Monday, June 14, 2021

Calculating a fair value for Bitcoin or USD

 

It is common to complain that there is no good way to calculated or even estimate any sort of correct value for Bitcoin.   It is then followed with something like if they can't tell when it is undervalued or overvalued how can they do any sort of value investing?   When should they buy or sell?

Of course, there is much truth to the above argument.   But I would like to explain here why the same argument works for the US dollar.

When the Federal Reserve was created it was supposed to always be able to redeem $20 in paper they had given out for 1 ounce of gold.   In fact, the paper money said "payable on demand".  This means they had to give you gold if you wanted.     So at that time you could think that $20 USD was the same value as 1 ounce of gold.   Now really they printed more money and over time this broke down, eventually dropping any particular exchange rate in 1971.

Today the assets that the Federal Reserve has are mostly bonds in USD.   This means that value of the assets backing the dollar are determined by the future value of the dollar.   So the current value of the dollar is based on the future value of the dollar.   This is recursive and so there is no good calculation for what the value should be.   For example, if we were to get 10% interest rates then the 30 year bonds the Federal Reserve holds are worth far less.   So the assets backing the dollar would be far less, so the value of the dollar would be far less, so the future value of the dollar would be far less, so the current value of the dollar would be far less, etc.   There is no end to the calculation, except that the dollar will eventually go to 0 value.   

There are many different ways to explain possible hyperinflation of the dollar.  In fact, it is normal for fiat/paper money to go to zero.

So there is no good way to calculate the correct value of the dollar.   So people who only feel safe investing when they can calculate the correct value for an asset should not invest in the dollar.   

So far people can say that the dollar is more stable than Bitcoin and they feel safer with a more stable asset.   But the faster it goes down and the faster Bitcoin goes up, the less compelling this argument is.   So as the dollar moves into hyperinflation, I would expect these "I like stability" types to flee the dollar for gold or Bitcoin.   When they finally switch, I expect they will wish they had switched long before.

For Bitcoin to go to zero value you essentially need something enough better than Bitcoin that people switch to it and stop using Bitcoin. 

With Bitcoin/Lightning transactions can be completed in a couple seconds and a penny.   It is hard to imaging how any other coin gets enough better than this to make it worth people's trouble to switch.   If ATMs and Websites are setup to handle Bitcoin/Lightning they probably don't save enough by switching to justify the cost of switching.

I think of money as a sort of game score keeping system.   Bitcoin is a fair score keeping system.  Nobody gets to cheat and make up as many points as they want in the game.   In the US dollar game the Federal-Reserve/US-Government can make up as many points as they want.   It is a "rigged game".   Players all around the world are not getting a fair deal.   It seems for everyone else, other than the US government, you can get a better deal playing the Bitcoin game than the USD game.   Over time I expect people and companies to switch from USD to Bitcoin.

If the users of Bitcoin are increasing then we can say the demand for Bitcoin is increasing.   If the supply is well constrained, then we can expect the price to go up.   We can't calculate what it should be, but in general over time we can say it should, on average, go up, as long as the number of users keeps increasing.

 It seems far more likely that the dollar will go to zero value than that Bitcoin will go to zero value. 

 



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