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16 November 2019

PODCAST: Kaiko's Ambre Soubiran on Bitcoin's 'Intrinsic Value'

PODCAST: Kaiko's Ambre Soubiran on Bitcoin's 'Intrinsic Value'


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“How can you say that having a system that enables permissionless transference and a decentralized and secure way to digitally transfer ownership [doesn’t have value].

No longer written off as some ignorable niche, more people are asking: Is bitcoin a macro asset?

So I think it’s a great question and it’s true how seeing how all the different narratives for bitcoins have evolved over time.

I think it’s really interesting to look at that now from a more macro perspective and say we’re seeing more and more institutional drive and institutional demand for bitcoin and the cryptocurrency world, the larger spectrum, but within the context of bitcoin.

Initially, it’s interesting because it was created as a more technical system, as a technical solution.

So I think it’s interesting because we say it has evolved from the original peer to peer electronic cash system into a financial asset, but it was originally conceived as a reaction to that financial system.

And when I talk to investors and people that are trying to put bitcoin in a box, I think it’s interesting, it’s like this giant disco ball that is spinning and every time you say, okay, it’s a currency and you try to put on it a model or evaluation framework on top of it, it just doesn’t work?

So the question is, if we look at bitcoin from a financial asset perspective, I think it’s important to have sizes and figures in mind because it has been thought of as an alternative to a financial system that was somehow broken.

So we could say that it is a decorrelated macro asset.

Because if bitcoin is going to be this uncorrelated, let’s say digital jurisdiction gold, that allows something that isn’t a nation-state to have the attributes that could trade without the mismanagement or perhaps decisions that are made politically that it could actually grow in this manner and become something totally different.

And I think there’s something really interesting when you think about this as a financial asset or as a gold, is that indeed, bitcoin is not directly subject to interest rates or to any kind of currency debasement.

And I think it’s the first financial assets for which after a point supply is actually likely to decrease.

We already say that, I don’t know, four out of the 18 million bitcoin are actually lost, lost somewhere on the blockchain somewhere because people have lost their keys for X, Y, Z reason.

So supply and the fact that it’s likely to start decreasing after a point is things that we don’t really mention when we think about this as a macro asset.

Price can increase, which will increase the market cap because it’s divisible and because you could fraction bitcoin all the way to I think the power of nine.

What would you say if … we’re looking at bitcoin now because it’s so small, it hasn’t really been able to affect the definition of a currency.

Like the idea that now there is this permissionless system that enables me to send a unit of accounts, effectively bitcoin, to whoever I want, whenever I want, at a relatively low fee is redefining the way we think about money.

Then it became this digital money narrative or this magic internet money, but today it’s rarely seen as a cash system.

Actually, at the time where it was seen as this private and anonymous currency, I was working in banking at the time and we started to raise the idea that bitcoin was something interesting to look at and they were completely, completely reluctant to have anything to do with bitcoin.

It started to attract also interest from the more VC investor space initiative because that was disrupting?

A lot of projects that, I mean a lot of them were unfortunately scammy, but there’s also a lot of great projects that actually raised funding and way more that would have raised playing the VC game and today, four years down the road, three or four years after the ICO, they’re still not profitable but fully independent and autonomous.

I think it creates new forms of startups that wouldn’t have existed without the ICO.

And that was something that again, coming from 10 years of banking, I’ve heard a lot at some point it was bitcoin was a word you are not really supposed to pronounce, but distributed ledger and distributed database was really sexy.

And I guess that started justifying more traditional interest for bitcoin in some ways.

So the last actually, now the institutional interest is really more because we’re looking at this and that’s the point of this conversation from a more, oh, it’s actually an uncorrelated financial assets.

So moving on to a more specific definition or type of behavior that we’re seeing from bitcoin today, but still definitely related to being uncorrelated and perhaps not a victim of some of the political decisions jurisdictions are making.

I think it’s definitely seen as a safe asset in jurisdictions where there is much more political and economic uncertainty.

So I guess, and it’s also if you look back over the history and the early days of bitcoin, I guess it was 2013, 2014, at the time it was Ecuador and all these like more Central American countries that were also driving adoption?

I don’t think at that point that people have a deep mistrust in the Euro or at least it’s not a theme yet.

However, I read something that I thought it was really cool on HODLers and if you look at more the on-chain data stuff, you see that people that have been holding, you have bitcoins that have been sitting on wallets and even through the year to date ties of this year and the even all-time highs of the past years, you have people that haven’t done or sold out or done anything over the past two years and five years.

There’s foregoing what you already to have to invest in bitcoin or to hide in bitcoin, and there is already having bitcoin and not wanting to get out of it and not wanting to actually take that existing gain, which is already on the table.

So there’s this idea, I don’t think in Europe people are running away from Euro to invest in crypto because they see it as a safe haven yet?

However, you definitely see that in the more already shaken economies that it’s a way to avoid your government having control of your own wealth.

On the safe haven thing though, there’s also a still, even though it’s much more, you know, bitcoin is now in I don’t want to say everybody’s mind, but close.

And one of the things I was hearing all the time when I was in the banking world was ‘OK, but this bitcoin thing, it doesn’t have any intrinsic value.’ And this is something to which I obviously completely disagree, and my response to that was how can you say that having a system that enables permissionless transference and a decentralized and secure way to digitally transfer ownership, like just that system and the fact that it works and that it has been working for 10 years has value and that’s the intrinsic value in my eyes.

But this is something because there are so many different narratives and so many misunderstandings, if you have an exchange that gets hacked and people understand that bitcoin was hacked, there’s still too many misunderstandings, which I guess prevents people seeing bitcoin as a safe haven asset just because you just don’t know what you’re getting into.

It’s the first time that even if you don’t understand, I’m sure you just say the random Joe in the street does not necessarily understand how the central bank work and how even their own bank works.

But because you have intermediaries and you have people that are theoretically accountable for your money, it’s not as scary.

So it’s not the same telling them, you have this new system that is transforming the way we represent ownership and the way we store value?

It means that you have power back to the individuals, we’re challenging many things, and because they don’t understand it, they just don’t want to go there.

It was hard for them to hold and have a conviction on that trade through all of the FID and the people saying US housing is never going to go down.

So when we look at the HODL waves, does it really tell you that people do believe that this safe haven behavior is bound to happen or they’re at least hedging that it could happen and this is the instrument to use to avoid it happening in the future.

So it’s a great question and I think it’s already a very good signal to know that people who have made significant gains are not interested in exiting that system.

And that’s really the … if we think about if a recession happened tomorrow, is the system sturdy enough yet to really be a safe haven and really have a significant inflow of capital into the bitcoin ecosystem and then hold through that.

However, people are trading it also because they think that it will increase, right.

And if they think that they’re going to profit, it’s because they’re hoping that it will become a macro asset or a safe haven.

It’s in general, from an asset management perspective, you see historically that in big crisis, in the ’07, ’08 crisis, generally correlations just jump to one when things really go sour because people are just trying to save whatever they can.

And of course all of the more blockchain community and believers of which we are a part of would say that a recession would benefit bitcoin.

And at that point, the system is overloaded, transaction fees skyrocket, everybody tries to protect their own interests.

And so there’s kind of a problem that happens at that point or a bottleneck into, I want to actually get my money into the bitcoin blockchain?

And what if that happens because people just tried to protect their coins, one of the big exchanges just goes bust and then it creates a complete shattering in the general trust in the ecosystem, and trust is what was the underpinning strength of that network.

And interestingly, if you look at the last 10 years, the best environments for bitcoin, and it’s the same for most risky assets, is one where you have relatively declining market volatility, you have monetary policies that are quite accommodative and you have low return, low economic growth.

But in a real crisis, honestly, at that stage, I don’t think the bitcoin space is mature enough to really, really handle a global economic downturn of the amplitude of what we’ve seen 10 years ago.

Because that means all the super short term traders, nothing would … like if transaction fees start skyrocketing and there’s this kind of idea that people will risk-off and see what happens.

Everybody that says wants to buy bitcoin, okay, well then you have a huge buying pressure on the order books and there is no market, nobody wants to sell.

I think they’re seeing a lot of interest as well in the … more in essence, and I’m stepping just one second away from bitcoin here, but on all the benefits of blockchain when it comes to these disintermediating the financing for SMEs, for example.

So there’s definitely the blockchain not bitcoin narrative at some point helped kind of go past specific limitations that were kind of old ghosts from the bitcoin is a way to finance the drug industry.

There were those like mental blockages where institutional players saw bitcoin as something they didn’t want to have anything to do with.

And then once people have accepted that blockchain actually is wonderful and important, bitcoin is the best expression of blockchain.

But it’s this kind of acceptance phase that people need to go through.

If everybody starts deciding that they want to transfer older financial wealth and bitcoin and we end up with a completely unbalanced order book because you’ll have huge amounts of buy order and then no demand to absorb that.

And second, because if you look at the way order books have evolved history, you also see how the market’s become more and more sophisticated.

It means how much percentage change am I going to get in my execution price depending on the different order sizes that I could place on percentage of the prevailing price.

Slippage on bitcoin can go down to one to two bips, whereas it’s somewhere between five and 10 bips for Ethereum for example, just as a horizon point.

We even see some markets where you have crosses where there’s so much buy and sell demand that people place orders above or below market price depending on if they’re buying or selling.

You can see exchanges, and by exchanges I mean just markets on bitcoin, becoming more and more efficient just because there’s more and more price takers and price sellers on each side.

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