Bitcoin Volatility

Volatility is a measure of how rapidly and unpredictably change occurs, a risk assessment. By comparison with other assets, such as gold (1.2%) and the dollar (1.8%), Bitcoin (3.13%; 30-day est.) is a risky investment indeed. That being said, what is interesting is the change to Bitcoin’s volatility over time.

In the early days, while Bitcoin was just beginning to gain traction, it was difficult to assign meaningful numbers to its volatility since the prices fluctuated so drastically but the absolute values were so low. Bitcoin could have gone from $0.000125 to $0.000190 in one day but that 65% rise in valuation did really amount to much. But, remember the fall of 2017 when Bitcoin’s price soared to $19,500? The volatility index was hitting values of 7.5% and 8.0%. Since then we watched as Bitcoin’s value returned to earthly amounts like $4500 and $3800.

Now, Bitcoin’s price is steadily rising again ($10,350 as of 9/11/2019). Meanwhile, Bitcoin’s volatility index continues to fall. This is a good thing. If Bitcoin is to be the asset class of world finance, the volatilty index has to be equal or less than that of gold today. It looks like we’re going that way.

(?) To Be or Not To Be

Bitcoiin.jpgAt the core of the crypto- controversy “scam or new asset class?”, is a personal belief from which all else flows.  If you think that Bitcoin is a Ponzi scheme, everything which is generated from that essential belief only serves to confirm a negative opinion of cryptocurrencies. No amount of ‘evidence’ is going to dissuade one of these thinkers from believing bad things will ultimately updo Bitcoin.  The only problem for them is how to prove that the value of bitcoin will go to zero, even though Bitcoin hovers around the $10,000 mark.  If they wanted to profit by the misfortune of others, they might even purchase a Bitcoin short position.

On the other hand, if you believe Bitcoin is only the beginning of a new asset class, that hundreds, if not thousands of other cryptocurrencies will follow, that many of them will be widely traded and prove to be a very lucrative investment for those who bought in early, your problem is two-fold.  First, you have to prove that the value of bitcoin will go as high as one million dollars per coin, even though bitcoin presently hovers around the $10,000 mark.  Second, to take advantage of this glorious insight you have to choose in which cryptocurrencies to invest.

Ultimately, a sufficient number of use cases will prove the value of cryptocurrencies, or not. Be on the lookout for those.  Uses cases are the best argument you can make about in which cryptocurrencies to invest or if to invest in Bitcoin at all.

I Seem To Be A Verb

dancer

I seem to be a verb.” — R. Buckminster Fuller

Reading “Bitcoin: Ringing the Bell For a New Asset Class” by Chris Burniske and Adam White, what comes to mind is a quote from R. Buckminster Fuller — “I seem to be a verb.”  Fuller, the inventor of the geodesic dome, an icon of forward-thinking, postmodernism, was one of the most progressive thinkers of the twentieth century. Fuller’s advice to students who wished to apply themselves to solving the world’s problems was to think ahead twenty-five years and figure out what needs doing.  His other, lesser-known inventions included the Dymaxion car (three-wheeled), Dymaxion house (factory-built) and pressurized shower which only used one quart of water.  Fuller was solving problems of over-population, water shortages, and material scarcity long before they were global concerns.   Fuller loved to lecture.  I attended a marathon three-day, eighteen-hour event given at Town Hall in New York City.  He was also a prolific writer.  This quote was also the title of a book he wrote.

Fuller was recognizing that we are, in a sense, a work in progress, that everything we did or hoped to do should be seen as being in motion, in a state of wanting to be.  He coined the word ‘synergy’ to mean ‘the whole is more than the sum of its parts.’

What does all of this have to do with Bitcoin and a new asset class? Burniske and White did an excellent job of using the language of economics to identify and evaluate traditional asset classes, then went on to explain how bitcoin is the same and how bitcoin is different.  The four features used to describe assets were: investibility, politico-economic features (value, governance, and use cases), correlation of returns: price independence and risk-reward profiles (returns and volatility).  Bitcoin’s explosive popularity growth and unique use cases set it apart from other asset types.

geodesicBitcoin’s open-source, non-governmental, communal nature is unusual and largely an unknown for the economists and traditional Wall Street investors.  Bitcoin shows itself to be distinct and separate from any other asset class as far as price independence.  So far, so good.  That’s how Bitcoin is the same and different from other asset classes.  But much like Fuller’s need to express our role in society and in the universe, something still is missing from Bitcoin’s definition, that makes it distinct.  It goes without saying that Bitcoin serves a different purpose than other assets.  In a changing environment, its purpose may well be an essential difference.

We live in a dynamic world;  one in which everything is changing.  Everything is in flux.  Everything is in motion.  We use calculus to determine next steps as much as we once used addition, subtraction, multiplication, and division.  Relationships fluctuate in a continuous dance of ebb and flow.  Fiat currency no longer is able to keep up with these dynamic systems.  We have computerized functions speaking to other computerized functions.  These computers have needs, too.  They need, in addition to behaving in response to one another, to remunerate one another.  We need cryptocurrencies in order to do that.  Fiat currencies no longer work.

For example, my subscription to word-processing software needs to be updated monthly.  Certain very expensive features are only billed when I use them.  I rent processing time from a supercomputer by the micro-second.  My social media advertising budget pays for click-through’s only when they lead to sales.  The list goes on and on.  My financial world is dynamic.  My money needs to be dynamic, too.  Bitcoin wallets can be set up to make payments in fine detail; eight decimal places, to be exact.  Other cryptocurrencies can be designed to make payments as a result of a contractual agreement, then change the terms of that agreement, and then continue to make payments without interruption. If we wish to be part of this future world, we need the currency that is able to live in this world, too. Neither gold, nor dollars, nor stocks nor bonds can do that job.  Bitcoin, on the other hand, is able to live the dynamic life this future world requires.

How Bitcoin Can Be Worth So Much

pyramid of wealthWith Bitcoin rising $4,830 TODAY, it’s difficult to explain to someone new to Bitcoin how it can be worth so much.  Here’s another attempt.

Scale down the 7.5 billion people in the world in proportion to the number of Bitcoin (16,600,000).  That gives us 451 people for each bitcoin.

If we take those 451 people and apportion the world’s wealth to that representative group, it gives us the following:

68% (296 people) worth $10,000 or less; 3% of the world’s wealth

22% (120 people) worth $10k-$100k; 13% of the world’s wealth

8% (40 people) worth $10k-$1000k; 41% of the world’s wealth

1% (5 people) worth $1,000,000 or more; 42% of the world’s wealth

Those 451 people buy some Bitcoin at a price of $1,000,000 per coin.

The first group, the 68%, the 296 people with less than $10,000, purchase just $100 worth of Bitcoin at $1,000,000 per.

The next group, the 22%, the 120 people with $10k-$100k, purchase just $900 worth of Bitcoin at $1,000,000 per.

The next group, the 40 people with $100k-$1000k, purchase $409,000 worth of Bitcoin at $1,000,000 per.

The next group, the 5 people with $1,000,000+, purchase $410,000 worth of Bitcoin at $1,000,000 per.

The amount of Bitcoin they purchase very closely mirrors the amount of currency they hold to cover the money they hold for a week up to a month of expenses.  If Bitcoin is a new asset class of digital currency, to be used for spending much the same as any other currency, then we can expect the kind of spending shown in this example.

That’s is happening now.

How fast will this happen? When there are no restraints such as budget limits, legal hurdles, government restrictions, or fear of failing: very quickly.