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Kudos to WallStreet analyst and advisor, Ric Edelman. He drank the Kool-Aid, he understands a profound sea change, and he sees the ducks starting to line up.

Check out the clearly articulated interview, below, with Bob Pisani at the New York Stock Exchange and legendary Wall Street advisor, Ric Edelman, (Not my term…That’s what CNBC anchor, Melissa Lee, calls him). Read between the lines, especially the last words in the video, below.

Ric Edleman has just joined Bitwise as both investor and advisor. This lends credibility and gravitas to the organization that created the world’s first cryptocurrency index fund. Bitwise benefits from Edelman’s affiliation, because the US has been slow (some would say “cautious”) in recognizing the facts on the ground: Cryptocurrency is already an asset class.

Edelman fully embraces a strong future for Bitcoin—not just as a currency or payment instrument, but as a legal and recognized asset class; one that is at the starting line of a wide open racetrack. He explains that the SEC sets a high bar for offering a Bitcoin ETF, but that this will be achieved. It will pave the way for large institutions, pension funds, etc to allocate a portion of money under management for blockchain products.

At timestamp 3:39, Melissa asks Edelman “Why wait for an ETF?” and “If you believe this strongly, why not advise clients to invest a portion of assets into Bitcoin right now?”

Edelman’s response is stunning. He explains that he is frustrated, because this is what he wants to advise. But, his firm is bound by the Investment Act of 1940—and so, they cannot tell a client “Go to Coinbase” or “Invest in a private fund such as Bitwise—that I am such a big fan of. We don’t have that ability in our practice.” [i.e. until the SEC recognizes Bitcoin as an asset].

In my opinion (and in the opinion of Edleman), SEC recognition of Bitcoin as an asset can’t be far off…

  • It’s already happening in other countries. Reputable exchanges and index funds exist today.
  • Unlike a traveler’s check or Amazon gift card, it is inherently a store of value, whether or not you believe that its value is intrinsic;
  • The IRS already considers it an asset for tax purposes (What an odd schism in definition & treatment!)
  • It is legal to pay staff in Bitcoin and use it to settle debts, for any recipient that accepts it. For employees and consultants, it is a wage or stipend, just like FIAT. They can convert into cash immediately—or retain crypto it to pay their own bills)

It’s not difficult to read between the lines. Edleman makes a clear recommendation, although he can not yet advise this—certainly not on the record. His personal forecast for long term adoption and appreciation, especially of Bitcoin, matches my own analysis. His new affiliation with Bitwise (a pretty bold move) demonstrates certain commitment.

This ends my analysis of Edelman’s strong endorsement. But it raises another important question:

If large financial institutions are likely to offer Bitcoin products
and services—and if credible analysts & advisors are chomping
at the bit to recommend this new asset class—shouldn’t we
invest in Bitcoin now?!

Ironically, I do not recommend hording or investing in cryptocurrency, even as a collectable. Why?! Because of the big “Investment Catch-22”. I don’t discourage investing in Bitcoin because I fear that its value will lessen. It is for a completely different reason. And so, my advice against investing is half-hearted.

Currently, Bitcoin and altcoins are widely misunderstood. Many people have these false impressions…

  • It is not backed by anything
  • It interferes with tax collection
  • Cryptocurrency facilitates crime
  • Governments will never allow it
  • They do not convey compelling benefits over government-issued currency
  • They water down the overall money supply
  • Their deflationary nature threatens economic growth
  • They are easier to lose and subject to scams & hacking
  • They do not facilitate refunds, rescission, recourse and customer claims
  • They interfere with a government’s ability to control its monetary supply

All of this is untrue, except the last item—and that one is a tremendous benefit.

Additionally, blockchain currencies fluctuate widely in real market purchasing power, many altcoins and all ICOs are scams, and acceptance is far from being ubiquitous. Clearly, widespread adoption requires stability, infrastructure, trust and ubiquity.

This cannot happen until two things occur:

  1. The fraction of transactions in normal business and retail commerce (purchases, salaries, debt payment and settlement) must significantly dwarf the fraction that is driven by investors, hoarders and speculators.
  2. A significant number of established brands, services or retailers must begin publishing prices in Bitcoin and honoring those prices throughout a defined sale period (e.g. until the next catalog is published or until the next production run).

Things are beginning to change, but for such a positive and transormative mechanism, that change is frustratingly gradual.

A series of falling dominos is already in process. But, the end game is retarded by those of us who invest in Bitcoin, because we are removing a limited resource from circulation and contributing to volatility. We do this, because we realize that—in the long run—Bitcoin can only go up in value. Yet, our investment at such an early stage (before consumer adoption) makes the infant sick.

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top Bitcoin writer at Quora. Book a presentation or consulting engagement.

Please don’t pay any attention to this posting. It is not for you… *

This graph presents indisputable fact: It compares US dollar growth as reported by the US government and Bitcoin growth (for all time), extrapolated by pure math.

I wish that this would put to bed the fake news, conspiracy theories, and “nothing backs it” nonsense. Unfortunately, seismic shifts in architecture or process take time for society to understand and accept. Early adopters will be the fortunate buckos. Timid or clueless denizens will complain bitterly about the unfair advantage of those who wise up before it hits a 6 figure exchange rate. Eventually, comparisons with legacy currencies will be utterly meaningless. It will become the currency. It will be the gold-pressed latinum of universal recognition and intrinsic value.

15 years from now, some will look back on our era and claim that the Winkelvoss twins were lucky. Risk, patience and an understanding of economics is not ‘luck’. They have the gift of prescience.

Bitcoin cannot be manufactured. Despite it being open-source and easily copied, it is very unlikely to be displaced by an altcoin or ICO. The fact that there will never be more than 21 million original bitcoin presents incredible opportunity to the frugal and wise—for a short time.

* Hopefully, few people will heed the siren call. Investing is Bitcoin might be good for you, but it is bad for the community. How so?! The more that individuals or institutions hoard, speculate or invest in Bitcoin—as opposed to driving adoption by actually using it—the longer it will take to gain traction as a functional payment instrument, or as the money itself.

So, this article is not for you. Move along. These aren’t the droids you’re looking for.

Philip Raymond sits on Lifeboat’s New Money Systems board. He co-chairs CRYPSA, hosts the Bitcoin Event, publishes Wild Duck and is keynote speaker at global Cryptocurrency Conferences. Book a presentation or consulting engagement.

Credit: (title & image): Peter Bergstrom
Did you catch the omage to both Star Trek and Star Wars? Look again

Titles are chosen by editors and not journalists or experts. I fought my editor over the above title. Yes, I address the teaser—and I explain a solid altcoin investment model. But, that comes after the break. The first part of this article should be titled “Why would anyone quote cost or value in Bitcoin?”. The subjects are highly related, so bear with me…

Today, a reader asked this question:

Some financial sites discuss value in Bitcoin terms, rather
than dollars or Euros. Why would I calculate the value of a
new car, my rent or an investment in this way? It’s hard to
understand how much money I need!

Answer: Your right! It’s difficult to estimate the value of a car or your rent in terms of Bitcoin. You are paid in dollars or Euros—and your landlord quotes rent in the same currency.

On the other hand, it’s natural to gauge the value of something by comparing it to a commodity that you earn and spend at a steady or predictable rate. Therefore, your assumption that it makes more sense to determine value on a dollar-basis is absolutely correct. No one determines the value of a new car by comparing the cost with a government’s national debt—or the number of donuts you would need to sell (unless you are a donut maker).

But, this assumption is transitory. It is based on a historical paradigm that is gradually changing. We are entering a bold new era. A big debate is shaping up over How gradual is the change? But make no mistake: This change is occurring in our lifetimes…

That change will eventually lead you to estimate, earn, spend and value things in Bitcoin or a similar cryptocurrency. One day soon, fluctuations in the value of the US dollar or Euro will cause you to wonder “What is happening with the dollar?” rather than shake your confidence in Bitcoin. Bitcoin (or something similar) will integrate into your mindset as the exchange medium, rather than fiat currency of a nation state.

Naturally, a series of dominos must fall, before you realize that Bitcoin is the money. I predicted this four years ago, and the process is already occurring. It is retarded by two unfortunate events, but these are both temporary setbacks:

  • Today, more people are hoarding and speculating rather than accepting or spending Bitcoin for goods and services. This delays the day that it can act as a useful, functional currency.
  • Miners, users, vendors and developers are chasing different goals. This makes it very hard to agree on necessary changes that will address several critical technical problems (i.e. transaction cost, speed, electrical demand, replay issues, etc).

Both of these problems have solutions, and we have already seen the solutions at work in altcoins. Think of forks and altcoins as beta tests…Bitcoin will fold in the best of these technical improvements and will very likely continue to inch toward becoming the world’s de facto currency.

Revenue Neutral Investing

To answer the question in the title, let’s look at this from a completely different angle. The individual who asked the original question went on to ask this:

Cryptocurrency sites compare and track the cost of altcoins in
terms of Bitcoin rather than dollars. What’s with that?! Do they
assume that we will all be selling Bitcoin to buy the new altcoin?

It actually makes sense to value altcoins in terms of Bitcoin—even today. How so?…

This growing trend provides very useful information. This method of quotation helps the reader to determine the relative change in value between the two currencies and compare it to fundamentals that they learn from news and research. The information can then be used to hedge an investment or even craft a revenue-neutral investment strategy. Allow me to explain…

I am long on Bitcoin. This is not likely to change. So I keep a significant fraction of my wealth in this form.

But, I also understand that the use and market for cryptocurrencies is young and very immature. A very few other forks and altcoins are the real deal. They have solved some major technical flaws with Bitcoin and they have the potential to become a credible, functional currency. This isn’t the place to explain my favorite coins, but the strategy is relevant.

Since I already have a substantial position in Bitcoin, I wish to avoid further exposure in the market. Therefore, I invest long and short at the same time (for example, using puts and calls)* on certain coins that are likely to perform better than other coins. This reduces risk, by leaving me without a loss, if the entire market rises or falls. The only way I might lose is if I get it exactly wrong! That is, if the coins that I believe are scams do better than the ones that I feel are well-designed and with a solid adoption trend. (Remember: The risk reduction strategy is to invest on the difference between an overvalued dog and an under-performing beauty).

To avoid the downside scenario (i.e. getting it exactly wrong), focus on fundamentals and not the cost of a unit, short term trends, emotional zeal, or other technical issues. Don’t follow the crowd! Bet on value and bet against hype. (TIP: The take-away, here, is to do both at once!). Investors who consider only asset cost and trends are in a craps shoot. The smart money determines which coins are likely to be a better functional instrument than other coins and then sticks with a dollar cost averaging plan for months at a time.

Want to learn more? Want to know which coins I admire? Reach out. Let’s talk. I don’t bite.

* A regulated financial exchange for puts and calls does not exist for altcoins. But, with a little research, you can create an nearly equivalent futures contract or options instrument. You may need to be a bit creative.

Philip Raymond co-chairs CRYPSA, publishes A Wild Duck, hosts the Bitcoin Event and kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

At the end of October, I delivered a keynote speech at the Cryptocurrency Expo in Dubai. That was just 5 weeks ago. When I left for the conference, Bitcoin was trading at $6,300/BTC. But in the next few weeks, it reached $10,000. Last week, I liquidated part of my investment at just under $13,000/BTC. Now, Bitcoin is about to cross $16,000. (I began writing this 10 minutes ago…but it has risen another $1600.00. Now, it is $17,000).

Dear Reader: I believe in Bitcoin. Yet, there is a “But” in the last paragraph below…

I believe in Bitcoin. Its rise is not fueled solely by investor hysteria. Rather, it is a product of delayed appreciation for a radical, transformative network technology.

In the mid 1970s, the microprocessor was spreading to every consumer gadget. It started a trend toward tools that added power and enjoyment to all facets of life. And they were quickly becoming faster, lower-power, lower-cost and more ubiquitous. If you understood the potential of the computer chip before mainstream investors, you couldn’t really invest directly in the microprocessor. After all, it is a platform improvement. But you could come very close—You might have invested in Intel, Fairchild or Texas Instruments.

Jump forward 20 years: In the mid 1990s, the Internet was spreading to every class of citizen and to all corners of the earth. But just as with a computer chip, you could own a web site, but you couldn’t own a piece of the internet’s market potential. You can’t invest in an idea, unless you are the inventor and you hold a patent.

But, 5, 6 and 7 years ago, many individuals saw the future. They understood that Bitcoin is transformative. They recognized that—contrary to popular misconception—Bitcoin is backed by something more tangible than dollars, Euros and Renminbi. More importantly, it exhibits the potential to become the global reserve currency. And it continues to do so, even as internal bickering threatens its utility as a consumer payment instrument. That’s because It diverts liquidity away from gold and national FIAT. Ultimately, it forces governments to be transparent and accountable to its citizens. This is further reinforced by rampant inflation in countries around the world and a growing list of trading partners who seek alternatives to the US dollar.

But, just like real estate, the supply of Bitcoin is capped. No one can produce more. It’s the math, stupid! Even if you only realized this one year ago, you still would have reaped a 2000% return on your investment as of this morning. (I am cherry-picking here, but Bitcoin had just crossed $630 on October 20 2016).

Let’s be clear: This is not a dot-com bubble or a 17th century Dutch tulip bulb mania. It is far more comparable to the 19th century California gold rush. The only frenzy is to acquire a functional instrument that is still trading for far below par value—but with the strange caveat that hoarding retards liquidity and the ‘functional’ adoption that we need to sustain long-term value.

The Bottom Line

In the grand scheme of things, Bitcoin is still undervalued—even at $17,000/BTC. It will fall and it will rise, but it will certainly be valued higher years from now.

…But, I must admit that this sudden and urgent race into outer space is a bit unsettling. From an investor perspective, it is not rational to leave when I recognize that the exuberance is rational. Yet, here we are at $17,000. I am taking some bitcoin off the table—A bit of bitcoin.

Philip Raymond co-chairs CRYPSA, publishes Wild Duck and hosts the New York Bitcoin Event. He is on the New Money Systems board and led the Cryptocurrency Expo in Dubai. He frequently consults and presents.

At Quora, I occasionally play, “Ask the expert”. Several hundred of my Quora answers are linked here. Today, I was asked “How much of Bitcoin’s value is driven by speculation”. This is my answer…

This is a great question! While the value of any commodity is determined by supply and demand, speculation is one component of demand. Another is the unique utility value inherent in a product or process. This is sometimes called ‘intrinsic value’.

It’s ironic that when a high fraction of value is driven by speculation, short-term value becomes volatile and long-term value becomes less certain—and less likely to produce returns for those same speculators.

Editor’s Note: In the past few weeks, a significant spike in Bitcoin’s value and trading volume relates to a pending regulatory decision expected at the end of next week. This activity is certainly driven by speculation. But for this article, I am considering periods in which the demands of individual events are less clear.

The value of Bitcoin is influenced by:

  • Day traders who buy and churn
  • Long-term speculators who buy and hold. This includes me.
  • Criminals who hope that cryptocurrency transactions can be more easily hidden than government backed currencies
  • Early adopters who use Bitcoin as a payment instrument or to send money
  • Vendors who accept the coin in exchange for products and services
  • Vendors who retain a fraction of revenue in Bitcoin (rather than exchanging to Fiat). To avoid a round trip exchange, they seek to purchase materials or pay staff with the Bitcoin they earned.

Here’s the rub: Bitcoin will not become a store of value unto itself (i.e. a currency), and it will not gain a significant fraction of the payment instrument market until the transaction volume of the first to user categories in the above list are overtaken by the the ones further down. Likewise, Bitcoin will not enter its biggest growth spurt until the last two items swamps the others as the largest motive for acceptance and use.

Put another way: Long term value must ultimately be driven by organic adoption from actual users (people who are buying and spending Bitcoin on other things.

In another article, I expand on the sequence of events that must take place before Bitcoin grows into its potential. But make no mistake. These things will happen. In tribute to the brilliance of Satoshi, the dominoes are already falling.

In response to the question, I estimate that at the beginning of 2017, 85% of Bitcoin value is still driven by speculators. I have not analyzed wallet holding periods compared against the addresses of known vendors. Furthermore, it would be difficult to understand the relationship between the number of speculative transactions and the overall effect on value. Therefore, my figure is more of a WAG than an calculated estimate. But it’s an educated WAG.

The fraction of speculative transactions will drop significantly in the coming months—even as late speculators jump on board. That’s because uptake from consumers and businesses is already taking off. The series of reactions that lead toward ubiquitous, utilitarian applications has begun. Bitcoin’s value will ultimately be driven by use as a payment instrument and in commerce.

Because it is a pure supply-demand instrument, Bitcoin will eventually be recognized as currency itself. That is, it needn’t be backed by precious metal, pegged convertibility or a redemption promise. When that happens, you will no longer ask about Bitcoin’s value. That would be a circular question, since its value will be intrinsic. Instead, you will wonder about the value of the US dollar, the Euro and the Yen.

As a growing fraction of groceries, gasoline and computers that you buy are quoted in BTC, you will begin to think of it as a rock, rather than a moving target. One day in the future, there will be a sudden spike or drop in the exchange rate with your national currency. At that time, you won’t ask “What happened to Bitcoin today? Why did it rise in value by 5% this morning?” Instead, you will wonder “What happened to the US dollar today? Why did it drop in value by 5%?”

Philip Raymond co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor
at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.