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Many are scratching their heads: "WTF? Bubble!? When will Bitcoin come crashing down?" The thing is, individuals and institutions worldwide currently own aroun

by cs702 9y ago

Many are scratching their heads: "WTF? Bubble!? When will Bitcoin come crashing down?" The thing is, individuals and institutions worldwide currently own around $300 trillion in financial assets.[a] If as a group they decide to hold, say, 2% of their financial wealth in Bitcoin, say, to diversify away from all nations on earth, then Bitcoin's market capitalization would go up 30x, from around $0.2 trillion to $6 trillion. The number of bitcoins is fixed, so the price would go up by the same multiple. In short, all it takes is for the world to want a tiny exposure to Bitcoin. Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. [a] http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/ http://money.visualcapitalist.com/worlds-money-markets-one-v...

beamatronic 9y ago
Why is gold being ignored then?
- s73ver_ 9y ago
  They likely also have gold, but they already bought it long ago.
- Snackchez 9y ago
  You can't transfer gold at will across the world. Although BTC is claimed to be a "store of value", it can also be transferred around fairly easily (with very little friction). It can also be exchanged for many different currencies.
- chatmasta 9y ago
  Because nothing has changed about gold, whereas bitcoin is new. Any investor putting 2% of their value into gold is already doing it. Investors putting 2% into BTC couldn’t do it before it existed, or matured to where it is now.
- vinceguidry 9y ago
  You either have to hold gold, which is dangerous and again contingent on avoiding nation-state failure risk, or you have to trust someone else to hold gold, which is perhaps as risky but the risks have a different profile.
  - bradleyjg 9y ago
    A) How is holding gold contingent on avoiding nation-state failure risk, or at least how is the relevant risk to gold as opposed to say your person? B) It's pellucidly clear that holding bitcoin is dangerous in the same way that holding gold is -- i.e. it can be stolen. In fact, it looks like the carrying costs may actually be higher.
    - vinceguidry 9y ago
      A) If your nation state fails and you have to flee the country, how are you going to take your gold with you? That's the real risk, not local vault security. B) You can take your bitcoin, encrypt it, and put it anywhere on the Internet in plain sight, and then hold the encryption key in your pocket, or in your head. Totally safe, especially against the real threat, border security. Bitcoin is far easier to physically secure than gold is. What's difficult is securing it in a manner that also makes it easy to do business with it.
      - bradleyjg 9y ago
        If your nation state fails and you die in the resulting chaos what good will the encryption key in your head do anyone? Saying that bitcoin is a better gold because it solves the nation-state failure risk is missing the forest for the bacteria in the ants crawling on the leaves of the trees. > You can take your bitcoin ... Perhaps you could, but people generally don't. So in terms of actual risk and carrying costs and how that relates to potential market cap, your foolproof system is rather irrelevant.
        vinceguidry 9y ago
        You seem to be dealing in absurd hypotheticals here. In most countries in the world, having your nation state fail on you is a very real risk. It doesn't fail all at once, so it's something you can plan for. Having wealth outside of the banking and financial sectors that's not also in physical form is something that's very valuable for this purpose.
- deleted 9y ago
  [deleted]
- ThomPete 9y ago
  Gold can't be used in the digital space.
- whatyoucantsay 9y ago
  It's not. The productive (e.g. industrial or jewelry) utility of gold is about USD $80 per ounce. But the price is at over $1200 per ounce. In effect investors haven't just not been ignoring gold, they've been buying it at such a rate as to pull it away from its intrinsic uses.
joshbaptiste 9y ago
Great comment and brings things a lot more to light when viewed from this angle.
maxerickson 9y ago
The entire investment community moving 2% of their wealth would be an incredibly massive exposure to bitcoin.
alexanderstears 9y ago
>Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. Except for gold and tangible capital. How did Germany get through hyper inflation and Zimbabwe didn't? Germany had a real economy and an industrial base. A person who owns a tractor owns a tractor regardless of the money printing going on. Sure, the State can seize the tractor but the United States can (and has) seized bitcoins - go tell the folks with bitcoins in the Silk Road that there's no nation specific risk exposure.
legutierr 9y ago
So I guess what you are saying is that the price of Bitcoin does actually have an upper bound, which is informed by the world's aggregate financial wealth, and is probably ~$500k per Bitcoin?
- bitxbitxbitcoin 9y ago
  That's the gist of what many Bitcoiners have been saying for years.
mikeash 9y ago
This reminds me of my wannabe indie developer friends saying things like, "If we sell this program for $10 and only 1% of Mac users buy it, we'll make $BIGNUM!" It's not wrong, but that 2% figure you mention really needs to be justified, not handwaved.
- em3rgent0rdr 9y ago
  In just the past year we have seen instability of states such as Venezuela, Zimbabwe, and even US.
  - VVayneTracker 9y ago
    How is a currency backstopped by nothing going to be superior? Volatility? It won't have the same exposure to the source of volatility to which national currencies are succeptable? Presumably it wouldn't be encumbered by an obligation to provide for the welfare of its constiuents. But in that sense, the burdens of a citizenry also translate into a valuable commodity which can be leveraged in the form of labor. Just spitballing here. It's a very interesting thought exercise. No person or entity can affect the money supply so the only governance function would presumably be This seems very murky. It's utility as a currency of last resort seems uncertain and therefore relatively weak. Considering it would have to serve as a source of stability in a time of volatility which is itself a highly uncertain proposition. To my mind, seems likely BTC is being used by the super-wealthy (persons and fictitious entities, i.e. corporations) to avoid taxes and to pay bribes.
    - Cthulhu_ 9y ago
      BTC is currently being used by a number of (rich) investors and a very, very large horde of excited people that see a lot of other people that got very rich this year. Tax avoidance in that last group is probably more out of ignorance than anything - I mean for a lot of people it's their first dip into something like the stock market.
dragonwriter 9y ago
> Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. It's still impossible, since your (and your potential trading partners’) access to the Bitcoin network, or even your ability to retain the keys which are equivalent to the Bitcoin itself, are not independent of state-specific risks. These present real storage, and even moreso liquidity, risks.
- pc2g4d 9y ago
  It's a complex phenomenon. There are various jurisdictions with their supply/demand for Bitcoin, affected by regulations, government (in)stability, the exchanges' ability to handle heavy volumes, etc. So Bitcoin's value doesn't diversify away from nation-specific risks---rather, it aggregates across the risks of all nations, which would tend to reduce the risk, but it doesn't exactly get away from it. Presumably a Bitcoin in North Korea is worth little to most North Koreans because they have no means of accessing the Internet or leaving the country to redeem its value. Should Bitcoin transactions be banned in a given country, but citizens retain mobility, Bitcoins will keep some value in that jurisdiction because of the ability to drive to a neighboring country, buy/sell Bitcoins, and return. Of course this will be subject to limits on cash flows across borders. Has anyone made a map showing Bitcoin prices across the globe?
jjxw 9y ago
I wouldn't say Bitcoin is even a good example of being able to diversify from nation-specific risks. China's crackdown on the currency is a great example and if the SEC or other regulatory body decides to crack down or otherwise make interacting with these markets more difficult it would presumably have an effect on the price. The largest risk to the long term viability for bitcoin (and probably crypto in general) are regulatory in my mind. A lot of value can be derived from regulatory arbitrage - just look at the evolution of cryptocurrency's use cases from 1) buying and selling illegal goods, 2) getting around capital controls, and now 3) issuing securities without having to go through the normal IPO process. It's a long road to people using this stuff to transact "real" goods and services. There is a very real nation-specific risk in the form of regulatory regime.
fullshark 9y ago
Agreed. Basically the bullish case for bitcoin is that it's a financial asset that institutional investors want to hold just because it has some sort of beta value that makes it useful as an investment hedge. The argument for it as an alternative currency seems out the window. The stakeholders don't care though because the price keeps going up, which is all they really care about.
Scarblac 9y ago
So a currency that is hardly used to pay for things with and can handle a small number of transactions per second, with transaction fees, risk of being made illegal, competitor altcoins that are at least as good and the energy consumption of a small country will hold 2% of the value of the world's financial wealth? Buying bridges from strangers looks completely sane in comparison.
- em3rgent0rdr 9y ago
  Lightning network protocol has reached version 1.0 and they've demonstrated videos of it working.
  - afghanPower 9y ago
    Lightning network destroys the whole reason why you would use bitcoin -> decentralization.
bradleyjg 9y ago
> The thing is, individuals and institutions worldwide currently own around $300 trillion in financial assets.[a] The overwhelming majority of which is productive assets. The only major non-transient holdings of non-productive assets is of gold. And that makes up about half a percent. So 2% for bitcoin, which at absolute very best is a slightly better gold, seems like a real stretch. > Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. Gold
- scrumper 9y ago
  So, I like this line of reasoning. I'll extend it, on the ridiculously generous assumption that 10% of gold holdings will shift into BTC. $300tn * 0.005 * 0.1 = $150bn. That's my stab at a fair upper limit for a supportable market cap for BTC. EDIT so I guess that makes me a short. I'd better sell.
  - VVayneTracker 9y ago
    10% seems highly optimistic. I would imagine it be ing an order of magnitude less. Then again. When humans are involved....
- VVayneTracker 9y ago
  I don't disagree but wonder whether the fact that it doesn't have a phyiscal property would militate in its favor over gold. I recently read a story about how a Saudi prince was having a few tonnes of gold driven to a neighboring country every day in order to avoid trade restrictions. Seems like it would be a lot easier and safer to just click a button on his computer. That said I could imagine it easily cutting the other way and saying that golds tangible properties are an advantage. This is a fascinating subject!
  - bradleyjg 9y ago
    I don't buy the perfect means of evading capital control argument. Look the mirror trading that a bunch of billionaires used to evade capital controls in Russia: https://www.bloomberg.com/news/articles/2017-06-28/how-mirror-trades-moved-billions-from-russia-quicktake-q-a https://www.bloomberg.com/news/articles/2017-06-28/how-mirro... It also just involved a click of a button. Nonetheless it was uncovered. Too often would be cypher-anarchists forget about rubber hose cryptoanaysis. And unlike gold, bitcoin are fundamentally non-fungible and traceable. The biggest advantage gold has over bitcoin is 5000 plus years of history as a store of value. The biggest advantage bitcoin has over gold is its immateriality. Personally I think the former outweighs the latter (no put intended).
DennisP 9y ago
I could see that happening, but with cryptocurrency in general; it probably makes more sense to have a diversified portfolio of cryptos than just one.
aaavl2821 9y ago
thats a dangerous line of thinking. along the lines of telling an investor "if we just get 1% of this massive market, we'll be huge!" if people decided to invest 2% of the worlds financial wealth into, say, drawings i made of million dollar bills, then my million dollar bill drawings would be worth $6 trillion. since i cant draw that fast, price would go way up it would be incredibly hard to get 2% of all the worlds wealth. for reference, private equity as an asset class (including venture capital, growth equity, buyout funds, etc) has only like $2.5T in assets
- pascalxus 9y ago
  Yes. but, his line of reasoning explains what everyone else is probably thinking.
benjaminjackman 9y ago
It may actually go up higher than that, markets tend to over-react to large investments. At these scales moving that much money around is not as simple as subtracting a number from one set of ledgers and putting it into another.
bitxbitxbitcoin 9y ago
Now it is very, very possible :).
hkmurakami 9y ago
2% is an enormous amount to put into such a shaky asset/currency.
deleted 9y ago
[deleted]

by cs702 9y ago

beamatronic 9y ago

Why is gold being ignored then?

s73ver_ 9y ago
They likely also have gold, but they already bought it long ago.
Snackchez 9y ago
You can't transfer gold at will across the world. Although BTC is claimed to be a "store of value", it can also be transferred around fairly easily (with very little friction). It can also be exchanged for many different currencies.
chatmasta 9y ago
Because nothing has changed about gold, whereas bitcoin is new. Any investor putting 2% of their value into gold is already doing it. Investors putting 2% into BTC couldn’t do it before it existed, or matured to where it is now.
vinceguidry 9y ago
You either have to hold gold, which is dangerous and again contingent on avoiding nation-state failure risk, or you have to trust someone else to hold gold, which is perhaps as risky but the risks have a different profile.
- bradleyjg 9y ago
  A) How is holding gold contingent on avoiding nation-state failure risk, or at least how is the relevant risk to gold as opposed to say your person? B) It's pellucidly clear that holding bitcoin is dangerous in the same way that holding gold is -- i.e. it can be stolen. In fact, it looks like the carrying costs may actually be higher.
  - vinceguidry 9y ago
    A) If your nation state fails and you have to flee the country, how are you going to take your gold with you? That's the real risk, not local vault security. B) You can take your bitcoin, encrypt it, and put it anywhere on the Internet in plain sight, and then hold the encryption key in your pocket, or in your head. Totally safe, especially against the real threat, border security. Bitcoin is far easier to physically secure than gold is. What's difficult is securing it in a manner that also makes it easy to do business with it.
    - bradleyjg 9y ago
      If your nation state fails and you die in the resulting chaos what good will the encryption key in your head do anyone? Saying that bitcoin is a better gold because it solves the nation-state failure risk is missing the forest for the bacteria in the ants crawling on the leaves of the trees. > You can take your bitcoin ... Perhaps you could, but people generally don't. So in terms of actual risk and carrying costs and how that relates to potential market cap, your foolproof system is rather irrelevant.
      - vinceguidry 9y ago
        You seem to be dealing in absurd hypotheticals here. In most countries in the world, having your nation state fail on you is a very real risk. It doesn't fail all at once, so it's something you can plan for. Having wealth outside of the banking and financial sectors that's not also in physical form is something that's very valuable for this purpose.
deleted 9y ago
[deleted]
ThomPete 9y ago
Gold can't be used in the digital space.
whatyoucantsay 9y ago
It's not. The productive (e.g. industrial or jewelry) utility of gold is about USD $80 per ounce. But the price is at over $1200 per ounce. In effect investors haven't just not been ignoring gold, they've been buying it at such a rate as to pull it away from its intrinsic uses.

joshbaptiste 9y ago

Great comment and brings things a lot more to light when viewed from this angle.

maxerickson 9y ago

The entire investment community moving 2% of their wealth would be an incredibly massive exposure to bitcoin.

alexanderstears 9y ago

>Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. Except for gold and tangible capital. How did Germany get through hyper inflation and Zimbabwe didn't? Germany had a real economy and an industrial base. A person who owns a tractor owns a tractor regardless of the money printing going on. Sure, the State can seize the tractor but the United States can (and has) seized bitcoins - go tell the folks with bitcoins in the Silk Road that there's no nation specific risk exposure.

legutierr 9y ago

So I guess what you are saying is that the price of Bitcoin does actually have an upper bound, which is informed by the world's aggregate financial wealth, and is probably ~$500k per Bitcoin?

bitxbitxbitcoin 9y ago
That's the gist of what many Bitcoiners have been saying for years.

mikeash 9y ago

This reminds me of my wannabe indie developer friends saying things like, "If we sell this program for $10 and only 1% of Mac users buy it, we'll make $BIGNUM!" It's not wrong, but that 2% figure you mention really needs to be justified, not handwaved.

em3rgent0rdr 9y ago
In just the past year we have seen instability of states such as Venezuela, Zimbabwe, and even US.
- VVayneTracker 9y ago
  How is a currency backstopped by nothing going to be superior? Volatility? It won't have the same exposure to the source of volatility to which national currencies are succeptable? Presumably it wouldn't be encumbered by an obligation to provide for the welfare of its constiuents. But in that sense, the burdens of a citizenry also translate into a valuable commodity which can be leveraged in the form of labor. Just spitballing here. It's a very interesting thought exercise. No person or entity can affect the money supply so the only governance function would presumably be This seems very murky. It's utility as a currency of last resort seems uncertain and therefore relatively weak. Considering it would have to serve as a source of stability in a time of volatility which is itself a highly uncertain proposition. To my mind, seems likely BTC is being used by the super-wealthy (persons and fictitious entities, i.e. corporations) to avoid taxes and to pay bribes.
  - Cthulhu_ 9y ago
    BTC is currently being used by a number of (rich) investors and a very, very large horde of excited people that see a lot of other people that got very rich this year. Tax avoidance in that last group is probably more out of ignorance than anything - I mean for a lot of people it's their first dip into something like the stock market.

dragonwriter 9y ago

> Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. It's still impossible, since your (and your potential trading partners’) access to the Bitcoin network, or even your ability to retain the keys which are equivalent to the Bitcoin itself, are not independent of state-specific risks. These present real storage, and even moreso liquidity, risks.

pc2g4d 9y ago
It's a complex phenomenon. There are various jurisdictions with their supply/demand for Bitcoin, affected by regulations, government (in)stability, the exchanges' ability to handle heavy volumes, etc. So Bitcoin's value doesn't diversify away from nation-specific risks---rather, it aggregates across the risks of all nations, which would tend to reduce the risk, but it doesn't exactly get away from it. Presumably a Bitcoin in North Korea is worth little to most North Koreans because they have no means of accessing the Internet or leaving the country to redeem its value. Should Bitcoin transactions be banned in a given country, but citizens retain mobility, Bitcoins will keep some value in that jurisdiction because of the ability to drive to a neighboring country, buy/sell Bitcoins, and return. Of course this will be subject to limits on cash flows across borders. Has anyone made a map showing Bitcoin prices across the globe?

jjxw 9y ago

I wouldn't say Bitcoin is even a good example of being able to diversify from nation-specific risks. China's crackdown on the currency is a great example and if the SEC or other regulatory body decides to crack down or otherwise make interacting with these markets more difficult it would presumably have an effect on the price. The largest risk to the long term viability for bitcoin (and probably crypto in general) are regulatory in my mind. A lot of value can be derived from regulatory arbitrage - just look at the evolution of cryptocurrency's use cases from 1) buying and selling illegal goods, 2) getting around capital controls, and now 3) issuing securities without having to go through the normal IPO process. It's a long road to people using this stuff to transact "real" goods and services. There is a very real nation-specific risk in the form of regulatory regime.

fullshark 9y ago

Agreed. Basically the bullish case for bitcoin is that it's a financial asset that institutional investors want to hold just because it has some sort of beta value that makes it useful as an investment hedge. The argument for it as an alternative currency seems out the window. The stakeholders don't care though because the price keeps going up, which is all they really care about.

Scarblac 9y ago

So a currency that is hardly used to pay for things with and can handle a small number of transactions per second, with transaction fees, risk of being made illegal, competitor altcoins that are at least as good and the energy consumption of a small country will hold 2% of the value of the world's financial wealth? Buying bridges from strangers looks completely sane in comparison.

em3rgent0rdr 9y ago
Lightning network protocol has reached version 1.0 and they've demonstrated videos of it working.
- afghanPower 9y ago
  Lightning network destroys the whole reason why you would use bitcoin -> decentralization.

bradleyjg 9y ago

> The thing is, individuals and institutions worldwide currently own around $300 trillion in financial assets.[a] The overwhelming majority of which is productive assets. The only major non-transient holdings of non-productive assets is of gold. And that makes up about half a percent. So 2% for bitcoin, which at absolute very best is a slightly better gold, seems like a real stretch. > Note that before Bitcoin it was impossible to diversify away from all nation-specific risks. Gold

scrumper 9y ago
So, I like this line of reasoning. I'll extend it, on the ridiculously generous assumption that 10% of gold holdings will shift into BTC. $300tn * 0.005 * 0.1 = $150bn. That's my stab at a fair upper limit for a supportable market cap for BTC. EDIT so I guess that makes me a short. I'd better sell.
- VVayneTracker 9y ago
  10% seems highly optimistic. I would imagine it be ing an order of magnitude less. Then again. When humans are involved....
VVayneTracker 9y ago
I don't disagree but wonder whether the fact that it doesn't have a phyiscal property would militate in its favor over gold. I recently read a story about how a Saudi prince was having a few tonnes of gold driven to a neighboring country every day in order to avoid trade restrictions. Seems like it would be a lot easier and safer to just click a button on his computer. That said I could imagine it easily cutting the other way and saying that golds tangible properties are an advantage. This is a fascinating subject!
- bradleyjg 9y ago
  I don't buy the perfect means of evading capital control argument. Look the mirror trading that a bunch of billionaires used to evade capital controls in Russia: https://www.bloomberg.com/news/articles/2017-06-28/how-mirror-trades-moved-billions-from-russia-quicktake-q-a https://www.bloomberg.com/news/articles/2017-06-28/how-mirro... It also just involved a click of a button. Nonetheless it was uncovered. Too often would be cypher-anarchists forget about rubber hose cryptoanaysis. And unlike gold, bitcoin are fundamentally non-fungible and traceable. The biggest advantage gold has over bitcoin is 5000 plus years of history as a store of value. The biggest advantage bitcoin has over gold is its immateriality. Personally I think the former outweighs the latter (no put intended).

DennisP 9y ago

I could see that happening, but with cryptocurrency in general; it probably makes more sense to have a diversified portfolio of cryptos than just one.

aaavl2821 9y ago

thats a dangerous line of thinking. along the lines of telling an investor "if we just get 1% of this massive market, we'll be huge!" if people decided to invest 2% of the worlds financial wealth into, say, drawings i made of million dollar bills, then my million dollar bill drawings would be worth $6 trillion. since i cant draw that fast, price would go way up it would be incredibly hard to get 2% of all the worlds wealth. for reference, private equity as an asset class (including venture capital, growth equity, buyout funds, etc) has only like $2.5T in assets

pascalxus 9y ago
Yes. but, his line of reasoning explains what everyone else is probably thinking.

benjaminjackman 9y ago

It may actually go up higher than that, markets tend to over-react to large investments. At these scales moving that much money around is not as simple as subtracting a number from one set of ledgers and putting it into another.

bitxbitxbitcoin 9y ago

Now it is very, very possible :).

hkmurakami 9y ago

2% is an enormous amount to put into such a shaky asset/currency.

deleted 9y ago

[deleted]