Bitcoin as Store of Value

JP Morgan Chase CEO Jamie Dimon, on the back of China’s announcement to throttle cryptocurrency, made comments yesterday that shook the market.  (It’s not the first time he’s done this.)

He supported blockchain technology for tracking payments but then goes onto to say it’s illegal to trade Bitcoin at the bank and that’s it’s a currency that is associated with criminal activities.

It’s comical to hear this. How can the CEO of a Bank, both support Blockchain (the thing that Bitcoin invented) but trash Bitcoin? To me it points to one very obvious fact: Bitcoin itself is a threat and he’s on a consistent PR smear campaign.

Why Bitcoin is a threat
Customer deposits, where people store their money for protection, is the basis of banking. Banks use those deposits to then do lending activities that actually make them money, such as lending up to 10x what they hold as deposits in the forms of mortgages. Those same lending activities, not only make them money but can also be packaged into new financial products, such as mortgages bundled into securities (like the ones that created the 2008 credit-crisis).

Why is Bitcoin a threat? Because it has the potential to fulfill a function that only government fiat currency and gold have every achieved and that now banks are the custodians for: store of value.

If Bitcoin becomes the Store of Value in the world, people would move their customer deposits to Bitcoin. And the affect of that would be catastrophic to today’s banks.

Does Bitcoin have a fighting chance to be this?
Well, first of all its achieved an adoption that I think is irreversible. The only thing that could stop Bitcoin now is if governments make it illegal — but even then, it would require every government around the world to act in unison. Because all you need is one island nation, acting an a clearing house, to fulfill the needs of Bitcoin. (And the nation that realises this will become a new financial centre of the world.)

Secondly, the characteristics of Bitcoin are remarkable. What’s going on right now is real work is being generated, to create a hash. That hash and encryption function, will continue to be generated until 21 million Bitcoins are created. And then the supply stays constant!

The significance of this is there is a fixed supply: which means inflation will not exist (rather deflation), a pretty critical feature of where you want your Store of Value. Real work, and hence, value is behind it; and the token itself has a real use beyond being a string of characters — such as acting as a token to authenticate a Blockchain network which will underlay the future Internet.

I agree that there is a bubble right now: the hype driving it makes the price unstable. But I also believe that Bitcoin itself will get to $10,000 in value, without a doubt purely due to human psychology. But that’s not all, it should one day equal in my opinion  all the narrow money of the world which is $29 trillion  (if you want to be conservative, I’ll accept Gold which is $7.8 trillion). So if Bitcoin right now is worth $64,406,377,384 on 16,563,637 coins in supply, it’s price should be $3,888.42 but calculated on all the coins it will ever issue (21m), it’s $3066. But if the market value reaches $29 trillion, then 1 BTC will one day be worth $1, 380, 952 which is a 450x multiple on current prices ($371k if you use gold).

The question about Bitcoin is not about should it exist or not: the truth is, no one can control it. If you believe all the governments of the world will ban it, then maybe — but I believe human’s aren’t that capable on something that isn’t life threatening.

The question about it being a better store of value in the world is also not really a question: by design, it’s superior. (But admittedly the governance mechanisms behind it to create a secure system, are still being worked out and being tested– such as the SegWit2 rollout in November which put this question in doubt.)

Which leads to  the ultimate question, in lIght of the above:  do you accept it to be the Store of Value in the world? And that is the million dollar question (or, ahem, $1.381m question).

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