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(B)(N) Bitcoins

July 13, 2017
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Figure 1: Bitcoin World

Drama. Bitcoins correlate computing power and the cost of it with purchasing power for other goods and services and, like gold or money, we can use it to buy food, cars, houses, services and so forth, and its worth derives from its scarcity (in part, please see below) and, secondly, the willingness of others to transact their business with us in bitcoins instead of dollars.

The willingness is not hard to come by because bitcoins are beyond the reach of any sovereign power and we can buy bitcoins at today’s market price in any currency and then leave the planet for the Bitcoin World.

And we need never look back if there are enough things to buy using only our bitcoins to buy them, including cash if we can sell our bitcoins to the bank, for example, or use our bitcoins to buy stocks which we can sell for cash when it suits us.

If you’re not salivating yet, you’re not an investor, but governments are also wondering about how they might tax increases and decreases in purchasing power without fixing their own currencies and bitcoins are an attractive consumer, investment, and black market currency in countries such as Zimbabwe, Venezuela, or Argentina, for example, which don’t actually have one.

XEQ XBT to USD

Figure 2: USD$2,377 at this moment

In practical terms, I can dial-up my wallet in Luxembourg at any time, check the balance in bitcoins, and see what I can buy today anywhere.

But if I wait ten minutes, I’m going to have the same number of bitcoins unless I’m a successful “miner” and have more (please see below) but I might not be able to buy anything if the “worth” of the bitcoin evaporates in ten minutes like a hyper-inflationary currency.

And we need to look at that today (and even now).

Miners

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Figure 3: Mining in Sichuan, China

Bitcoins are created on a worldwide chain of private but connected computers (the blockchain) which maintains a general ledger in the cloud-space; bitcoin transactions are nominally free to the user because the miners who operate these machines and post to the general ledger are paid in new bitcoins on a regulated schedule for regulated work (please see below because that model is inflationary just as printing money is) and the transactions are immediate and secure in so far as the technology can guarantee it and, after all, they have all of our eggs in one basket pending a cloud-heist.

For example, there’s a thing called the “51% Attack” in which the owners of 51% of the existing bitcoins (worth about $30 billion) collude to block the chain and force the weaker miners out of business which is a strategy similar to OPEC years ago or cornering the silver or copper markets more recently.

Bitcoin World

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Figure 4: More power, please.

The economics of bitcoins is the same as paper money issued by a sovereign state but, unlike the latter, there are well understood rules which make it better: there can be any number of miners and the current block of bitcoin transactions (payables and receivables which aren’t already on the global ledger) that is available to them needs to be validated, posted, and closed on the global ledger in order for the one miner (of thousands) who closed the block to earn 12.5 new bitcoins (out of treasury, so to speak, and like a discount on government overnight funds) before a new block can be put in front of them.

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Figure 5: Cooling

If the blocks are long, then the computational time begins to stretch-out and it becomes less profitable to complete the chain whereas if the blocks are short then they can be completed more quickly and the cost of completion in time and, therefore, its value in bitcoins per hour is moderated every 2016 blocks (about two weeks) to average at the current mandated rate of 12.5 bitcoins every ten minutes or 75 bitcoins per hour which are currently worth about $240,000 per hour at the market price and about 100× the cost of running a supercomputer to do it (and we’ve long since surpassed Moore’s Law and non-linear holographic quantum computing is coming).

As a consequence, if the demand for bitcoins in low, then the miners can’t earn more than 75 bitcoins per hour whereas if the demand is high and the blocks are long, the miners will need to put on more power or suffer a decline in their income because they can’t close six blocks per hour.

And the other side of that equation is that if the consumer demand for bitcoins is low, then so is their worth even if the blocks are small, which sounds a lot like any other currency except that the total number of bitcoins is limited to 21 million and there are 16 million in circulation now and the payout rate (12.5 bitcoins per new block) is mandated to decline by 50% after every 210,000 blocks (about four years) are posted.

But it’s not hard to change the tic-toc value of our money in bitcoins into something more substantial by calculating the risk price for bitcoins because their rational value is guaranteed by the same thing as anything else – the societal standards of risk aversion and bargaining practice – which is demonstrated for us by what the buyers are willing and able to pay for bitcoins pending their needs or anxiety for liquidity.

Exhibit 1 TG BTC USD

Exhibit 1: Bitcoin World – Risk Price Chart

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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