EDITOR'S NOTE
First of all, thanks to reader M. for alerting me to this Squawk Box Europe interview with Cornell's Eswar Prasad today. Prasad basically warns that while digital currencies are here to stay, "Bitcoin itself may not last that much longer." And he just published a whole book about digital currencies, so he's not a novice here.
Prasad's argument is that Bitcoin is too clunky and energy-intensive to compete with newer, slicker digital currencies. This after a weekend in which its value plunged 20% for no reason, which would seem to feed the critics' case. "What gives [it] value?" Reader M. asked. "Other than FOMO, why should anyone buy with no seeming regard for price?"
So here's what I would say in response. Let's start with Prasad's arguments. Bitcoin is only clunky because it has the highest "proof-of-work" standard in the crypto space. The whole genius behind its genesis is that transactions don't need a central authority (like your bank) for approval. The computers plugged into its network run a simple but sophisticated code to validate and approve transactions (their incentive and reward is to receive some Bitcoin themselves). The core idea was actually pioneered in the '90s by "hashcash."
Love or hate Bitcoin, the technology behind it is a significant computer science breakthrough. Rivals that have quicker processing times can also raise security concerns (let's not get into a whole Ethereum thing right now). It's why Bitcoin is, in a sense, the "gold standard" of crypto. And now, the Lightning network and other "layer two" solutions are trying to do for Bitcoin what Visa and Mastercard do for the banking system--allow for instant payments that still have Bitcoin's underlying security features.
As for concerns about its energy usage, as more Bitcoin get mined, the reward for mining it actually drops. Nearly 19 million of the 21 million Bitcoin have already been mined. So it's possible that its energy usage actually peaked a couple years ago. By one estimate, its emissions will fall by two-thirds by 2026, and disappear by 2031. Has Bitcoin used tons of energy? Yep. Will it continue to do so far into the future? Less clear.
And finally, what about its fundamental valuation? Should each Bitcoin be worth $60,000, $20,000, or $2,000? There is no cash flow, so you can't do traditional security analysis. There are no future earnings to estimate. Again here, the better analogy is probably to gold. Gold has value because when all else fails, it is a recognized form of money. Bitcoin is the same to the digital world--the recognized global standard. To me, the price simply reflects the extent to which "everybody wants a piece"--and how scarce those pieces are to come by on any given day. Are there leverage concerns involving stablecoins and hot money players that could get shaken out by more huge price drops? Absolutely.
There is also the "stock-to-flow" analysis that has become the standard way of "valuing" Bitcoin. It basically compares the mining rate of new Bitcoin to the total amount available. Or in other words, "how many years, at the current production rate, are required to achieve the current stock. The higher the number, the higher the price," as one popular chartist explains. It may correlate over time, but with huge swings. By one estimate, it was supposed to put Bitcoin over $98,000 last month.
So is Bitcoin going away? I doubt it. Can it be "valued"? Not exactly. Does it have value? Sure. Should fund managers be buying it? Only if they can justify it to their investors. What should its price be? I have no idea.
See you at 1 p.m!
Kelly
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Senin, 06 Desember 2021
Is Bitcoin going away?
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