All the cryptocurrencies that aspire to become the new benchmark monetary protocol like bitcoin are in competition. In the end, we may well be faced with two possibilities: either they all end up at zero, or one of them manages to assert itself as the new digital monetary standard. Bitcoin is currently the crypto best positioned to win this fight to the death.
Bitcoin is neither a stock nor a commodity
Currency is a very specific type of asset, very different from commodities or stocks. For example, to calculate the fundamental value of a stock, it suffices to estimate the present value of the cash flows that the company is expected to generate in the future. Whether it is a bond, a share or an option, all these assets have in common generate financial flows that can be evaluated.
Generally, assets that have large cash flows and less risk are better valued than risky assets with low cash flows. It is then possible to compare the different assets with each other thanks to financial indicators in order to determine which stock is attractive based on the distance between its fundamental value and its price.
Bitcoin is therefore not an action, because it does not generate cash flow. You will never receive dividends hodling BTC, if you didn’t know.
But is it a form of raw material? A raw material derives its value from its use to meet a basic need: energy, housing, food, etc. It is common to value commodities based on the history of the good in question and by averaging prices over long periods. Here too, it seems that bitcoin is not a commodity, because it does not allow the production of useful and traded goods on the market.
Bitcoin: a poor quality currency in 2022
Bitcoin is therefore a currency. That is, a commodity that you accept as payment because you expect it to be accepted as payment when you want to make a purchase with it in the future. The need to shift purchasing power over time being a basic human need.
Currently it is a poor quality currency insofar as she is very little accepted as a medium of transaction and is too volatile to carry purchasing power over time.
Since the currency does not generate any financial flows, one cannot calculate its fundamental value as one would for stocks. In contrast, it is possible to compare currencies with each other, for example between BTC and the dollar or between BTC and the euro. All currencies are in competition. Eventually, the currencies that constitute the best store of value (in particular between two transactions) and the best medium of exchange are essential.
If bitcoin were a good currency in 2022, it should ensure that its users can buy more and more goods over time, with as few fluctuations as possible. It is clear that this is still not the case, because purchasing power in terms of goods is too volatile in the short term. Which makes us say that for the moment the BTC is a failure.
Bitcoin, volatility and entropy
Since bitcoin is a form of currency, then it is the future price of BTC that determines its current “value”. Therefore, the current price is a mirror of beliefs on the price that BTC will have tomorrow. If it is still at 20,000 dollars and not at 0, it is becausethere are more people who believe that BTC will trade above $0 in the future. And it is the abrupt shifts in people’s beliefs about the future price of BTC that are driving the currency’s volatility.
To minimize currency volatility, central banks are very relevant institutions: they coordinate people’s expectations towards a common belief. Of course, she manages to coordinate these beliefs as long as it remains credible. If it loses its credibility (for example by creating inflation), then its action will have the opposite effect and lead to an increase in entropy. Naturally, not all central banks enjoy the same level of credibility: the Fed is not the ECB, which is not the Central Bank of Venezuela.
This is why in the second half of the 20th century, states sought to increase the degree of independence between central banks and the treasury. In fact, the divorce never took place and today central banks and states maintain a strong twin relationship.
No Politburo on bitcoin
Bitcoin therefore has immense potential, which is based in particular on its acephalous governance system which guarantees that there will never be more than 21 million units. In other words, bitcoin has a some credibility on its monetary policy. It remains to coordinate and stabilize people’s beliefs, what is complex in a commanderless environment.
The difficulty comes from the fact that bitcoin is an object anarchist which does not have a central committee, Politburo and especially no army. This is the paradox: bitcoin derives its value from its uncontrollabilitybut this may well prevent it from transforming the test to become a credible competitor to the greenback.
Let us recall an episode in monetary history which wonderfully illustrates the dangers created by unstable and poorly coordinated beliefs and anticipations. In 1707 John Law went to France. He suggested replacing the existing currency with banknotes based on shares of the West India Company. In 1719, the value of the Company’s shares rose from 500 pounds to 10,000 pounds. John Law’s coinage was a real success at first… before collapsing miserably in 1720. John Law ruined a lot of people with his Ponzi. Also Do Kwon.
We can therefore see that bitcoin is a very fragile object that could more easily fall to zero than a currency emanating from a central state entity credible.
The race to become the standard store of value of the future
Currencies are protocols subject to the divine power of network effects. Protocols tend to converge towards a single reference standard. Just as VHS and Betamax couldn’t coexist, currencies subject to the free market converge towards a reference currency. Today, the ultimate monetary standard is the dollar. Therefore, the chaotic competition that we observe between BTC and other cryptos could end with the total demonetization of all others excluding the victorious currency.
We can then deduce that all the cryptos which have absolutely no chance of becoming a stable standard and which have the sole value proposition of being mediums of exchange are Ponzi pyramids which will end up at zero. For example, Litecoin, Bitcoin Cash, UST or XRP.
What happens with shitcoins is thatthey work thanks to the trust that everyone places in them. But everyone’s trust is fragile, because it comes from everyone. It rises because it rises. When the lie is exposed, collective trust crumbles and a death spiral takes shape.
Therefore, the market will have to designate a clear winner who will have previously destroyed all its competitors. Either all of these cryptos will perish and end up zero, BTC included, or they will all end up zero except one.
Bitcoin is not necessarily the crypto that will emerge victorious from this chaos, but it is undeniably the one. who is in a better position. The least risky investment logic would therefore consist in allocate more savings into crypto which has the best chance of becoming the future monetary norm.
After maximalism, Bitcoin imperialism?
We have therefore seen that all currencies (including fiat) resemble forms of speculative bubbles. Bitcoin is a currency. Bitcoin is therefore a bubble.
The real question every investor should ask themselves: what is the probability that the bubble will never burst i.e. bitcoin will become the benchmark monetary standard ? That is to say that bitcoin executes other cryptos before attacking the dollar? The probability is actually very very low, but it is not zero. This is an even stronger hypothesis than the maximalist thesis. We could talk aboutbitcoin imperialism !
If BTC managed to suppress the Fed, it would be a miracle.
This bet against the Fed is nevertheless based on convincing arguments: central banks have systematically alternated between orthodox phases and periods of monetary easing. Even if the Federal Reserve will use all its arsenal to curb current US inflation, it is likely that a new printing cycle will emerge again in a few years. When inflation is lower and seems docile” under control “.
In fact, as long as the public deficit does not become illegal, as long as the public debt is in conformity with the Constitution, as long as there are academics ready to deliver “studies” which show that the deficit creates growth, well the inflation cycle will restart.
In this case, investing in BTC could be particularly smart.
The best way to permanently end bitcoin
Just close the exchanges. If you are absolutely certain that governments will ban Coinbase and Binance, then you should bet on the dollar rather than BTC.
If the exchanges are closed, all mainstream investors will be stuck with tokens that they can’t sell. But once you can’t sell anything, it’s worth nothing. Once a very large proportion of people accept that a token commodity has been demonetized, the transition is irreversible. You can never buy a house with assignats. There is no way to save the demand for a currency that cannot be spent.
Bitcoin is a bubble, like all other currencies. Will it be the bubble that does not burst, that is to say the next monetary standard? Bitcoin risks ending up in zero if it fails to outrun all of its competitors in the crypto market, before fighting the ultimate battle with the US greenback. Bitcoin is much more likely to end up zero than one million. However, when we see the level of faith in the religion of deficits, we could well wonder if we should not allocate part of our portfolio in BTC.
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Bitcoin changes everything! Coming from a financial background, everything fascinates me in this technology. Every day, I try to enrich my knowledge of this revolution which will allow humanity to advance in its conquest of freedom.