Why we think Alan Greenspan is wrong about Bitcoin

Yesterday, December 4th 2013, Alan Greenspan (ex-Fed Reserve Chairman) told media that I guess Bitcoin is a bubble. The question is I do not understand where the backing of Bitcoin is coming from… Individuals with very high net worth and who have great reputations could create their own currency because people would be willing to exchange their checks with others probably at par. That is not the case with Bitcoin.

When he was asked whether Bitcoin could be the new Gold, Greenspan’s reply was No. Well, see that – it has to – it has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it. Maybe somebody else can. But if – you asked me is this a bubble in bitcoin. Yeah, it’s a bubble.

Bitcoin value going through the roof might give an impression of a bubble, but there is lot to know about Bitcoin before judging it:

  • No doubt you would keep seeing things like this - On December 1st 2013, a college student made more than $24,000 by waving a sign which held a visual representation of the Bitcoin logo and a QR Code for his Bitcoin Wallet address, asking his mom for money. People donated small amounts. But think about it, didn't you think the same chatting on internet, internet banking, mobile money transfer in early days. Remember, Mark Andreessen recently said Bitcoin feels like early days of internet. So let time pass, let things settle down, let Bitcoin exchanges and wallets bring in more security and less theft and I am optimistic its there for long term. Because its more efficient than any currencies we had before and directly solves core problems like international money transfers.
  • You could theoretically do everything with Bitcoins today that you could do with your currency online. Like a trip to several countries (not comfortably though) around the world like that couple did. You can also buy your own private island at Stock up on designer perfumes – Authentic Fragrances or avail Healthcare services in SFO– My Doctor Medical Group.
  • Publicly available ledger – You do not have to provide identifying information to participate in the Bitcoin network. It doesn’t need to know the sender and the receiver. But records of every Bitcoin transaction are stored permanently on the network’s shared public transaction register. You can access them here.
  • ZipZap is set to add 25k small shops and 240k locations in Russia in the second week of January 2014, which will hand out Bitcoin for Cash. There are ecommerce sites coming up in India that accept bitcoins.

And I can keep going on and on and on. But let me present a view from another author Brian at Lets Talk Payments who is tracking Bitcoin very closely…

The Gold Rush: This is the environment where Bitcoin could go to $1m'

To hear some of the most respected investment fund mangers say this is rather surprising. Hugh Hendry is rather legendary in the UK for how accurate he has been on understanding trend analysis. He has been on target for quite some time. But this public revelation is unique from someone of his esteemed background.

Here is the very interesting part. Hendry would be massively acquiring Bitcoins if there was a system that would allow his funds to buy, hold and trade Bitcoins was made to be easy and accurate for fund managers. Thus it does not take much thought where some innovation will take place. If investment funds join the Chinese then Hendry’s thesis is not only mathematically possible, it may be inevitable.

I predict that the next major jump in Bitcoin will be Investment funds and Hedge funds buying in to the raising tide. This will have an interesting effect on all other algorithm currency.

The values any human assigns to any object virtual or otherwise is in the minds of the people on both sides of the transaction. If these funds find an easy way to participate, and I know of at least 5 stealth companies that are addressing this issue, there are not real conceptual limits to the values the market may place in these algorithms.

Eclectica’s Hugh Hendry has said he would buy into online currency Bitcoin if it were feasible to do so within his funds.

Hendry has bought 3D printing stocks as a play on trend-driven, QE-fuelled equity markets, and said the rise in the valuation of Bitcoin amounts to the same thing.

All US-listed 3D printing stocks are trading on at least 50 times earnings, but Hendry said he has little concern over the sector’s sky-high valuations. 'We are in 3D printing stocks. I say to my team ‘don’t tell me the valuations, it is trending,' he said, speaking at a Harrington Cooperconference at which he also revealed he is no longer bearish.

The power of those trends is such that Hendry said he would own Bitcoin if it was accessible on a regular exchange. The value of the volatile online currency passed $1,000 per coin for the first time last week.

This is the environment where Bitcoin could go to $1m. There is no qualitative reason, but it is trending. If I could own Bitcoin, I would. If I own 3D printing, it is just the same thing, he said. Hendry added equity market fundamentals do not matter at a time when policy is misaligned, emphasizing instead the ‘feedback loops’ created by US quantitative easing.

There is no point arguing about the one-way causality we [as an industry] believe determines our processes. That is all about a belief this is rational. We want to believe markets go up because the economy is improving, because corporate cashflows are improving. But when you get monetary disturbances creating loops, it does not really matter.

Meanwhile, although the hedge fund manager remains concerned over the fate of China, despite his bullish turn, he acknowledged trend-driven investors could also play Chinese stocks effectively.

You could go long consumer discretionary, or long Chinese internet stocks, and hedge out the beta, Hendry said.