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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JiminyCrickets's picture

During the crash of 1929, less than 3% of Americans owned any stocks at all.

hola dos cola's picture

The only way you can crash it is to have a giant amount and dump it on the market.

The most obvious of many alternatives is to get people to sell it, ignore it and avoid it. E.g. a 'smear campaign' a la 'bitcoin is Evil' and, depending on the effort, maybe even (try) outlaw it. Emphasizing the security flaws, real or perceived, would go a long way too in this matter.

Don't get me wrong, I follow the development from a distance but with great interest in the blockchain technology. (For now I choose not to speculate because of 'early adaptors etc.') Uncorrupted, it has a great future. Let's see.

 

jomama's picture

Gold and Silver have been my worst performing assets over the last five years.

Silver Savior's picture

In terms of what? Gold and silver has been the winner in my world. They have done exactly what I wanted them to do. The future for them looks more than vibrant.

Cephisus's picture

The size of the block-chain will delegate the transactions of bitcoin to approved systems.  Once the block-chain size is larger than the consumer can store, only a few approved vendors will log transactions.

JiminyCrickets's picture

Actually it is the minersw who determin transaction speed, and they offically go to war with the Developers today with Bitcoin Gold fork.

JiminyCrickets's picture

Actually it is the minersw who determin transaction speed, and they offically go to war with the Developers today with Bitcoin Gold fork.

Harbourcity's picture

The article is crap.

Bitcoin is highly manipulated in factors higher than that of gold because Bitcoin 1) has a very small market capitalization, it takes way less money to move Bitcoin values and 2) its secrecy makes it easy to manipulate it through phantom trading.

Lastly, the only people who care are milleniums which have the least amount of wealth of all generations alive. The only way other generations will take on Bitcoin is if they're manipulated into it through funds.

exartizo's picture

agreed...

the price of Bitcoin et al, has been manipulated by the Banksters for quite some time now, as is common knowledge in certain circles.

and here's my "Two (Tulip) Cents"....

Tulip Mania aka BitCoin mania was (is) a period in the Dutch Golden Age (in the early 21st Century) during which contract prices for some bulbs of the recently introduced and fashionable tulip (Bitcoin) reached extraordinarily high levels and then dramatically collapsed in February 1637 (xxxxx, 2017-2019)

Tulipmania is generally considered the first recorded speculative bubble (or economic bubble). At that time Tulipmania (BitCoin Mania) was more of a hitherto unknown socio-economic (disaster) phenomenon (380 years later... how quickly they forget!) than a significant economic crisis (or financial crisis).

Historically, Tulipmania (BitCoin Mania) had no critical influence on the prosperity of the Dutch Republic (United States), the world's leading economic and financial power in the 17th century (21st Century). The term "tulip mania" (Bitcoin Mania) is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.

In Europe (on the Internet), formal futures markets (Bitcoin Exchanges) appeared in the Dutch Republic (worldwide) during the 17th century (early 21st Century).

Among the most notable centered on the tulip market (Bitcoin exchanges), at the height of Tulipmania (BitCoin Mania).

At the peak of tulip mania (Bitcoin Mania), in February 1637 (October 2017), some single tulip bulbs (BitCoins) sold for more than ($6,000, $5999.98 MORE than any SANE person would pay) 10 times the annual income of a skilled craftsworker.

Some modern economists have proposed rational explanations, rather than a speculative mania, for the rise and fall in (Bitcoin) prices (but they are Full Of Shit).

The 1637 event was popularized in 1841 by the book Extraordinary Popular (Bitcoin) Delusions and the Madness of (Bitcoin) Crowds, written by British journalist Charles Mackay.

At one point 12 acres (5 ha) of land ($6,000 dollars) were offered for a Semper Augustus bulb (single Bitcoin).

Mackay claims that many such investors were ruined by the fall in prices (of Bitcoin), and Dutch (some world-wide) commerce suffered a severe shock.

Although Mackay's book is a classic, his account is contested.

Many modern scholars feel that the mania was not as extraordinary as Mackay described (that's bullshit) and argue that not enough price data are available to prove that a tulip bulb (Bitcoin Mania) bubble actually occured (FUCK YEAH IT DID).

JiminyCrickets's picture

Tulips are not rare,and they can multiply to infinity.

NoBillsOfCredit's picture

Don't confuse him with facts he is ignoring

JiminyCrickets's picture

Imagine what those tulips would be worth today if 17th century Holland had Intelectual Property Laws that allowed corpwhorations to patent DNA?

Exponere Mendaces's picture

What a retard. Here's the real story on tulips. You're so fucking fossilized you can't even get the insults right.

---

https://www.reddit.com/r/Bitcoin/comments/76fg7j/bitcoin_aint_tulips_in_...

Bitcoin ain't Tulips. In fact, Tulips ain't Tulips either

Okay, so the tulips keep getting mentioned in this sub. In fact you can probably track the rate of the rise of BTC by looking in /r/Bitcoin for references to “the tulips” – uptick in number of new posts mentioning tulips = fast pump for BTC.

Anyway, if any newcomers are interested, the Dutch tulip mania of November 1636 to February 1637 is considered the bubble – a cautionary tale of how greed and “the madness of crowds” can result in a person offering 12 acres of land for a single tulip bulb, shortly before “supply exceeded demand” and the whole thing collapsed, crashing the Dutch economy and ruining thousands of lives.

Except it’s all bullshit.

Well, it’s not ALL bullshit – there really was a crazy few months where people were contracting to pay stupid prices for tulip futures.

But since the 1980s, economists have been trying to explain to everyone that Tulipmania didn’t crash the Dutch economy, didn’t ruin that many lives, and in fact didn’t even result in the sale of any actual tulip bulbs.

The Wikipedia entry has good detail, (https://en.wikipedia.org/wiki/Tulip_mania) and has a whole bunch of books in the references, but here are some bullet points:

    First up it’s really really important to know: Traders weren’t buying tulip flowers, and they weren’t handing over cash in exchange for boxes of tulip bulbs. They were buying futures contracts for that season’s tulip bulbs.

    These contracts were signed in taverns, and the only money that changed hands up front was 2.5% of the contract (up to 3 guilders) which went to the tavern owner.

    Some historians think it became a sort of drinking game. Who could draw up the craziest tulip contract, haha! (Thouigh of course, here and there were the usual predatory traders who took it very seriously, because they can smell blood and are smart and ruthless and will take money off any idiot who isn't paying attention.)

    Relatively speaking, hardly anyone was involved, just those certain types of merchants who liked speculation and hung out in taverns. The nobility wasn’t involved. The wider economy wasn’t involved.

    When the time came to pay the contract, and collect the actual bulbs, (almost) nobody did. For why – see below.

    As a result, prices collapsed very quickly in February 1637, but we don’t actually have the precise numbers or data on the shape of the collapse. But prices of these futures contracts definitely collapsed.

    And yet, apparently modern historians can positively identify only six prominent merchants who suffered financially from the mania – probably because they took up debt against the value of their tulip futures contracts.

    After it all ended abruptly in February 1637, a bunch of people who really hated speculation wrote and distributed pamphlets telling everyone how tulips ruined the Dutch Republic and speculation should totally be made illegal again. These pamphlets were later used as a primary sources by Scottish journalist Charles Mackay when he mythologised Tulipmania in his book Extraordinary Popular Delusions and the Madness of Crowds. Turns out, in a strictly historiographical sense, it’s not a very good book.

    As a result of first the pamphleteers and later Mackay, the actual economic facts of the phenomenon were buried under myth and fable – did you hear the one about the sailor who mistook a tulip bulb for an onion and ate it for lunch?! They were going to execute him, hahaha! (Wikipedia points out that tulip bulbs are poisonous and taste gross, but neglects to take into account that sailors on shore leave are very drunk.)

    In the 1980s, as mentioned, better historians (and economists) than Mackay began to dig deeper. And they found out some interesting things. For instance, in late 1636, the Dutch florists guild began to discuss what would eventually become an order: that all tulip futures contracts from November 1636 onward, were to be considered options contracts – and if the holder didn’t want to pay, they could simply cancel the contract via a 3.5% fee.

    This of course made the drinking game MUCH more fun – traders could bid up contracts to truly insane amounts because everyone knew the only money that would have to be paid was 3.5% of whatever. Haha! Drunk trading is fun!

    It got so insane, the Dutch authorities banned these sorts of contracts in February 1637, and the drinking game was ruined.

    Meanwhile, evidence suggests that actual florists were trading real bulbs for real money at pretty much normal prices.

At this point, you might be wondering what any of this has to do with Bitcoin. The answer is nothing.

It is fascinating how often we still hear about Tulipmania and the collapse of “tulip prices” described as a “panic” and a cautionary tale. Even Investopedia says:

Tulipmania was the first major financial bubble. Investors began to madly purchase tulips, pushing their prices to unprecedented highs; the average price of a single flower exceeded the annual income of a skilled worker. Tulips sold for over 4000 florins, the currency of the Netherlands at the time. As prices drastically collapsed over the course of a week, many tulip holders instantly went bankrupt.

Which is just… not right at all. They weren’t selling flowers, they didn’t sell for “over 4000 florins” (a super-rare bulb was contracted for a basket of goods valued at 2500 florins), hardly anyone went bankrupt, and for fuck’s sake no one was holding actual tulips.

Of course – as we say in Australia - we mustn’t spoil a good yarn with the truth.

Because here we are, 30 years after economists started saying “the tulips weren’t all that” and we’re still accusing everything that spikes in price of being “tulips”.

Cool it with the tulips. The tulips can only really teach us one thing: don’t trade options contracts when you’re drunk.

NoCamelCase's picture

It is Bitcoin, not BitCoin

tmosley's picture

>it takes way less money to move Bitcoin value

Incorrect. Gold exchagnes are corrupted, so manipulation there not only costs nothing, but is PROFITABLE.

>its secrecy makes it easy to manipulate it through phantom trading.

Bitcoin exchanges are far more open than gold exchanges. Anyone can see the order books, ffs.

>the only people who care are milleniums

Financial institutions are coming in now. They seem to care.

JiminyCrickets's picture

Without regulation massive order books could be just a few whales washing trades back and forth creating froth, no real way for a trader to trust what they see.

Harbourcity's picture

Exactly.  Bitcoin's value is based on liquidity - liquidity can be falsely generation by trading back and forth.  It is a huge scam.

Harbourcity's picture

>>it takes way less money to move Bitcoin value

>Incorrect. Gold exchagnes are corrupted, so manipulation there not only costs nothing, but is PROFITABLE.

There is far more market capitalization for Gold than Bitcoin.

"Estimates put the Total Market Cap of Gold at around $7 Trillion. Right now the Total Market Cap of Bitcoin is around $12 Billion roughly 0.15% of Gold"

>>its secrecy makes it easy to manipulate it through phantom trading.

>Bitcoin exchanges are far more open than gold exchanges. Anyone can see the order books, ffs.

Balance Addresses % Addresses (Total) Coins $USD % Coins (Total) 0 - 0.001 12189544 58.1% (100%) 2,184 BTC 12,342,214 USD 0.01% (100%) 0.001 - 0.01 3803708 18.13% (41.9%) 14,878 BTC 84,083,592 USD 0.09% (99.99%) 0.01 - 0.1 2976785 14.19% (23.76%) 93,000 BTC 525,588,009 USD 0.56% (99.9%) 0.1 - 1 1353844 6.45% (9.58%) 442,524 BTC 2,500,913,916 USD 2.66% (99.34%) 1 - 10 502451 2.4% (3.12%) 1,367,172 BTC 7,726,548,706 USD 8.22% (96.68%) 10 - 100 134404 0.64% (0.73%) 4,437,547 BTC 25,078,719,821 USD 26.67% (88.46%) 100 - 1,000 16321 0.08% (0.09%) 3,801,985 BTC 21,486,848,847 USD 22.85% (61.8%) 1,000 - 10,000 1590 0.01% (0.01%) 3,417,616 BTC 19,314,597,925 USD 20.54% (38.95%) 10,000 - 100,000 117 0% (0%) 2,781,733 BTC 15,720,912,453 USD 16.72% (18.41%) 100,000 - 1,000,000 2 0% (0%) 282,051 BTC 1,594,003,431 USD 1.69% (1.69%)

Look at the % ownership based on %.  It is totally manipulated.

>>the only people who care are milleniums

>Financial institutions are coming in now. They seem to care.

They care about the spread they can make on the sale - NOT Bitcoin itself.  It's a scam and it may go higher but as soon as there is a run, it's done.

 

 

Spaced Out's picture

"Right now the Total Market Cap of Bitcoin is around $12 Billion"

Way off the mark buddy, try doing some easy research next time :D

GassedUpOldMan's picture

Goldies just jealous they can't make 5000% over a 4 year period.

Dragon HAwk's picture

The older you are, the less you trust electronics with your Money

PN7's picture

> The older you get...   Not quite true.  I am 79.  I've been into bitcoin for 7+ years.  Wells Fargo phoned me.  Said the Feds wanted to know about my bitcoin activity.  The guy was slightly embarrassed to ask.  I gave him the info the Feds wanted.  Then he said he was really glad to see someone my age so interested in bitcoin.  We had a good laugh.

JiminyCrickets's picture

What did the Feds want to know, pleeease tell us?

hola dos cola's picture

Did you personally know the guy who phoned you? If not, how can you be sure it was Wells Fargo on the other end of the line?

You were told "the Feds wanted to know about my bitcoin activity." Would you gave given the the same information if the guy hadn't mentioned "the Feds"?

Why do you think the guy was "embarrassed to ask", what caused the embarrassment?

 

I can hardly believe a thing you wrote there. If wrongly so, I think you would be well advised to sell your bitcoin now. And that has nothing to do with bitcoin.

JiminyCrickets's picture

30 years IT experience and handling even a dozen Bitcoin makes my palms sweaty and heart pound. Malware, massive chains,  fresh builds, forks, limited documentation, lost coins, Developers, Miners,  crooked exchanges, slow transfers,shifty banks, looming goverments. I said fucit sold my stack and getting the loot out while the gettin's good. I will re-invest a portion in alt-coins when the fog clears.

JiminyCrickets's picture

The 'Network Effect" will only hold limited favor for Bitcoin, Cryptos are so ubiquitous that they can be easily exchanged for one another. Although Bitcoin did all the work getting everyone to the party, its has yet to be seen who everyone goes home with.

Yen Cross's picture

 I'd love to share my trades. Unfortunately, they would all be lies.

 ;-D

  What does it mean when a hedge fund is 120% long or short a trade?

  I'm fucking with you, because I'm looking for smart people.

   What's the difference between buying "puts" and selling "calls"?

  HINT: Your parents payed for it.

libertyanyday's picture

What problem is trying to be fixd by usng BTC ?

  I dont care about the selling points

what is the real underlying problem that crypto is going to fix...........please?

ElTerco's picture

The blockchain mining rate was designed to have that exact curve, further proving the Ponzi nature of BitCoin. A lot of coin could easily created in the beginning, with the amount of effort required to generate new coin following that curve. It it looks like an engineered Ponzi, it is.