Do Higher Prices Make Crypto-Assets Crypto-Currencies?
May 23, 2017 10:51 AM ET
Marc Chandler
Currencies, macro, Deep Value, special situations
Summary
There has been a surge in interest and prices in the so-called crypto-currencies.
Nevertheless, there is a fundamental contradiction between incentives to hoard and networking effect as a means of exchange.
They are currencies as much as "grande" means medium.
There has been a surge of interest and activity in what have been dubbed crypto-currencies. According to the Economist, the market cap for this space is around $60 bln, and a founder of the one of the crypto-to-crypto exchange estimates daily turnover is as much as $2 bln.
Some of the price action is breath-taking. The most well-known is the Bitcoin. The price surged 140% last year and is up nearly as much already this year. The Bitcoin accounts for around half of the market cap for crypto-currencies and acts as the numeraire for others that are linked to it.
The Bitcoin's appreciation has percolated into the mainstream media, but it is not the only one that appreciated dramatically. Ripple, for example, began the month with a market cap of around $2 bln. It was recently at $13 bln. Ethereum was worth about $700 mln in January and recently was valued at more than $8.5 bln.
There are several factors that may have spurred renewed interest in this space. Geopolitical uncertainty is running high. The seemingly unpredictable US President, who antagonized friends and foes, is escalating the long-simmering confrontation with North Korea, has dropped the largest non-nuclear bomb in Afghanistan, and launched a missile strike on Syria for its alleged use of chemical weapons. European politics were perceived to be a grave risk. Chinese capital controls may have encouraged some interest in crypto-currencies as a means to circumvent the restrictions. The recent cyber-attack demanded Bitcoins as payment (and some reports suggested at least $80k of bitcoins were paid). Also, recently, demand from Japan followed the inclusion of the Bitcoin under the country's regulatory framework.
Despite the increased activity and surging prices, the crypto-currencies are currencies in name only. There remains a fundamental contradiction at the heart of crypto-currencies. If they are an alternative to fiat currencies (though they are also typically not backed by gold or silver either), then they should be hoarded as a store of value. However, if they are hoarded, they cannot develop the critical mass of networking to fulfill the other functions of money (means of exchange).
The volatility also does not lend itself to being a store of value (another agreed upon the function of money). Consider that it is not unusual in recent days for the price of the Bitcoin to change by 2-3% a day. The US dollar, in contrast, rarely moves one percent day, and while the Bitcoin has appreciated by nearly 50% over the past month, the Dollar Index has fallen 2.3%.
Crypto-currencies appear ease to buy but are more difficult to liquidate. Reports suggest that even modest amounts take days to complete. It appears that a small part of the float actually trades, and the supply is limited. There are around 16.3 mln Bitcoins and 1,800 new ones a day.
The rising price for crypto-currencies and new interest do not alter our assessment. These are not currencies in any meaningful sense. To the extent that some retailers accept them is a bit of a novelty and marketing fluke. Some of the larger businesses, like Virgin, which previously indicated a willingness to accept Bitcoins as payment, reportedly convert such payments into hard currencies. It is a gimmick, not confirmation of its currency status.
Leaving aside the questions of the origin of money, money, under conditions of modernity, facilitates exchange and is used to pay taxes and settle debts. When crypto-currencies can be used to pay taxes and/or are generally accepted to retire debt, then their money status needs to be reviewed. Under present condition, none of the functions of money are met by crypto-currencies. They are hardly used as a means of payment. They are poor stores of value. They are not units of account.
People can still make and lose money trading them. They are part of the universe of paper assets, with their own niche rules governing supply. One can use some crypto-currencies to conceal transactions, but do not expect the taxman, the landlord or grocer to accept them anytime soon. They are currencies to the extent that contacts on Facebook are friends and the "grande" means medium size at Starbucks.
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What Is One Of The World's Largest Derivatives Exchanges Doing With Bitcoin?
JAN 10, 2017 @ 08:00 AM 12,935
by Laura Shin,
CME Group started more than a century ago in Chicago as a place where farmers could lock in prices for their crops. Today, its exchanges — CME, CBOT (Chicago Board of Trade), NYMEX (New York Mercantile Exchange) and COMEX (Chicago Mercantile Exchange) — cover every major asset class, such as metals and energy and U.S. Treasury bonds.
And now it’s making a foray into bitcoin. This past November, CME launched both a once-a-day bitcoin reference rate (BRR) and a bitcoin real-time index (BRTI) that updates every second.
And this coming year, it will launch a blockchain-based digital gold product, Royal Mint Gold, with The Royal Mint, a 1,000-year-old institution owned by Her Majesty’s Treasury in the United Kingdom.
Leading these efforts at CME is Sandra Ro, head of digitization initiatives. Ro, who came to CME five years ago, began her career managing foreign exchange and mergers and acquisition risks, and now directs FX research and product development for CME.
In the first episode of Season 2 of my podcast, Unchained ( Google Play, iTunes, Stitcher, TuneIn Radio), she talks about CME’s current and forthcoming work with cryptocurrencies and blockchain.
Laura Shin,
CONTRIBUTOR
Opinions expressed by Forbes Contributors are their own.
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These are the show notes for the Unchained podcast, sponsored by OnRamp. Listen to my whole interview with Sandra here or on Google Play, iTunes, Stitcher or TuneIn Radio.
CME Group started more than a century ago in Chicago as a place where farmers could lock in prices for their crops. Today, its exchanges — CME, CBOT (Chicago Board of Trade), NYMEX (New York Mercantile Exchange) and COMEX (Chicago Mercantile Exchange) — cover every major asset class, such as metals and energy and U.S. Treasury bonds.
And now it’s making a foray into bitcoin. This past November, CME launched both a once-a-day bitcoin reference rate (BRR) and a bitcoin real-time index (BRTI) that updates every second.
And this coming year, it will launch a blockchain-based digital gold product, Royal Mint Gold, with The Royal Mint, a 1,000-year-old institution owned by Her Majesty’s Treasury in the United Kingdom.
Leading these efforts at CME is Sandra Ro, head of digitization initiatives. Ro, who came to CME five years ago, began her career managing foreign exchange and mergers and acquisition risks, and now directs FX research and product development for CME.
In the first episode of Season 2 of my podcast, Unchained ( Google Play, iTunes, Stitcher, TuneIn Radio), she talks about CME’s current and forthcoming work with cryptocurrencies and blockchain.
Sandra Ro, executive director of digitization at CME Group
Ro was introduced to bitcoin by a friend in 2012. Upon reading the bitcoin white paper by anonymous creator Satoshi Nakamoto, “I was immediately taken by the revolutionary potential of a global payments network based on a completely decentralized, peer-to-peer, open source protocol,” she says. “For me, that represented a way to move money or value, faster, cheaper and more efficiently than the mediums that are available today.”
However, upon digging into it further, she realized that cryptocurrencies could represent a new asset class, as they had attributes different from other major asset classes today. Ro says that three main characteristics include the potential to invest in bitcoin as an invest-able product, the fact that it can be used as a medium for payment, though not one backed by any sovereign state; and its ability to be used to move around value, the way that Ripple’s XRP token (a cryptocurrency like bitcoin but on Ripple’s, not bitcoin’s, network) is used to move euros and dollars.
“You now have a network that is able to tokenize brand new assets or create token versions of physical world assets and move them around in a virtual world,” she says.
As for blockchain, she says one of its greatest applications in financial services will be enabling the sharing of information. “That’s where you could have information that’s been traditionally siloed, shared across, say, CME and our clearing member or ourselves and an end user client,” she says. “Everyone could have a golden copy of a specific set of information, transactions, records, and when changes are made to a specific set of records, that will be readily available to that subset of the network.”
CME decided to launch the BRR and BRTI because “this is exactly the sort of thing that CME does, which is to bring transparency and price discovery to markets,” says Ro. “This is what we’ve done for a wide range of asset classes for more than 100 years.”
BRR aggregates the trade flow of major bitcoin spot exchanges — Bitfinex, Bitstamp, Coinbase’s GDAX, ItBit, Kraken and OKCoin — during a specific calculation window, once a day. It’s a transparent reference rate calculated against the U.S. dollar at 4pm London time and should be particularly useful to those who do over-the-counter trades.
The Real Time Index, which is published once every second, calculates the global demand to buy and sell bitcoin, reflecting the current and fair price of Bitcoin in USD. It should appeal to anyone who trades bitcoin that needs a live price feed.
CME decided upon these products so that the nascent bitcoin market could have pricing products based upon a sound methodology, governance and oversight.
Ro says its Royal Mint Gold product, which will launch in mid-2017, “will change the way traders and investors will trade, execute and settle gold.”
The product’s digital trading platform will operate 24/7, the way Bitcoin trades. “Unlike the traditional physical spot cost model for investing in gold — the management fees and ongoing storage charges — RMGs will actually offer ownership of the underlying gold with the option for conversion to physical gold with zero storage costs,” says Ro. “That’s significant from an investment standpoint.
Tune into the full episode ( Google Play, iTunes, Stitcher, TuneIn Radio) to find out what Ro thinks bitcoin’s main usability problems are, which other cryptocurrencies have piqued her interest, and what other physical world assets she thinks could be traded by blockchain.
Plus, she reveals what obstacles and challenges she believes could doom cryptocurrencies and blockchain to failure, and what aspects of cryptocurrencies and blockchain she is most excited about.
These are the show notes for the Unchained podcast, sponsored by OnRamp. Listen to my whole interview with Sandra here or on Google Play, iTunes, Stitcher or TuneIn Radio.
I host the Unchained podcast ( Google Play, iHeartRadio, iTunes, Stitcher, TuneIn) & wrote The Millennial Game Plan. Disclosure: I own some bitcoin & ether.
http://www.forbes.com/sites/laurashin/2017/01/10/what-is-one-of-the-worlds-largest-derivatives-exchanges-doing-with-bitcoin/#2e5910436b1a
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