Would You Like That in Bitcoin or Ether, Sir?

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The blog posting made below was originally written in November 2017, but never posted. At that time Bitcoin was trading at $7700 and a number of clients had asked about it.  In developing a response for them, I  began the draft of a posting on my web site to send to the larger group of my financial clientele and to friends and family.  I  did not immediately finish the editorial touches and meant to complete  later. Regretfully,  I got sidetracked by other pressing matters, and never hit the publish button.  I hate when that happens…

Anyways, I discovered the old posting today, and was checking how my forecasting had done.  Not too bad. Bitcoin did hit $19000 that year, then went on to  drop to $3000 later that year. By the way, I did go long at $6000. That’s not the catching the bottom, but at today’s $33,000 value,  it’s still a nice return.

So do I still believe Bitcoin and Ether will flourish in coming years. More than ever. It will continue to be a rocky ride, (I expect a continued correction down to $23,000 at the time of this writing.) But given the state of global economies, there is no doubt in my mind that these two cryptocurrencies will be dominant parts of the financial system within less than a decade. I would not even be surprised to see them become the “gold” backing a new global currency when the dollar falls off of its present perch.

***********Draft Posting from November 2, 2017 ********************

Ether (ethereum) and Bitcoin are the leading contenders in the thousand of new cryptocurrencies that have emerged in the last decade. New ones are cropping up almost on a daily basis. As the main financial advisor at Northstar Strategic Investments, I have been watching the evolution of these currencies with great interest, and counseling my clients as to their suitability.

Long-term – over a period of 20 to 50 years, I have little doubt that one of these two currencies will command a permanent place in the global financial system. Prior to that, I think we will see very significant crash-and-burn phenomenon occurring, where mucht of the recent runup of these two cryptocurrencies will reverse.

The recent approval of the Chicago Board of Exchanges to allow for the issuance of futures trading for Bitcoin will surely be followed very quickly by a market for Ether as well. This should have two effects, with contradictory impacts on the currencies’ present trading values

1) On the one hand, the existence of a futures market will allow hedge funds and large financial institutions to hold the currencies while using futures to hedge their downside risks. This will give new legitimacy to the cryptocurrencies, and make them available to millions of traditional mom-and-pop investors. Thus this will greatly impact the demand side of the equation, and tend to positively boost the currencies.

2) On the other hand, the existence of futures markets will allow an easy path to shorting the cryptocurrencies, in other words to bet on their values collapsing. This is difficult if not impossible to do today. That new facility, along with algorithmic programming at the heart of the futures markets, could quickly cause a drop to turn into a rout.

Given the huge bid-ask spreads currently inherent in the present cryptocurrency exchanges, this is not a market for the weak of heart. We are currently not recommending it to our clients, as we believe the runup has been too far, too fast. If anything, once the futures markets are in place, we may place some hedged bets to the downside.

So does that make me a naysayers? Not at all. Take Bitcoin. A maximum of 21 million Bitcoin will ever be produced over time, by the anti-inflationary nature of this undertaking. Right now, a small fraction of the 8 billion people on the planet – 50% to 60% – are actively using ecommerce on a day to day basis, on of those maybe 1 in a 10000 are trading in cryptocurrencies. Gross World Product is around $107 trillion dollars in 2014, according to the CIA World Factbook.

Let’s assume Bitcoin is used by only 1 percent of the present global population, and that they use the crytocurrencies at the same velocity as the US dollar. At that usage, we can expect Bitcoin to trade around $25,238 or 4 times today’s value.

1% x $107 trillion = $1007 billion / 21 million Bitcoin circulating = $47952 / 1.9 (V) = $25238

Ether (or Ethereum) is a more complicated picture, as the communities involved in its creation are in the midst of a huge battle as to its future direction. The issuance model is not fixed yet. There is a general consensus among Ethereum aficionados that the indiscriminate and arbitrary printing of money as practiced by central governments of the world with traditional currencies should not be allowed with Ether. But there is an ongoing discussion whether or not the costs for the consensus needs to be financed by inflation that basically taxes every coin holder or if transaction fees are sufficient.

Consequently, we cannot be sure if there are disinflationary tendencies built into Ether, as there are in Bitcoin. But judging by rough number of Ether in circulation today, which is 95,607,142 tokens at the time of this writing (November 2017) the same calculation as above gives:

1% x $107 trillion = $1007 billion / 95.6 million Ether circulating = $10533 / 1.9 (V) = $5543

Today’s price is $310, for comparison.

Two factors can propel those numbers much higher. In 30, 40 or 50 years we expect adoption of these leading cryptocurrencies will reach levels far higher than 1%. Levels in the 20 to 40% range are not unlikely at all. So multiply the above figures accordingly. Secondly, the world economy will not remain stagnant. If the currencies above are restricted as to new issuance, as Bitcoin today is and Ethereum might become, their value would have to
increase in line with global growth.

So if you are willing to suffer through an 80 to 90 percent collapse in the value of your cryptocurrency investment over the next year or so, by all means buy it. That investment could be worth 10 , 20 or 30 times what you bought it for. Me? I prefer to wait for the big correction, and load up the boat at that time.

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