The rationalist’s case for buying bitcoin

Weighing the odds.
Weighing the odds.
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Determining an intrinsic value for bitcoin is difficult, in large part because it’s different things to different people. For some, bitcoin is a digital collectible they hope to hold onto forever (well, at least until it’s worth $100,000 or more). For others, bitcoin is a currency, as real as the US dollar or the euro. The truth is, there isn’t a universal truth about bitcoin’s nature, so a combination of speculative value and use value get wrapped into the cryptocurrency’s global price.

Longterm holders rarely sell bitcoin. In effect, when they purchase bitcoins, they remove the coins from circulation indefinitely, betting that eventually, they will be more valuable than they are today. These passive holders could be compared to passive stock market investors. They simply buy and wait… and wait some more. When the price dips, they sometimes purchase a few more units.

But by practically removing themselves from day-to-day trading, they leave bitcoin’s price to be determined by a small sliver of active traders. This frenzied bunch is responsible for setting cryptocurrency prices each day. Short-term traders move rapidly between different assets, hoping to score profits on arbitrage opportunities. They attempt to capitalize on panic selling after hacks, and cash in when bitcoin rebounds.

Bitcoin is more volatile than most commonly traded currencies, but price swings are just the nature of a market. People perceive risks differently, have different liquidity needs, and assign assets different values. In these ways, bitcoin is no different from shares in IBM or Tesla. (To be fair, it’s is probably more like Tesla than IBM.)

All this can be disheartening for an investor looking to take the plunge into bitcoin, but worried not only that the price will fluctuate wildly, but that it could go to zero. Since bitcoin has no real-world anchor, its value is only what its buyers decide it is.

There is some good news though: Bitcoin has true utility—sort of. It can be used to swap from one currency into another, without incurring the fees levied by currency brokers. For example, a person could trade from US dollars to bitcoin, and then bitcoin to Mexican pesos. This entails exchange-rate risk and the possibility of theft or loss, but this swap can be done through crypto at a lower price to customers.

From that perspective, how much bitcoin is “worth” doesn’t really matter—what matters is the volume of trade between USD and pesos that passes through bitcoin. If you anticipate that number going up, then all else equal, bitcoin’s price would seem likely to rise as demand for it increases (and remember, the total supply of bitcoin will never exceed 21 million units). This analysis extends to any currency trading pair. The question is whether volume transacted through bitcoin will grow.

Bitcoin plays a role in many segments of the economy, including money laundering, remittance services, and the black market. To be certain, bitcoin isn’t necessarily the best option for any of these, especially considering its traceability and the challenges of storing crypto securely. In that sense, cold hard cash is one of bitcoin’s direct competitors, while companies like Western Union provide more reliable money transfer services than crypto exchanges.

However, Bitcoin’s 24-hour trading volume is now $11.7 billion, and that number may well grow over the next 10 to 20 years (whether or not it’s reflected on legal trading platforms). It could be driven by increased speculation, or by greater demand as more people come online. Already, a decade into bitcoin’s existence, a vibrant ecosystem of exchanges and custody services has made crypto accessible to millions of people. That probably seemed impossible back in 2009.

The progress has been respectable, and barring catastrophe, it seems likely to continue. As crypto enthusiasts develop faster and more anonymous virtual currencies, bitcoin could become the primary settlement unit for new assets. While it’s easy to make the bear case against bitcoin (i.e., market manipulation, lack of usage), there’s reason to remain openminded enough to see the potential, too.



SEC files suit against Kik for Kin ICO

The US Securities and Exchange Commission filed a complaint against Kik Messenger on Tuesday, alleging that the company conducted an unregistered securities offering for its cryptocurrency, Kin. The SEC took care to dot the i’s and cross the t’s, spelling out Kik’s alleged misbehaviors in a 49-page document. Here’s a gem from a Kik employee quoted in the suit: “The whole point is to make our legal department happy, not the users (who are actually investors and probably could care less that they got a sticker pack for their $10K investment into KIN).” ¡Ay, caramba!

Takeaway: Eileen Lyon, Kik’s general counsel, contends that “the SEC’s complaint against Kik is based on a flawed legal theory.” Kik has said that they will fight the SEC every step of the way, and this case could set a precedent for how the regulator approaches other companies that conducted ICOs. Get ready to rumble.

Please send news, tips, and your favorite quotes from the SEC complaint to Today’s Private Key was written by Matthew De Silva, and edited by Oliver Staley. Choose a job you love and you will never have to work a day in your life.