Gold, Bitcoin, And Metcalfe’s Law

Tyler Durden's picture

Frank Holmes, CEO of US Global Investors, reported back from the LBMA/LPPM Precious Metals that took place in Barcelona last week. Holmes gave the key note address on Day 2 “Quant Investing: From Gold to Cryptocurrencies.”

According to a thrilled Holmes, his presentation was voted the best – no doubt helped by the topical subject matter – and he was the recipient of an ounce of gold. He went on to relate the views of the conference attendees regarding the relative performance of gold and cryptos should there be (heaven forbid but sadly topical) a conflict involving nuclear weapons.

“Speaking of gold and cryptocurrencies, the LBMA conducted several interesting polls on which of the two assets would benefit the most in certain scenarios. In one such poll, attendees overwhelmingly said the gold price would skyrocket in the event of a conflict involving nuclear weapons. Bitcoin, meanwhile, would plummet, according to participants—which makes some sense. As I pointed out before, trading bitcoin and other cryptos is dependent on electricity and WiFi, both of which could easily be knocked out by a nuclear strike. Gold, however, would still be available to convert into cash.”

Unsurprisngly, the conference attendees gold voted gold as the superior store of value – a view which echoed the recent Goldman Sachs primer on precious metals. Goldman asked whether cryptos are the new gold and concluded “We think not, gold wins out over cryptocurrencies in a majority of the key characteristics of money…(precious metals) are still the best long-term store of value out of the known elements.

However, there is obviously a difference between a superior store of value and shorter-term upside…and Holmes is far from bearish on bitcoin and other virtual currencies.

One of his observations is, alas, only too relevant for many gold investors that “Because they’re decentralized and therefore less prone to manipulation by governments and banks - unlike paper money and even gold - I think they could also have a place in portfolios. He goes on to aim a couple of blows on Bitcoin’s biggest recent detractors “Even those who criticize cryptocurrencies the loudest seem to agree. JPMorgan Chase CEO Jaime Dimon, if you remember, called bitcoin ‘stupid’ and a ‘fraud,’ and yet his firm is a member of the pro-blockchain Enterprise Ethereum Alliance (EEA). Russian president Vladimir Putin publicly said cryptocurrencies had ‘serious risks,’ and yet he just called for the development of a new digital currency, the ‘cryptoruble,’ which will be used as legal tender throughout the federation.”

It was Holmes observation on Bitcoin and Metcalfe’s Law that we particularly enjoyed…

Most people are probably (at least vaguely) familiar with Metcalfe’s Law on the economics of network effects. Wikipedia notes “Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). First formulated in this form by George Gilder in 1993, and attributed to Robert Metcalfe in regard to Ethernet, Metcalfe's law was originally presented, c. 1980, not in terms of users, but rather of ‘compatible communicating devices’ (for example, fax machines, telephones, etc.). Only later with the globalization of the Internet did this law carry over to users and networks as its original intent was to describe Ethernet purchases and connections.[The law is also very much related to economics and business management, especially with competitive companies looking to merge with one another.”

This was Holmes’ take:

“Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes.

 

Robert Metcalfe, distinguished electrical engineer, was speaking specifically about Ethernet, but it also applies to cryptos. Bitcoin might look like a bubble on a simple price chart, but when we place it on a logarithmic scale, we see that a peak has not been reached yet.

Holmes is not the first to link Bitcoin with Metcalfe’s Law. For example, the Journal of Electronic Commerce Research published a study earlier this year. As TrustNodes reported

“The study measured the value of the network based on the price of relevant digital currencies and compared it to the number of unique addresses that engage in transactions on the network each day, according to the abstract. The results show that ‘the networks were fairly well modeled by Metcalfe’s Law, which identifies the value of a network as proportional to the square of the number of its nodes, or end users,’ the study says…The application of Metcalfe’s law towards transaction numbers specifically has long been suggested, with a fairly strong correlation between the price of digital currencies and their transaction numbers observed over many years. Ethereum, for example, was barely handling 20,000 transactions at the beginning of the year. Now it manages nearly 300,000 a day. Likewise, price has risen some 10x during the same time period. The reason for this relationship is fairly intuitive. As more projects build on ethereum, more users find it useful as there are more things they can do with it, which in turn makes ethereum more useful for new projects as it allows them to tap into more users. The same can be said about merchants. As more of them accept eth for payments, more think eth can be useful for everyday things, which means more merchants want to accept it to tap into the increased number of users, so forming a virtuous cycle. Metcalfe’s law of network effects can be applied to developers too, or investors, including speculators. The more that use it, the more useful it becomes, with the reverse applying too. The fewer individuals that use it or the more that stop using it, the less useful it becomes.”

If that was his killer chart, however, this was perhaps his killer comment.

Bitcoin adoption could multiply the more people become aware of how much of their wealth is controlled by governments and the big banks."

This was among the hallway chatter I overheard at the Precious Metals Conference, with one person commenting that what’s said in private during International Monetary Fund (IMF) meetings is far more important than what’s said officially. We have a similar view of the G20, whose mission was once to keep global trade strong. Since at least 2008, though, the G20 has been all about synchronized taxation to grow not the economy but the role government plays in our lives. Trading virtual currencies is one significant way to get around that.

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adolphz's picture

Loving this new bit coin 

 

I am taking bets on how long it takes Shepwave to begin intensive fibonacci analysis bit coin like they do for stocks and gold. Could only imagine  getting that kind of precision  on bit coin. 

BendTheFed's picture

Those are dicks you’re taking not bets.

Billy the Poet's picture

Next up: How do Moore's Law and Gresham's Law impact bitcoin and is it a Giffen good?

tmosley's picture

Moore's Law does not impact bitcoin because the algorithm scales the difficulty of the hash problems as more hashing power enters the network. Gresham's Law will hold sway until bitcoin has reached full adoption or until a given fiat currency enters hyperinflation (a la Venezuela). Bitcoin is not a Giffen good because all coins are always consumed at all times. 

Billy the Poet's picture

Bitcoin is not a Giffen good because all coins are always consumed at all times.

 

Explain.

tmosley's picture

Honestly, "consume" is a misnomer here, as money is not consumed. Supply is fixed, so demand is the only variable in the price. When bitcoin was first getting started, a guy bought a pizza for 10,000 bitcoins. People don't throw around tens of thousands of bitcoins for much of anything today. 

What a Giffen good really is is something like Grey Goose vodka, the demand for which went up considerably when they increased the price from bottom shelf to top shelf prices. Items for conspicuous consumption must be expensive. Gold fits to an extent because of its use in jewelry, but really it isn't, not in the way that has been claimed. The price goes up, and people can't afford as much, so they don't buy as much.

Billy the Poet's picture

When bitcoin was first getting started, a guy bought a pizza for 10,000 bitcoins.

I hope they threw in some breadsticks or a two liter with that.

 

Giffen good

 

In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics.

 

If the number of bitcoins is fixed or limited and widespread adoption occurs then the price must necessarily rise.  The combination of a rising price and increased buying would necessarily make bitcoin a Giffen good.

tmosley's picture

>The combination of a rising price and increased buying would necessarily make bitcoin a Giffen good.

But they aren't buying more of it. They are just paying more. Look at the volume in terms of bitcoins. It's plummeting. In mid 2015 it was around 10,000 BTC traded per day. Today it is more like 400,000.

Edit: Retard alert. 400,000 is more than 10,000. Looks like you are right.

Billy the Poet's picture

I've enjoyed having an actual conversation with you. Now I'm going to put some hot sausages on the stove and watch Donovan's Reef.

Carry on.

Doña K's picture

"The price goes up, and people can't afford as much, so they don't buy as much."

Does'nt this then hinder bitcoin sales?

adeptish's picture

Bitcoin will become a reliable future vector of currency but never actual currency.

0valueleft's picture

It was confusing for me as wee lad, some quarters and dimes went into a box on the top shelf of my parents closet and others I was given for the bubble gum machine. 

Billy the Poet's picture

And the quarters and dimes came out of the closet when the Hunt brothers blew a bubble of their own.

remain calm's picture

I thought Holmes was a porno star.

Code Duello's picture

@adolphz - shepwave shill:  here you go -- 5 up from mid-September low.  Third is extended vs first implying short fifth.  The latter has probably topped at 6180USD on Oct 20.  No momentum confirmation at the new high.  Look for major breakdown. Tmos and others hoping for ~4000USD area should not be disappointed.

 

malek's picture

"Bitcoin adoption could multiply the more people become aware of how much of their wealth is controlled by governments and the big banks."

Case of jumping out of the frying pan into the fire:
with tulipcoins nobody controls it anymore, INCLUDING THE "OWNER"

tmosley's picture

>nobody controls it anymore

Expound and post evidence.

TBH sounds like you are just grasping at straws. Desperate.

Craven's picture

Possibly the first free market in a long time

Anteater's picture

Possibly the greatest con since the Pharoah Tut took donations

for a pyramid, 'Devoted to Populism, Freedom and Democracy'.

Now please all stand for the Pledge to the 'Rockets' Red Glare'.

 

(Rockets' Red Glare, like Winter White House, is Bolshevism.)

 

They are CryptoBits, not currencies. They are not even coins, 

since they DON'T EXIST IN ANY REALITY. CryptoBits are the

Ghost Dancing last gasp of the New American White Plebians.

 

Just learn Spanish, downshift, and you'll be 'rich as Croesus'.

Bay of Pigs's picture

tmosley might get a woodie from an “oldbug” giving BTC a thumbs up.

tmosley's picture

Oldbugs are different from goldbugs.

Goldbugs have control of their faculties.

Schmuck Raker's picture

Bitcoin is not reliant on Wifi, or the internet.

Yellow_Snow's picture

True,  and there is a BTC node satellite already off the internet.

In the future there will be a large network of satellites covering even the most remote areas of earth...

BobEore's picture

Hey! Yu finally gave me a reason... to gives ya a greenie!
Anybody luvs "the Guy"... can't be all bad! Waaaay ahead of their time!

In related news... Mosley(bagholder in chief here!)and Co were preceded and predicted by the work of the famous

Schmenge Brothers... who nailed the "Happy Wanderers" schtick of our buttcoin brotherhood here... as they wander from INTERNATIONAL FINANCE CAPITAL scam

to scam... always in search of the best way to lose their pants...

short pants n cabbage rolls!

Dats' jus how we roll... in Crypto-Cabbagetown! Leutonians unite!

Billy the Poet's picture

Joe Flaherty is from Pittsburgh as I am. Lots of Pittsburgh area references in that show. Here's one:

 

Blood Sucking Monkeys from West Mifflin PA

https://www.youtube.com/watch?v=MEjdt_n1l-4

 

Mustafa Kemal's picture

"Bitcoin is not reliant on Wifi"

Yeah, that was a bit sloppy

JiminyCrickets's picture

DDoS and sybil attacks could make Bitcoin useless onthe internet.

Yellow_Snow's picture

There's still time to sell those old gold relics and buy in...  :)

DjangoCat's picture

"Most people are probably (at least vaguely) familiar with Metcalfe’s Law on the economics of network effects. .."

I have been hammering at this for days.  It is the network effect, stupid!

So the war is on.  Bitfinex will no longer accept wire transfers from US Citizens.  I am not US and still get the same message.

Canada's QuadriguaCX has the same message, No More Wires.

So, what's a fellow to think.  It hasn't hit the news.  They haven't sent me any advisories.

The squeeze on crypto is on.  ((THEY))) don't like it.   This will squeeze adoption.

My bet is that they will fail.


tmosley's picture

Nobody wants to deal with American regulators.

DjangoCat's picture

Canadian and British are of a piece.

Billy the Poet's picture

So even if the blockchain is inviolable governments can still regulate the flow of their own currency and therefore cash conversion could be impeded.  Again, assuming that the blockchain itself is untouchable one could freely hold bitcoin but one would have to transact with it directly (which also might invite regulation) or do some kind of money laundering when cashing out into fiat.

The unhackabilty and freedom supposedly inherent in the blockchain model would seem to prevail only within the realm of the blockchain itself. Barriers can still be placed between your purchasing power and your actual ability to make purchases or cash out.

Now, I could be wrong but the often expressed premise that bitcoin is untouchable by virtue of the technology behind it seems to be exaggerated.

 

PS -- The Firefox spell checker doesn't know the word "blockchain." What a drag. But it does know "bitcoin."

tmosley's picture

>governments can still regulate the flow of their own currency and therefore cash conversion could be impeded

Render unto Caesar. Yes, governments can control their fiat gateways. But there are ways around those. Gift cards, services like purse.io, localbitcoins, etc.

>Barriers can still be placed between your purchasing power and your actual ability to make purchases or cash out.

Purchases no, fiat exchange, yes (save the inverse of the above services).

>Now, I could be wrong but the often expressed premise that bitcoin is untouchable by virtue of the technology behind it seems to be exaggerated.

It is untouchable. Fiat/banks are not. You don't have to use those things, though.

Yellow_Snow's picture

Bank of America won't allow me to wire funds to Coinbase anymore...

Used BISQ instead

DjangoCat's picture

Looks to me like an attempt to plug the larger movements of funds.  The slow leak thru Bitcoin ATMs and Localbitcoin type peer to peer networks will bleed them dry eventually.

 

HRH Feant2's picture

Really? I use ACH transfer process. Slower but cheaper. I am not dealing with high dollar amounts so not a big issue.

Fuck the big banks. My local bank has had no problem with my Coinbase account. Been in business since 1911. Six branches in one county. Plenty of these small banks/savings and loans/credit unions all over the US.

JiminyCrickets's picture

Prolly cause Coinbase is inthe process of handing all customer records over to the IRS.

tmosley's picture

Aren't you embarrased to bank with BoA? I'm embarrassed to have ever even been associated with Wells.

factorypreset's picture

I closed my BoA account after their douchetard CEO bought a $90,000 oriental rug for his office right after the 2008 from financial crisis.

Silver Savior's picture

I am with Bank of America and Coinbase. The debit card way not only works but my limits were raised to amounts I would never transfer. I actually have too much of a limit.

BurningBetty's picture

Got the relics, the Fiat and the 1s and 0s. All covered!

hola dos cola's picture

Pump bitcoin, replace the dollar with bitcoin, crash bitcoin. Play again, Sam.

tmosley's picture

How are you going to crash bitcoin if everyone owns it? The only way you can crash it is to have a giant amount and dump it on the market. Even Satoshi (in theory) only has a couple million BTC. Five days trading volume as of today.

Remember, you can't print more. That is a big part of the draw.