Okay we already know what a bitcoin is worth. *checks*. A bitcoin is worth £1922.75.
That’s what people are willing to pay for it, and by gum that’s as good a definition of “worth” as anything else.
But you know what I mean – what should a bitcoin be worth? What’s a fair price?
If price is the equilibrium between quantity supplied and quantity demanded; and we know the quantity supplied; then what determines the quantity demanded?
It’s a tough one. From what I can see, standard economic theories can be used to understand what’s going on with about half the bitcoin story. The other half is a mystery. It could be a whole new paradigm! … Or it could be an incredibly silly bubble.
Bitcoin drives experienced markets people mad because it doesn’t fit the models or schema they’ve developed over their working life. It literally does not compute.
Tom’s better way to do it
Take Tom Tragett. Tom’s a trader. He’s been trading currencies for decades. And he has a currency trader’s view of the world: he thinks in terms of liquidity, risk, reward.
He’s what a more pretentious person would call “cartesian”.
Now a guy like Tom isn’t going to like bitcoin one bit. It doesn’t fit with his view of the world.
I’ll let him make the case for the “unexplained” 50% of the bitcoin story. He ranted about it in an email earlier this week:
Well…beyond anything obvious like margin and entry cost ….its almost unquantifiable …heck its totally unquantifiable in terms of how you analyse it …..technically and fundamentally.
Charting it is out…. as there’s no points of reference and who would be looking at those anyway ….so of course you cannot set any kind of stop based on any technical analysis and fundamentally how can you study it or add ‘raison d’etre’ for even entering the thing in the first place!
So some pretty solid grounds for avoiding it altogether as far as I am concerned…..plus as we have seen this week its dropped over 10% on nothing…..went up on nothing I suppose as well!
Then half an hour later, another email:
To my last email …I just looked at the IG chart on it and one day I see it fell almost 20% in day! Wipe out moves I think…..just to endorse what I said in the previous email.
And in fact; from its peak on 12th June to its low on 15th June it fell by nearly 30% …..not for any serious investor I don’t think!
Tom doesn’t like it one bit. But he’s been around long enough to know that there’s more than one way to skin a cat; just because you don’t like bitcoin doesn’t mean you can’t profit from the trend. He’s found a much cleverer way to profit from bitcoin.
The story that makes sense
So Tom’s a skeptic, fair enough.
What’s the other side of the story? What do we understand about bitcoin?
Well bitcoin isn’t really as strange as all that. The digital element of it may be new. But it’s only the latest example of an alternative currency.
There’s the famous example of the economics of a prisoner of war camp: In 1940, a Cambridge economist goes off to war. In 1942 he gets captured in Libya and spends the rest of the war in a POW camp in Germany. On his return he writes a famous paper describing the monetary system of the camp: basically how cigarettes established themselves as the unofficial camp currency.
I read a similar story only this week: in US prisons, foil bags of mackerel are being used as currency. They make a useful currency because they’re long lasting, readily available, and portable.
My point is that spontaneous, unofficial currencies aren’t new. People tend to invent them because they just make a lot of sense. A commonly-agreed currency lets people swap stuff they wouldn’t otherwise be able to swap.
Bitcoin users aren’t stuck in a POW camp with no access to official money. But a lot of them do have stuff they’re not able to swap – like Venezuelans or Chinese who want their money out of the country, or nefarious types trafficking nefarious stuff, or gamblers.
A medium of exchange, as economists call it, is a great thing. It lets you have the things you want. Things you wouldn’t be able to have otherwise.
And that’s what it really comes down to. Bitcoin lets people have the things they want. What better reason for a currency is there than that?