Can Bitcoin Become a Long-Term Store of Value?

[FallenApple]

Can it be treated like a rare commodity that is of high value? Gold isn't legal tender either but it's rarity and demand keeps the market value reasonably high.

Are there any fundamental reasons why bitcoin wouldn't turn out to be like a precious metal?

I'm talking long term. Right now, I think it still is a bit volatile. I'm thinking about doing a buy and hold strategy.

 

[Borg]

Take a look at the BITCOIN, Heists, Thefts, Hacks, Scams, and Losses thread and decide if you still want to invest.

 

[Mark44]

Right now, I think it still is a bit volatile.

Something of an understatement. In Dec. 2017, it was a bit under $20,000. In late January of this year, it was about $3,600. Right now the price is a little over $5,000, so in a little over a year, it lost 75% of its value.

 

[Klystron]

Can it be treated like a rare commodity that is of high value? Gold isn't legal tender either but it's rarity and demand keeps the market value reasonably high.

Are there any fundamental reasons why bitcoin wouldn't turn out to be like a precious metal?

I'm talking long term. Right now, I think it still is a bit volatile. I'm thinking about doing a buy and hold strategy.

A fundamental difference is the lack of an underlying commodity. Even the most abstruse derivatives of, say, pork belly futures, contain the expectation that farmers will raise pigs for sale to a market. Holding precious metal futures expects metals will be mined, smelted, refined, and sold. At some level real estate investment trusts (REITs) collect and collate mortgages on actual properties.

Comparing Bitcoin to currency exchanges requires different analysis but that was not your question.

[Bold added to original post.]

 

[russ_watters]

Can it be treated like a rare commodity that is of high value? Gold isn't legal tender either but it's rarity and demand keeps the market value reasonably high.

Are there any fundamental reasons why bitcoin wouldn't turn out to be like a precious metal?

Well the basic issue is that Bitcoin is not a precious metal, it's just bits. Precious metals have intrinsic/practical value in addition to being rare (strictly speaking, *everything* is a certain scarcity, so the word "rare" isn't all that useful in this context). The intrinsic/practical value of bitcoin is exactly zero. It's more like a Beanie Baby, which had value as long as people thought it had value and not a moment longer.

 

[BWV]

To be fair, Bitcoin is an alternate currency like gold, not a collectible like baseball cards or Beanie Babies. People value gold by social convention that goes back thousands of years, Bitcoin has been around about a decade. It is possible that Bitcoin could compete with gold for this role, but by no means a sure thing. An anonymous, untraceable offshore payment system is valuable to criminals and people in oppressive regimes (bitcoin purchases are booming in Venezuela for example), so I do think they are here to stay in some form. Not clear why these systems would be valuable to a law abiding citizen in a developed democratic country. In addition to the speculative risks, as Borg noted, there are significant operational risks in cryptocurrencies.

I would be careful about the phrase 'intrinsic value', which becomes an oxymoron if thought about too much - all value comes from outside the object, nothing is 'intrinsic'. Whale oil used to be an essential commodity, but it is of no value today.

 

[Rive]

I'm talking long term.

Technically, for any trading instrument a (barely valuable) technical prediction requires at least five times of history than the timeframe of prediction asked.

So, for ten year long 'long term' prophecy please ask again in 2060

 

[BWV]

Technically, for any trading instrument a (barely valuable) technical prediction requires at least five times of history than the timeframe of prediction asked.

So, for ten year long 'long term' prophecy please ask again in 2060

why 5x? the only 'technical' prediction method that works (according to academic finance) is momentum and that only requires enough history to show rising or falling prices

 

[Nik_2213]

Consider how a recent 'bit vault' with millions of virtual bit coins turned out to be empty after the operator died.

Consider how many bit exchanges have crashed & burned after hacks.

Consider how my Norton's had a stand-up, bare knuckle fight last night with a 'legitimate' Google-searched site that had recently been infested by 'mining' malware...

{ Data: ...I was tempted by her offer... Zero point six eight seconds, sir. For an android, that is nearly an eternity.}

IMHO, current situation is still akin to 'Wild West', when any bank could be robbed, swindled or simply fail, even those empowered to issue currency...

 

[russ_watters]

To be fair, Bitcoin is an alternate currency like gold, not a collectible like baseball cards or Beanie Babies.

Setting aside that gold is not a currency, it's an element...

What does that get us? I can write "1" on a post-it note and "1,000,000,000" on another and call it "currency" too. So what? Why should anyone let me use either of those post-it notes to buy anything?

The OP didn't ask about Bitcoin's value as a currency but as "a rare commodity". Bitcoin doesn't have any commodity value. It's even worse as a store of value than it is as a currency!

People value gold by social convention that goes back thousands of years...

While that's true, even part of the "gem" value of gold is related to its practical value: it doesn't corrode. Bitcoin doesn't have a practical value.

...Bitcoin has been around about a decade. It is possible that Bitcoin could compete with gold for this role, but by no means a sure thing.

Is it even likely? Unlike gold it has no practical or aesthetic(or does it?) value. Unlike the dollar or Euro it has no promise behind it. Unlike a Beanie Baby it isn't cute (or is it?). Users could decide tomorrow they aren't interested in it anymore and its value could drop to zero. IMO, the only reason Bitcoin has any value at all is that some people think its cool and some people don't understand fad bubbles. I don't even think its value as an illegal currency is a big influencer (should we even be advocating that?).

An anonymous, untraceable offshore payment system is valuable to criminals and people in oppressive regimes (bitcoin purchases are booming in Venezuela for example), so I do think they are here to stay in some form.

Perhaps, but so is cocaine and I'm not stuffing any of that under my mattress as a store of value either. Maybe more to the point, a system of transferring value is important to criminals. But Bitcoin is absolutely terrible at that except for its difficulty to trace. Everything else about it as a currency is terrible. A good currency is stable and easy to use first and foremost. Bitcoin users are willing to accept it being a terrible currency because of its attribute of being anonymous/untraceable. Maybe a better cryptocurrency will be invented, but of course if that happens Bitcoin's value will go to zero.

Not clear why these systems would be valuable to a law abiding citizen in a developed democratic country. In addition to the speculative risks, as Borg noted, there are significant operational risks in cryptocurrencies.

I don't think it is unclear. The point of currency hasn't changed in thousands of years. It needs to be a stable and easy to use means of holding and transferring value. Add-in the criminal element, and you also have the possibility that the government could step in at any time and cancel it.

I would be careful about the phrase 'intrinsic value', which becomes an oxymoron if thought about too much - all value comes from outside the object, nothing is 'intrinsic'. Whale oil used to be an essential commodity, but it is of no value today.

Agreed, "intrinsic value" is a difficult concept to pin down. It's hard to measure instantaneously and it isn't constant. Gold may well be the best there's ever been though in terms of longevity and consistency. But one thing's for sure: the "intrinsic value" of Bitcoin is the same no matter what units you use or how you try to measure it: 0.

...Just like a dollar bill. Or Beanie Baby. Or baseball card. Or a Monet.

 

[russ_watters]

If it wasn't clear from my last post, I'd like to point out again the split-personality nature of Bitcoin:
-Is it a commodity?
-Is it a currency?

The two are very, very different things, and while most Bitcoin advocates will argue in favor of its value as a currency, what they are really interested in is its value as a commodity. Bitcoin is terrible for both, but by hyping its value as a currency they can at least temporarily give it value as a commodity.

 

[Nik_2213]

I'd remind you of the Dutch Tulip bubble.
https://en.wikipedia.org/wiki/Tulip_mania
As the craze grew, rare bulbs, imported at great expense, soared in value unto 'totally ridiculous'...

At one port, a peckish sailor supposedly took what he thought was an onion or shallot from sack, nibbled it. Importer had him arrested, as even that single bulb was worth a lot of money.

By the time the case came to trial, the bubble had burst and all those exotic bulbs were worthless. Worse, they were toxic, could not even be eaten safely...

But the charge had stuck, and the guy went to jail for 'Grand Theft Tulip' or equivalent...

FWIW, his life may have been saved by that prompt arrest: During WW2 famine, IIRC, many Dutch were poisoned by trying to eat such bulbs. Can be done but, like some types of cassava, require very lengthy, so-patient preparation to leach the toxins. Akin to 'retting' flax...

 

[BWV]

 

[Klystron]

why 5x? the only 'technical' prediction method that works (according to academic finance) is momentum and that only requires enough history to show rising or falling prices

Some (most) forms of modern technical price prediction software derive from systems used to track and intercept aircraft based on radar returns while the aircraft moves in multiple dimensions. Simplistically the answer 'momentum' is accurate but the number and type of inputs into that computation are quite complex.

Even ignoring the many computational inputs still requires best estimates of the expected position of the object (price/aircraft) at appropriate times in the future and then accurately tracking the object for intercept.

Financial prediction software is so poor at tracking, say the closing price of an S&P 500 stock, that one could assume price manipulation without considering that the calculated prediction based on momentum lacks vital data. For an excellent if exaggerated example, review stock price momentum during the morning of 11 Sep 2001. The numerous news feeds into trading offices are not for entertainment but to adjust prices for conditions.

Generally, 'buy and hold' and 'long term' intend to avoid market highs and lows and concentrate investment potential over a period with a minimum of some multiple of the tracking time of the price data. Never invest (gamble) an amount more than you can safely afford to lose.

 

[BWV]

If financial prediction software worked it then wouldn't work - the EMH’s a jerk

Simple momentum measures work about as well as more complex ones, after accounting for datamining and overfitting

The signal processing techniques work on radar due to real physics that is not applicable to financial data

 

[Rive]

...according to academic finance...

Well, academics are rare to make good traders. They tends to mess up: when it is about psychology, they are about math and when it is math, they suddenly have too much psychology to keep cool.

the only 'technical' prediction method that works ... is momentum and that only requires enough history to show rising or falling prices

I don't know what/which 'momentum' do you refer to, but even the most basic indicators needs history to provide information about the chart.

 

[BWV]

I don't know what/which 'momentum' do you refer to, but even the most basic indicators needs history to provide information about the chart.

(Wikipedia)

In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month.[1][2] Momentum signals (e.g., 52-week high) have been shown to be used by financial analysts in their buy and sell recommendations.[3]
The existence of momentum is a market anomaly, which finance theory struggles to explain. The difficulty is that an increase in asset prices, in and of itself, should not warrant further increase. Such increase, according to the efficient-market hypothesis, is warranted only by changes in demand and supply or new information (cf. fundamental analysis). Students of financial economics have largely attributed the appearance of momentum to cognitive biases, which belong in the realm of behavioral economics. The explanation is that investors are irrational,[4][5] in that they underreact to new information by failing to incorporate news in their transaction prices. However, much as in the case of price bubbles, recent research has argued that momentum can be observed even with perfectly rational traders.[6]

 

[Rive]

The existence of momentum is a market anomaly, which finance theory struggles to explain.

Told ya' academics are not for this

Closest to this kind of 'momentum' in trading would be some indicators. They needs history and interpretation, and they have only limited range of prediction power. The ~ 5X range as the minimal requirement stands.

 

[BWV]

The ~ 5X range as the minimal requirement stands.

Stands based on what? Why not 3x or 10x?

 

[nsaspook]

An anonymous, untraceable offshore payment system is valuable to criminals and people in oppressive regimes (bitcoin purchases are booming in Venezuela for example), so I do think they are here to stay in some form.

Bitcoin purchases are going down in Venezuela because there is no power for days or weeks in some locations. Needing global communications technology to buy bread and milk from the corner market can be a serious impediment to life in oppressive regimes under extreme stress.

https://ambcrypto.com/bitcoin-btc-following-mega-blackout-in-venezuela-btc-volume-domino-drops-in-neighboring-countries/

https://spectrum.ieee.org/energywis...grid/netblocks-tracks-venezuelas-power-outage

 

[BWV]

Good point

 

[Rive]

Stands based on what? Why not 3x or 10x?

Sigh... Most indicators are based on some combinations of chart data averages. This means they need previous data first to have an actual, valid value. Usually this goes back to 9-20 candles.
The same time these indicators has a lot of stupid statistics (based on the market history) about the chance to have too drastic change (trend change) within the next few periods. By these statistics usually 2-5 candle is the maximal 'safe' predictive range.
The actual rate will vary due personal risk acceptance, indicator type/personal settings, luck and plenty of other voodoo, but at the end you need at least a dozen candle back to 'see' few candles long in the future of a trend (momentum, as struggled up by academics ) - that's the basis of the 5X value, as minimal requirement.

That's all.

 

[BWV]

Ok so no basis for your contention other than claiming special knowledge of trader lore. About as productive as talking to an astrologer

 

[Rive]

I can't really understand where that come from for you...

 

[BWV]

You are talking about technical analysis like it is a legitimate discipline, but at the same breadth seem confused about the concept of momentum, which is well documented and can explain most any positive results of TA (after accounting for various selection biases).

 

[Rive]

You have just linked a wiki article that how ill-defined and cloudy the 'momentum' is by academic 'science', and then you reject the clear cut approach/definition of 'indicators' about the 'momentum' as chart property - together with the math and statistics coming with it.

It is exactly what I mentioned in #16:

Well, academics are rare to make good traders. They tends to mess up: when it is about psychology, they are about math and when it is math, they suddenly have too much psychology to keep cool.

Especially the second part.

 

[BWV]

Given that the greatest living trader is a trained mathematician, not sure your characterization holds. Momentum is well defined, simple and robust, unlike trader jargon or technical analysis.

 

[FallenApple]

Well the basic issue is that Bitcoin is not a precious metal, it's just bits. Precious metals have intrinsic/practical value in addition to being rare (strictly speaking, *everything* is a certain scarcity, so the word "rare" isn't all that useful in this context). The intrinsic/practical value of bitcoin is exactly zero. It's more like a Beanie Baby, which had value as long as people thought it had value and not a moment longer.

Yes, that is true. There are elements more scarce than gold but yet has a lower price. I think demand due to culture around the world is a big part of it. For example, gold is heavily purchased in India and China, which are large segments of the world population.

 

[rootone]

Bitcoins and others have no intrinsic value at all.
A value they have at any given time is largely due to speculation (gamboling).
Gold may be expensive for a small amount, but you can do useful/creative things with it.
You can even do useful things with tulip bulbs. (Like growing tulips)
https://en.wikipedia.org/wiki/Tulip_mania

 

[Vanadium 50]

Bitcoins and others have no intrinsic value at all.

Unlike, say, dollar bills?