Brad delong bitcoin value

Everybody who buys BitCoin rationally profits ex ante:. Those who need BitCoin at that moment of peak fundamental demand profit by laundering money or obtaining the release of loved ones. Those who speculate before that moment earn a competitive expected return for their capital, research sweat, and risk-bearing. This is just a normal efficient financial market assessing lumpy and sporadic information about future peak fundamental demand for money laundering and ransom payment.

There are large returns—both positive and negative— ex post. But that's just volatility for you. If you believe that message, Cochrane—if you believe that lumpy arrive of information about future peak fundamental demand for money laundering and ransom payment is the explanation for the gyrations of BitCoin—I have a Nigerian prince on the line who has a unique source of tulip bulbs infected with the tobacco mosaic virus.

And would you like to see some bonds from the Kingdom of Poyais? What we have to understand is not that BitCoin has a potential convenience yield for money launderers and ransom payers—and hence a positive price. What we have to understand is the magnitude and fluctuations of that positive price. What we have to understand is that the price is 10 times what it was at the start of What we have to understand is that there appear to be people in the Bay Area holding half the BitCoins in the world, with an average investment of million each.

Is it a 'bubble? It strikes me as a fairly pure instance of a regularly occurring phenomenon in financial markets, one that encompasses some "excess valuations" in stock markets, gold and commodities, and money itself.

Let's put the pieces together. Bitcoin has no cash dividends, and never will. So right off the bat we have a problem—and a case that suggests how other assets might have value above and beyond their cash dividends.

Well, if the price is greater than zero, either people see some "dividend," some value in holding the asset, beyond its cash payments; equivalently they are willing to hold the asset despite a lower expected return going forward, or they think the price will keep going up forever, so that price appreciation alone provides a competitive return.

The first two are called "convenience yield," the latter is a "rational bubble. If a price goes up forever, eventually the value of bitcoin must exceed all of US wealth, then all of world wealth, then all of interplanetary wealth, then all of the atoms in the universe. The "greater fool" or Ponzi scheme theory must break down at some point, or rely on an irrational belief in the next fool.

The rational bubbles theory also does not account for the association of price surges with high volatility and high trading volume.

So, let's think about "convenience yield. Even though we know pretty much for sure that within our lifetimes bitcoin will become worthless? If you're not sure on that, more later. Well, dollar bills have the same feature.

They don't pay interest, and they don't pay dividends. By holding dollar bills, you are holding an asset whose fundamental value is zero, and whose expected return is demonstrably lower than that of, say, one-year treasuries.

One year Treasuries are completely risk free, and over a year will give you about 1. This is a pure arbitrage opportunity, which isn't supposed to happen in financial markets! It's pretty clear why you still hold some dollar bills, or their equivalent in non-interest-bearing accounts.

They are more convenient when you want to buy things. Dollar bills have an obvious "convenience yield" that makes up for the 1. Also, nobody holds dollar bills for a whole year. You minimize the use of dollar bills by going to fill up at the ATM occasionally. And the higher interest rates are, the less cash you hold and the more frequently you go to the ATM.

So, already we have an "overpricing"—dollars are 1. And tech stocks. Some of the convenience yield of cash is that it facilitates tax evasion, and allows for illegal voluntary transactions such as drugs and bribes. We can debate if that's good or bad. Lots of economists want to ban cash and bitcoin to allow the government more leverage. I'm less enthusiastic about suddenly putting out of work 11 million undocumented immigrants and about half of small businesses.

The US tends to pass a lot of aspirational laws that if enforced would bring the economy to a halt. To say nothing of the civil liberties implications if the government can track every cent everyone has ever spent. But US cash is largely stuffed in Russian mattresses.

It is even less obvious that it is in our interest to enforce Russian laws on taxation or Russian control over transactions. Or Chinese, Venezuelan, Cuban, etc. And more so bitcoin. This is the obvious "convenience yield" of bitcoin—the obvious reason some people are willing to hold bitcoin for some amount of time, even though they may know it's a terrible long-term investment.

It certainly facilitates ransomware. It's great for laundering money. And it's great for avoiding capital controls—getting money out of China, say.

As with dollars there is a lot of bad in that, and a lot of good as well. See Tyler Cowen on some parallel benefits of offshore investing. But good or bad is beside the point here. The point here is that there is a perfectly rational demand for bitcoin as it is an excellent way to avoid both the beneficial and destructive attempts of governments to control economic activity and to grab wealth—even if people holding it know that it's a terrible long-term investment.

On top of this "fundamental" demand, we can add a "speculative" demand. Suppose you know or you think you know that bitcoin will go up some more before its inevitable crash. In order to speculate on bitcoin, you have to buy some bitcoin. I don't know if you can short bitcoin, but if you wanted to you would have to borrow some bitcoin and sell it, and in the process you would have to hold some bitcoin.

So, as we also see in high-priced stocks, houses and tulips, high prices come with volatile prices so there is money to be made on speculation , and large trading volumes. Someone speculating on bitcoin over a week cares little about its fundamental value. Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve's role as actual dollar source, and its commitment not to allow deflation to happen.

Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function Placing a floor on the value of bitcoins is Dogecoins and Litecoins and Peercoins oh my: What you need to know about Bitcoin alternatives: Though weirdly it's a joke that, at least on paper, is worth millions of dollars The founders of Dogecoin took the source code of another Bitcoin variant called Litecoin, made some further tweaks, and rebranded it as 'Dogecoin'.

That's a reference to the canine variant of lolcats, an Internet meme where a grammatically challenged dog makes excited statements. Dogecoin has been around for less than a month. Bitcoin's pseudonymous creator, Satoshi Nakamoto, did an amazing job of building a payment network that is secure, scalable and useful.

But he wasn't perfect; he made some design decisions that might not look so great in retrospect. The problem is that thanks to Bitcoin's decentralized design, it's not easy to change the core Bitcoin protocol.

Hence, if you have an idea for an improved version of Bitcoin, it's easier to start your own virtual currency Most of the altcoins have focused on improving mining, the process the Bitcoin network uses to process transactions. In the Bitcoin mining process, hundreds of computers race to solve a repetitive math problem.

The winner of the race gets to add a 'block' to the Bitcoin network's global transaction register, and to award itself 25 bitcoins roughly 20, dollars for its trouble As a result, mining has become an increasingly specialized activity, with people spending thousands of dollars on chips whose only function is to mine Bitcoins As this is being written, the value of all Litecoins is more than. The second Bitcoin flaw is the The Bitcoin principle that miners with more computing power earn more Bitcoins is known as 'proof of work'.

Several Bitcoin alternatives use an alternative principle called 'proof of stake', where miners with the most virtual cash earn the most. That approach eliminates the incentive to spend ever-larger sums of money on mining hardware, which is good for the environment All bitcoins in circulation are worth around 10 billion dollars. Its nearest rival, Litecoin, has a total market value of around million dollars.

The other virtual currencies are worth much less You want to get richer. You can either work on Yap doing something useful, or catamaran over to Palau where the limestone is, carve a big piece of limestone into a disk, catamaran it back, and use it as money.

If the value of stone money is too low, it won't be worth anyone's while to catamaran over to Palau. Thus the stone money supply will stop growing if the price dips. As long as the relative desire to use stone money does not shrink faster than per-capita income on Yap plus the population of Yap grows, the value of stone money on Yap will be determined by its cost of production--that is, the cost of catamaraning it over to Palau, carving the limestone disk, and bringing it back We can see this at work come the late 19th century.

Europeans show up with steel tools that make it a lot easier to carve limestone disks on Palau. Thus there is a huge boom in the limestone disk-carving stone money-mining industry.

And the value of stone money on Yap Falls as the money supply grows You can either work doing something useful, or you can set up a botnet to mine BitCoins, or you can fork the code behind BitCoin and set up your own slightly-tweaked virtual cryptographic money network. Setting up a new, alternative network is really cheap.

Thus unless BitCoin going can somehow successfully differentiate itself from the latecomers who are about to emerge, the money supply of BitCoin-like things is infinite because the cost of production of them is infinitesimal. By asserting, over and over again, simply that it was first. And this might work. But I am skeptical. By stressing that it has a trustworthy track record of being a safe store of value--and thus appealing to a history that the latecomers do not have.