For many people, the main obstacle to using cryptocurrencies is that they are volatile; their value fluctuates sharply across time depending on, apparently, many different factors.
To put the issue in context, the original paper on bitcoin was published in late 2008 and the first transaction in early 2009: since then, its value in dollars or euros has risen by more than 15,000%.
In contrast, over the same period of time, the parity between the dollar and the euro, has varied by a few percentage points up or down. No surprise therefore that bitcoin is seen as highly volatile and unsuitable for transactions, and at best, a store of value, subject to the systemic risk that arises every time the authorities or a government make decisions that could affect it. China talks of banning bitcoin mining and its price falls. Elon Musk uses part of Tesla’s reserves to buy bitcoin? Bitcoin rises. Janet Yellen calls bitcoin extremely inefficient? Bitcoin falls again. This instability has encouraged speculation, while others are wary of the risk.
Why is bitcoin so volatile? In a sense, the issue is structural and part of a process: bitcoin, by the very nature of its algorithm, consists of a fixed number of units, twenty-one million, of which, as we see in the graph, about 90% have already been issued. During this time, the bitcoin adoption process is subject to social and legislative factors of all kinds and conditions, which, while not affecting the currency’s mechanism per se, do cause, as we have already seen, temporary fluctuations, sometimes significant. However, its algorithm continues doing its job, based solely on mathematics, and nothing that any legislator says can really affect it in the long term. A country could ban bitcoin, but in practice, this is the same as trying to limit the use of any technology: if its value proposition attracts a sufficient number of users, such bans are a waste of time. And since the value proposition of bitcoin in the long run — a currency with self-contained rules, monetary policy and consensus rules implemented by software and with an independent value unaffected by the actions or decisions of any particular actor — is evident, it will remain in use.
In short, bitcoin’s volatility is simply a reflection of adoption mechanisms. Since not everyone understands how it works or has accepted that it is the future of money, it remains subject to volatility, which will continue as long as its process of price discovery does not stabilize. This has not happened yet, because on the one hand, not all bitcoins have been issued, nor has it been adopted en masse yet. What happens when all bitcoins have been issued and more and more people and entities become aware of its value proposition? Its use increases, the value-setting process converges, and it becomes valuable as a transactional currency. We are, quite simply, witnessing that process in real time.
What will happen to currencies such as the dollar or the euro? Their volatility is of a different order. These are currencies that respond to the decisions of the governments of a country or countries, which in many cases are dealing with natural catastrophes, pandemics, bailouts, other spending priorities, or simply the need to “reactivate the economy”, and which, therefore, form part of an imperfect system in which it is necessary to continue generating money and stoking supposedly “healthy” inflation, with all that this entails in terms of increased inequality. In reality, currencies such as the euro or the dollar, although they provide us with a false sense of stability — in part because we mistakenly believe there are reserves behind them — they are much more unstable and subject to random factors that are impossible to control.
So yes, bitcoin is volatile, but a different type of volatile. Bitcoin is convergent in the long term and a price will be established by mathematical means, while traditional currencies are subject to hard-to-predict political decisions and processes, as well as structural inflation, and governed by rules that are, as such, contradictory.
Once we reach a certain level of consensus about the value proposition of a technology, its mass adoption becomes unstoppable and inevitable. Next time somebody mentions bitcoin’s volatility, remember that.
Published at Fri, 09 Apr 2021 10:23:43 +0000
Everything You Need to Know About Finance and Investing in Under an Hour
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Bill Ackman is one of the top investors in the world, and he’s said that he’s aiming to have “one of the greatest investment track records of all time.” As the CEO of Pershing Square Capital Management, the hedge fund he founded, he oversees $19 billion in assets.
But before he became one of the elite, he learned the basics of investing in his early 20s.
This Big Think video is aimed at young professionals just starting out, as well as those who are more experienced but lack a financial background.
Ackman takes viewers through the founding of a lemonade stand to teach the basics, explaining how investors pay for equity, a word interchangeable with “stock.” In the example, the owner starts with $750, with $250 of that coming from a loan.
William Ackman is founder and CEO of Pershing Square Capital Management. Formed in 2003, the hedge-fund has acquired significant shares in companies such as JC Penney, General Growth Properties, Fortune Bands and Kraft Foods. Ackman advocates strategies of “activist investing,” the practice of using stock shares in publicly-traded companies to influence management practices in a way that benefits shareholder interests.
Hi, I’m Bill Ackman. I’m the CEO of Pershing Square Capital Management and I’m here today to talk to you about everything you need to know about finance and investing and I’m going to get it done in an hour and you’ll be ready to go.
How to Start and Grow a Business
So let’s begin. We’re going to go into business together. We’re going to start a company and we’re going to start a lemonade stand and now I don’t have any money today, so I’m going to have to raise money from investors to launch the business. So how am I going to do that? Well I’m going to form a corporation. That is a little filing that you make with the State and you come up with a name for a business. We’ll call it Bill’s Lemonade Stand and we’re going to raise money from outside investors. We need a little money to get started, so we’re going to start our business with 1,000 shares of stock. We just made up that number and we’re going to sell 500 shares more for a $1 each to an investor. The investor is going to put up $500. We’re going to put up the name and the idea. We’re going to have 1,000 shares. He is going to have 500 shares. He is going to own a third of the business for his $500.
So what is our business worth at the start? Well it’s worth $1,500. We have $500 in the bank plus $1,000 because I came up with the idea for the company. Now I’m going to need a little more than $500, so what am I going to do? I’m going to borrow some money. I’m going to borrow from a friend and he’s going to lend me $250 and we’re going to pay him 10% interest a year for that loan.
Now why do we borrow money instead of just selling more stock? Well by borrowing money we keep more of the stock for ourselves, so if the business is successful we’re going to end up with a bigger percentage of the profits.
So now we’re going to take a look at what the business looks like on a piece of paper. We’re going to look at something called a balance sheet and a balance sheet tells you where the company stands, what your assets are, what your liabilities are and what your net worth or shareholder equity is. If you take your assets, in this case we’ve raised $500. We also have what is called goodwill because we’ve said the business—in exchange for the $500 the person who put up the money only got a third of the business. The other two-thirds is owned by us for starting the company. That is $1,000 of goodwill for the business. We borrowed $250. We’re going to owe $250. That is a liability. So we have $500 in cash from selling stock, $250 from raising debt and we owe a $250 loan and we have a corporation that has, and you’ll see on the chart, shareholders’ equity of $1,500, so that’s our starting point.
Now let’s keep moving. What do we need to do to start our company? We need a lemonade stand. That’s going to cost us about $300. That is called a fixed asset. Unlike lemon or sugar or water this is something like a building that you buy and you build it. It wears out over time, but it’s a fixed asset. And then you need some inventory. What do you need to make lemonade? You need sugar. You need water. You need lemons…
Read the full transcript at https://bigthink.com/videos/learn-to-invest-and-start-a-business-in-under-an-hourTags: finance