Post Libra Backlash, How SHOULD we Value Bitcoin?

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The last month has seen a lot of volatility in the price of Bitcoin, with many people ascribing both the rally over 13,000 and the fall to below 10,000 to the Libra story.  There has certainly been a lot of coverage, with headlines like these coinciding with the pullback from the recent highs: 

“Bitcoin Tumbling as Libra Attacks Intensify”

“Libra’s Scrutiny Pushed Bitcoin Price Lower, How Low Will it Go?”

“Shark Tank Celebrity Claims Facebook’s Libra Will Pummel Bitcoin to ‘Zero’”

Unfortunately, as with most of the coverage of Libra, these stories miss the most salient point:  Libra, not Bitcoin, is a direct challenge to current monetary policy.  Bitcoin is way too small for the US government to be afraid of and it is more useful for law enforcement than people realize.   Libra, on the other hand, represents a serious threat to the current method of foreign exchange management. As I wrote previously, Libra, if it realizes its potential, could result in immense power in the hands of a foreign domiciled foundation to impact the value of the dollar vs other currencies.

 

Before describing the Libra “threat” that has policy makers in a lather, let’s look at Bitcoin.   Bitcoin does represent an alternative to fiat currencies, but, then again, so does gold, which has a global market cap of less than 1/10th of global fiat money supply.   At such a ratio, the governments of the world essentially ignore it, except perhaps for some jawboning against its value when it rallies strongly. For a historical reference, at the height of the Great Depression, when gold was outlawed in the US, the ratio of its value to global currencies was dramatically higher (It was supposed to be 1:1, but we know that wasn’t the case).  In any case, at today’s value, few people in government worry about its competitive potential to the dollar.   

 

So, where does that leave Bitcoin?  With a market cap of less than 1/30th of gold, it would likely need to rise by a factor of 30 or so to even get on the radar of government monetary authorities.     In addition, the ability to trace bitcoin transactions on its blockchain makes bitcoin quite useful to the DEA, FBI and other law enforcement agencies working to combat global drug cartels, terrorist organizations, etc.   If bitcoin were banned, in addition to the likelihood of a more private alternative taking its place, cash would be used even more, and that is much harder to trace.

 

Libra, on the other hand, could be viewed as threat from inception.  It could potentially become the primary currency for transactions among Facebook’s 2 billion clients.   While that would take time, it would mean that the weightings of the “basket” of currencies backing Libra could become extremely significant.    To understand how this is likely to be viewed, it is structured similarly to the International Monetary Fund’s SDR (Special Drawing Right). The SDR is exclusively used by the IMF and has a total supply of roughly $200 billion, which, as it is similar to bitcoin, is not terribly important.  That said, the last time the basket comprising the SDR was adjusted, in 2015, there was a fair amount of political capital spent on the process by member governments, as that was the review that resulted in the inclusion of the Chinese Yuan.      

 

Now consider Libra.  If every Facebook client held only $1 in Libra, that would mean that the basket underlying the token would be 10 times the size of the SDR, making the relative weights of the currencies backing Libra a very contentious topic.  The determination of the currency basket, however, will be completely in the hands of a foundation whose members are private companies, and the domicile for the foundation, as currently proposed, will be in Switzerland.  Is it any wonder that the US government reacted as it did???   

 

In addition, Facebook itself has made itself a target of lawmakers by its penchant for treating its clients private data as its own property.  Add to that a series of charges of monopolistic practices and it was (is) easy to predict the furor.  

 

All of this said, the fact that Facebook chose to create a crypto currency at the center of their payment system has raised awareness of crypto in general, and much of that has spilled over into Bitcoin, with resulting price volatility.  It is worth noting that some have pointed to this volatility as a reason why Bitcoin could not be used as a currency, but such analysis misses the point: Bitcoin today is not ready for use as a currency, but that does not mean that it can’t grow into such a use.

 

Bitcoin’s price movements, at this point, need to be viewed in the context of its nascent level of global acceptance.  As I have often commented, Bitcoin trades as a long dated option on its acceptance by a critical mass of people around the world.  If Bitcoin achieves acceptance, it will ultimately represent a meaningful percentage of value of the world’s money supply, which is currently greater than $70 trillion.   It is not surprising, therefore, that Bitcoin is experiencing significant price movements as this early stage.  As pointed out earlier, for Bitcoin to become part of the mainstream view of currencies it would need to rise by over 30 times its current price, and arguably more before achieving a stable value.   If, however, Bitcoin does achieve this and becomes a global medium of exchange, its unalterable monetary policy should suppress volatility, at least against goods and services, if not against other currencies. Such a potential future is one reason why I am bullish on its chances, but DYOR and do not construe my opinions as a recommendation, as these opinions are offered for education value only.

 

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