Thoughts on Bitcoin, PMs, Bubbles and fundamentals

[PansPurse]

So the question is still going around in circles, is Bitcoin a bubble? What about other cryptocurrencies?

I thought I’d take a little time to get my thoughts down in some kind of coherent manner. Caveat, this is based on my own reading and understanding which, although better than some, is obviously much less than others.

I want to start by looking at a couple of older bubbles, the dot com and the housing market. In both those cases, the crash, the bursting of the bubble occurred because the value people were prepared to pay for something was no longer a fair reflection of the thing itself. It turns out that having a website without a reasonable business model isn;t enough to make a business.

Investing tends top come down to two approaches, the first is doing what everyone else is doing. Much as stock brokers etc would hate to admit it, this is where an awful too of market movements come from. The alternative to this herd mentality is to make investments based upon a sound understanding of a business or stock’s fundamentals. That’s what everyone likes to think that they’re doing and (IMHO) when done properly will tend to lead to relatively stable lower-risk bets which deliver more modest returns than higher stakes gambles (did I mention that I have absolutely no qualification in this field? I have no qualification in this field and am happy to be educated/corrected). This is all basically pre-amble to my main point, what are the fundamentals that underpin precise metals and what are the fundamentals of bitcoin (or other cryptocurrencies?

For precious metals, like most commodities, there’s a balance of supply and demand. Supply comes rom mining and demand comes from people who want the thing (hey guys!). Mining only happens because the cost of extracting and purifying PMs is less than their market value. There are economic prices below which it’s just not practical to mine PMs and this gives us essentially a market floor. Why? Because if the price drops below that, mines close, the supply reaches and liquidity in the PMs market also dries up, pushing the price of whatever is available higher, higher price then suddenly makes mining economical again. That’s the fundamentals for PMs (so far as I understand them) so what about Bitcoin?

In order to meaningfully trade bitcoin you need the support of the bitcoin network. That is, if all the computers running bitcoin were to suddenly switch off, bitcoin would be basically worthless. There’s no such risk with PMs because they represent extraction work that’s already been carried out, rather than relying on a network run by other people continuing to exist in years to come. Is this reckless assumption to be making?

Well, bitcoin relies on the network continuing to function. But that’s ok because bitcoin’s design includes an incentive for people to continue operating the network; the minting of further bitcoins.

Mining bitcoins takes energy and the basic fundamental here is that the value gained by mining a coin should be more than the value lost in mining it, i.e. the computer hardware, internet bandwidth and, most importantly, the energy used in the mining. Its important to remember that the mathematical problem that has to be solved as the "proof of work" for mining is adjustable to match the computing power available on the bitcoin network. So if the value of mined coins goes down, miners will likely reduce the amount of energy they use by shutting down older and less efficient equipment, and the difficulty of the required computation will decrease to match and keep the block rate of about once per ten minutes. The number of bitcoins issued per block is also set to keep decreasing so will go from 12.5 currently to 6.25 in a couple of years’ time, but that should;t have too big an impact not he price by and of itself.

What this difficulty scalability means is that the network can function on relatively little computing power (like it did back in the early days) and that, if the price of bitcoin remains fairly level, we should expect to see step-changes of the energy consumed in mining bitcoin every few years as the reward decreases. So, overall I don’t think the bitcoin network is going to crumble into dust. Even a catastrophic collapse in the price would just mean that it’d revert to a quirky thing being run by enthusiasts on their home computers. In that regard the market floor for bitcoin is low, incredibly low.

So based on this line of thinking, bitcoin and PMs are surprisingly similar, but bitcoin has a lot further to fall int he event of a massive collapse.

What I’ve not included here is things like gold/silver mining futures, or other forms of paper PMs. Nor have I really discussed other forms of cryptocurrency that use different operating principles (different forms of proof of work, proof of stake etc) which will probably have very different underlying mathematics.

And yes, all of this is moot in case of something like a giant solar flare that cooks all our electronics but, frankly, if that happens you won;t be able to post here to say I told you so...

[MickB]

There are 180 different currencies on our planet and now 1381 different crypto currencies.

Not every person on the planet could be expected to go digital and do away with cash. Also, try explaining crypto currencies to someone who hasn't even got access to electricity, why would they believe in something that you can't hold?

In a thousand years you won't have an archaeologist finding bit-coins in the ground!

Gold and silver have and will stand the test of time. I won't be swapping any of my precious metals for something that could fit onto a memory stick as I can't get my head around a system that's only been around a short while.

I've spoken to a few people who invest in stock and shares who are refusing to be drawn into cryptos. I know of only one person who has ten different cryptos on the go that he's investing in and has made money but he said he'll pull out for cash later this year.

One person quoted the 'Emperor's clothes' as a way of explaining their thoughts on the new funny money. Probably still early days and with the excitement of people being super rich out of nothing gets everyone excited, it will peak then drop like a stone. Good luck to those who understand it better than me and are making money out of it, but it's not something I'll be dabbling in.

 

 

 

 

[999magnum]

Very interesting PP. Crypto currencies are something that's new and exciting to me. Who knows if we'll ever get to the moon, but I need to know and to know is to be in the game.

[MIP]

The test of time will settle things down. The problem is that we might not be here to see it by then.

[onlyroadtoheaven]

Great post @PansPurse. I love the subject of bubbles (not Jackos Monkey) and was looking for the next one early last year as I thought one was due. Clearly I completely overlooked Cryptos as being the next bubble so have missed out. For me its now looking back at history to see how previous bubbles have played out and how to use this to my advantage. 

It seems that when bubbles burst all assets suffer as people move to the safety of cash. However this time currency itself is an issue (debt, printy printy etc) so what happens next? Looking at all the asset classes, and the way the economies of the world are going, I am still most comfortable in precious metals.

[KDave]

Good post your ideas landed and I agree you have hit the fundamental of what gives bitcoin it's value (but perhaps not other crypto as you say). The mining infrastructure just like in pm mining sets the floor, but unlike pm the continued existence of bitcoins function and the maintenance of its value are dependent on the continuation of mining, the cost of which is rising all of the time. If mining stops, for whatever reason, bitcoin stops. 

[vand]

TL;DR.

Of course it's a bubble. It's so blindingly obvious right now, never mind with the benefit of hindsight after it has all imploded.

Nobody uses bitcoin to actually trade goods and services. It's all predicated on speculation that some idiot will be willing to pay more for it at some point in the future. Eventually you reach the greatest fool and there is nobody left who will buy.

That is not to say that some of the technology isn't interesting or useful, but hey, even the tulip bulbs had some real utility.

[vand]

It looks to me like we've just seen the "bull trap" setup in Bitcoin where it touched 17k, now selling off again and threatening to make new lows.

[Goldhooked]

54 minutes ago, vand said:

Nobody uses bitcoin to actually trade goods and services.

Yes they do.  There are several precious metal dealers that accept bitcoin payments as well as a raft of other retailers in various sectors.  There are also bitcoin Visa cards that tens of thousands of people are using to spend on anything and everything.

[Mariner1961]

I would be interested to know how any business copes with selling goods for crypto when there are such rapid movements in value. Your profit could be wiped out in the time it takes to wrap and post an item. Or is there a large markup for using crypto? Perhaps if there is anyone one here who sells goods and accepts crypto they could explain how they cope with the price fluctuations.

I've bought some cyptos, sold some, bought more. But tbh I'm still to be convinced.

[BackyardBullion]

Europeanmint accepts bitcoin - but I cannot for purposes of the group order with them. 

I would imagine most dealers convert it into FIAT as soon as possible - dealers live or die by their cashflow and you cannot use bitcoin for anything practical for running a business...

[Mariner1961]

3 minutes ago, BackyardBullion said:

Europeanmint accepts bitcoin - but I cannot for purposes of the group order with them. 

I would imagine most dealers convert it into FIAT as soon as possible - dealers live or die by their cashflow and you cannot use bitcoin for anything practical for running a business...

That's pretty much what I was thinking.

[Goldhooked]

Sharps Pixley in the UK accept bitcoin - https://www.sharpspixley.com/articles/sharps-pixley-now-accepts-bitcoin-as-payment-for-gold_272114.html

And taken from the Bit Forum, here are a couple more European dealers that also accept crypto...

http://www.bitgild.com/
https://zilvergoudwinkel.nl
 

[Mariner1961]

1 hour ago, Goldhooked said:

Sharps Pixley in the UK accept bitcoin - https://www.sharpspixley.com/articles/sharps-pixley-now-accepts-bitcoin-as-payment-for-gold_272114.html

And taken from the Bit Forum, here are a couple more European dealers that also accept crypto...

http://www.bitgild.com/
https://zilvergoudwinkel.nl
 

Had a look, interesting. With only a 0.5% markup for using bitcoin it worked out much the same as Atkinsons for a 2018 Gold Britannia although out of interest I've messaged them to see what rate of bitcoin to £ they use as that could make a major difference. Then would have to take into account the fees involved. Might be ok for an exit out of crypto though.

 

[Goldhooked]

16 minutes ago, Mariner1961 said:

Had a look, interesting. With only a 0.5% markup for using bitcoin it worked out much the same as Atkinsons for a 2018 Gold Britannia although out of interest I've messaged them to see what rate of bitcoin to £ they use as that could make a major difference.

From what I gather from those here who have already used bitcoin to buy from Sharps Pixley, I think you will find it works out more expensive than paying in fiat.  I was really just making the point to the user above who said no-one is using crypto to buy goods and services.

[Mariner1961]

1 hour ago, Goldhooked said:

From what I gather from those here who have already used bitcoin to buy from Sharps Pixley, I think you will find it works out more expensive than paying in fiat.  I was really just making the point to the user above who said no-one is using crypto to buy goods and services.

Having heard back from them the rate isn't too bad, only about 2% out from what's quoted on some of the exchanges. If you're trying to turn your crypto profits into PM's I don't think that's too bad myself, although have never tried it elsewhere.

Although going back to the original post I remain of the opinion that it's all still a bubble, regardless that some will take them at the moment, that can change pretty quickly.

[PansPurse]

Now this is interesting, yes it's still very volatile, but Bitcoin price seems, overall, to have levelled out a little (maybe contracting a bit) over the last month. It's still not great if you want to purchase stuff with it, but at least it's not falling off a cliff?

[KDave]

It can't fall below a certain threshold you said it yourself and you explained the reasons yourself. How much does it cost to mine a bitcoin now? That is the floor you mention and anything lower is game over for the currency all the way back to zero because without mining, the transactions can't be verified and so it becomes worthless. It is 100% reliant on its infrastructure which to me means it is 100% third party owned and not some new digital gold that can exist independently of a third party infrastructure. Outside the banking system is a good sales pitch so long as you don't go looking for the equivalent third parties that run the thing, without which bitcoin is not possible and make its failure inevitable. Place your bets! 

[mr-dead]

7 minutes ago, KDave said:

It can't fall below a certain threshold you said it yourself and you explained the reasons yourself. How much does it cost to mine a bitcoin now? That is the floor you mention and anything lower is game over for the currency all the way back to zero because without mining, the transactions can't be verified and so it becomes worthless. It is 100% reliant on its infrastructure which to me means it is 100% third party owned and not some new digital gold that can exist independently of a third party infrastructure. Outside the banking system is a good sales pitch so long as you don't go looking for the equivalent third parties that run the thing, without which bitcoin is not possible and make its failure inevitable. Place your bets! 

If 90% of the miners went offline as it was no longer profitable then the difficulty level would just adjust to compensate so there is no minimum threshold.

Dont forget people were mining bitcoin when it was under a $1

 

Less hash power = lower difficulty level to keep block times consistent.

[PansPurse]

22 minutes ago, KDave said:

It can't fall below a certain threshold you said it yourself and you explained the reasons yourself. 

Sorry, but that's not what I said . As @mr-dead correctly notes, the difficulty of the hashing problem adjusts to match the available computing power, so a loss in Bitcoin's value basically prompts miners to use less computing power. This is scalable both ways, right down to its original setup of a program running in the background on the computers of a few enthusiasts. To all intents and purposes I don't think there is a floor.

[KDave]

I stand corrected. There is no floor and the infrastructure can in theory just be one man and his laptop. You are not selling it to me! 

 

[metallica73]

Silvergoldbull accept Bitcoin, BitcoinCash, Litecoin & Dash

I recently paid for an order using LTC, at a lower rate than would have been possible otherwise.

I am sceptical of Crypto as a long term storage of assets, but there is money to be made there. Litecoin was sat at $40 for weeks when I first dabbled and shot to over $300

[mr-dead]

I still believe Bitcoin was created by the powers  above as a beta test for going cashless in the future.

As soon as all scalability and security issues are resolved the central banks will slowly start rolling out their versions of crypto (we are just entering this stage now)

Final stage is when Bitcoin and other cryptos are demonised in a big propaganda campaign then banned globally due to being linked to terrorism, drug dealing and money laundering .

 

There is still good money to be made in the short term but I wouldn't bet the wife/house/mortgage on it long term.

[PansPurse]

2 minutes ago, mr-dead said:

Final stage is when Bitcoin and other cryptos are demonised in a big propaganda campaign then banned globally due to being linked to terrorism, drug dealing and money laundering .

Well China (home to, I think, the majority of Bitcoin's computing power) is already encouraging local authorities to do what they can to discourage mining. Also, just this week South Korea announced plans to ban cryptocurrency trading in the country.

[Martlet]

2 hours ago, mr-dead said:

I still believe Bitcoin was created by the powers  above as a beta test for going cashless in the future.

As soon as all scalability and security issues are resolved the central banks will slowly start rolling out their versions of crypto (we are just entering this stage now)

Final stage is when Bitcoin and other cryptos are demonised in a big propaganda campaign then banned globally due to being linked to terrorism, drug dealing and money laundering .

 

There is still good money to be made in the short term but I wouldn't bet the wife/house/mortgage on it long term.

That's an odd view of crypto.  The scaling issues are from poor design, and i'm not sure of real security issues (it is underpinned by encryption after all).  Moreover, the banks already have electronic payment systems in place and people are going cashless via cards, contactless payments, paypal, Swift/SEPA etc.  They don't need crypto currencies, it does solve any problems they have (except  Satoshis original concept to bypass banking, i think we're past that now) and its a lot less usable than the systems in place.  Also, bitcoin started with demonisation, its put that behind it now. 

The evidence of behaviour of governments is they are more interested in regulation that banning crypto, i dont believe they or the banks see it is a threat, and the banks see blockchain concept as an opportunity to tidy up their own internal transactions.