FINALLY - Economists starts to understand bitcoin! *Fortune article*

[kaysersoze]

Finally, serious economists are starting to take the time to study cryptocurrency & Bitcoin beyond the cliches. Below the fortune article :

http://finance.fortune.cnn.com/2014/02/18/50000-bitcoin/

Could there be a $50,000 bitcoin?

Stanford economist Susan Athey on how to analyze Bitcoin's value on fundamentals.

FORTUNE -- In the last year, and with increasing intensity following the early December price spike that briefly put Bitcoin above $1,200, critics have sounded the alarm that the price is a bubble. Some, like Felix Salmon, have recognized the value of the cryptocurrency, but argued that it is simply overvalued, much like pre-2008 real estate.
Others haven't stopped there, claiming that bitcoin is all bubble, at the center of which is little or no intrinsic value -- something closer to a Dutch tulip mania than a real estate bubble. Those making the latter case have included Nobel Laureate Robert Shiller and former Federal Reserve Chairman Alan Greenspan.
It seems reasonable enough to be skeptical of a digital currency unbacked by any state or real-world goods. But bitcoin optimists argue that what "backs" bitcoin is the functionality of its frictionless, low-cost, decentralized payments system. As Circle CEO Jeremy Allaire put it at fact-finding hearings held by the New York Department of Financial Services in January, "The growth in the value of bitcoin is a put option on its adoption as a payments platform."
MORE: Bitcoin's no good, horrible, very bad few weeks
An anonymous viral e-mail circulating among bitcoin watchers and partisans lays out a few simple hypothetical usage and adoption scenarios, and their consequences for bitcoin's price. If Amazon.com (AMZN) adopted bitcoin for all payments, its volume of $38 billion, divided by a supply of (at the time of the email's writing) about 7 million bitcoin, would make each bitcoin worth $5,400. If $300 billion in international remittance was conducted in bitcoin, that volume alone would push the price to $42,000. Adding these, along with online poker and gas station transactions, would lead to a total transaction volume of $602 billion -- and a bitcoin, even at today's expanded supply of 12 million coins, worth $50,000.
"Those numbers are good ones to start with. In some sense, that's like a maximum," says Susan Athey, a professor of economics at the Stanford Graduate School of Business who has been studying bitcoin. Few would realistically argue that bitcoin will service 100% of even these silos in the near term, but the volume/supply ratio is the starting point for understanding bitcoin price -- as more consumers or organizations choose to use bitcoin, increased volume will drive the price up.
Building from that basic formula, Athey adds a variety of variables to build an analytic framework. The first is velocity -- how frequently a bitcoin can be spent. Because bitcoin, unlike paper money, is very low-friction, there's the possibility of a very high-velocity bitcoin, if, for example, vendors or traders only held bitcoin very briefly, cashing it in and out to government currencies on either end of transfers. That, Athey says, would allow a small volume of bitcoin to process a large volume of payments, keeping the price of bitcoin relatively low.
Then there are even less predictable and higher-risk variables. Obviously, bitcoin's future price depends hugely on the adoption rate of the cryptocurrency model. Athey believes that the cryptocurrency model of distributed ledgers is "a really simple, powerful technology that is superior to existing technology," and there are major drivers that point toward wide adoption.
One fascinating adoption scenario frequently floated among bitcoin adherents is specific to retail. Online retailers' razor-thin profit margins get a huge boost when they pay a bitcoin processor's fee of about 1% instead of credit card fees of 2-3%. How long will it be, some ask, before a major retailer offers a discount for those paying in bitcoin, as a way to maximize that increased profit margin? Such a discount could drive significant bitcoin adoption in a very short timeframe.
Still, Athey believes that cryptocurrency also faces challenges that could kill it in its crib, above all from government regulations. "There's [only] a small number of big countries," and adverse regulation in just a few of them could render cryptocurrency far less functional in the long term.
MORE: Why venture capitalists are right to be crazy about bitcoin
It's just as uncertain whether, even if cryptocurrency becomes part of how we transact, bitcoin will be the only, or even the most adopted. "There's a big probability that there's a zero market share for bitcoin" in the future, says Athey, as competing cryptocurrency systems integrate desired features, better functionality, or simply more effective marketing campaigns. The price plunge following recent revelations about "transaction malleability" in the bitcoin code point to the dangers of even perceived systemic flaws. A division in the cryptocurrency market could keep future values of individual systems, including bitcoin, relatively low. (Disclosure: Athey consults with Ripple Labs, creators of a competing cryptocurrency system.)
The outcomes of all of these risks are still very hard to predict, and Athey thinks this explains the current volatility in bitcoin's price. "There's no reason to think right now that all reasonable people should agree on the regulatory reaction of various governments. [And] even if everyone was just broadcasting the fundamentals, a lot of information has been coming out about the fundamentals. It's not surprising that the value should be changing."
Still, this is much different than the impression from some corners that the price of bitcoin is nothing more than a shared fantasy. While the email pointing to a $50,000 bitcoin is imprecise to say the least, it's a starting point. A more rigorous mathematical model integrating demand projections with probabilities of certain make-or-break contingencies isn't just possible -- it likely already exists, in various versions, across various investors' hard drives.
For Susan Athey, though, the question of a specific cryptocurrency's value seems less exciting than contemplating the broad changes that bitcoin's innovation will bring to finance. "When you really think about what we do today in the banking system ... it's kind of stunning that that's the way we do business in 2014. It seems very natural that things will change. It's only surprising that they haven't changed already."

[babilonian]

A good article.  The BTC community needs more of those people.

[Siegfried]

A good article.  The BTC community needs more of those people.

The author fails to consider bitcoin's use a store of value in her calculations. She assumes that 100 percent of bitcoins will be in constant circulation. My personal experience and knowledge of the bitcoin community (limited though it may be) leads me to believe that more than 90 percent of bitcoins are being held as a long-term store of value or lost, rather than in circulation (10 percent of bitcoins). That means she should use 1.3 million bitcoins in her calculations, not 13 million, which leads to a market price of 500,000, not 50,000.

Is my reasoning sound? Does anyone have a better estimate of the ratio of bitcoins in circulation compared to store of value? Does this even matter?

[solex]

There was also another great write-up by an economist, known as "11Bills", posted yesterday on reddit:

Much has been learned in the last 50 years about “money / currency”. The goal presumably to find out what the best possible money is, then adopt it. The choices made deciding our monetary policy should be a matter of political debate. This debate though has largely been out of the public eye.
One needs to realize that the type of money used by a civilization has direct consequences on the distribution of wealth, the distribution of real physical resources, and the distribution of power. How money flows through the system results in how goods & services flow. Bottlenecks and distortions in the flow of money result in distortions of the real economy.

It is generally agreed that the most recent financial collapse was caused by financial distortions. Hundreds of billions of dollars lent out against personal housing assets that were overpriced, then resold at a profit as “AAA securities”. Any repercussion for the rating agency which confirmed that rating? Any inherent moral hazard caused by the link between rating agencies, and the banks issuing the securities?
Since this crisis began SIX YEARS ago, governments have been acquiring real assets by drawing on an empty but limitless bank account. The government does not even need to incur the expense of actually printing money to create billions of dollars of bank credit (that can be distributed to bank shareholders). Central banks have changed their official role from maintaining a fixed, counterfeit free supply to actively trying to manipulate the economy through monetary policy. Governments have targeted inflation in a period of natural deflation (by natural deflation I am referring to the natural process of prices decreasing because of better technology, better economies of scale, and higher productivity). Because of pressures of natural deflation central banks have been in constant monetary expansion. No other globally traded asset has decreased in value more consistently than fiat money.

Government manipulations distort the economy. Several results, some more visible in one economy compared to another: 1. The effect of monetary policy in China has been to funnel credit primarily to government owned enterprises and government friendly businesses at the expense of other actors in the Chinese economy, strengthening the control of the communist party. 2. In much of the western world (Canada, US, Britain most visibly), easy money policy increased house prices drastically. The ratio of wages to rents has been steadily decreasing, which reduces disposable income for the majority of households (consumer spending could be affected which could affect the broader economy negatively) 3. Japan has been in a debt crisis for 20 years. The main benefactors of ‘Abenomics’ are holders of the Japanese equity market; including many large foreign investors.

Our economy is experiencing financialization, which is a systematic exploitation of the monetary system to move wealth from the productive economy to the financial economy. In the past thirty years we have seen: 1. An increase in the size of the financial industry with respect to all other economic activity. Rising efficiency should have had the opposite effect on the industry. 2. An increase in the role of financial controllers in the management of corporations. 3. An increase in the percentage of financial assets in all tradable assets. 4. An increase in the perception that stock market fluctuation are a determinant of the business cycle.
We must ask ourselves: ‘will the nation continue to be the most influential actor on the flows of commerce?’ Nations limit trade, limit international cooperation, and create adversarial incentives. Politicians have been spouting about free trade for a generation, but ‘free trade agreements’ are complex laws designed to protect the interests of large corporations and industries. Bitcoin is an outlet for consumers and small businesses to connect globally with zero friction. Trust is placed in an online network that is the result of a scientific breakthrough in mathematical security that cannot be interrupted by outside forces.

Today 1% of that market costs 96million. In July of 2009, the United States paid more than $19 billion in interest on the public debt.
The first step is to recognize that national paper money and fractional reserve banking are human institutions, they were built on the ideas, politics and technology of last century. They can and will change over time. They should change now. A de-centralized monetary system is more democratic and will put different pressures on society and lead to different results. A monetary system that puts more value on resources in the future (deflationary) will result in a society more willing to conserve. A monetary system that is equal across all nations will encourage reflection on the wealth inequality between nations and encourage international charity, international remittances and the support of small businesses selling their goods internationally.

Bitcoin is the first mover in the market and there is no reason to believe that Bitcoin will not be a leader over the next decade because the growth of this market has inherent positive feed-back loops. As the market grows in size the developers who believe in the durability of Bitcoin in the long term have more funds, and time to invest in technological improvements. This investment will happen on two fronts. The protocol will likely see an update that addresses malleability of transactions, and the scalability of the blockchain. These updates are being done by well educated experienced experts with extreme focus on the security and stability of the release. There will not be a Bitcoin protocol release analogous to the Obamacare website launch. The second front of Bitcoin development is built using the blockchain to establish trust. Several companies have made breakthroughs into the online payment system market, and a lot of work is being done to ease the usability and security of Bitcoin wallets (Electrum is my recommendation to you! bitcoin.org → resources → wallets → Electrum). Services that create contracts (ownership) between investors & savers will be provable on the blockchain. Bitcoin can also be the vehicle to create contracts (m of n addresses) that create a very secure escrow.

TL:DR Do not let short term market speculation by people who do not believe in the long term use of Bitcoin disrupt the development of this technology.

http://www.reddit.com/r/Bitcoin/comments/1y70jb/my_view_on_the_future_of_bitcoin_i_have_a_degree/

[instructor2121]

That is a really good article. Thanks for sharing

[BittBurger]

  I can barely believe my eyes  

She states that if all Bitcoin does is Amazon.com amount of commerce, and replaces Western Union ... that will bring it to $42,000 a coin.

Thats staggering.  

Why?   Because its a drop in the bucket for what Bitcoin is going to be replacing.  Drop in the bucket!

They call it a "maximum" but lets be realistic.  The remittances market is guaranteed to be taken over by Bitcoin.   Done.

Now exactly how many Amazon.com's worth of commerce is there in this world?   Thousands-of-them-worth?

Entire countries are on the verge of adopting Bitcoin (Cyprus, Argentina, etc).  How many more Amazon.coms does that equate to?

If their Maximum brings Bitcoin to $42,000 .... then we are all going to be extremely wealthy in 10 years.

-B-

[bg002h]

The calculations are really dumb in the article. The author doesn't understand the concept of money velocity. $600 billion in business _per year_ could theoretically be done with a sea shell worth a 1¢. That sea shell would have to change hands ridiculously quickly...given that internet money can change hands quickly, to simply divide 1 years business by the number of tokens implies bitcoins change hands once a year...the bank of America paper is better thought out...although I disagree with their model inputs, just not the model (as in this case).

http://cryptome.org/2013/12/boa-bitcoin.pdf

[seanwilliam1988]

It’s really time for the economists to discuss and study bitcoin because it’s already affecting the economy globally. If they don’t act now, it can possibly cause a huge problem for them in the future.

[babilonian]

Susan Carleton Athey is an American economist. She is a professor of economics at the Stanford Graduate School of Business. Prior to joining Stanford, she was a professor at Harvard University.

It's interesting that I read all these replies from you guys about the article.  Any of you are Harvard professors of economy??

Let's leave the economics of currency to those who understand it better than us.

[rohnearner]

It’s really time for the economists to discuss and study bitcoin because it’s already affecting the economy globally. If they don’t act now, it can possibly cause a huge problem for them in the future.

don't worry we'll be considered as future economists because i don't think all of those are going to understand the concept , because most of them have already made up there mind and there is no point banging our heads explaining it to them..!

[Sheldor333]

Glad they are becoming probitcoin, but then they will go where ever there is money like they have always done.

[Lauda]

The article has its good points, but the calculations are bad.

[CryptoPanda]

good one indeed