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Hitting the Books: How Bitcoin is somehow worth more than the paper it's printed on

Bitcoin and similar blockchain-based cryptos exhibit the same radical divergence from traditional scarcity economics that we first saw when MP3s and Napster cratered physical album sales at the turn of the century. Unlike gold, which derives its value from both its myriad uses in fashion and industry as well as the difficulty involved in extracting it from the Earth, acquiring new Bitcoin is as simple as digitally mining more of the stuff. In his latest book, The Future of Money, Senior Professor of Trade Policy at Cornell University, Eswar S Prasad deftly examines how we collectively assign value to these digital constructs and what that means for the economics of tomorrow.   

Harvard University Press

Copyright © 2021 by the President and Fellows of Harvard College. Used by permission. All rights reserved.


At a conference held in Scotland in March 2018, then Bank of England governor Mark Carney observed that “the prices of many cryptocurrencies have exhibited the classic hallmarks of bubbles including new paradigm justifications, broadening retail enthusiasm and extrapolative price expectations reliant in part on finding the greater fool.” The last phrase in his statement was an allusion to the period of seemingly ever-rising real estate prices during the US housing boom of the early to mid-2000s. High and rising real estate valuations seemed to be based on the notion that all it took to make money from a house purchased at inflated prices was to find just one buyer—an even greater fool than oneself—willing to pay an even higher price.

Carney’s speech came on the heels of another by Agustín Carstens, head of the Bank for International Settlements; he described Bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster.” Skeptics, including central bankers and academics, correctly note Bitcoin’s extremely volatile prices and the periodic price collapses it has experienced. Indeed, from an economist’s perspective, there is no logical reason Bitcoin should be priced beyond its value in providing an anonymous payment mechanism, let alone the sort of value it commands. Yet, even as it has shed all pretense of being an effective medium of exchange, Bitcoin has maintained the faith of its adherents. It seems not just to persevere but has become an increasingly prized store of value—or perhaps more accurately, an attractive speculative asset (at least as this book is being written—this could all change in a moment). What accounts for this?

To address this question, we must first consider what gives a financial asset, tangible or not, economic value. For one thing, an asset represents a claim on future goods and services. Owning a share of stock or debt issued by a firm is a claim on the firm’s future earnings, which in turn is based on its ability to create real products or services that have monetary value. The same is true for real estate, which yields real services to homeowners or renters that can be monetized. Owning a government bond is in principle a claim on future government revenues, which could come from taxes or other sources.

Gold is dif­ferent. It has an intrinsic value based on its industrial use, and it is also used in jewelry (and tooth fillings). But its market value seems far greater than its intrinsic value based on these uses. It appears that gold derives its value mainly from scarcity rather than its usefulness or any claim it offers of a future flow of goods and services. Scarcity by itself is clearly not enough; there has to be enough demand for an asset as well. Such demand could hang on a thread as slender as a collective belief in the market value of the asset—if you think there are other people who value gold as much as you do and enough people feel the same way, gold has value.

So is Bitcoin just a digital version of gold, with its value determined mainly by its scarcity? The limit of twenty-one million bitcoins is hardcoded into the algorithm, making it scarce by construction. But there still needs to be demand for it, as even Bitcoin cannot escape the basic laws of market economics, especially the determination of prices based on supply and demand. Such demand could of course be purely speculative in nature, as seems to be the case now that Bitcoin is not working well as a medium of exchange.

It does take copious amounts of computing power and electricity to mine Bitcoin, and unfortunately, computers and electricity have to be paid for in real money—which is still represented by fiat currencies. It has been argued that Bitcoin’s baseline price is determined by this mining cost. One research company estimated the electricity cost of mining one bitcoin in the United States to be about $4,800 in 2018. Another company estimated the overall break-even cost of mining a bitcoin in 2018 at $8,000, suggesting that this constituted a floor for its price. But this is hardly reasonable logic. Just because something takes a lot of resources to produce is not enough to create demand for it and, therefore, to justify its price.

Bitcoin devotees, needless to say, have an answer for this; given the technologically inclined nature of this community, it had to be a quantitative model. The model, if it can be called that, uses the ratio of the existing stock relative to the flow of new units as an anchor for the price.

Consider gold. The total stock of gold that exists in the world (above ground) is estimated at about 185,000 metric tons. Roughly 3,000 tons of gold are mined each year, which amounts to about 1.6 percent of the existing stock. Thus, the stock-to-flow ratio is about sixty. It would take that many years for annual gold production, assuming it continues at the average rate, to reproduce the existing stock. For silver, this ratio is about twenty-two. The logic of this pricing model appears to be that even doubling the annual rate of gold or silver production would leave their stock-to-flow ratios high, in which case they would remain viable stores of value with high prices. The physical constraints on supply—ramping up mining operations would take a long time—mean there is little risk of a surge in supply knocking down prices of the existing stock. By contrast, for other less precious commodities, including metals such as copper and platinum, the existing stock is equal to or lower than annual production. Thus, as soon as the price begins rising, production can be ramped up, preventing large price hikes. With these commodities, prices are more closely tied to values based on industrial and other practical uses.

In 2017 the stock of Bitcoin that had been mined was estimated to be around twenty-five times larger than that of the new coins produced in that year. This is high but still less than half of the stock-to-flow ratio for gold. Around 2022, Bitcoin’s stock-to-flow ratio is expected to overtake that for gold. Thus, if one accepts this logic, the price of Bitcoin must eventually rise.

This valuation is built entirely on a fragile foundation of faith. As one influential Bitcoin blogger puts it: “Bitcoin is the first scarce digital object the world has ever seen. . . . Surely this digital scarcity has value.” This blogger makes profuse allusions, which are echoed on most websites and chat boards frequented by Bitcoin adherents, to how Bitcoin and gold are analogous: “It is [the] consistently low rate of supply of gold that is the fundamental reason it has maintained its monetary role throughout human history. The high stock-to-flow ratio of gold makes it the commodity with the lowest price elasticity of supply.” Fiat money and other cryptocurrencies that have no supply cap, no Proof of Work consensus protocol, and no need of large amounts of computing power to keep operating are seen as less likely to retain value because their supplies are not constrained and can be influenced by the government or small groups of individuals or stakeholders.

Clearly, logic and reason are not important underpinnings of Bitcoin valuations. And it is hard to argue, as I have learned, with a twenty-fiveyear-old who bought his first bitcoin at $400, then kept buying, and now views every dip in Bitcoin prices as a buying opportunity to add to his stash. But, as an economist, one does worry for that young man (whom I sat next to at a conference in January 2019 and with whom I ended up having a long and heated discussion) and others who have bet their life savings on Bitcoin and other cryptocurrencies. Then again, with the price of Bitcoin where it is in April 2021, perhaps my time would have been better spent in the past few years acquiring some bitcoin rather than laboring on this book.

Ford invests $50 million in an EV battery recycling company

Ford has announced a partnership with Redwood Materials to recycle electric vehicle batteries. The automaker is investing $50 million in the startup, whose co-founder and CEO is Tesla's former chief technology officer JB Straubel. Redwood, which also recycles batteries for e-bike company Specialized, will use the funds to expand its manufacturing facilities.

The companies say the deal will make EVs more sustainable and affordable by bringing the battery supply chain closer to home. They plan to increase battery production in the US, something the Biden administration is looking to do to reduce dependency on imports from countries such as China.

Recycling batteries in a closed loop will help reduce costs and benefit the environment, as Ford will rely less on imports and the mining of raw materials. Redwood claims it can recover 95 percent of elements such as nickel, cobalt, lithium and copper on average using its recycling technology. The company reuses those materials to make anode copper foil and cathode active materials for new batteries.

Ford announced the financial backing as part of its plan to invest over $30 billion in electrification by the end of 2025. The company recently said it would spend another $250 million to ramp up production of the in-demand F-150 Lightning EV.

In May, Ford revealed plans to make EV batteries at BlueOvalSK plants in North America by the middle of this decade. BlueOvalSK is a joint venture Ford plans to form with SK Innovation, pending approval.

London's largest cab company will go fully electric by 2023

London courier and private hire taxi firm Addison Lee has pledged to convert its whole passenger car fleet to electric vehicles by 2023. While the company's website says it has over 4,800 cars operating in the UK capital, its recent acquisition of black taxi service ComCab will make it the largest taxi company in London with over 7,000 vehicles. It already has 650 zero-emission vehicles in its fleet after the acquisition, but to be able to fully switch over to electric, it has teamed up with Volkswagen.

Addison Lee is investing £160 million ($218 million) to replace its existing fleet with slightly larger Volkswagen ID.4 vehicles. The standard ID.4 has a 77 kWh lithium-ion battery pack and has range of 250 miles, making it more suitable for city use than for long-distance driving. Its capable of 201 horsepower and 229 pound-feet of torque, with speeds reaching 100MPH. 

The firm will start by rolling out 450 EVs by the end of 2021, presumably in addition to the 650 electric cars it already has. Then, the company plans to add 200 electric cars per month until its whole fleet has been replaced within a couple of years. The firm also plans to set up charging infrastructure for its drivers using the new £3.5 million (US$4 million) Future Mobility Fund it has established.

If the company succeeds in transitioning to electric by 2023, it'll be ahead of its competitors like Uber, which previously pledged to replace its existing fleet with EVs by 2025. It also means up to 20,000 zero-emission trips each day in London, which will help the government achieve its goal of a net zero economy by 2050.

US probe into Binance reportedly expands to investigate insider trading

Binance is apparently facing more pressure from regulators over possible abuses at its cryptocurrency exchange. Bloombergsources said US officials have expanded their probe of Binance to include possible insider trading and market manipulation. The company hasn't been accused of wrongdoing, but Commodity Futures Trading Commission investigators have reportedly inquired with potential witnesses about issues like the location of Binance servers (and thus whether the US can pursue any cases).

The commission had previously launched an investigation into the sales of derivatives tied to cryptocurrencies. It's reportedly looking for internal Binance data that might show sales of those derivatives to American customers, breaking regulations that forbid those sales without registrations. The Internal Revenue Service and Justice Department are also probing possible money laundering on the exchange.

There are no guarantees of action. The CFTC and Justice Department have supposedly been investigating Binance for months, and any decisions might take a while longer.

Not surprisingly, Binance said it was above-board. A spokesperson told Bloomberg the exchange had a "zero-tolerance" approach to insider trades as well as ethical codes and security guidelines to prevent those actions. The company added that it fires offenders at a bare minimum. The CFTC has declined to comment.

The heightened scrutiny of Binance, if accurate, would come as part of a larger US crackdown on cryptocurrencies. Officials are concerned the lack of consumer protections (including regulation) might hurt customers who sign up for services expecting the same safeguards they have with conventional money. In this case, the focus is on accountability — insider trading could wreck valuable investments and erode trust in Binance and other crypto exchanges.

NFT marketplace admits employee used insider information to buy collectibles

One of the largest marketplaces for trading NFTs has found itself embroiled in controversy. In a blog post spotted by The Block, OpenSea admitted on Wednesday that one of its employees, Nate Chastain, had purchased NFTs he knew the company had planned to feature predominantly on its platform.

Hey @opensea why does it appear @natechastain has a few secret wallets that appears to buy your front page drops before they are listed, then sells them shortly after the front-page-hype spike for profits, and then tumbles them back to his main wallet with his punk on it?

— Zuwu🟩 👻🎃🦇 (@ZuwuTV) September 14, 2021

The admission came after a Twitter user named Zuwu accused Chastain this week of using secret Ethereum wallets to buy front-page NFT drops before they were available for the public to purchase, and then later selling them at a profit following the inevitable spike in interest.

OpenSea called the incident “incredibly disappointing,” and said it’s investigating what happened. “We want to be clear that this behavior does not represent our values as a team,” the company stated. “We are taking this very seriously and are conducting an immediate and thorough review of this incident so that we have a full understanding of the facts and additional steps we need to take.”

I just wanted to secure one of these before they all disappeared tbh

— Nate Chastain (natec.eth) (@natechastain) August 3, 2021

The company notes it has already implemented two new policies to prevent incidents like this from happening in the future. Moving forward, OpenSea employees aren’t allowed to buy or sell from collections and creators while they’re being promoted. They’re also prohibited from using confidential information to buy and sell NFTs on OpenSea and elsewhere.

Understandably, the incident has caused quite a stir among the company's customers, with some likening Chastain’s behavior to insider trading. More than anything, the episode highlights just how much of a wild west the NFT market is at the moment. According to an analysis by business law firm McMillan, there are currently no laws in either the US or Canada that regulate the sales of NFTs. This incident may push the Securities and Exchange Commission to change that. 

Steve Wozniak's latest moonshot is a private space company

Steve Wozniak has started a company called Privateer Space. The Apple co-founder announced the private space firm on late Sunday. Unfortunately, other than to promise his company would be “unlike the others,” Woz didn’t provide many details on the venture.

A Private space company is starting up, unlike the others. https://t.co/6s8J32mjuF

— Steve Wozniak (@stevewoz) September 13, 2021

A teaser Privateer released on YouTube mentions the startup was co-founded by former Apple engineer Alex Fielding. Wozniak and Fielding have collaborated frequently over the years. Back in 2002, they co-founded a company called Wheels of Zeus (WoZ), which worked on GPS smart tags. Wozniak later sat on the board of directors of Ripcord Networks, the robotics startup Fielding founded after Wheel of Zeus shut down in 2006.

On its website, Privateer says it will have more to share at the upcoming AMOS tech conference in Maui, Hawaii that’s scheduled to start on September 14th. What's clear is Woz and company are about to enter a highly competitive market that is dominated by billionaires like Elon Musk and Jeff Bezos. That's not an easy space to succeed in. 

PayPal acquires buy now, pay later provider Paidy

PayPal is continuing its push into buy-now-pay-later (BNPL) services with the acquisition of Japanese company Paidy for 300 billion yen ($2.7 billion), Bloomberg has reported. That represents its second largest acquisition to date after the $4 billion dollar purchase of online coupon aggregator Honey

BNPL services let users divide purchases into multiple payments with paying any interest. Instead, PayPal and other providers make money by charging fees to merchants when a consumer buys a product, much as credit card providers do. PayPal's move follows Jack Dorsey's Square much larger acquisition of Australian BNPL firm AfterPay for $29 billion. 

Paidy differs from other BNPL firms in that it allows Japanese consumers to purchase items online and then pay them off in person at local convenience stores. PayPal doesn't currently offer a BNPL service in Japan, so the acquisition will help it break into that market. 

“Paidy pioneered buy-now-pay-later solutions tailored to the Japanese market,” said PayPal Japan chief Peter Kenevan. “Combining Paidy’s brand, capabilities and talented team with PayPal’s expertise, resources and global scale will create a strong foundation to accelerate our momentum in this strategically important market.”

Musical instrument company Roli files for administration, will relaunch as Luminary

Roli, the modular musical instrument business backed by Pharrell Williams and Grimes, has entered administration in the UK, the company has confirmed. It will now relaunch as Luminary, with an emphasis on beginning rather than professional musicians, the company said. 

Luminary will be led by Roli founder and CEO Roland Lamb. Roli had approximately 70 employees who will move to Luminary, which will also retain Roli's intellectual property and assets. However, Roli raised some $76 million from institutional investors, some of whom will lose their money, according to the report. 

The company launched with the Seaboard modular keyboard and Blocks modular system designed to let you play tunes, tap out beats and do loops while recording music with an iPhone or iPad. It followed up with Lumi Keys, an electric light-up piano designed to help novices learn to play. 

Luminary

However, Lamb said that the company's early focus on professional musicians and tinkerers limited its potential for growth. "Ultimately, what happened was the pro-focused products we initially developed, although successful within their marketplace, the marketplace wasn't big enough given our venture trajectory," he told Business Insider. In 18 months up to June 30th 2019, the company lost £34.1 million ($47.1 million) on revenue of just £11.4 million ($15.8 million). 

As such, Luminary will now focus on learning to read music and play piano with the aim of becoming "Peloton for piano." To that end, it will offer the $300 Lumi Keys keyboard and an $80 yearly app subscription, along with a basic free tier. It will also relaunch the Seaboard, which has been out of stock recently. "I've learned a lot about how to operate in new ways that are better... so I'm excited about this next stage," Lamb said. 

PayPal may offer a stock-trading platform in the US

PayPal is “exploring” the idea of allowing its users to trade individual stocks. Per CNBC, the company recently hired TradeKing co-founder Richard Hagen to head up a new unit at the company called Invest at PayPal. “Leading PayPal’s efforts to explore opportunities in the consumer investment business,” Hagan says of his new job on his LinkedIn profile. The outlet reports PayPal has also had discussions with potential brokerage partners.

Moving into retail trading wouldn’t be out of character for PayPal. The company has spent much of the last year expanding into the cryptocurrency market. It all started last October when PayPal announced it would let US users buy, sell and hold Bitcoin, Ethereum, Bitcoin Cash and Litecoin. PayPal CEO Dan Schulman also recently told investors the company could partner with different financial institutions to expand the number of services it offers. He even mentioned “investment capabilities” as one possibility. Either way, it’s a move that would make sense in the context of all the recent interest in retail trading that came out of the GameStop saga.

A PayPal spokesperson declined to comment on the report when we reached out.

Should PayPal decide to offer stock trading, it may take some time before it’s available to US users. CNBC reports PayPal is unlikely to roll out the service this year. And if the company decides it wants to operate as its own brokerage firm, it would need approval from the Financial Industry Regulatory Authority (FINRA). That’s a process that can take more than eight months.

Virgin Orbit is going public to fund its space satellite program

Virgin Orbit has announced plans to go public on the Nasdaq stock exchange through a special purpose acquisitions company (SPAC) merger. The deal with NextGen Acquisition Corp. II values Virgin Orbit at $3.2 billion.

The combined company is expected to pull in up to $483 million in cash when the deal closes, which Virgin Orbit believes will happen by the end of this year. Around $383 million of that is expected to come from funds NextGen holds in trust, and the other $100 million from a common stock PIPE (private investment in public equity) offering at $10 per share. Virgin Orbit's existing stakeholders will own around 85 percent of the combined company, with NextGen shareholders owning about 10 percent, PIPE investors (which will include Boeing) holding roughly three percent and the SPAC sponsor owning the remaining two percent or so.

We've launched rockets to space from the wing of a jet. We've delivered commercial, civil, & nat'l security satellites to their target orbits from the end of a runway. And we're just getting started.

Now, we're planning to go public on @nasdaq. More: https://t.co/S7SiELgDY9pic.twitter.com/8Aa50Jkfes

— Virgin Orbit (@VirginOrbit) August 23, 2021

Virgin Orbit will use the funds to scale up its rocket manufacturing endeavors and bolster the company's space solutions business and Virgin Orbit’s ongoing product development initiatives. An SPAC merger with a company (usually a shell corporation) that's already listed on a stock exchange allows a business to go public without going through the usual initial public offering process.

The first spaceflight company to go public through an SPAC, and the company that really kicked off the SPAC trend, was Virgin Galactic back in 2019, which sought to fund its tourist trips to space. Virgin Galactic spun out Virgin Orbit as a separate company in 2017 so they could respectively focus on space tourism and small satellite launches. Virgin Galactic held its first fully crewed flight in July (with founder Richard Branson on board), while Virgin Orbit had its first successful satellite deployment in January.

Virgin Orbit launches its satellites from a custom Boeing 747, with the LauncherOne rocket taking payloads into space. The company says this approach offers a "significant performance advantage" over traditional ground launches (an approach adopted by the likes of SpaceX) while lowering "local carbon emissions and acoustic impacts" at launch sites.