I was reminded of this question earlier in the week when Jamie Dimon, the CEO of JP Morgan Chase, announced that the value of bitcoin is going to zero. Investors take notice when the CEO of the largest bank in the United States makes a prediction concerning the future value of an asset.
Bitcoin / USD – Weekly 5 year Chart
Readers of this blog recognize our belief in the futility of predicting the future. Sun Tzu said it best nearly 2,500 years ago: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”
Markets are complicated ecosystems made up of numerous people in differing roles. If investing was a physical science, the perfect equation for success would have been discovered decades ago. Instead, markets are made up of emotional beings with beliefs, biases and desires participating in their own self-interest. The flight or fight response that kept our species alive in the wilderness is often counterproductive in the lifelong process of investing and building wealth. Our emotional biases act as pitfalls to successful investing and exacerbate market forces.
Financial markets bring together investors with differing perspectives to a venue where they can act on those views in pursuit of financial gain. As long as there is a willing buyer and seller on either side of an asset, you have a market. The concept of value comes down to what someone is willing to pay for that asset at any given moment in time. Up until 1971, the U.S. Dollar was convertible into gold at a rate of $35 per ounce under the Bretton Woods agreements. On August 15, 1971, President Nixon ended international convertibility of the U.S. Dollar into gold, thereby revoking the gold standard. Known as one of the measures of the “Nixon Shock”, the U.S. Dollar was rendered a fiat currency. By October 1976, the U.S. Government changed the definition of the Dollar, and all references to gold were removed.
The value of the U.S. Dollar lies in the belief of those who transact with it. Much like bitcoin, its value is backed by no physical asset and will change over time based upon the perception of the long-term health of the US economy and government. With the U.S. money supply having increased by nearly 10-fold in the last decade and 400% in the last two years, it’s little wonder why assets like commodities, stocks, bitcoin and real estate have risen sharply.
U.S. Money Supply M1 (in Billions) – Weekly 5 year Chart
Bitcoin was created by Natoshi Sakamoto, a pseudonym for the individual or group who created bitcoin, likely in response to the Global Financial Crisis as an alternative to central bank-controlled fiat currencies. The asset is programmed so there will only ever be 21 million bitcoins, unlike fiat currencies which have no such limitations. While bitcoin is highly speculative and not for every investor, it has the potential to act as a hedge against the unprecedented global central bank stimulus that began in 2008 and has only accelerated since. If I were Jamie Dimon, I would be more concerned about the trajectory of today’s fiat currencies than with bitcoin going to zero.