Bitcoin Boom: Asset, Currency, Commodity, or Collectible?

 As I have noted in my previous posts on cryptocurrencies and Bitcoin in particular, I cannot agree with either his most ruthless critics or his most ardent advocates. Unlike Jamie Dimon, And I don’t believe, unlike their most dedicated fans, that cryptocurrencies are now or will ever become a new asset class.or that these currencies could change fundamental truths about risk, investing and governance. Meanwhile, the reason for the disagreement is that the two sides seem to fundamentally disagree about what bitcoin is, and at the risk of provoking general resentment, I will express the opinion that bitcoin is not an asset, but a currency, and since so, it is impossible to calculate its value or invest in it. You can only assign a price to it or trade it.

Content

• Assets, raw materials, currency and collectibles
• Investing versus trading
• What is Bitcoin?
• Verification in practice

Assets, raw materials, currency and collectibles

Not everything can be valued, but almost everything can be estimated. To understand the difference between cost and price, let me start by stating that every type of investment I will consider should fall into one of the following four groups:

1. Cash generating asset. The asset generates or is expected to generate cash flows in the future. The business you own is definitely an asset, as is the right to the cash flows from that business. These rights can be either contractual (bonds or debt), residual (equity or equity), or even conditional (options). What assets have in common is that these cash flows can be predicted, and assets with high cash flows and lower risk should have a higher value than assets with lower cash flows and higher risk. At the same time, assets can also be valued relative to each other, scaling the price paid according to a common metric. In the case of stocks, this takes the form of comparing price multiples (P / E ratios, EV / EBITDA,
2. Raw materials. A commodity derives its value from using it as a raw material to meet basic needs - be it energy, food, or housing. Although this value can be determined by examining the supply and demand of a given commodity, in both cases there are long delays in time, which makes the process much more difficult than for an asset. Consequently, commodities are generally valued relative to their own history — when normalized prices for oil, coal, wheat, or iron ore are calculated by averaging prices over long cycles.
3. Currency. Currency is the medium of exchange that you use to denominate cash flows; it is also a repository of purchasing power if you choose not to invest. By themselves, currencies do not have cash flows and their value cannot be determined, however, their price can be determined in relation to other currencies. In the long run, the prices of currencies that are more widely used as a medium of exchange and that better retain their purchasing power over time should rise relative to currencies that do not have these characteristics. However, for short periods of time, other forces may dominate - including governments trying to manipulate exchange rates. If we talk about a more traditional example, then you can see it in the graph comparing the US dollar with seven fiat currencies,

   

   Bitcoin Boom: Asset, Currency, Commodity, or Collectible?

4. Collectible. A collectible has no cash flow and is not a medium of exchange, but it can sometimes have aesthetic value (as in the case of a painting by a great artist or a sculpture) or embody an emotional attachment (baseball card or team shirt).A collectible cannot have value as it also does not generate cash flows, but it can be judged based on how other people perceive its attractiveness, as well as the rarity of the collectible.

Seen through this lens, it is clear that gold is not a cash-generating asset, but is it a commodity? Since the value of gold has little to do with its utilitarian functions, and more to do with its long-standing function of storing value - especially during crises or when you lose faith in fiat currencies - it is more of a currency than a commodity. Real estate is an asset, even if it takes the form of a personal dwelling, because in its absence you would have to bear the rental costs (cash flow). Private equity and hedge funds are forms of investing in assets, currencies, commodities, or collectibles, not individual asset classes. 

Investing versus trading

The main point is that for cash-generating assets, both value and price can be determined. For commodities, it is much easier to determine the price than the value, while currencies and collectibles can only have a price. What follows from this? I have previously written about the difference between investing and trading, now it is worth returning to this contrast. To invest in something, you need to calculate the corresponding value, compare with the price, and then act on that comparison - buy if the price is less than the value and sell if it is higher. Trading is a much simpler activity when you ask the price of something, decide if that price will rise or fall in the next period of time, and then make a price bet. While you can succeed both ways, the skills and tools used are different for investing and trading, and what a good investor requires is different from the ingredients needed to trade well. The table below shows the difference between trading (price game) and investing (value game).

	Price game	Value game
The underlying philosophy	Price is the only real indicator on which to act. Nobody knows what the value of an asset is, and its definition gives little.	Each asset has a fair or true value. This value can be determined, albeit with an error, and the price must (in the end) come to the value.
Rules of the game	You are trying to guess in which direction the price will move in the next period (s), and take a position before this movement. To win the game, you must be right more often than wrong about direction and get out before the wind changes.	You are trying to determine the value of an asset, and if its price is lower (higher) than the value, you buy (sell) the asset. To win the game, you must be (mostly) right about value, and the market price must move towards that value.
Key factors	Price is determined by supply and demand, which, in turn, are influenced by market sentiment and dynamics.	Value is determined by cash flow, growth and risk.
Informational influence	Additional information (news, stories, rumors) that changes the market sentiment will move the price even if it has no real impact on the long-term value.	The value can only be affected by information that materially changes cash flows, growth and risks.
Instruments	(1) Technical indicators, (2) price charts (3) investor psychology	(1) Analysis of coefficients, (2) estimation by DCF method (3) examination of financial statements
Time horizon	It can be from very short term (minutes) to moderately short term (weeks, months).	Long term
Key skill	Be able to identify changes in market sentiment / dynamics earlier than other market participants.	Be able to determine the "value" of assets under conditions of uncertainty.
Key personality traits	(1) Market "forgetfulness" (2) quick reactions (3) gambling instincts	(1) Belief in the concept of "value" (2) Belief in the market (3) Patience (4) Immunity to pressure from others
Main hazard (s)	Changes in market sentiment can occur very quickly, nullifying profits for several months within a few hours.	The price may not come to a value even if your estimate of the value is "correct".
Additional bonuses	Ability to change prices (with a lot of money and a large number of followers).	Can provide a catalyst that can drive price to value.
The most misguided player	A trader who thinks he is trading based on value.	A value investor who thinks he can argue with the market.

In my opinion, you can play both the value and the price game well, but misconception about the game you are playing and using the wrong tools or using the wrong skill set in that game is a recipe for failure.

What is Bitcoin?

The first step towards a serious discussion about Bitcoin should be deciding whether it is an asset, currency, commodity, or collectible. Bitcoin is not an asset as it does not generate cash flows on its own for those who own it (until it is sold). It is not a commodity because it is not a raw material that can be used to produce something useful. The only exception that comes to mind is that if it becomes a necessary component of smart contracts, it can begin to play the role of a commodity; for Ethereum, this can be a lifesaver, as it was touted not so much as a currency, but as a convenient tool for smart contracts. Then we are left with a choice between currency and collectible, with bitcoin supporters leaning towards the former. and his opponents - to the second. In my last post, I argued thatBitcoin is a currency , but not very good yet, as it has only limited acceptance as a medium of exchange and is too volatile to be a store of value. Looking ahead, I see three possible paths for Bitcoin as a currency, from best to worst.

1. Global digital currency. In a best-case scenario, bitcoin gains ubiquitous use for transactions around the world, becoming a widely used global digital currency. For this to happen, it must become more stable (in relation to other currencies), central banks and governments around the world must agree to its use (or at least not actively try to discourage it), and the aura of mystery surrounding it must disappear. ... If this happens, it will be able to compete with fiat currencies, and given that the algorithm places restrictions on its creation, its high price may be justified.
2. Millennial gold. In this scenario, Bitcoin becomes a haven for those who distrust central banks, governments, and fiat currencies. In short, he takes on the historic role of gold - but for those who have lost confidence in or fear centralized power. It is interesting to note that the bitcoin talk is filled with mining terminology, as this implies that the creators of bitcoin - whether intentionally or not - shared this vision. In fact, the hard limit for bitcoin of 21 million pieces is more consistent with this scenario than the first. If this scenario unfolds and bitcoin shows the same durability as gold, it will behave like gold, rising in value during crises and falling in more joyous times.
3. 21st century tulip bulbs. In this worst-case scenario, Bitcoin is like a meteor - as it takes off, it attracts more and more money from those who see it as a source of easy profit, but just as quickly burns out when these traders move on to something new and different (which may turn out to be a different, better-engineered digital currency), leaving bitcoin owners with memories of how things could have been. If that happens, Bitcoin could very well become the equivalent of tulip bulbs, a speculative asset whose prices first skyrocketed and then collapsed in 17th century Holland.

I would be lying if I said I know which of these scenarios comes true, but they are all still likely. If you are trading bitcoin, you may not care as your time horizon can be measured in minutes and hours, not weeks, months, or years. However, if your interest in bitcoin is longer term, you should focus less on the background noise of daily price movements and more on progress in using it as a currency. Please also note that you may be pessimistic about Bitcoin and other cryptocurrencies, but be optimistic about the underlying technology, especially blockchain, and its potential to be disruptive innovation.

Verification in practice

Combining the section where I categorized investments into assets, commodities, currencies and collectibles with the section in which I argued that Bitcoin is a "young" currency allows me to draw the following conclusions:

1. Bitcoin is not an asset class. Those who dedicate a portion of their portfolios to Bitcoin should be very clear about why they are doing so. They do this not because they want to diversify their portfolio and own all asset classes, but because they want to apply their trading skills to Bitcoin to spur the returns on their portfolio. Lest you take this as an attack on cryptocurrencies, I hasten to add that fiat currencies (such as the US dollar, euro, or yen) are also not asset classes.
2. It is impossible to calculate the value for bitcoin, you can only determine its price. This follows from the recognition that bitcoin is a currency and not an asset or commodity. Anyone who claims to know the value of bitcoin is either applying a completely different definition of value than me, or just coming up with something on the go.
3. It will be judged as a currency. In the long term, the price to be assigned to bitcoin will depend on how efficient it is as a currency. If it is widely used as a medium of exchange and is stable enough to be a store of value, it deserves a high price tag. If it becomes like gold, the marginal currency that investors flee to during crises, its price will be lower. Worse, if it turns out to be a temporary currency that loses all purchasing power as it is replaced by something new and different - then it will be a complete failure.
4. You don't invest in bitcoin, you trade it. Since you cannot determine the value of bitcoin, you do not have the essential ingredient you need to be an investor. You can trade Bitcoin and get rich off it - but that's only because you are a good trader.
5. The recipe for a good trader. To be a successful trader in bitcoin, you must be aware that the change in its price will be weakly dependent on fundamental factors, will completely depend on the mood and inertia of the market, and large price shifts may occur due to additional information coming in.

Would I buy Bitcoin for $ 6,100? No - but not for the reasons you think. Not because I think it is overvalued - because I cannot make such a judgment without determining its value, but, as I noted earlier, it is impossible to calculate it. The reason is that I am not and have never been a good trader, and as a result, my judgments about prices are dubious. If you have good trading instincts, you should play the price game - as long as you understand that it is a game in which you can win or lose millions depending on your ability to determine market sentiment. If you win millions, I wish you all the best! If you lose millions, please don't let your paranoia blame the establishment, banks and governments for your losses. Easy to get, easy and squandered!