bitcoins, you don’t get value aside from the value of their market price at the time. But you also get that value by holding them.

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