The Free Market In Bitcoin

Free markets are a rarity today.  I mean truly free markets.  The stock and commodity markets are about as close as you get.  If you haven’t read Professor John Cochrane’s blog post about The Hard Road to Free Markets you should.  He starts off,

The fundamental reason so many markets are not free, and so dysfunctional, is that the voters of our democracy don’t really want freedom. Freedom will come when we want it, when we insist on it, when the average voter sees a free market solution rather than endless controls as the answer to real-world problems. The sad paradox of free markets is that free markets do not need people to understand them to work. But democracy does require voters to understand how things work.

Yesterday, Bitcoin futures started trading at the CBOE.  If you paid for real-time quotes, you got them.  If you didn’t and went to the free CBOE website you didn’t see them because their website crashed.  If you haven’t dealt with an exchange before, quotes and data are a big piece of their revenue.  Any quote on an exchange website is likely to be 10 minutes old unless no one on earth is trading the product and they want to entice people to trade it. No such problem with Bitcoin.

Bitcoin and its ecosystem are the wild wild west.  ICO’s have raised billions this year.  How much?  Over $3B.  If you don’t understand Bitcoin and the technology surrounding it, here is a link to a great primer by CB Insights.  Some people think Bitcoin is a trust network.  Banks need trust networks badly.

The SEC is going to start to step in and regulate Bitcoin.  Some light regulation is a good thing.  Having standardization over an ICO would help people digest information and make a better decision.  Virtually every ICO has some sort of white paper.  Except, you can find a white paper template on the internet and fill in the blanks.  It’s not as if some real academic research has been done.

The problem with valuing Bitcoin and other cryptocurrency is the uncertainty in the future.  How big and widespread is it going to get and what will its ultimate value be if and when it becomes widespread?  Trillions?  Billions?  Worthless? No one knows which is why the speculative fervor is high.

Yesterday, the futures rallied 8%, surging 11% in the first six minutes.  None of the smart shorts that were supposedly out there materialized.  I wouldn’t use one day with relatively thin bid/ask spreads as a proxy for the entire market.  Give it time and a trend will emerge.  Smart shorts don’t step in front of a runaway freight train and Bitcoin is a runaway freight train.

There are some things I don’t like the way America has chosen to regulate specific sectors of the investing world.  It’s caused normal people to be locked out of investing in companies like Uber/Lyft, Airbnb and other high flyers because the economic incentives due to over-regulation steer those companies to stay private significantly longer.  Americans build wealth via their job and investing in the stock market.  They assume the risk and accept responsibility for the outcome.

Remember the 1980’s?  Normal people invested in companies like Microsoft and other early internet companies.  They made money.  No doubt, many people lost money betting on losers.  I’d rather have the risk of potential losses than government stopping people from deciding what to do with their own money that they earned and paid taxes on.

Bitcoin/Cryptocurrency is allowing normal Americans that wouldn’t otherwise have a chance to take a chance.   It has the potential to democratize a lot of capital and get money and assets into hands that don’t have access.  Most of these cryptos will fail.  But if the technology is pervasive there should be a great return and an early investor could build a nice nest egg.

We don’t have free markets in America when it comes to health care, food, clothing and most of our staples.  Ironically, it’s the corporations that sometimes actively push for regulation to stop competitors from entering.  Dodd-Frank is a great example of that.

Why are free markets hard?  They are messy.  They have a large variance. Normative economic values get injected into the market by politicians, regulators and pundits.  How many times have you heard, “It’s not fair”. Well, Cochrane has a great summation of that here.

The reaction to Uber surge pricing is a similar test. Economists love it. You mean rather than sit in the rain and wait, I can pay more, compensate someone else for waiting, encourage a driver to skip dinner, and take me where I want to go, now? I’m in. Or, I can save some money and go later. Everyone else hates it. And gets cities to ban it. And we go back to waiting.