Bitcoin And Value Illusion

One childhood hobby, an obsession really, was my coin collection. Pennies were a particular focus. The hunt for the great white whale was the search for the elusive 1909 S-VDB, the "S" designating this very first Lincoln penny had been struck by the San Francisco mint and the "VDB" reflecting the initials of the Lincoln cent designer, Victor David Brenner. Some initial controversy arose such that the mint ceased its production after fewer than half a million had been struck. This relative scarcity eventually drove its price in the collectors' market into the thousands of dollars.

Such was my first life lesson in scarcity value i.e. price dependency of an item being largely a function of its scarcity, real or imagined, rather than any reference to its cost of production or real utility value. While a ratio in the neighborhood of a hundred thousand to one might sound outlandish many other examples, perhaps more modest, have arisen over the ages. Think Beanie Babies, probably each costing a dollar or two to produce yet some eventually fetching hundreds of dollars due to their perceived "limited production" run. Think fine art. Think certain vintage wines.

Think Bitcoin. What an incredible phenomenon this has become. We'll dispense, for our purposes, the details of what's beneath the mathematical and technological hood, a subject so formidable it could make a grown man (or woman) weep. Rather, we'll address the issue from the philosophical angle and discuss an element that largely drives its price i.e. the representation of a finite limit on the issuance of future "coins."

As most already know, these are, in fact, not physical coins but rather digital representations of such, a mere string of binary numbers. For all intents and purposes the cost of production is zero. And, so, the representation that there would never, ever be more than twenty-one million (approximately nineteen million currently outstanding) of what is essentially a mathematical algorithm somehow translates into a current valuation of more than $13,000 each.

Welcome to the paradox of manufactured scarcity i.e. valuation ascribed not so much to that which is actually produced as it is to the promise of its future non-production. Whence comes the value? At least with art and wine there is usually some sort of underlying value, be it aesthetic or savor, though even here each may be subject to excessive premiums that smack of snobbery or elitism.

Yet Bitcoin would appear untethered to any such qualities and its valuation would seem to be due primarily, if not exclusively, to this self-imposed limitation. Okay, then, someone give me a bid for my one-of-a-kind heavily used old sock as there will never be another one precisely like it and further it has some utility value as a foot warmer. Or, more to the point, that Bitcoin premium (arguably infinity over its zero cost) would seem vulnerable in the face of an onslaught of other "manufactured scarcity" schemes, crypto-currencies or otherwise.

Bitcoin certainly has its detractors or at least skeptics. Keynesian economist Paul Krugman sniffed that it is "a bubble wrapped in techno-mysticism inside a cocoon of libertarian ideology." Others have referred to it as a Ponzi scheme. Governments have threatened to regulate or ban it outright.

But consider this: many countries are actively exploring the prospect of initiating their own form of crypto-currency, in particular our own Federal Reserve (see MM 9/11/20, Looming Monetary Reset). The indelicate question one might pose to Chairman Powell, as he seeks coordination with the European Central Bank and International Monetary Fund for the roll out of central bank digital currencies, is what Bitcoin-like limitations might be imposed on those issuances in order to levitate or to even preserve their value? Short answer: none. Longer answer: governments hate any competition designed to avoid their own monetary debasement.

The advent of Bitcoin provides us the opportunity to discuss the real question of valuation perception in the most stark terms. Our focus discussion piece addresses most of the concerns raised by the nay-sayers, how this crypto-currency is central to the upcoming new world order of finance, and articulates why the attendant risk/reward ratio makes it the absolutely compelling investment (er, speculation) (click, https://www.realvision.com/shows/expert-view-crypto/videos/the-bitcoin-life-raft-and-the-new-bretton-woods).

You heard it here first. Bitcoin might just be the biggest thing since the 1909 S-VDB.

(To access previous Member Monday introductions, click TOC)