Every time the furry over Bitcoin appears to have reached a crescendo, it only explodes higher. This can not only be seen in the price – up 23% in a single day. But is can also be seen in the ratcheting up in the profile of those getting involved in the debate, with none other than former Fed Chair Alan Greenspan the latest to opine. But when the issue is considered from the standpoint of Bitcoin vs gold, the dramatic price rise might not seem so improbable, as both assets have very little practical value.
Bitcoin vs gold: Its about to get real as banks start fighting bitcoin futures launch
You know the battle over Bitcoin is intensifying when the big banks start to crank up their interminable lobbying machine to halt the advance. The Financial Times reported early Thursday morning that “the world’s largest banks are pushing back on the introduction of bitcoin futures.”
Citing the Futures Industry Association, “whose members include all the largest Wall Street banks,” the article pointed to a letter that is destined to arrive in Commodity Futures Trading Commission hands Thursday stating opposition to the December launch of futures contracts on the CME and CBOE exchanges. The letter cites a lack of transparency in the approval process, improper deliberation methods and increased systemic risk.
“It is also our understanding that not all risk committees of the relevant exchanges were consulted before the certification to launch these products,” the letter stated, pointing to a self-certified regime for “these novel products” that add risk to the listed derivatives clearinghouse structure.
An oft concern is that with such dramatic price swings, margin calls could flood the system during a price crash, exacerbating the market slide. Because the underlying derivatives industry clearinghouse structure is based on mutual risk sharing to a degree, there are extreme scenarios under which a margin catastrophe could put “legitimate” futures contracts used for managing risk in agricultural and financial products at risk.
Hedge fund manager George Michalopoulos, head of the Leonidis Cryptocurrency Fund, recognizes the concerns but notes that institutions entering the market are likely to moderate volatility.
“As the market matures, part of the adoption process is the entry of exchanges and institutional players who might dampen volatility over time, a phenomenon seen in mature derivatives markets. Institutions offering these products are strong and acknowledged experienced in volatile markets. By entering the equation, they will help solve some of these problems.”
The large exchanges themselves have been eying the issue from many standpoints, including analysis of the negative inferences underlying market structure mechanics. “While bitcoin supply is extremely transparent, bitcoin demand is rather opaque,” Erik Norland, executive director and senior economist at the CME wrote in a blog post this week.
He says the rate at which bitcoin has been mined is predictable. “Its ultimate supply is a known quantity, fixed well in advance. There will never be more than 21 million bitcoins. This feature makes supply almost perfectly inelastic.”
Bitcoin vs gold: Is cryptocurrency supply a fixed number?
In the bitcoin vs gold debate, the supply issue is frequently raised, with those questioning bitcoin noting that competing cryptocurrencies and renegade initial coin offerings (ICO) are launched without restriction making supply a moving target. Michalopoulos notes that bitcoin value is like Facebook to a certain degree. “Facebook’s value is not in its code, but in the network effect,” he says.
While both gold and bitcoin are subject to network effects to various degrees, there are also key differences. Among them, new competing metals cannot be created out of thin air as is the case with bitcoin and gold cannot be hacked like bitcoin. But there are also meaningful similarities.
In the bitcoin vs gold debate, both assets in and of themselves have little tangible value. Gold is an adornment metal that doesn’t have near the practical applications in manufacturing and construction that silver or rare earth metals such as platinum do.
Likewise, bitcoin from a “currency” standpoint has little intrinsic value and is not backed by a central government. While the technology underlying the cryptocurrency has material value, the investment in bitcoin does not capture direct ownership of that asset.
“Bitcoin looks like the history of fiat money in the United States and elsewhere,” Greenspan told CNBC yesterday, comparing it to the 1775 Continental currency created to help the US fight the British for impendence. That currency was worthless by 1782.
“Humans buy all sorts of things that aren’t worth anything,” he said, pointing to an eventual decline in value. “People gamble in casinos when the odds are against them. It has never stopped anybody.”
In the end, it is human judgment, however flawed, that drives market prices. Former US Congressman and Presidential candidate Ron Paul, a long time central bank critic who has opined on the dangers of fiat money without a solid anchor to a commodity such as gold, has advocated a retirement fund that lets users invest in cryptocurrencies such as bitcoin. He ran a poll among his followers that asked if they were given the money, where would they like to invest: Federal Reserve Notes, gold, bitcoin or a 10 Year US Treasury bond?
The answer was bitcoin, in a landslide.
Bitcoin vs gold: when will the incredible rally end?
Michalopoulos, a bitcoin bull, acknowledges that it the rally will end, but says we’re a long way off.
He notes that both institutional and retail investors are entering at the same time, which is unusual in market history. “We’re just starting to hit the meatiest part of ramp up,” he said, pointing to a multi-trillion-dollar market size as his target. Viewed through this lens, “valuation starts to make sense and it looks less like a bubble.”
That said, he doesn’t rule out the potential for a crash. The end of central bank quantitative easing has the potential to take a bite out of financial markets in general. If this happens, the most speculative markets, even if they are not directly correlated, could get hurt.
While some analysts have pointed to the assumption that the rise in cryptocurrency popularity is correlated to concern over unconventional central bank monetary policy and the potential decline of fiat currencies, the unanswered question revolves around bitcoin operating as a safety net in a currency devaluation? Don’t bet on it, says Michalopoulos. “Bitcoin is not a safe haven, that’s absurd,” he said.
But it is too early to call it a bubble. “Not to engage in ‘Fed speak,’ but a bubble can only be determined ex-post, after the crash occurs,” he said. Will his former boss at Citadel, Ken Griffin, ever enter the market. “Based on his early comments, not initially,” Michalopoulos said. “But eventually if the market matures I wouldn’t be surprised to see Citadel getting into market making and involved algorithmically, even from a speculative standpoint.”
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