Nick Hubble – Capital and Conflict (United Kingdom) –
There hasn’t been much about bitcoin in Capital & Conflict of late. Our friends at Exponential Investor are the experts. You can sign up for free, just like Capital & Conflict.
The cryptocurrency certainly is in the mainstream media nowadays. Its actual users are still a tiny proportion of the potential. As one cryptocurrency fund manager put it, “I can hear the herd coming.” The debate about “bubble or no bubble” rages.
Even if a zero or two have been added on to the figures, the price action in bitcoin has been as wild as ever lately. The moves are measured in hundreds of pounds instead of dozens, but the percentage falls and gains aren’t new.
The price of bitcoin doesn’t interest me much. It’s an exchange rate, not a price. Saying that one bitcoin can buy £5,027 is as meaningless as saying one pound can buy 149 yen or 1.12 euro. That’s not useful information by itself. You have to adjust for the price level in each country.
Despite the pound’s ability to buy 149 yen, which makes you feel rich, a tourist from Shropshire will find themselves giddy at the price of a cab in Tokyo. The point being that an exchange rate alone isn’t important. You have to adjust for price levels.
The change in the exchange rate over time and its volatility is important though. Bitcoin is up many hundreds or even thousands of per cent over the last few years. The volatility is high too.
But there’s something far more interesting going on.
What makes exchange rates useful is the cost of living in each country. But bitcoin doesn’t have a country. Does it? So what is the basis of its value?
Is bitcoin useful because of its characteristics? Instant, free, anonymous transactions are great. If bitcoin can actually deliver on these promises. More on that below.
But first, let’s take a look at the free holiday bitcoin promised you just months ago.
Consider the premium which people in Japan, South Korea and Zimbabwe pay for a bitcoin. South Koreans paid about 15-25% more than their counterparts in the US and Europe for bitcoin. Japan’s premium reached 30% and in Zimbabwe the price almost hit double recently.
It’s not a currency issue, as I suspected at first. This is measured in US dollars, which are used in Zimbabwe. And the Korean won and Japanese yen trade freely with other currencies.
Take this example from earlier this year:
On May 25, Cointelegraph reported that Bitcoin price surpassed $4,500 in South Korea as the market’s premium reached an extreme. Bitcoin was traded within the South Korean Bitcoin exchange market for as much as five million Korean won, the highest bid in the global Bitcoin exchange market’s history.
At the time, the global average Bitcoin price barely reached $2,600 prior to a major market correction which ultimately led to a $700 decline.
So here’s my question for the bitcoin faithful: if bitcoin has the features claimed by its proponents – anonymity, ease of transaction, etc – how can this price disparity exist?
Bitcoin offered a free holiday in South Korea
At a $1,900 premium per bitcoin in South Korea, a moderately wealthy Brit could buy a few bitcoin, go on holiday in Korea, sell the bitcoin there, pay for the hotel, return to the UK, exchange their remaining Korean won for pounds and pay off the cost of their flight on the credit card.
Even after the commission on currency exchange when you get back, the profit per bitcoin you take to Korea would be well over £1,000.
It’s a free holiday!
I’ve asked our bitcoin experts about the idea.
Unfortunately, the premium on bitcoin is rapidly plunging in Japan and South Korea. And I don’t want to go on holiday to Zimbabwe.
But why did the arbitrage opportunity come into being? (That’s the actual question I asked our bitcoin experts Sam Volkering and Eoin Treacy. I’ll publish their replies tomorrow.)
From what I can gather, it’s something to do with the tough money laundering laws in South Korea and Japan. Which just illustrates how bitcoin remains reliant on government infrastructure to function. So much for anonymous, instant and free transactions…
Then again, the premiums in Japan and South Korea have disappeared in the last few months. So what’s going on?
The real story isn’t speculation
Leave the price action behind and ask yourself about the potential uses of bitcoin and its competitors. Why use them? Are they convenient enough? Are they truly anonymous, gold backed or whatever it is they promise? Is it safe to keep them in the wallets and institutions that make them useful?
Not many of us are stuck in Venezuela or Zimbabwe. In countries with failing currencies and painful capital controls, bitcoin does make sense. That’s why the bitcoin price in Zimbabwe is about double elsewhere. (The US dollar’s value in Zimbabwe is less than 20% of its face value according to Reuters, so bitcoin is hardly the odd one out.)
I think bitcoin’s power for the financially downtrodden has been proven beyond doubt. And it’s a huge boon to humanity in the fight against government control.
The cryptocurrency revolution just doesn’t seem robust
Most who buy cryptocurrencies are speculators. Most in the industry are shifty. If you actually try to use or sell cryptocurrencies, the roadblocks pop up everywhere.
If the crypto world’s boom is based on past price increases and not the usefulness of the technology, the trustworthiness of institutions or the problem solving capability of the currencies, then the price will crash eventually. From how high, nobody knows.
The thing is, I’m gradually being proven wrong. Usefulness, convenience, trust and many other factors are steadily growing. Not at the pace of the price, but improving nonetheless.
The famous Bitcoin Girl described to me how on her travels she pays her followers in bitcoin for local money, leaving the transaction cost of currency exchange at 0.
The news has many further stories of success, where bitcoin has solved a genuine problem quite well.
Then there’s blockchain technology. The useful concept behind bitcoin has many other applications. If the world integrates blockchain, cryptocurrencies will get a boost.
My point is, you don’t have to decide whether bitcoin is a bubble or the technology that revolutionises our economy. It can be both. Perhaps your focus should be on how you can use bitcoin to change your life, not just get rich.
The tech bubble anticipated how the internet would change our world. But it was a bubble too. And many of its companies failed. For investors, it was a divisive event. Some gained wealth, some lost. Today we use the internet for everything.
The same goes for railroads, land in the New World and so on and so forth. Bubbles heralded the promised change, it’s just that prices too.
If you want to navigate this world to understand how to make use of cryptocurrencies and to discover which ones will survive the bubble, you need this man’s help to do it.
One word of warning. Developments in South Korea and Japan show how bitcoin’s success is tied to government policy. Only once bitcoin was approved by the government did the premium disappear.
Bitcoin will not be the libertarian currency some had hoped for. It will be the digital currency that technology enthusiasts hoped for.
Until next time,
Capital & Conflict