Jamie Dimon trashed talked the Bitcoin by calling it a fraud on September 12, 2017. The BTC was trading at approximately $ 4,148. Today (9th November), it trades at $7,458. Jamie Dimon isn’t the first financial expert to dismiss the Bitcoin. In January I asked Andie Xie, ex JP Morgan Economist, about his views. He called it gambling. Ray Dalio was on the same page, saying that it is a bubble. But the Bitcoin kept going up. There’s clearly something unique about this situation. But is the Bitcoin’s amazing bull run this year just a bubble?
A bubble is a situation where a commodity is being traded much higher than it’s actual intrinsic value. Thus, all bubbles are designed to burst beyond a certain point. So what is a Bitcoin’s intrinsic value? A currency’s value principally depends on the following:
1. It needs to be a medium of exchange
2. It needs to have inherent value backed by an asset. (The current fiat currencies are backed by the trust on the issuing Government)
A Bitcoin is a medium of exchange amongst it’s society. Its value is backed by both the trust on the technological system and the fact that they are denominated in fiat currencies. Now, having established this, I have a simple Equity example to determine whether Bitcoin is a bubble.
Imagine a public company ABC. ABC is currently trading at $100 per share. The next year presents 10 contracts for the taking. If ABC get all 10 contracts, the cash flows generated would put ABC’s stock value at $ 1,000. The investors are certain that ABC has the ability to grab all 10 contracts, so they start buying their stock. Eventually the stock price starts trading at $1,500. This excess $500 per share is a bubble. There are 2 risky assumptions investors make: ABC can bag all 10 contracts and the stock will sell at the right price.
The Bitcoin isn’t different. The price keeps going up as the people wish to push till Governments accept the situation. Thus people are assuming that at some point, it will be a major medium of exchange. The big questions are these:
1. Will the governments cave in and make it a mainstream currency?
2. If they do, how many governments and companies will accept it? The actual value will depend on this.
Thus, if you relate to the Equity example, the current price of $7,000 + is justified if at some point in future, the volume of transactions match this. To conclude, I will say 2 things:
- The Bitcoin IS NOT a typical bubble since there is a possibility that this price can be justified in the future
- The current framework will always prevent it from becoming a mainstream currency as it cannot handle functions like Credit multiplication and taxation.
It all boils down to who will give in the first: The government or the people.
Read the original article here.