“The stock market is filled with individuals who know the price of everything but the value of nothing.”
Bitcoin can’t care less about its vertical positioning on a chart. But as emotional monkeys with too much brains for our own good, we become attached to the price movements. Up and down, back and forth, oscillating like many naturally occurring phenomena, price is supposed to be an equilibrium.
As we have become accustomed to using stocks, real estate and other assets to store value, we have begun to demand that they must rise in price. When we begin to use stocks to store value, there is an attachment to maintaining the price of a stock. Imagine that an investor owns a large amount of shares. That amount is acquired at a certain price, and they now have a vested interest in keeping the price of that security above the purchase price, regardless of their belief in the company itself.
Discovery of real prices is scary
Shares have not been allowed to discover price legitimately. Many factors make this true. In this article, I focus on the underlying psychological mechanisms that influence people to hold on to their certainties know they don’t believe in it. This is a roundabout way to say that pricing is hindered.
A real store of value is necessary for an economy. Without that capital, capital begins to be allocated to unnecessary pools – real estate, the stock market, failing companies. These pools then have self-significant investors protecting their nominal value. Again, the price discovery of hard money unleashed will be scary. The reason investors protect the price of these assets is for the storage of wealth – but Bitcoin obsolete these forms of storage of wealth, highlighting their shortcomings.
While hedge fund managers and desktop traders enthusiastically welcome volatility, many investors still liken it to the devil. In their view, volatility is the potential for loss. However, broadening one’s view of the market can change the way one looks at volatility. By imagining time on a scale beyond that of market cycles and economic quarters, we can see that the pricing of a store of value is a long-term operation.
Gold has always been worth gold, but the dollar-denominated value has changed drastically. Anyone who lived in the past today would be amazed at the “price” of gold.
For hard money, the price does not reflect this its worth (like stocks) but a measure of the the value of the currency against the hard money.
How bloated is your currency? You can find out by looking at the price of bitcoin in that currency. It can be a difficult concept to wrap the mind around. Traditionally we say that an object (such as a car) is worth $ X amount. “Worth”, which means that this is the value we will apply to this object. “Value”, meaning the amount of resources (time) that we are willing to give up for another good or service. In economics (simplified) it is a measure of benefit. But with Bitcoin, the $ X amount is a measure of the value of the currency denominator, USD. It can be the euro or the yen. We use hard money to convert our traditional understanding of value; instead of the fiat currency representing the perceived value, the hard money does.
Again, it’s tricky to wrap the mind around. Let’s take bitcoin for $ 35,000. Rather than assuming that Bitcoin (the protocol) has a value of $ 35,000, we see a valuation of $ 35,000 with one bitcoin.
Separate the Bitcoin protocol and the Bitcoin currency
When a stock is valued, it is the “price” of the stock supposed to be an appreciation of the company in general. Now the number associated with the price may depend on the issuance of shares and things like stock split. But this is the general concept.
With Bitcoin, we have to separate the valuation from other hard currencies via bitcoin / currency pairs and the valuation from the Bitcoin protocol. Some bitcoin / currency pairs have hit record highs – literally, in these places in the world bitcoin is more “worth”. But the total market capitalization in dollars is still fairly easy to express. We can easily do the other fiats’ trades in USD and find the total wealth stored in Bitcoin. This is the valuation of the Bitcoin protocol here.
As pointless as it may sound, reversing your perception of Bitcoin valuation makes all the difference.
Returning to the first few paragraphs, I have described how investors traditionally protect the face value of their equity storage assets. This is partly because they do not have real hard money to store value in, and as such must create pools of wealth that are atypical for storing value over time. However, when we turn our understanding of Bitcoin valuation around, we can see an end to this.
Assets measured against bitcoins will undergo straight price development. There are no psychological games here – because everyone relies on Bitcoin to store their value, they can now properly evaluate unsaved value assets. Without an incentive to maintain the value of stocks, real estate, and other bad wealth-storing choices, the world can be re-evaluated to the right prices.
Traditionally, people value assets based on the benefits they provide – either cash flow, capital growth, or some other benefit found through economic analysis. But the value of things in bitcoin is different. When we start to value things in bitcoin we can find their legitimate value as bitcoin is the most legitimately valued money. There are no manipulations of offer or redemption, or quantitative easing or laws protecting value – only direct valuation.
What we are unlocking here is a medium on which people can draw their ideas for benefit. Never before have we had an unfettered monetary paradigm that allows us to communicate without fear of human emotions, greed, or idealism. The importance of this type of money cannot be underestimated – valuation in money is the cornerstone on which we build our ideas about the world and what has value in it.
Money is a medium Like it speech. Just as speech allows us to express thoughts, money allows us to express our idea of value. There have been periods in history when money has been able to flourish independently of influence. These periods are just precursors to the Bitcoin era. What we will experience is simply unpredictable. But the idea of Bitcoin itself, free money, sovereign money, has been unleashed into the world. And coincidentally, it came about along with the Internet, the interconnected paradigm shift that has made instant communication around the world accessible to everyone.
Bitcoin’s unstoppable nature, the protocol, perhaps lends itself very well to bitcoin, the currency’s unstoppable soaring price. Time will tell.
This is a guest post from Casey. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.