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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.

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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.

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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.

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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4.5 stars on average, based on 161 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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NEO

The Lamen’s Story behind QTUM

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Market Update: Th crypto market cap has climbed back above $500 billion. Well done folks! I am liking the slower gains, as I think this could be new entrants. We have a ton of people way behind in cost basis on every coin, so I am just not convinced that those people sold at the bottom and then are re-entering. We waited this out, and the chatter throughout the media is getting to be too much for the later adopters to bare without getting involved. I have begun my history lesson to figure out where the true technical evolution is occurring in blockchain, and what will have the application to render an immediate investment. QTUM combines UTXO ledgers and smart contracts in one platform, and I need to understand their business reasoning behind why that is important. That starts with bitcoin.

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The Timeline in Blockchain

The beginning was bitcoin. This framework was created by the infamous Satoshi Nakamoto, who wanted to encrypt the way that money could be transacted. The transaction model he chose for his ledger based blockchain was inputs and outputs. Each bitcoin is an output from an input, and outputs are used to send money, not accounts.

UTXO “Unspent Transaction Outputs” is what your bitcoin account consists of. Don’t expect Windows 95 to be the most sophisticated! So, when someone sends you bitcoin, it goes “UTXO”. It is added up with all of the other times you received but didn’t send…and there is your bitcoin balance. Here’s where it gets tricky. Say you have UTXO balances of BTC 5, 3, 2. That means someone sent those coins to you in 3 different transactions. Now you want to send 1 BTC. UTXO will choose the most prudent one, 2 in this case, and then create an input for 2. But I wanted to only send 1! Don’t worry, there will be two outputs, 1 BTC for your recipient, and 1 BTC back to UTXO. You cannot take portion of a UTXO, it will all go into the input, and out the output.

Ethereum was the evolution. Instead of this UTXO model where there is no real single account- just lists of inputs and outputs, there was a place where people could have an account that is much similar to a bank account. You send, you receive, and everything is recorded. There is no choosing which UTXO fits which transaction, each transaction can be unique, and only the amount needed will be input. Debits and Credits, just like a bank account.

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Ethereum smart contracts are pillars of the account model. These contracts have unlimited capability to set rules (e.g., 100 voters, duration: six hours, choices: Candidate A, Candidate B, etc.), quantify inputs, determine precise results safely and securely, and dispense the ether of course! This new function in the blockchain required code of higher quality (I am not going to go GitHub level here) for the smart contract to work with, rather than a smart contract having to deal with a bunch of random UTXO’s. The account system worked for this just fine…or so we thought.

The DAO, founded by a consortium of Ethereum founders and followers, was a fund (a smart contract “account”) created in 2016 to be the first organization to promote the migration of business and commerce into the blockchain, and automate things for absolute and unbiased results. If you wanted to make a project that would benefit commerce on the blockchain, the smart contract would determine a consensus-based allotment.

Ironically, the DAO smart contract “account” was spoofed into funding a “Child DAO”, an exact replica of the DAO that convinced the smart contract to fund it multiple times over. Ethereum went from $20 to $13, as $70m was drained into the Child DAO. The Child DAO issue eventually led to an Ethereum hard fork, the result of voting to not let the attacker (who said he had legal right to his property through a lawyer) have his prize for his creation, and emptying the piggy bank to all those who lost ETH and laid claim to it.

QTUM

I want you all to know that all of that information was needed for me to explain QTUM.

This all started when I wanted to do some research for my own benefit. QTUM’s “About Us” was claiming their new benefits were that they designed a UTXO blockchain that has accounts with a smart contract account layer. So my thought was, why does QTUM want a UTXO blockchain? They believe UTXO has much more in scalability terms for business functions by having limiting information and “Proof of Consensus” model, and they wanted to build something that could act as the ether for those who were hard at work mining in the bitcoin UTXO community.

Eighty percent of all the QTUM tokens will be distributed for an array of purposes, but a major one is to bring the real world application into blockchain. Much like the older brother before it, QTUM is providing a DAO-like Account that can incentivize technical projects that can stay on their UTXO chain, but come out of the shadows to work within the community. Those who are used to coding in the Bitcoin blockchain will be happy to see that they now have Ethereum’s paint brushes in their own technical backyard. QTUM also can migrate Ethereum’s contracts into this new smart contract environment.

The platform has partnered with two companies in China (cybersecurity & media) to date, both of which are working along the lines of bringing business into the blockchain through smart contracts. China has been very cold on blockchain as of late. This may be a good project, but they are fighting against my favored incumbent NEO, and there is nothing I would say that truly separates them as unique for large migration. There will only be a handful of platforms. One for each country depending on laws/regulations. NEO is my choice.

Conclusion

I am a fan of the concept of taking a big community of people and trying to give them incentives through smart contracts to work harder for business purposes. I am not sure how big the bitcoin UTXO community is. Like you have seen, this is very deep technical information and the differences between UTXO and the Account method are murky at best for a lamen.

I have a small holding of QTUM, and it will remain small. UTXO seems like a bridge to bitcoin’s old tech that they are reviving. Ethereum already has had the first wave of business migration, and it seems that Solidity, the coding language of Ethereum smart contracts, is on every developers to-do list.

Overall, if QTUM makes a ton of money, non-coders won’t know why. It is a platform for people in the bitcoin chain to use for business purposes, but Bitcoin was made by someone who vanished and there is no one leading the initiatives within. Does bitcoin have an initiative? This may be like a Coder’s Coin. They like it for the certain coding characteristic, but overall the difference is minimal other than the chains are different. I think paradigm platform chains will exist, and the current ones are Ethereum and NEO.

A true technical smart contract artist or developer may disagree with me, but I see no extremely valuable difference between Ethereum and QTUM. QTUM certainly isn’t a coin for business people like myself. I will stick to what I know, and that is Ethereum-based platforms and compliance.

 

None of this is a recommendation to buy or sell cryptocurrencies. I own a small holding, and as mentioned, it will remain small. Best of luck to you on the exchanges. If you would like to remain updated on my thoughts, please do follow me @raijincrypto on Twitter.

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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4.3 stars on average, based on 18 rated postsMythological God of Lightning. Cryptocurrency/Blockchain writer, evangelist, and friend. May the odds be ever in our favor.




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Notable Market Prognosticator Jeremy Grantham Considers Bitcoin to Be a “Bubble”

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The investor who accurately predicted two major market crashes has described bitcoin a “bubble” that is waiting to burst. Although bitcoin enthusiasts have heard this song before, it carries a little more weight coming from from Jeremy Grantham, the co-founder of GMO.

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Bitcoin has No Fundamental Value

Grantham, who famously called the dot-com and sub-prime mortgage crashes, said the bitcoin bubble is likely to burst within the next six months to two years.

In his regular report on market trends, he said bitcoin has “no clear fundamental value” and operates in “largely unregulated markets.” This is combined with “a storyline conducive to delusions of grandeur” that makes bitcoin the very thing that investors fear.

In his analysis, Grantham compares bitcoin’s meteoric rise to the the dot-com era around 1999 and early 2000. This is exemplified in the following graph, which charts bitcoin’s meteoric climb against several of history’s biggest bubbles.

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In fact, bitcoin’s rise is so steep that it dwarfs the South Sea Company of the 1700s. In Grantham’s view, the extent of the asset’s growth means the bubble could burst long before the broader market peaks. Based on recent price trends, that peak could be a long ways out.

Bitcoin’s Bull Run

We’ve all read about bitcoin’s meteoric rise over the last 12 months, but much less has been written about its prior performance. The digital asset was actually the world’s best performing currency in six of seven years between 2010 and 2016 before being overtaken by Ripple in 2017.

Bitcoin’s epic rally helped trigger a broader cryptocurrency explosion, resulting in a market now worth more than $750 billion. The total value of all cryptocurrencies peaked around $833 billion on Sunday before correcting lower over the past 20 hours.

As Grantham’s prediction clearly demonstrates, cryptocurrencies have divided market participants and investors about the true nature of its rally. Privacy advocates, technology companies and those weary of big government have described cryptocurrency as a major evolution in how we conceive and transmit monetary value. Government agencies, institutional investors and Wall Street have been much more critical, going as far as describing bitcoin as the tool of cyber criminals.

Though disagreements over cryptocurrency will continue, all these actors more or less share one thing in common: they all support the development of blockchain technology. The immutable ledger has demonstrated utility that extends far beyond the crypto sphere, with banks and even governments experimenting with it.

Whether or not bitcoin is a bubble has less bearing on the argument that cryptocurrencies have revolutionized the financial system. There are more than 1,400 coins in circulation, and many agree that the vast majority will fail. Though a bitcoin crash would have a devastating impact on investors and the market at large, it would not negate the project of decentralized currency. Alas, the viability of bitcoin and other crypto assets does not depend on whether they are in a bubble state or not.

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.

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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4.5 stars on average, based on 161 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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BNP Paribas Says Bitcoin Will Suffer Because It Lacks Central Bank Support

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International financier BNP Paribas doesn’t believe in bitcoin’s future because the cryptocurrency lacks a lender of last resort. In its view, this will limit the widespread adoption of the digital payment universe.

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Bitcoin’s Future Is Limited

According to The Telegraph, BNP Paribas believes bitcoin’s future is being stymied by a lack of central bank support. This not only carries significant risks, but will actually limit the growth of cryptocurrency outside the core investment community.

“The potential threat to central bank seigniorage, worries about money laundering, financial stability, tax avoidance and crime, all make regulatory moves elsewhere possible,” the French bank said in a note.

Although BNP acknowledged that bitcoin is probably in a bubble, it said this alone “does not mean that the bubble will burst soon.” Bitcoin has added more than 1,000% over the past year, with prices recently crossing $8,000.

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The bank believes that one of the major risks facing cryptocurrencies is their inability to cope with a major financial crisis. Unlike the 2008 financial crisis, a meltdown in the crypto sphere won’t bring central bank regulators to its aid.

We’ve Heard It All Before

BNP isn’t the first major financial institution to criticize bitcoin, and likely won’t be the last. Of course, its criticism must be understood within the context of the modern day central banking system.

In other words, financial institutions rely on the fiat currency-generating machine known as the central bank to shore up liquidity when times get tough. This is what it means to be a ‘lender of last resort’. (They also receive government funding to stay afloat once they become over-leveraged. It pays to be called ‘too big to fail’.)

In a decentralized system like bitcoin, there are no banks to hold your currency. This essentially removes the notion of a bank run, rending central bank intervention less relevant.

Of course, central banking is just another system of control. It represents another layer of government that many view as unnecessary. Any system that dissolves centralized power risks being met with stern resistance from the old boys club. It therefore comes as no surprise that the heavy hitters have come out in full force against bitcoin. (Of course, they are more than happy to use the technology bitcoiners have developed over the years.)

Then again, it also bears reminding that the mainstream has become much more accepting of cryptocurrency than ever before. We are on the cusp of bitcoin futures and probably ETFs sometime in the near future. Investment banks such as Goldman Sachs are also moving closer to trading bitcoin, but are still evaluating the risks and potentials of the alternative asset class.

Bitcoin’s emergence has spawned at least a 1,000 other cryptocurrencies. Although most market participants agree that most will fail, they also sense a major paradigm shift underway in the global financial system. Combined, the market is valued at nearly $240 billion.

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.

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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4.5 stars on average, based on 161 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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