2017-08-22

Explaining Swings in Bitcoin’s Price, Cryptocurrency Primer (video)

Explaining the Swings in Bitcoin’s Price I Fortune

Video published Aug 17, 2017, by Fortune.com: Bitcoin has been on a tear since the start of 2017. But according to Fortune’s Jen Wieczner, the cryptocurrency is due for a downturn. Supply and Demand, Hype and Scarcity.

A Primer on Cryptocurrency

Video above published Aug 17, 2017, by L2inc.com: By popular demand, Scott Galloway and Aswath Damodaran discuss topics in cryptocurrency, from why it's impossible to value, to why people choose Bitcoin over gold.

0:01  The number one requested topic among users of Winners and Losers is:
0:07  cryptocurrencies.
0:08  Aswath, tell us more about cryptocurrencies and how you price and/or value them.
0:13  The first thing is you cannot value currency. You can price them.
0:16  Real quick - difference between value and pricing.
0:21  The difference between value and pricing is value you try to estimate what you get as cashflow.
0:25  So when you value a business you project out what the business will generate as cash flow.
0:28  So you can value cash flow generating assets.
0:31  But gold, currencies, Bitcoin are not cash flow generating assets.
0:35  You ask me what the value of gold is.
0:37  I don't know but I can price gold and we price currencies relative to each other.
0:41  And that's, I think, the opening to think about cryptocurrencies and why they've risen so much over the last few years.
0:48  If you think about gold,
0:49  let's think about gold - the alternative to paper currencies for hundreds of years.
0:55  When people lost trust in paper currency because all you have is a piece of paper,
1:00  it's all based on trust.
1:02  Doesn't every fiat currency eventually collapse throughout history
1:05  Fiat currencies vary widely.
1:08  In France if you gave me a Venezuelan Bolivar I'm probably better off just using it as toilet paper than trying to spend it.
1:12  So when we talk about fiat currencies not all fiats are equally trustworthy.
1:17  So when we lose trust in currencies, we go elsewhere.
1:21  For the longest time the place we went was gold.
1:24  I think what's changed is for younger people the place they go when they don't trust paper currencies is now cryptocurrency.
1:31  But help me - I understand, theoretically as an old guy
1:36  you go to gold and it can be used for fillings or jewelry.
1:39  What is the underlying guarantee and limit of a cryptocurrency?
1:44  Let's face it, the people who bought gold didn't want to use it,
1:48  they wanted to sell it to somebody else at a higher price.
1:50  It's a pure pricing game. The reason people have historically bought gold is not because they think gold has a physical use
1:57  but because they think it'll have enough of a pricing attached to it that they can sell it to somebody at a higher price.
2:03  So it's the illusion that it's become a store of value.
2:05  Exactly.
2:06  Okay so help me price Bitcoin and Ethereum.
2:10  I think the key to think about is if you have enough of the population losing trust
2:15  because we lost trust in governments and central banks and who can blame people for losing trust in them
2:20  and if you're 35, 30 or 25, you have no interest in pricing gold and playing the gold game,
2:27  you actually think you have an inside track on playing the pricing game with Bitcoin
2:32  and one of the things that always strikes me when I talk to people in this space
2:37  who are cryptocurrency fanatics is they think they know more than they do.
2:41  They think they understand everything about block chains and who
2:44  owns what and where the pricing is going and that's always a piece of the pricing game:
2:48  people who are overconfident about the capacity to forecast price.
2:53  We don't need very many people for the pricing to kind of do what it's done
2:56  which is if four or five percent of the population has lost trust and is paranoid.
3:00  So Trump is the best thing to happen for cryptocurrencies.
3:05  Collectively, globally. You could argue that governments across the globe...
3:12  It's I think a problem.
3:13  So you think in any sort of crisis, more missile tests coming out of North Korea, cryptocurrencies similar to gold go up, people stick cryptocurrencies under the mattress.
3:22  In fact one of the most interesting things about this bull market is it's a very differentiated market.
3:27  Half the market thinks that everything is cheap,
3:30  the other half thinks everything is increased.
3:33  I've never seen a divide as large as I have in the market that we're in
3:36  which is between the Bulls and the Bears.
3:38  There's almost no connecting point and it's very political. It's more political than economic.
3:44  Tell me who you voted for in the last election, I can tell you whether you're bullish or bearish.
3:48  That's how much of a correlation there is between politics and what you think about the market now.
3:53  which is not a healthy place to be.
3:56  So I think that even though markets have been going up,
3:59  the subset of people who think that markets are overpriced is a fairly large one and it's very intense
4:04  and they believe this for three, four, five years and that's the group that's increasingly leaving stocks
4:11  and they're saying well I can't go to bonds, I'm getting 2%,
4:14  what am I going to put my money in where I can make some money in the future?
4:18  A 25 year old has a hundred bucks. Mock portfolio - just create an asset allocation for me and a 55 year old.
4:25  The tool is very simple: you want to spread your bets.
4:27  Time is your ally.
4:29  So the 25 year old, don't try to time the market, don't tell me the markets you know, too high, too low, it doesn't matter.
4:36  You've got 40 years to play this game, just take your money, make your asset allocation.
4:42  So you want a portfolio that looks like this.
4:45  If I took the market cap of every traded asset in the world put in a pie chart
4:48  I want the pie chart of your portfolio to look very much like that.
4:53  Diversification and low cost.
4:55  Exactly.
4:55  55 year old.
4:57  55 year old you gotta worry more about this,
4:59  especially about the fact that if you have a shock to the market you might not be able to make that money back before you need it for retirement.
5:06  So 55 you know, the first question I would ask is hey do you still have an income?
5:11  If you're already retired at 55 the kind of advice I'm going to give you is going to be very different
5:15  than you give a 55 year old with an income stream still coming from working
5:18  because let's face it, a lot of 55 year olds have 15 years of work life still left in them.
5:24  So I think that you've got to get more cautious,
5:27  but the old know once you get to be 65 everything's got to be in cash.
5:31  You got to rethink because a lot of 65 year olds are still making enough of an income
5:34  that they don't need to touch their portfolios yet.
5:37  So it really is a question of do you depend on your portfolio for your cash needs
5:41  and if the answer is yes
5:42  then I'm going to increasingly shift your weight from any kind of risky asset class
5:46  because there is no safe place in the world where you can put your money in, make an 8% return and still draw cash every year
5:53  and not worry about your principal being affected.
5:55  Thanks very much, Professor Aswath Damodaran.
5:58  And more information at Damodaran.com.

See also: The ABCs of BITCOIN .... James Altucher | LinkedIn.com

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