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Bitcoin Has No Intrinsic Value? Neither Does the Dollar, According to St. Louis Fed

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Bitcoin has seen its fair share of criticism from central bankers, but for two analysts at the St. Louis Fed, cryptoassets could be the wave of the future.

In a recently published paper, Aleksander Berentsen and Fabian Schar of the St. Louis Federal Reserve argue that cryptocurrencies are “well suited to become an important asset class.”  As one might expect, this way of thinking is not common within institutional circles or even government.

The paper is intended as a primer on cryptocurrencies, delving into the technical details of transactions and mining. In the Outlook section, the authors maintain that bitcoin’s most apparent application is holding value as an asset. In time, bitcoin can emerge as its own asset class, giving investors broad diversification benefits.

Interestingly, Berentsen and Schar argue that bitcoin itself “could over time assume a similar role as gold.” This argument has been posed before by those who view bitcoin as a long-term store of value. Investment adviser Ark Invest has explained that bitcoin could store $25 billion worth of value if it usurped only 1% of gold’s role as a private investment.

Bitcoin and gold have diverged sharply in recent weeks, as the cryptocurrency’s nouveau riche sought refuge in bullion following an unprecedented decline in the crypto market. Gold prices clocked in at four-month highs recently, while bitcoin plunged 50% from last month’s record levels.

Bitcoin Has No Intrinsic Value? Neither Does the Dollar

One of the chief criticisms levied at bitcoin and other cryptocurrencies is their lack of intrinsic value. According to the authors, the same criticism can also be directed at fiat money like the dollar.

“… Bitcoin is not the only currency that has no intrinsic value,” they argue. “State monopoly  currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.”

It goes virtually without saying that the views expressed by Berensten and Schar are rarely uttered in the world of central banking. After all, these are the very institutions in charge of monetary policy (a fancy word for the size and growth rate of the money supply).

The Federal Reserve has expressed keen interest in bitcoin, and has confirmed that it too is thinking about creating its own digital currency. Like other central banks, the Fed is also interested in distributed ledger technology to facilitate payments, clearing and settlement.

It has been tough to ignore bitcoin’s growing sphere of influence. The cryptocurrency, which started off as an obscure and esoteric entity, has spawned a multi-billion-dollar economy that connects startups, investors and consumers. At its height, the cryptocurrency market reached $830 billion. That was a mere 12 days ago. Even after the latest drop, the market cap for all 1,400+ coins is in excees of $564 billion, according to CoinMarketCap.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

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4.6 stars on average, based on 552 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Bitcoin

Bulls and Bears Wrestle as Bitcoin Price Holds $7,500

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If there was any doubt that the likelihood of a regulated bitcoin ETF was pulling the market strings, it’s been put to rest with the recent performance in the BTC price. Think back to early July when the bitcoin price couldn’t manage to break the key $6,800 level. It was stuck more in the $6,500 range. But when scuttlebutt of securities regulators approving a bitcoin ETF as soon as August began swirling, the excitement bolstered the BTC price first to $6,800 and then to $7,300 quickly and ultimately to levels it hadn’t seen since May at $8,400.

But once U.S. SEC officials voted against the Winklevoss bitcoin ETF, it’s been slow and steady declines in the bitcoin price to the current level of approximately $7,500. The bitcoin price wound up shedding approximately 7% over the past week.

Source: CoinMarketCap

But if you ask Bart Smith, who leads the digital assets group at Susquehanna, investors should notice a silver lining because the bitcoin price has been able to hold the $7,500 and avoid plummeting to $6,100.

Smith is watching for a couple of things to happen. “We must see higher highs and higher lows,” he told CNBC, pointing to the key levels in the bitcoin price that he is watching out for.

From there, he described two scenarios — one bullish and one bearish. “If the bitcoin price continues to break through and hold at $7,500 and bounce higher, I think it’s probably very bullish,” he said. On the other hand, if the bitcoin price were to break through the $6,800 level, Smith and the technicians he talks to believe it would be “very negative.”

Bitcoin Bull

Cryptocurrency trader Brian Kelly who is at the helm of BKCM believes the market sell-off will be short-lived, calling the price correction “normal.”

“[Bitcoin] had a pretty good run from $5,800 up to $8,300, $8,400 or so. So while it might seem crazy to the legacy markets and the bitcoin world, this is just a normal correction,” Kelly told CNBC.

Market participants have been saying that a bitcoin ETF this summer was overly optimistic, with some suggesting that a regulated bitcoin ETF making its debut sometime in 2019 was more realistic. Kelly is somewhere in the middle of that range, saying that the SEC could approve a product by year-end 2018 but not before that. The industry infrastructure such as custody solutions to secure institutional capital from the likes of pension funds and endowments not to mention banks must be more developed before the floodgates open.

Featured image courtesy of Shutterstock 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 40 rated postsGerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.




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Bill Miller Says Bitcoin Is Interesting But That Most Cryptocurrencies Are Worthless

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According to Bill Miller, Bitcoin is, “interesting but that most cryptocurrencies worthless.” He said this in an appearance live on Bloomberg’s show, “What’d You Miss?”

Despite the seeming negativity of his comment, Miller went on to espouse a highly informed and rationally bullish case for the long-term value of Bitcoin.

This defense of Bitcoin’s true value worth arrived as a retort to a condescending question asked by host Joe Weisenthal, specifically, “have you ever thought about how one would go about forming a fair valuation of Bitcoin?”

Miller responded by stating that there are many ways of valuing Bitcoin, but that the most common is to view Bitcoin as a non-correlated asset most similar to gold, except it’s that much more easily transportable than gold and can in turn be used to actually buy things.

He further posits that therefore all one needs to do to determine a proper value to analyze the size of the gold market and calculate what percentage of that market Bitcoin could realistically obtain for itself.

As for the risk inherent to Bitcoin, he believes that “anyone can afford to lose 1% of their money, but how often does 1% of your money result in 10 or 20 or 50% in a few years?” He called it a “positive expectation” lottery ticket.

He also argued that if Bitcoin became a third as valuable as gold, central banks around the world would start to view it as another potential asset just like gold to hold for themselves. That would also increase the market value.

Miller in his own words considers Bitcoin, “An interesting technological experiment. It’s much less risky today then it was when it was priced at $100 a few years ago.

For every day that it doesn’t blow up and go to zero, or get regulated out of existence, what’s gonna happen is that more money is going to flow into the ecosystem, more people are looking at it, and there’s only 17,000,000 Bitcoin outstanding in the world.

There are 25,000,000 millionaires in the world. So all it would take is every millionaire to get one bitcoin for the price to go non-linearly higher.”

He also believes that Bitcoin is the most stable cryptocurrency and has the highest probability of being the most successful. He namedropped Ethereum as a close competitor but reaffirmed that Bitcoin is the one he’s the most personally interested in and the one he is most bullish on.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Extensive and Unenforceable SEC Regulations Should Be Challenged

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For those who don’t know or aren’t located in the USA: the U.S. Securities and Exchange Commission (or ‘SEC’) is an independent federal agency which was founded in 1934, by then-President Franklin D. Roosevelt.

Conceptually, it is an impartial entity for the enforcement and implementation of federal legislature and regulations pertaining to securities and tradable assets; as well as national stock and options exchanges.

The SEC have recently been in the crypto-financial headlines because of their decision to define cryptocurrencies as securities. As a result of this, all relevant laws that pertain to securities are now applicable to cryptocurrencies as well, and this is a statement that the SEC have been all too keen to broadcast.

As such, the company have opened investigations and delivered subpoenas to 80 cryptocurrency companies.

These actions have far reaching implications for the crypto industry both in the USA and abroad, as the decisions made by American lawmakers often have a rippling effect on other Western nations.

The Speculative Feedback Loop

For investors and active traders, the decisions made by the SEC have had a negative impact on the overall value trends across the crypto-markets.

Predictably, the trend has propagated by opportunistic publications (whose revenues are driven by sponsorships and advertising) – which creates a feedback loop of negative speculation / reaction, and the spread of FUD.

It appears that the highly publicized legal actions taken by the SEC as mentioned above are (in this writer’s opinion, at least) meant to make examples of the parties involved, whilst sending a message to companies within the industry that they are not willing to compromise on enforcing their legislative decisions.

Whether the government can universally enforce these rules across an industry which is largely built upon the ideological and technical principles of decentralization, however, is highly questionable.

A Law for the Abiding

I believe that there are a few potential outcomes of such mis-informed law-making, which are likely to take place because of the SEC’s mis-informed decision-making.

  • They will create the laws / rules first and create an enforcement strategy second – indicating a fatal lack of insight into the very-real complexities of the ever changing crypto-sphere.
  • Due to their lack of technological expertise, they will likely contract an external organization or form a new government department to complete investigations & enforcement at the taxpayers’ expense.
  • Because of the difficulty of enforcing these rules (which they are seemingly unaware of) the lawmakers may opt for extreme penalties as a deterrent to those who risk disobeying.

Whether the government can enforce their regulations effectively on cryptos or not; what is likely is that the rules won’t be governed absolutely (it’s almost impossible to achieve 100% enforcement of crime).

As a result, legitimate businesses are likely to suffer because of this ignorance whilst the real bad actors are unaffected and apathetic to the new implementations.

Bear in the China Shop

The situation in China, for example, is indicative of another potential unforeseen result of increasing regulations. The country recently and infamously imposed a comprehensive ban, blocking all cryptocurrency trading and ICO websites from inside the country and abroad.

Serious entrepreneurs and business-owners with a thorough dedication towards their craft have subsequently migrated to independent coastal municipalities, such as the special administrative region of Hong Kong, to overcome these obstacles. Presumably if the ban were to somehow be introduced into such cities also, then the cryptocurrency organizations in China (or at least, the legitimate ones) would go one step further and move to another country with less restrictive laws on cryptos.

This would be a slap in the face to the government themselves in the long-term, as they would be missing out on the financial incentives offered by effective, fair taxation & regulation of the sector; rather than outright blacklisting.

Similarly, other federal departments in the USA have made their own mistakes regarding cryptocurrency. Citizens and organizations are required to pay tax on all cryptocurrency earnings and transactions, as they would with any other currency. The government have again subjected a misunderstood market to the regulations expected of a highly controlled, centralized form of tender (fiat) – and there have not been any reported instances of conviction in this regard due to the difficulty of identifying of decentralized data as an unauthorized third party.

I have nothing against regulation, considering the potential of cryptocurrency to be a volatile ‘wild west’ of finance; but it needs to be approached in a completely different way.

Manipulators of Ignorance

A quick diagnosis of the problem leads to the conclusion that the key malefactors contributing to these controversial laws being implemented are political influencers who possess a disproportionate level of technical knowledge in comparison to their peers.

Look at FCC Chairman Ajit Pai, for example. Despite your opinion on the net neutrality bill, its repeal was heavily influenced by the man’s disproportionate industrial expertise on the subject; which was accumulated through a career of working for the very organizations who stand to benefit most from the decision.

Furthermore, the controversial repeal was influenced heavily by corporate lobbying groups. It should be considered that finance-based legislature is similarly likely to be influenced by powerful influencers whose vested interests lie in centralized industry.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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