Bitcoin’s Marijuana Equilibrium Principle

I wrote in the Forum that the South Korean government is entering a makosa party with Bitcoin: it wants to tax cryptocurrency trading while technically regulating it through cessation of anonymous accounts, and closure of virtual coin exchanges (as necessary). This will possibly usher order, at least in South Korea, in the whole cryptocurrency nexus. I noted the move as beneficial to Bitcoin because an optimal government intervention would likely help the legitimacy of the currency. However, my point is ironic since once governments around the world begin to regulate the digital currency, the most important feature of Bitcoin [out of government control] would be gone. Sure, things evolve in life; it is very possible the fans of Bitcoin and other cryptocurrencies would fall in line.

There is good news for Bitcoin: governments are getting interested in the cryptocurrency. That is the best thing for Bitcoin, ever. The government of South Korea has noted that it would impose new curbs on cryptocurrency trading. And regulators will now have the power to close virtual coin exchanges if needed. It does not stop there: government will monitor and track accounts, banning opening of anonymous cryptocurrency accounts . To even make it better, government has a tax structure for all cryptocurrency trading

Yes, Bitcoin was invented to provide a new means of exchange that runs outside government in a world where the purveyors are living under governments. That absolute lack of legality that comes from government has been the weakest element of the cryptocurrency. But as governments begin to regulate it, the acceptability will strengthen over time. While it is already in some leading bourses like Chicago, the absolute lack of legality means some institutional investors cannot put money in Bitcoin. Nonetheless, the more governments recognize and accept Bitcoin, it will experience a “negative effect” on the trading value: price will stabilize (not growing, uncorrelated) and Bitcoin will begin to behave like typical global currencies. For most, that would be a bad thing, even though it may be good!

Here are some ways government regulations could affect Bitcoin:

• Defeat of the Original Purpose: Government regulations will defeat the purpose why the currency existed in the first place. Sure, a government intervention will bring many new players into the cryptocurrency world but it would also stabilize the value of the currency. When that happens, Bitcoin would track typical currencies like US dollars, Euro and Pounds Sterling.
• Core Advocates may exit: With regulation, Bitcoin value will stabilize. Some people may lose interest as the value will not be growing. Most are not there for 2% quarterly appreciation; they want double digit growths.
• Stringent Rules: As government moves in, buying and selling Bitcoin would be harmonized. Channels would be streamlined and new trading classes could be created. Brokers could decide which investor categories can buy Bitcoin without guidance. The possibility may be that retail investors earning a certain wage level may be excluded [think of the Startup Act which prevents non-qualified investors to buy equities in startups in U.S.]. Government will put these rules to protect the small guy [it reasons] which unfortunately hikes the frictions for trading cryptocurrency.

Marijuana Equilibrium Principle

Bitcoin has many intrinsic similarities with Marijuana on scarcity, illegality and “highness” for owners. Marijuana is scarce especially when non-obviously legal; Bitcoin has that feature. People that take them go into the Mars as they become “high”; buying a coin at $120 and seeing it jump to $20,000 few years later must be a high experience. Just as for Marijuana, the law is here and there on Bitcoin.

But that was before American states began work [unbelievable that someone can legalize goof]. Yes, marijuana was legalized in some states in U.S. for medicinal purposes. There were obvious effects and those affected the equilibrium points of marijuana in many ways.

Before most U.S. states legalized marijuana, most “actors” found it largely easier to acquire; it was even cheaper even though the buying/selling was riskier. But after the regulation, government imposed stringent conditions [doctor prescription] making it more difficult to acquire, despite the larger supply pool since it became a legal business. For the actors in goof, there was more supply but getting it was harder because any player must meet a doctor first. The dynamics created a new price equilibrium, and made marijuana to behave like a typical elastic product with push and pull mechanisms where price has marginal impact on demand.

This could happen in Bitcoin, post-regulations. We would have more Bitcoin exchanges but the conditions to acquire the coins would become more stringent. Also, just as the price of marijuana has normalized wherever it is legalized, Bitcoin price will mimic that trajectory. It will attain an equilibrium point and then stabilize there. Just like that, it will track the behavior of typical currencies like U.S. dollars and Euro.

All Together

In summary, the end goal is that once governments begin to regulate Bitcoin, it would be price-normalized. With that, it joins other currencies and the game is over. The growth will be predictable, taking out speculators. That will make it less appealing to some people even though it would attract new classes of players. While South Korea will not drive this game, it can serve as a live experiment into the future. The world is waiting for U.S. to take action and once it does, that will become the golden regulation guiding Bitcoin and other cryptocurrencies. I believe no matter what happens, the Marijuana Equilibrium Principle will follow Bitcoin once it is regulated. Yes, by looking at what happened to marijuana (yes, goof), one can predict Bitcoin, post-regulation.

NB: I am building a cryptocurrency investment thesis for a client and needs a framework. In my firm, we are studying marijuana business to see how we can provide long-term guidance to my client.

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