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Author Topic: 2013-04-06 [Spanish] Juan Ramón Rallo: Bitcoin is not a bubble  (Read 965 times)
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April 08, 2013, 09:00:31 PM

Juan Ramón Rallo has a PhD in Economics, having completed the degree with Honours and final year law degree with Honours final year at the University of Valencia, as well as master of the Austrian School economics from the Universidad Rey Juan Carlos de Madrid. Currently a professor in the OMMA study center and study center ISEAD. He has received the 'Award Julián Marías' 2011 at the scientific career in the field of social sciences to under 40 years. It is also an economic analyst and director of the Institute esRadio Juan de Mariana. He also co-authored the study on the cost of renewable energies in Spain Study of the effects on employment of public aid to renewable energy sources and books A crisis and five errors, awarded the Free Enterprise Foundation Rafael del Pino, Chronicles of the Great Recession (2007-2009), liberalism is not a sin, the errors of the old economy, a truly liberal model and a liberal alternative to exit the crisis.

Via Google Translate:

Usually we tend to qualify as bubble the price of any asset that goes up very quickly, assuming that at some point end up clicking and falling. Such primary reasoning entails two problems: a) any assets to be revalued so dizzying is a bubble, b) can not apply the analysis of all asset bubbles.

Regarding the former, it suffices evolution, for example, of the shares of Wal Mart. In early 1997 began an uptrend that took from 11 dollars a share to over $ 50 just two years later, today, after decades, trading at 76 and never below 40. Wal Mart was not in a bubble phase. Point.

More juice, however, is the second problem: not every asset is capable of being analyzed under the criteria of a bubble. What is a bubble? Basically, when the current price of an asset exceeds the present value of its future cash flows. For example, if a floor that has a market price of one million euros can be rented for 850 euros per month (10,200 per year), it is clear that the floor price is under bubble: if a bank deposit, for example I offer 2%, would be more logical than a million euros placed in the tank (charging € 20,000 per year) and pay the monthly rent of bank interest. Something similar could be said about a stock or stock with respect to a commodity (if the current purchase price far exceeds the eventual sale price of this future-based on their expected utility to end-consumers, it is in bubble phase).

One type of assets to which, however, can not be applied this analytical framework: monetary assets. The typical case is that of gold. Is the gold bubble? People tend to respond very categorical (both for and against) when, quite simply, the question is not relevant. At the end of the day, what is the value of gold as its core? If we had to guide us for their supply and industrial demand, gold cotizaría perhaps a market price of $ 50 an ounce (or less). Problem: since the breakdown of Bretton Woods, has never quoted or foreseen never have to trade at that price. Why? Because gold has uses beyond the non-monetary: specifically, its monetary use (be the ultimate medium of exchange when mistrust between agents and between governments is greatest).

The question then is how to estimate the fundamental value of the monetary value of gold. And here the problems begin. In a way that could bring fundamental value as the probability of the cause that leads them to the agents to assign monetary value to an asset. For example, if gold demand because people expected to be a war, if war does not take place, then the current monetary value of gold is unfounded and will tend to prick. In fact, many gold investors use different rates or indices reflecting fear psychology (calm or panic) market to take their positions in gold.

It is a sound strategy and often successful but with two weaknesses. First, does it make sense qualify a bubble fire insurance? The logic is the same: what contract I fire insurance? What if my house burns, if not burned finally, I've been capitalizing an asset (insurance) that actually had no value. A bubble? I would rather say that I was buying peace or protection against risk of fire, that is, the same thing happens with the gold investment for fear of a war. And, for similar reasons, people might start to demand gold over its entire life-not because a war theme, but simply "just in case", that is, for a generic protection against pure uncertainty. This would be so much arrogant analyst qualify as "irrationality of the masses towards a barbarous relic", but, as we say, is just buy a generic protection against disasters that I can not even conceive.

However, the biggest obstacle to bubble talk is another. What is the equilibrium price of the generic protection? Simply not there: good is gold as a monetary asset when its price is $ 1,000 an ounce as when is 5000. That is closer to $ 1,000 than 5,000 depend simply on two factors: a) the number of people who want to incorporate as cash reserve in shareholders, b) the percentage of their assets that people want to have as gold.

Notice that this is largely incompatible with the analytical framework of the bubbles. When someone claims a bubble is trying to indicate that the asset is being sobreadquirido in this (demand too high) in relation to the value of its future income (is now paying a lot more for these future income than you would pay for them in cash each future time). Or put another way, the current price of the asset deviates from its "equilibrium price" in the long term. But monetary assets there is a curious fact: the more people demand a monetary asset in the present, the higher its present price and often also its equilibrium price. So, how can we speak of bubble if, indeed, the fundamental value of monetary assets depends on the people suing you?

One solution, partly successful, would look at the speculative demand for that asset: if there are people who is suing not because I want to incorporate it into their heritage as cash, but because they expect other people to go to claim a monetary asset in the future , then we think that the price is in bubble territory. Well, but to conclude that not only have to look at that there is a strong speculative demand, but to analyze whether or not it is likely that speculators are right: that is, that in the future will emerge an intense demand for money on that claim. And with monetary assets, unlike the rest, its price increases ever more not necessarily moving away from their fundamental values ​​(not increase the likelihood of bubble), then remember that these core values ​​can go traveling with increasing price (if, for example, the current holders of monetary assets accepted retain a greater portion of its assets in the monetary asset or if the speculative boom causes new agents know that monetary asset and demand).

My proposal is to abandon the analytical framework of asset bubbles in the case of monetary assets and think in terms of "processes of monetization and demonetization" of these assets. Reasoning in terms of monetization helps clarify things: if a monetary asset has certain advantages to act as a medium of exchange against the other, the agents will be incorporated as part of its heritage and its market price (equilibrium price and ) will increase (monetization). By contrast, when agents start to distrust yourself and remove it from its heritage, its price will start to sink (demonetization). Or, to put it more simply, if final demand for orange juice and increase its annual production could not increase, the equilibrium price would increase. It would make no sense to call this price increase as "bubble orange juice", as much as we believed that future demand for orange juice could sink back: simply, the current price was what the market according emptied demand and supply this, even if it is higher than the price that empty into the future. Same thing happens with monetary assets: not correct bubble label them as much as its future price is likely to fall sharply (if they come under demonetization).

Some judge that with this post I intend to reinvent the wheel, but rather sought to clarify the terms of debate. When some claim that certain monetary assets, such as gold or Bitcoin , a bubble are starting and implicitly assuming that the monetization process will fail and that, ultimately, will be demonetized. Of course, that's something that can happen to any monetary asset (including the dollar!), But to argue that a monetary asset demonetized as Bitcoin will need a much more refined than incurring simply begs the question (" be demonetized "), an analysis that usually appears or not or that, when it appears, you do so clearly erroneous assumptions (like Bitcoin is capable of being falsified, that their numbers can grow beyond 21 million, etc. ). Perhaps because there are good fundamental reasons that surely or with high probability, Bitcoin necessarily must fail, I despise as a sole active forgetting bubble phase is an asset monetization phase (which, by Of course, as all monetary assets is likely to be demonetized).

Personally I am somewhat skeptical that laudable experiment is private and decentralized Bitcoin and do not understand the dislike that some supposed free market advocates profess him, except that want to justify what is increasingly unjustifiable: the money monopoly of central banking. But, yes, I reiterate that, being very friendly with Bitcoin, it is prudent to note that money is an experiment that may well fail. Your continued monetization is not far from guaranteed and therefore its demonetization (especially from current levels) is an event now much more likely that the gold or the dollar. Precisely because it is a fiat money (their movement depends on a strong commitment of the parties to continue accepting it), there is no automatic stabilizer of money demand and its value except same strong commitment to its users (in contrast to does happen, for example, with gold). When, therefore, the holders are very convinced and committed to their future potential, the Bitcoin has, so to speak, very powerful automatic stabilizers, as they enter "weak hands" who understand much worse it works and how to acquire experiment, its value goes back, at least in the short to medium term, much more unstable.

Now, does that mean that the value of Bitcoin is going to collapse, as they believe that those who qualify will happen inevitably bubble? No. And precisely because there is no need to sink their value, calling him a bubble is inappropriate. There are two potential routes of stabilization (in value or growth rate) of Bitcoin: one, that the public has acquired Bitcoin as an experiment, what goes in your transactions using P2P and finish it considered useful for these purposes ( being those purchases, a significant portion of their annual transactions), so that permanently consolidate some of its assets in the form of Bitcoins, two, and derived in part from the above that a "big player" as Amazon announced its readiness to sell their products in exchange for Bitcoins (raising therefore permanently its monetary value). Either of these events can happen (indeed, as more people buy and use Bitcoins, will be more likely to happen), and either slow the demonetization and the bursting of the Bitcoin current prices.

In sum: Bitcoin is a monetary asset rather interesting characteristics in the current political context. Obviously, money is not better than the dollar or gold in any situation or context (and vice versa), but it is necessary that it is, because the question is not whether all exchanges of the world will always end up being effected through Bitcoin (scenario very, very unlikely), but if a portion of them end up doing it. Simply give the latter case (and largely already happening) to the current price drops Bitcoin not only long term but continue to grow in a sustainable manner. However, and as I said, still in a very preliminary stage of monetization, the risk of demonetization (and price collapse) is still there. The issue is not present what is possible-or even likely for some-as absolutely inevitable, that is, introduce Bitcoin as a bubble. It's not, and who should respond tittle bubble immediately afterwards what is your estimate of "equilibrium price" or "fundamental value" of Bitcoin. Because if we start from the basis that prejudiced not play any role in the future money, then $ 100 a Bitcoin is a bubble, but it will also be $ 0.1. And, of course, in the absence of a deeper analysis of why Bitcoin desmonetizándose end, as learned statement itself would have a value close to zero dollars (or Bitcoins).

Disclaimer: Do not understand this text as a recommendation to invest in Bitcoins. I leave that to the individual choice of each. Also, I have not, nor have I had, and I have no intention in the foreseeable future have no positions in Bitcoins.
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