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
