Cryptos

Dear Ladies and Gentlemen

Thank you very much for your positive feedback on my last weekly mail under the title «all things must pass». Interestingly, many messages were hovering around the intrinsic value of cryptocurrencies, probably also because of the crash we had experienced in Bitcoin and Co. last week and over the weekend. John sent some interesting questions and made some remarks, I would like to cover in this weekly.

Bitcoin

One Bitcoin, the best-known and most prominent digital currency in terms of market share, cost just under USD 32’000 on the Bitstamp trading platform on Sunday evening, a good 15 % less than the previous day. Other digital currencies such as Ether also fell – in some cases much more sharply than Bitcoin. Last week, Bitcoin briefly fell to USD 30’000 on Wednesday but could recover somewhat in the days that followed. With a level of around USD 37’000 last Friday evening, Bitcoin had lost around a quarter of its value over one week. Since the record high of almost USD 65’000 in April, it had halved last week but recovered ever since.

What happened?

Experts cited news from China as a fundamental reason for the recent price slide. The government reaffirmed an earlier announcement to take stricter action against the production of cryptocurrencies. The production of digital currencies is also called mining and consumes enormous amounts of electricity in the production process. Previously, Tesla CEO and crypto advocate Elon Musk had already stirred up the cryptocurrency market several times. Musk seemed to suggest that Tesla, the electric car manufacturer, could divest its Bitcoin holdings. Musk quickly denied this, but the price movements in bitcoin were enormous. Another negative factor came from the US last week. On Thursday evening, the US Treasury Department announced that it was considering making crypto transactions of more than USD 10’000 subject to mandatory reporting for tax honesty purposes. If implemented, this would be a blow to the anonymity of crypto transactions that crypto fans value so much.

Excessive Volatility

Ladies and Gentlemen, excessive volatility is part of the game. Volatility is the price any speculator has to pay to get maybe (there is no certainty) awarded with excessive returns. There is no free lunch ever, and I do not understand why speculators (sorry, I can not call them investors) buy cryptocurrencies if they cannot stand the volatility. In other words, if they cannot stand the volatility, they should maybe consider staying away from cryptocurrencies or even financial markets alltogether. The massive fluctuations show the market dilemma for digital currencies; on the one hand, they promise high profits, on the other hand, immensely high risks.

However

However, despite the heavy losses in recent weeks, Bitcoin still costs roughly four times as much as it did a year ago and as I have mentioned before, I would not be surprised to see it move up to USD 100’000 or more neither would I be surprised to see its price implode.

Intrinsic Value

Ladies and Gentlemen, depending on whom you ask, you will find every possible answer to the question of the intrinsic value of Bitcoin and Co. Up to you to choose the answer you want to believe. My take on it is that a national economy backs any fiat currency issued by governments or central banks. People, land, labour, innovation, education, a social system, physical gold on central banks‘ balance sheet, taxes, etc., is part of this backing. Whatever value you may want to attribute to this, it is there. Something Bitcoin and Co. cannot offer. On the other side, the last decades have shown a massive increase in central banks‘ balance sheets and an almost frivolous issuance of fiat money, which eventually may lead to inflation. Something that cannot occur in Bitcoin, as volume is strictly limited, at least per currency. However, another currency can be added relatively quickly, and another one and another one and therefore, inflation can maybe not occur within a currency but in the number of currencies issued.

For me the topic is fascinating and I am looking forward to the further development of it.

Please do not hesitate to write back to me and please let me know your views!

… but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

Ladies and Gentlemen, I wish you an excellent start to the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth