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China’s Bitcoin Move Should NOT Have Been a Surprise; Why the pundits are wrong, again…

Traders Magazine Online News, September 19, 2017

David Weisberger

Those that don’t understand the fundamental value proposition of bitcoin and crypto-currencies are out in force today, due to the Chinese decision to shut Bitcoin exchanges.  This is interesting for many reasons, most important of which is that the Chinese move was predictable and, if anything, might make crypto-currencies more valuable in the long run.  That said, before I explain how and why that might be true, permit me a little rant.

I am always amazed by the capacity of people, lacking expertise or knowledge of specifics, to make authoritative conclusions about why markets move the way they do.  During the Internet bubble, I got tired of hearing “this time its different” or “it’s a new paradigm for valuation” when describing why companies SHOULD trade at 100 times sales, despite no profit and no path to grow.  During the run up to the financial crisis, I could not understand how national housing prices could reach levels where the only way the average person could afford a house was to perpetually re-finance.

Yet, in both situations, TV commentators and well-known analysts kept up the bullish siren song until the bitter end.  Then, in the aftermath, in many cases, despite the firehose of liquidity being sprayed by central banks into the asset markets, those same people took a long time to understand why assets were no longer falling…

I have reserved judgement on crypto-currencies until recently, when I finally took some  time to learn about the dynamics of the market.  From my “Austrian Monetarist” view of economics, I was slow to comprehend why an “asset” with no real backing would increase in value so rapidly, basically when the rationale was the same reason that many people invest in gold.  After all, not only does every story about BitCoin, picture golden coins with a B on them, but the story behind the asset is the same.  Both assets are plays to profit from those losing confidence in the world’s central banks, who have printed trillions of dollars of extra fiat currencies.

The argument is that dollars, euros, pounds, yen, etc, have nothing backing them anymore, besides a government with a printing press, so let’s back a new global currency.  Let’s pick one that can facilitate trade in the modern world, that uses modern technology to ensure there IS NO PRINTING PRESS, that can ensure the validity of transactions and that has the key characteristics of money. (Impossible to counterfeit, durability, divisibility, portability, limited supply, uniformity, and acceptability).  Amusingly, the fiat currencies of the world no longer have a limited supply and most countries have rules against portability as well.  Gold, of course, meets all of these characteristics, which is why it (along with silver) has been considered money for thousands of years.  (It is also why, in the 1930s, when the US lost control of the dollar due to excessive government spending, they confiscated and banned the use of gold.  Of course that excess spending pales in comparison to the global liquidity deluge we have experienced in this era, but that is another story)

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