I’m going to go ahead and kick this hornet’s nest and see what happens.

Bitcoin.

There, I said it. Jamie Dimon’s diatribe yesterday got me thinking again about Bitcoin cryptocurrencies at large. I’ll be the first to admit that I am an old school currency trader--I know first hand there is little else that draws the admiration of the citizenry of an autocratic regime with a hyperinflationary monetary policy than the US dollar.

If you were bold enough to click through to that link, you see that there has been 1 million percent inflation in Venezuela since Hugo Chavez took power in 1999. But that was way back in mid-May--now it is 3 million percent and counting. The Venezuelan Bolivar lost 2/3s of its (already worthless) value in only 77 days.

When a third world autocrat implements capital controls, the objective is generally to prevent the citizenry from fleeing the local financial system for the safety and security of the US dollar. In Argentina, until early last year you couldn’t just waltz into a bank and ask to have your pesos converted into dollars--moreover, grain exporters couldn’t freely repatriate dollars without a morass of taxes and red tape. So even from a corporate perspective, you can see the power of a currency system that would enable you to circumvent government controlled financial systems.

And that’s what makes Jamie Dimon nervous!! Few banks are as highly levered to the interaction of the US and international financial system than JP Morgan. Freedom of movement and libertarian absolutism is the basic, global value proposition for cryptos in the foreseeable future.

So what is, or should, Bitcoin be worth? I guess I am old enough that I have to go back to my international economics textbook to match up Bitcoin with the definition and uses of a currency:

  • A currency is a medium of exchange that is used to buy or sell assets, goods and services. We think of it as being tied to a country or central bank, but it can be stuff like airline miles too--a currency I try to convert into dollars, magazines or airfares as quickly as a Venezuelan with a sack full of bolivars.
  • What is a good currency? A solid currency needs trust. The entity and monetary system backing the currency needs to be predictable, legally stable, and widely recognized. Some currencies FX traders think of as lousy currencies, like the Turkish Lira have depreciated dramatically--but are still legally recognized tender in the international financial system.
  • A good currency must be a store of value--as a TRY holder, I would have lost money in USD/TRY over the past several years, but I would have made some of that back holding TRY assets at much higher interest rates over the years--and I would have had the freedom to convert to USD at my pleasure any time during that period. So the currency held its value--it didn’t go completely to pieces like the currencies of Venny or Zimbabwe.
  • Most simply, the changes in value of such currencies are driven by trends in real interest rates and the domestic expected return on capital relative to foreign return on capital.

How does Bitcoin fit into that system? Here’s where I am going to throw out my fuddy duddy opinions and we'll see if the millennial set or the cryptocurrency true believers can set me straight.
  • Medium of exchange: Bitcoin has a $65bn market cap and trades millions of dollars per day. You can get online, set up a wallet and buy into it relatively easily and virtually anywhere.  That makes it a widely recognized medium of exchange. Sure, it is well off the billions of dollars traded every day in EMFX currencies or trillions in DM currencies. But it is growing and will probably rival small country currency volumes soon. So a modest but growing “check” here.  
  • Store of value: Ok, so help me out here--I am long bitcoin--what interest rate am I going to draw on that? Can I lend it out? Nobody is borrowing in bitcoin. I see value in using it as a dark-web currency but not as an asset. I understand the value in being outside the traditional financial system but the PBOC moves last week show that governments have an incentive to make lives difficult for crypto traders and ICOs, even if they can’t completely shut it down.
  • Which leads to the last bullet...Trust: Do I have any confidence in what it will be worth tomorrow?  Not really. Do I think it will be equally liquid and accepted non-country based asset, like gold? Not really. Will it be overwhelmed by some other cryptocurrency long-term? Maybe. Will governments and established banks crush or co-opt it? Maybe. The tin-foil hat crowd will be happy to opine on how this will be the first discussion topic at the next annual illuminati jamboree.

I'd love to buy into this--it really does appeal to my anti-establishment impulses. But I’m from Missouri on this one. Show me.

No interest rates, no monetary policy, no capital markets, no derivatives...but long on hope and the blockchain story. I don’t even want to get into the “fair value”, bubble talk, or astronomical recent returns--I just need convincing on how cryptos are defined as a currency, and how that will interact with the establishment.

And again to throw my lot in with Jamie--blockchain is a totally different topic--that is a technology that has enormous value for payment systems and corporate supply chains. Even if and when the technology is there to implement blockchain’s promise of the “smart contracts”, distributed bookkeeping, and real-time payments, I still want to get paid in dollars!

And I don’t think that is going to change in my lifetime. Am I just behind the curve here? Convince me otherwise!