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> According to the efficient-markets hypothesis (EMH), which still dominates the analysis of financial markets, this should be impossible. The EMH states that t
by enoch_r 14y ago
> According to the efficient-markets hypothesis (EMH), which still dominates the analysis of financial markets, this should be impossible. The EMH states that the market value of an asset is equal to the best available estimate of the value of the services or income flows it will generate. In the case of a company stock, this is the discounted value of future earnings. Since Bitcoins do not generate any actual earnings, they must appreciate in value to ensure that people are willing to hold them. But an endless appreciation, with no flow of earnings or liquidation value, is precisely the kind of bubble the EMH says can’t happen.
No. No no no no no.
EMH doesn't say that everything must be priced according to the "best available estimate of the value of the services or income flows it will generate." For example, if I pay $20,000 for a car, that doesn't mean that the present value of the extra income I'll earn thanks to that car is $20,000. It might mean the car makes my life more pleasant and convenient. Dollars are valuable for exactly the same reason--since everyone I know will accept dollars instead of whatever it is they'd like to buy with dollars, having dollars makes my life extremely convenient. That, not the fact that I need them to pay taxes, is what makes dollars so valuable.
The issue here is that there are network effects. Just as dollars are more valuable to me because they're used and accepted by everyone I know, or a fax machine is only valuable to me if I know someone who can receive my faxes, a currency is only valuable when someone else is willing to accept payment in it. This means that, as a currency is adopted by higher and higher proportions of the population (or as the perceived odds of that rise), its value also rises.
Bitcoin definitely looks like a bubble to me. It's a small market, it's dominated by people with strong philosophical positions that predispose them towards BTC. And shorting is difficult. But the reasoning in the article is absurd.
- thatthatis 14y agoThe EMH applies to market-traded securities. Your car is not a marketable security.
- enoch_r 14y agoThat's probably a better way to put it. I guess the point is that EMH doesn't apply to BTC for some of the same reasons it doesn't apply to cars--both cars and currencies get much of their value from utility that's unrelated to the income flows they generate.
- thatthatis 14y agoThe EMH applies when there is a robust market, as there is in bitcoin. How assets get their value to each participant or what valuation methods are used is irrelevant -- the point of the EMH is that the market price is correct because of the market. I don't believe the EMH is accurate, but it's worth understanding exactly what it is if you're going to say it is wrong. The EMH is routinely applied to currency trading, as well as asset trading (i.e. gold/silver/natural gas). It doesn't matter whether you view BTC as a medium of exchange or a store of value -- the EMH is reasonably applied against BTC because there is a robust market.
- enoch_r 14y agoIt looks a bit silly to accuse me of not understanding what EMH is while simultaneously changing your working definition of its applications from "market-traded securities" to "liquid markets." I accepted your scope for EMH and showed that the author's argument was still incoherent--currencies are not securities[1]. But if you'd rather go back to a scope for EMH that applies to BTC, that's fine. The author claimed that: 1. EMH applies to BTC. 2. This means that the price of a BTC should be the value of its underlying asset. 3. The value of BTC's underlying asset (nothing) is 0. 4. Therefore, EMH is wrong. And as my original post argued, 2 is wrong. In cases where an asset has value external to its backing, EMH says nothing of the sort. A corrected version of the author's logic: 1. EMH applies to BTC. 2. This means that the price of a BTC should capture the present value of a BTC from several sources--the value of its underlying asset, its utility as a medium of exchange, and the any expected appreciation in the future. 3. The value of BTC's underlying asset (nothing) is 0. 4. Therefore, either BTC has positive utility as a medium exchange, BTC is expected to appreciate in the future, or both. Or EMH is wrong. Either we apply EMH to market-traded securities, in which case it doesn't apply to BTC, or we apply EMH to anything with a liquid market, in which case it doesn't say that BTC's true value is the value of its underlying asset. Either way, the argument falls flat as a refutation of EMH. [1] http://en.wikipedia.org/wiki/Security_(finance)#cite_note-1 http://en.wikipedia.org/wiki/Security_(finance)#cite_note-1
- thatthatis 14y ago
- dmix 14y agohttp://en.wikipedia.org/wiki/Subjective_theory_of_value http://en.wikipedia.org/wiki/Subjective_theory_of_value