Prepare for the Weirdness

“Something is happening here,
But you don’t know what it is,
Do you, Mr. Jones?”
— Bob Dylan

No sir, not a chance. Mr. Jones does not even pretend to know what’s happening in America right now, and neither does anyone else.

Across the wire, this morning BTC/USD hits a record high of $9,200. “This is up 200% since Jamie Dimon’s, JP Morgan Chase CEO, fraud call.” -Mr. White Bonanza: Bitcoin Hits $9,200, Up 200% Since Jamie Dimon ‘Fraud’ Call .

In September, Mr. Dimon stated J.P. Morgan’s stance on Bitcoin to CNBC at the 2017 Delivering Alpha conference in New York.

JP Morgan ChaseChairman and CEO Jamie Dimon said bitcoin is a “fraud” that “won’t end well.” Dimon added Friday that if people are “stupid enough to buy” bitcoin, they will pay the price for it.

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After this statement JP Morgan Chase announced it would launch a blockchain-based system, aiming to “significantly reduce” the number of parties needed to verify global payments, ultimately cutting the transaction times.

A visible sign that the big banks want to develop ways to cut market share from VISA and Mastercard. Whom, have dominated the transaction business since the late 1980s.

The whole debate revolves around three main threads, according to one of  The Economist’s bloggers, Buttonwood’s notebook. 

(1) The limited nature of supply {new coins can only be created through complex calculations, and the total is limited to 21 million}. The limited supply figure is embedded in the estimates inherent to the Bitcoin system.

(2) fears about the long-term value of the fiat currencies in an era of Quantitative easing;

(3) The appeal of anonymity. This being the major draw for criminals and those wishing to keep off the radar. Albeit, this being even more true of cash.

The Buttonwood notebook next leads the reader to the valuation methodology of an order of magnitude “the fundamental long-term” BTC/USD exchange rate. Which I found fascinating.

If we assume Bitcoin is a currency (i.e., a unit of account, a store of value), then it will need to adhere to the ‘quantity theory equation of money’.

Where: MV=PT ( the real money supply is multiplied by its velocity) = (the price level is multiped by the transaction volume).

M= the Bitcoin money supply, which we already know to be 21 million.

V= the velocity of the base money. Is usually considering to be 10x

P= the Bitcoin value of a dollar (i.e., 1/the dollar value of a Bitcoin)

T= US dollar volume of transactions that could be reasonably be carried out by Bitcoin.

Therefore, rearranging the equation to solve for P, the “long-term fundamental magnitude value” of BTC/USD is the long-term value of transactions that will be carried out by Bitcoin] / 21 million (total supply).

For the numerator, we will use a proxy provided by the United Nations’ Global Financial Integrity report, ‘ Transnational Crime and the Developing World’ GFI: Transnational Crime and the Developing World  figure on the total value of the global illicit drug market as the long-term value transactions that could be carried out by Bitcoin.

GFI

In the GFI report, they cite the global illicit drug market being as large as $652 billion (USD) and at least being $426 billion (USD). By taking the mean of the two figures we find a reasonable market total of $539 billion (USD).

In sum, multiplying total supply of Bitcoins by 21 million by its velocity (21,000,000 *10= 210 million.  [ $539 billion / 210 million] = $2,566.67 FMV for. the BTC/USD exhcnage rate.

With Bitcoin now reaching far past that level, Spot price currently being that of $9,160.00. Bitcoin now trading at a 28% premium to FMV. $BTC:USD

Ho ho, so watch your six if you’re in the arena. And in closing take it from Mr. Hunter S. Thompson, Prepare for the Weirdness.

Screenshot 2017-11-26 13.05.34

-R.W.N II

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