Bitcoin both is and is not a store of value

The weekend just gone has seen some extraordinary price moves and yet as I looked through most of the media early this morning there was no mention of it. For example I have just scanned the front page of the online Financial Times and there was not a peep. One mention on Bloomberg seems a little confused.

Bitcoin’s march toward respectability faces another hurdle as hedge-fund platforms reject the overtures of firms trading cryptocurrencies.

I didn’t realise it was marching towards respectability myself and if it was are hedge funds a benchmark? Apparently things are going badly.

It’s the latest blow for a digital currency that’s struggling to break into the financial mainstream.

The next bit I found particularly fascinating.

Joe Vittoria, CEO of the Mirabella platform, said he has doubts over bitcoin’s liquidity and where oversight might come from. There are also suggestions that the digital currency’s valuation should be below where it’s currently trading, he said.

You see that second sentence applies to so many markets right now for example many of the world’s bond markets have been pumped up by central bank buying. Others might be wondering is another example is the online food delivery company Just Eat in the UK which looks set to join the FTSE 100 as it has a larger market capitalisation than the supermarket chain Sainsburys.

For an article posted around 4 hours ago they seem rather behind the times.

While investors have embraced bitcoin, sending it soaring above $8,000.

Last night as I checked how financial markets were starting the week in the far east I noted this and put it on Twitter.

Bitcoin has been on another surge and is US$ 9396 now.

Of course it is soaring above $8000 technically but is behind events. Indeed this morning it has risen again as Reuters point out.

Bitcoin’s vertiginous ascent showed no signs of stopping on Monday, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone.

The digital currency has seen an eye-watering tenfold increase in its value since the start of the year, and has more than doubled in value since the beginning of October.

It BTC=BTSP surged 4.5 percent on the day on Monday to trade at $9,687 on the Luxembourg-based Bitstamp exchange.

There are different pricing platforms but on the one I look at it reached US $9771 earlier. Although as ever there is a fair bit of volatility as it is US $9606 as I type this sentence.

Jamie Dimon

The Chief Executive of JP Morgan hit the newswires back on the 12th of September.

If a JPMorgan trader began trading in bitcoin, he said, “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.” ( Bloomberg)

Considering the role of the banking sector in money laundering and financial crime this bit was somewhat breathtaking.

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”

This intervention can be seen two ways. The first is simply expressed by the fact that the price of Bitcoin has more than doubled since then. The second is ironically also that it has doubled as of course that is a building block in determining whether something is a bubble or not.

What has driven this surge?

Back on the 29th of December last year I pointed out the Chinese connection.

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops!

If we move onto this morning Reuters have been on the case.

By some estimates, China’s overall debt is now as much as three times the size of its economy……..Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

This has the government worried.

China’s central bank governor, Zhou Xiaochuan, made global headlines with a warning last month of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

In such a position Bitcoin investment may seem a lot more sensible than otherwise. If nothing else those caught in the clampdown on the shadow banking sector may think that it is worth a go and the funds involved are so large it would only take a relatively small amount to have a large impact.

It was also be a particular irony if some of the money the Bank of China pumped into the system last week found its way into Bitcoin.

ECB and the war on cash

This is something which must provide some support to Bitcoin which is simply fears over what plans central banks have for cash. This particularly applies to those who have been willing to dip into the icy world of negative interest-rates such as the European Central Bank and I am reminded of this from the 22nd of this month.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount of
deposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

Currently those with most to fear seem to be those with money in Italian banks although just to be clear as we stand now the deposit protection scheme up to 100,000 Euros still operates.

If we look forwards to the next recession it would appear that some central banks will arrive at it with interest-rates still negative so if they apply the usual play-book we will  then see interest-rates negative enough to mean that cash will be very attractive. I have postulated before than somewhere around -1.5% to 2% is the threshold. Then they will have to do something about cash. Perhaps they are on the case.


Other fears may come from the way that central banks have expanded balance sheets and thus narrow measures of the money supply. The Bank of Japan explicitly set out to double the monetary base.


There is a mixture of fear and greed in the price of Bitcoin. The fear comes from those wishing to escape domestic worries in China in particular as well as worries about the next moves of central banks. The greed simply comes from the rise in the price which has been more than ten-fold since I looked at it on December 29th last year. So if you have some well done although of course the real well done comes when you realise the profit. I note others making this point.

Bitcoin’s market cap just passed 150 billion USD. For those who do not know, that is how much money NEW bitcoin “investors” will have to spend, in order for the current bitcoin holders to get the money that they THINK they have.  ( @JorgeStolfi )

That statement is true of pretty much every price although of course some have backing via assets or demand. So often we see a marginal price used to calculate a total based on an average price that is not known. Also with a price that has varied between US $8992 and 9771 today alone I would suggest that this below must have more than a few investors screaming for financial stretcher bearers. From @JosephSkinner74

Long/Short Bitcoin swings with up to 100x Leverage at Bitmex! 💰💰 Enjoy a 10% Fee Discount! 👌🏽

What could go wrong?

This leaves us with the issue of how Bitcoin functions as a store of money which depends on time. Today’s volatility shows that over a 24 hour period it clearly fails and yet if we extend the time period so far at least it has worked rather well as one.

A royal wedding

Firstly congratulations to the hopefully – our royal family has form in this area – happy couple. But fans of the magnificent Yes Prime Minister will already be wondering what it is designed to distract us from and whether Theresa May has turned out to be more effective in this regard than Jim Hacker?!


35 thoughts on “Bitcoin both is and is not a store of value

      • Thank you very much for the great link, hunkydory69. I just read an excellent 2015 book by Edmonton financial advisor Hilliard Macbeth, “When the Bubble Bursts: Surviving the Canadian Real Estate Crash”. He speculates that the 1634-37 boom and bust in tulip bulb prices was never called a bubble because “bulb bubble” is hard to say. On p.24 he writes that: “Most people, wealthy and poor alike, became besotted with the idea of owning and trading tulip bulbs for financial gain.” From your link, it would seem, this was not the case.
        I already mentioned this to Shaun, but not to you. A former Chief Statistician of Statistics Canada was asked to review a paper I co-authored that was finally published by the C.D.Howe Institute as “Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator”. He saw no merit in adopting an acquisitions approach to owner-occupied housing in a target inflation indicator of a central bank as a protection against housing bubbles, resorting to reductio ad absurdum by bringing up tulipmania in the Netherlands. It was a feeble argument, since flowers, including tulip bulbs, are in scope in the Canadian CPI. I was just asking that the same acquisitions approach be used for owner-occupied housing as is already used for tulip bulbs. He really should have explained why he thought a macroeconomic price index should adopt an acquisitions approach for tulip bulbs and almost everything else, but not for owner-occupied housing. He never did.

        • Hi Andrew

          You made me wonder about tulip bulbs and the UK CPI and RPI but whilst they are in scope we do not get precision.

          “Selected varieties of plants, cut flowers, seeds and including flowers purchased over the internet ”

          Mind you maybe it was wise not to specify tulip bulbs!

          • Thank you, Shaun. Natural Christmas trees would be part of that plants category. As you know, I am on a crusade to have Christmas trees priced in the UK consumer price indices, as part of a seasonally weighted series for gardens, plants and flowers. Christmas trees are already a priced item in the UK Agricultural Price Index (API).

  1. Frankly Shaun

    “..investor compensation schemes should be replaced by limited discretionary exemptions… ”

    should send a shiver up everyone’s spine , BIRP policy and as we see “war on cash” just leads me to state that the BANKS are still bust

    and coming bail -in will stuff everyone , well us plebs mostly…

    Don’t they realize this sort of thing starts civil wars and riots ?

    the India experiment or debacle , should have warned them…. but I just don’t think the CB heads live on the same planet as the people .


    • Hopefully, Forbin, its Germany that may prove to be the problem for their scheme. Like you, they like currencies that can scratch the windows. Given half a chance Macron would sell the French down the river. ( hope that expression doesn’t have any racist connotations…. ).

  2. Off topic, I know, but I wonder whether the energy usage of bitcoin will see its demise (bear with me, as it sounds so odd). If you google bitcoin electricity usage, you will see that it uses more electricity than many countries and this is expected to ramp up over the next few years, for reasons that I am too old to understand.
    On topic, I think that the Central Banks have brought bitcoin upon themselves. When you invent money out of thin air (aka QE) and have negative interest rates and start talking about removing cash from the system, it is only human nature to try to seek some sort of alternative.

    • I would appreciate if someone could explain this energy usage and also what bitcoin mining is. The only thing I am sure about is that you don’t dig the damn things up! Beyond that my knowledge is scant.

      • Bitcoins are created out of thin air using a very large amount of computing power to solve a mathematical problem – hence the considerable use of electrical energy. the pound in your bank account is created in much the same way but with much less energy cost. I am not sure that I can see a difference between the pound in your bank account and a bitcoin or, come to that, a cowrie shell.

        The interesting question is what happens when bitcoin mining becomes far, far, faster and easier when we have quantum computing? Probably a collapse in value as we have with – say – the currency of Venezuela. Nothing safe about any fiat money, which is what bitcoin is.

        • ‘Bitcoins are created out of thin air using a large amount of computing power to solve a mathematical problem’ Que? Sounds like something out of a Harry Potter book. I REALLY don’t understand bitcoins!!

        • A very interesting point but, as I understand it (very badly, probably), the various computers compete in some manner and (so far) extra speed has led to increased energy usage as a result.
          On the current extrapolation of growth (nonsense, I expect), it will apparently use all the electricity on the world by the end of 2020.
          That would really be a pointless way to end civilisation!!

          • Hi James

            It would be something out of the Hitchhikers guide to the galaxy if it did happen wouldn’t it? Somewhere the spirit of Douglas Adams is wondering why it didn’t think of that….

        • the pound in your pocket starts out being created when a real person or company promises to provide real goods and services in the future. If that person makes a promise to his bank to provide goods and services to the value of £1 (plus interest) in the future, his bank will credit his account with £1 now, which he may spend immediately. His promise is embodied in the loan agreement with his bank that he has signed. The £1 in his account has been simply created for him by his bank.

          Once he has transferred the £1 to somebody else’s account, by spending it, he then has to provide the real goods and services that he has committed to provide, in order to obtain a £1, plus interest, back again (maybe the one he caused to be created, most likely one created by someone else making a similar promise). That £1, plus interest, once obtained, is evidence that he has fulfilled his promise and by presenting it to his bank, he can discharge his obligation to them. Both the loan agreement and the £s he used to discharge the agreement are destroyed.

          There is a huge difference, then, between a BTC and the pound in your account. The £ was created by someone promising to provide goods and services to the value of £1 plus interest. The holder of the £1 may view it as a token that gives him the right to obtain goods and services to the value of £1 plus interest at some point in the future. When BTC are created, nobody promises to provide anything at all in order to obtain it back again at some point in the future in order to destroy it.

          • I’d take issue with this. Most GBP starts life as issued against housing, and no work is done it’s simply a speculative bubble. Workers are then forced to pledge ever more of their share of labour for the same pile of bricks. In this way bankers *appropriate* fiat money by issuing at a rate ahead of wealth production, devaluing each GBP and thereby accruing a real claim over future production.

            Here is what I think the main difference is between pyramid scheme bitcoin and pyramid scheme GBP: the state has a monopoly on violence and taxes must be paid in GBP. This is what gives fiat money value. Hold it. Someone will want it because if they cannot pay their taxes they are going to jail.

            Not the case with bitcoin. Settlement of taxes is what confers value.

  3. I was working with several welders last week who were buying hundreds of dollars worth on a lunch break.A colleague asked them to explain bitcoin to him … they couldn’t.

    But when central banks cheered on by seemingly all govts are doing there best to destroy their currencies it must stand a small chance of long term survival

  4. So, total Bitcoins are now worth $150 Billion from zero a short time ago!
    Presumably this is the sum so far spent by ‘investors’ buying into this market? But who holds all this (apparently useless) fiat money which has been used to mine these Bitcoins?
    However, if the value is pure speculation, presumably in order to sell a bitcoin you first have to find a willing buyer at that higher price?
    Surely with nothing backing up the value, other than a succession of greater fools, then it is bound to collapse?
    Could someone please enlighten me??

    • I could not agree more as to your thesis, but maybe (and I mean maybe) today’s teenagers and young adults are coming into and creating a world of blurred electronic and physical reality.
      Using cash to pay for things already seems to be age-related, with twenty year olds using cards for things only costing a couple of pounds. For every country in the Eurozone, national currencies which were used two decades ago don’t exist any more. Perhaps people will just see Bitcoin etc as another part of their lives which has become electronic and convenient, rather like downloading music rather than buying CDs.

    • the amount of money that has been ‘invested’ in BTC is considerably less than $150bn. That figure is simply the number of BTC in existence multiplied by the price that a single BTC last traded at. The vast majority of those BTC would have been purchased for a much, much lower price.

  5. Bitcoin only exists in cyberspace therefore it does not exist,it is worth $10000 just like the fool who paid $450m for a canvas with some paint on it recently,they are buying because they think a greater fool will take it off their hands for more.
    Bitcoin is the emporers new clothes and they don’t exist.
    How could you trade with this it changes value similar to that you would find in a hyperinflation scenario only in this case the buyer or seller would be taking a similar risk it could go massively in either direction.
    Bitcoin just another illusion in a fake world….it is dark outside do you think Vladimir Putin is responsible?

  6. Blockchain is the software technology behind Bitcoin, and now seems to be prepared for use in all sorts of transactions. I think its unique factor is its ability to allow communication of information through a group without intermediaries and seems to be very difficult to change once the information is transferred. I think the energy use is about the scale of computing power required between numerous computers to change the blockchain in a way acceptable to all involved in the information exchange. If there is a large energy requirement for just Bitcoin, imagine the requirements if blockchain is used for many other transactions.
    It seems to me to be an immense hammer to crack a very small nut. The nut ( I think) is the ability to confidently exchange something among a peer group without identifying the members of the group and ( this is the bit that seems to make it ‘worthwhile’) without using an intermediary like a ‘formal exchange’. So for instance blockchain is now being used to develop oil trading without an exchange, the result is hoped to be instantaneous price discovery for any player without intermediaries.
    I admit to being routed in an analog world. It seems to me to be something that is being done because ‘we can’, rather than because we need to, or even particularly want to. But its driven by the mindset of silicon valley and we all will learn to love it, won’t we?
    I cam across a very simple Youtube video on blockchain.

    • Hi Jim

      Thanks for your explanation and the video which gave me more of a clue as to why Bitcoin is using up so much power. What with the push for electric cars there is not going to be much left for other uses is there?

      • Hi Shaun
        No is the simple answer. Electricity demand would increase by 50%, notwithstanding rather fanciful ‘smart charging’ ideas. Someone estimated that would require the whole of Scotland to be covered by windmills. Very poor utilisers of land are our renewables ( as well as all their other failings).
        However perhaps the cunning plan is to stop us using cars, or at least owning them. Like younger people don’t own CDs anymore they just stream music when they want it, so apply the same mindset to cars. And this leads to self-drive cars that just pick you up when required. A moral problem has already emerged regarding self-drive, software programmed cars. Who ( or what?) decides which of Assimov’s 3 laws operates when a collision is about to happen? Who would get in one knowing that a piece of software could decide whether you make it to the other end of your journey?
        I am often glad that its unlikely I will be around to ‘enjoy’ this BNW.

  7. Shaun
    I am beginning to think that the BBC reads this blog – they had a piece on bitcoin at 630 yesterday saying what a disaster it will be

  8. Been reading your blog since 2011 and this is my first post! Interested to get your thoughts on a recent paper by the Swedish Riksbank on its e-Krona project. They are concerned by the reduction in the use of cash and are investigating how to reduce the risk of there no longer being a “legal tender” in circulation if they go cashless / the over reliance on privately owned payments systems…

    • Hi Gavin and welcome to the comments section. I am a bit late to welcome you to the site!

      It is a fascinating development isn’t it? I think we can all understand the driving forces as for example a few years ago it became normal to pay at the pub by card rather than by cash.

      However I think that the Riksbank is secretly pleased because should it take interest-rates even further negative then there is less cash ( suddenly 0% is attractive) to act as an escape valve and weaken the policy.

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