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iTrust Daily Insight

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11th September
Morning Edition 9.11.2019

Very Sad Anniversary: A Pause to Discuss Intrinsic Value of Currencies

Pre-market hours, September 11, 2019

  • Bitcoin:  $10,084 (Source: Coinmarketcap.com)
  • Digital currency price movement today: generally down 1.5%-4% (Coinmarketcap.com)
  • Number of digital currencies with market cap over $1 billion: 15 (Coinmarketcap.com)
  • Market Capitalization of Bitcoin: $180.8 billion (Coinmarketcap.com)
  • Gold “F” futures contract: $1498 (source: Yahoo Finance)
  • Copper “F” futures contract: 2.615 (Yahoo Finance)
  • Oil “F” futures contract: $57.50 (Yahoo Finance) (Iran hawk John Bolton leaving job)
  • DJIA: $26,959 (Yahoo Finance)
  • S&P 500: $2,984 (Yahoo Finance)
  • FTSE (main London stock index): 7,340 (Scottish court ruling re Brexit) (Yahoo Finance)
  • Shanghai stock index: 3,008 (Yahoo Finance)
  • US 10 year Treasury yield: 1.738% (up 28 basis points in four trading sessions; unchanged today) (WSJ.com)
  • US 2-10 yield difference: +0.075% (i.e., positively sloped — normal — yield curve) (WSJ.com)

Today the big news is:

1) it is the 18th anniversary of the terrorist attacks on the US; more on this below

2) the supreme civil court for Scotland said the recent machinations by the Prime Minister of the UK to suspend parliament were illegal.  The case will go to the supreme court for all of the UK.  Traders and investors are encouraged to understand this news. Some believe a “hard Brexit” on October 31 will have very deleterious effects on the UK economy.  Others, like me, believe the sun will very likely come up on November 1st and that there will have been much Ado About Nothing.

3) John Bolton is leaving his job.  John Bolton is a very strong anti-Iran ‘hawk”.  His departure has caused many to believe it is now more likely the US and Iran will try to strike a more conciliatory tone in their relations.

Very Sad Anniversary: a pause to discuss Intrinsic Value of currencies
The Intrinsic Value of Safety — on the 18th Anniversary of the 2001 Terror attacks

 Earlier this week, I happened to be present when iTrust’s CEO was asked, “What is the intrinsic value of Bitcoin?”  My impression of the purpose of the question was to demonstrate there is no intrinsic value in Bitcoin and therefore investments in Bitcoin are foolish.  The person asking the question is a highly respected individual and we were in a group setting of his friends, so; until we get a chance to have a one-on-one meeting with that individual, our best response, on that day, was just to smile and accept his ridicule.  

The best answer, though, is a question and then an answer: What is the intrinsic value of the British Pound or the Swiss Franc or the US Dollar or Gold or Silver?  Scarcity and wide acceptance as a store of value and a means of transactions give all these currencies and precious metals their intrinsic value.  Bitcoin and other Digital Currencies are similar.  To the extent people attribute value to them and they are seen to be a good alternate asset in which to store wealth and / or seen to be an asset whose changing value either has very low correlation or maybe even negative correlation to global stocks and bonds, then even institutional investors may come to invest in digital assets as a good store of value.  As we have noted earlier, the “jury is still out” on whether institutional investors will come into the asset class, but with three digital currencies (Bitcoin, Ethereum, XRP) all with market capitalization’s well over $10 billion, it seems to be the digital currency asset class is being seen at least by the people who own then as a legitimate store of wealth.

We do not know all the reasons why all the current holders of digital currencies are holding their currencies, but we suspect many holders own their digital currencies as a way to escape their domestic governments’ capital controls or as a way to diversify their wealth away from their domestic currencies (called fiat currencies).  Most governments can decide simply to start printing more money, which “debases” the value of their currencies, which causes inflation.  To escape such a potential trap, investors have long sought gold or “hard currencies” such as the US dollar or the Swiss Franc (the latter which is still backed by gold reserves).  However, many in communist countries or other countries with capital controls cannot easily acquire gold or hard currencies. As such, we believe, some such wise forward looking people are diversifying their wealth away from their domestic currencies and into digital currencies.

Eighteen years ago today, like many of our readers, I know exactly where I was when the planes hit the towers and the FAA had lost track of three other planes.  (One went down in Pennsylvania, one hit the Pentagon and one was just lost momentarily in the confusion of the moment.)  But is was a very scary morning and it was also a very scary few weeks.  For months after, many Americans were hyper-vigilant about the possibility of another attack.  And when the markets finally re-opened, values plummeted as markets assessed the risk that people would be afraid to fly and that global commerce would slow dramatically.

In such times of fear, “risk free” assets such as bonds (debt) issued by the US Treasury go up a lot in value.  Some investors sometimes see signs that fear is about to spike and they invest in assets which tend to hold their value in such times as other people clamor to buy safe assets.

We do not know the future of whether the markets for digital currencies is going to continue to thrive and grow.  However, for now, we can confidently state that the Intrinsic Value for digital currencies is derived from investors’ belief they are a good part of a portfolio of where to store wealth either as a hedge against inflation or as part of a larger portfolio or as a means to escape capital controls.  

Thus, on this day, on the anniversary of the attacks that were cause for the last time the US markets had a protracted time of closure, we confidently assert that Digital Currencies do have Intrinsic Value and that that value is assessed daily by the markets in ways similar to how gold and fiat currencies have Intrinsic Value.

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com

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