3rd November 2022 > > Mohamed El-Erian.

tl;dr

MoneyGram is the latest financial services firm to adopt cryptos.

Market Snap

Market Wrap

Another 75bps from the Fed, with the same expected in the next hour from the BoE.

Central bankers laughably claim that their actions in recent years have had no deleterious impact on the rampant inflation we are seeing now. With inflation seemingly likely to fall, absent any more dramatic world events, as oil and gas prices revert to mean, I suspect they will try to claim the glory.

Central banks should return to their core business as owners of the Mint and lenders of last resort. They have no other competency.

Curious Cryptos’ Commentary – Mohamed El-Erian

Mohamed El-Erian is Chief Economic Adviser at Allianz having spent many years working for Bill Gross at Pimco as co-chief investment officer until a very public falling out at the end of 2013. He is a heavyweight with intellectual heft, and his musings are always worth listening to.

Regarding BTC, he has this to say:

“To be clear, I do not think that bitcoin will become a global currency, I don’t think it will get massive adoption. When people say it will reach $100,000, $200,000, $300,000, they assume massive adoption: you are not going to get that.”

Mohamed is giving the impression that he believes there is room for BTC, but purely as a niche. Indeed he goes on to say that the cryptocurrency sector will survive the ongoing bear market and remain a vital part of “the ecosystem of payments.”

Unfortunately I think he is being a little disingenuous here. If you unpack what he is saying, it seems apparent to me that he is a crypto naysayer. Let me explain why.

…

The value inherent in BTC arises for two reasons.

The first is as a store of value, the second is its utility as a network.

Looking at store of value, if we take the upper bound of Mohamed’s price prediction – that BTC will never exceed $100k per BTC - then the total market cap of BTC is limited to $100k multiplied by the 21mm coins that will ever be in existence i.e. $2.1 TRILLION dollars.

The market cap for gold is just shy of $11 TRILLION dollars. If BTC can only ever be worth less than 20% of that total, BTC could not be considered as a store of value, making this factor in the intrinsic value of BTC utterly worthless.

As for the network value, it might be instructive to look at the growth and decay of social networks.

Social networks derive their value from both the size of their network, and the growth in that network. Friends Reunited was one of the earliest examples of a successful social network but it is no longer with us. The reason is simple – its network size stopped growing then started to diminish. The decay in value as the network contracts is as brutal as the growth in value in the early stages.

As an aside, this is the reason for the pivot away from Facebook to the Metaverse for Meta – Facebook as it was configured was in danger of following in the footsteps of Friends Reunited. Its large, and some say outsized, bet on the Metaverse is better understood in the context of it being its only option of continuing a growth trajectory.

But back to BTC. If the network value of BTC is limited to just $2.1 TRILLION – with global financial assets north of $100 TRILLION as a minimum and probably much greater than that – then it is irrelevant, and its network utility will begin to diminish, making this factor in the intrinsic value of BTC utterly worthless.

…

In effect Mohamed – by limiting the upper price of BTC to just $100k per BTC – is stating that the real value of BTC is precisely zero.

…

He is not the only one of course. Controlling, centralised organisations such as governments, central banks, the IMF (International Monetary Fund), civil servant bureaucracies worldwide, and some news outlets whose ethos is one of coercion and control, will continue to make such claims, though with no rationality to their argument.

What these people are all saying is that decentralisation is a spent force that cannot and will not be harnessed for the good of humankind.

And that is a perfectly reasonable, if entirely flawed, position to take.

And if you believe that to be the case, then I suggest you should not have any crypto investments, though I would urge you to continue reading and educating yourself about cryptos just in case you do come round to my way of thinking.

I do not want you to miss out on the opportunities heading our way created by the greatest technological revolution of all time simply through ignorance and confusion.