Former Assistant Secretary of Housing And Urban Development, HUD and investment advisor Catherine Austin Fitts says you have to be careful and fully understand Bitcoin. Fitts explains, ‘We do know they want to go to an all-digital system with central bank cryptos. The easiest way to build the prison is to get freedom lovers everywhere to build our prison for them. To me, Bitcoin has always been the prototype on the way to building an all-digital, omnipresent crypto control system that they would love to put into place.’
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with Catherine Austin Fitts, publisher of The Solari Report.
All science is merely a means to an end. The means is knowledge. The end is control. Beyond this remains only one issue: Who will be the beneficiary?
(Neils Christensen) The debate between goldand bitcoin, as to which is the ultimate safe-haven and inflation hedge, continued to rage this past week. However, I feel that the longer this debate goes on, the more investors are missing the bigger picture.
The stark reality is that there is more than $16 trillion worth of negative-yielding debt floating around the world right now. The U.S. government continues to move forward with its proposed $1.9 trillion stimulus package to support the U.S. economy. The Federal Reserve’s balance sheeting grows from record high to record high, pushing above $7.4 trillion.
The U.S. also isn’t in this boat alone; central banks around the world are maintaining extremely accommodative monetary policies and growing their balance sheets to record levels.
(Kitco News) – Bitcoin is one of the most unequally distributed assets in the world, with just under half a percent of all bitcoin investors owning more than 80% of all bitcoins, and should they liquidate, the market could see a substantial sell-off, said Ryan Giannotto, director of Research at GraniteShares ETFs.
“It’s a major challenge for the asset class: it’s intended to be a financially democratizing force, yet it is so profoundly distributed in an unequal fashion. It’s really unlike anything we’ve ever seen. This is one of the perils of bitcoin investing that go unreported, undiscussed,” Giannotto said. “It is a seriously cornered asset class.”
Five hundredths of a percent of bitcoin investors control over 40% of all bitcoin, and just under half a percent of all bitcoin investors control over 5/6ths, or 83%, of bitcoin, he noted.
Most of these larger stakeholders, or “whales” as they are referred to as in the crypto community, are early adopters of bitcoin.
If these early adopters of bitcoin were to sell their holdings altogether, that would exceed the daily trading volume, effectively “wiping out” the asset, Giannotto said.
(Dennis Miller) At the local convenience store, my wife Jo handed the clerk a $5 bill and waited for her change; finally asking for it. The clerk said, “We have a coin shortage. We have to round things to the nearest dollar.” Screw that! She dug in her purse, cobbled together the correct change and demanded the clerk give her a dollar back – while the line of “social distanced” customers behind her grew long.
The next day she bought a fountain Coke, normally $1.00 plus tax. The clerk said, “$1.00 please.” The merchant absorbed the tax. There are signs in the local stores saying they have a shortage and will buy rolled coins.
My BS meter went into full alert. A government capable of putting a man on the moon could solve a coin shortage in a matter of a few weeks. If there is a shortage, it’s because some politicos, or bankers want to create one.
New Digital Reserve Currency Anticipated to be Part of Future COVID-19 Stimulus Package
(Yahoo News) Vancouver, British Columbia–(Newsfile Corp. – April 6, 2020) – NetCents Technology Inc. (CSE: NC) (FSE: 26N) (OTCQB: NTTCF) (“NetCents” or the “Company“), a disruptive cryptocurrency payments technologies company, is pleased to announce that it has completed internally designated preparation for the expected US Government backed cryptocurrency, “Central Bank Digital Currency” (CBDC).
NetCents jumped into action as soon as it learned of the plans US Congress made to legislate for this US Federal Reserve Digital Currency as part of two different versions of the first Central Bank Digital Currency (“Stimulus Bill” or the “Bill”). Ultimately this aspect of the legislation wasn’t included in the final version of the first Stimulus Bill, but the Board and Advisors of NetCents have agreed that this “Digital Dollar” will be included in subsequent legislation.
The Bill is expected to establish a “Digital Dollar”, defined as ‘a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal Reserve Bank or … an electronic unit of value, redeemable by an eligible financial institution.’ This will create a cryptocurrency backed and guaranteed by the US Federal Government. The Bill goes on to define a digital wallet, and a requirement that US chartered banks offer these wallets.
The establishment of these products is intended to simplify the cost and process of distributing the millions of stimulus payments contemplated by the Bill, but the effects of this move will be far reaching. While the complexity of this undertaking meant that Congress was unable to include it in the first Bill – NetCents Management believes the ultimate adoption is a foregone conclusion.
Daniel Gorfine, founder of fintech advisory firm Gattaca Horizons and former Chief Innovation Officer at Commodity Futures Trading Commission (“CFTC”), as well as a founding Director of the Digital Dollar Project, stated to Forbes, ‘It is worth exploring, testing, and piloting a true USD CBDC and broader digital infrastructure in order to improve our future capabilities and resiliency. While the crisis underscores the importance of upgrading our financial infrastructure, broadly implementing a CBDC will require time and thoughtful coordination between the government and private sector stakeholders.’ – Forbes, March 24, 2020 (link below)
NetCents has developed software to support these initiatives and stands ready to support the effort. Part of the Bill requires US chartered banks to offer these digital wallets to their clients – NetCents has built this platform as part of its current white-label offering for financial institutions.
The Forbes article goes on to quote Carmelle Cadet, Founder and CEO of EMTECH, a modern central bank technology and services company. She has recently started a new initiative called, ‘Project New Dawn’ to ensure the unbanked and underbanked receive economic stimulus payments. Citing a FDIC report in 2017 that identified 63 million unbanked and underbanked in the U.S., she notes, ‘If checks are the form of payment, the stimulus is not going to reach many of them. That would be approximately $100B underutilized of stimulus for lower income householders.’
“We fully support the US Government in its’ creation of the contemplated Digital Reserve Currency. The US dollar is already the reserve currency of the World – so moving it to a digital format makes total sense. The US might have 63 million unbanked, but the planet Earth has billions of unbanked – it only makes sense that the dollar take a digital form to enable remittance and micropayments for the unbanked globally – as well as ensure its status as the World’s dominant currency. The benefits to the Treasury would accrue into many billions of dollars in innumerable ways. Societal benefits would be created as well; a Digital Dollar would be difficult to use for crimes and funding terrorism for example. This milestone is the ultimate endorsement that Cryptocurrency and Blockchain are here to stay,” stated Clayton Moore, Chief Executive Officer, NetCents. “We look forward to offering our platform to US Banks and then to Global Banks so that they can meet the requirements for a digital USD wallet,” he summarized.
NetCents Technologies enables transactions that are both touchless and within social distancing guidelines – which is an added benefit in the current environment.
The NetCents Suite of software enables individuals and merchants to transact using Cryptocurrency both in a physical store environment as well as in an e-commerce setting – it is deploying Crypto-enabled financial products across numerous business verticals to become a complete Crypto ecosystem.
(Birch Gold Group) Thanks to the Federal Reserve, the idea that you can go into a store and anonymously purchase something with cash might soon be obsolete.
Corporatocracy Fedcoin: ‘in private banks we trust’
Why? Because they’re developing something called Fedcoin, which would be based on blockchain technology.
The digital and decentralized ledger that records all transactions. Every time someone buys digital coins on a decentralized exchange, sells coins, transfers coins, or buys a good or service with virtual coins, a ledger records that transaction, often in an encrypted fashion, to protect it from cybercriminals. These transactions are also recorded and processed without a third-party provider, which is usually a bank.
Right now, Bitcoin is a popular form of cryptocurrency that operates using blockchain technology. Like the description above, Bitcoin is decentralized, its transactions are anonymous, and no central bank is involved.
But the irony is, the blockchain tech behind the Fed’s idea isn’t likely to be used the way Bitcoin uses it. Not even close.
Originally, the “Fedcoin” idea appeared to be a security enhancement to a century-old system used for clearing checks and cash transactions called Fedwire. According to NASDAQ in 2017:
This technology will bring Fedwire into the 21st Century. Tentatively called Fedcoin, this Federal Reserve cryptocurrency could replace the dollar as we know it.
The idea didn’t seem to move very much three years ago, but now the idea of a central bank-controlled “Fedcoin” seems like it could be moving closer to reality, according to a Reuters reportfrom February 5.
According to the report, “Dozens of central banks globally are also doing such work,” including China.
Of course, there is risk, according to Federal Reserve Governor Lael Brainard. For example, there is the potential for a country-wide run on banks if panic ensued while the Fed “flipped a switch” and made Fedcoin the primary currency for the United States.
But blogger Robert Wenzel warns the risks of the Federal Reserve issuing its own cyber currency may run even deeper than that.
“This is not good.”
Lawmakers try to package and sell whatever ideas they come up with, no matter how intrusive or ineffective they might be.
According to Brainard, Fedcoin has the potential to provide “greater value at a lower cost” for monetary transactions. Sounds reasonable, if taken at face value.
But no matter how the Fed may try to “sell” the idea of utilizing Fedcoin in the future, Wenzel’s warning is pretty clear:
A Federal Reserve created digital coin could be one of the most dangerous steps ever taken by a government agency. It would put in the hands of the government the potential to create a digital currency with the ability to track all transactions in an economy—and prohibit transactions for any reason. In terms of future individual freedom, this would be a nightmare.
If you use cash at a grocery store, no one will know who you are or what you bought unless it was caught on video or you use a reward card. In the rare instance a store accepts Bitcoin, the same would be true.
But if you were to use a centrally-controlled digital currency like Fedcoin, who knows what the Fed will decide to track now or in the future? Or what meddling they could come up with to deny your transaction?
If the Federal Reserve wanted to outlaw cash, and your only choice was to use Fedcoin to make purchases, then your financial life would be tracked under their watchful eye.
“Not good” indeed.
Protect your retirement by maintaining your financial freedom
Who knows if the Federal Reserve will move closer to making cash a thing of the past? Perhaps Fedcoin will add to the number of ways the Fed can meddle with your retirement?
Until that gets sorted out, you can consider other options to protect your retirement with a tangible asset that can’t be converted into digital form.
Precious metals like gold and silver continue to hold value, and have for thousands of years. And because they are physical assets, you can’t be tracked as you could if Fedcoin moves from being a bad idea to reality.
A complaint filed by lawyer Dr. Jonathan Levy on behalf of cryptocurrency crime victims, whose claims totaling over €27 million, takes aim not only at the European Commission but singles out the United Kingdom and several other EU member states as safe havens for crypto criminals.
The EU is accused of “maladministration” in regard to cryptocurrency. Maladministration is the technical term for various types of governmental injustice including delay and failure to investigate, take action or follow the law.
Dr. Jonathan Levy represents the Victims and the National Liberal Party, a UK political party with a platform that includes sound crypto currency policy. The EU stands accused of knowingly permitting the transfer of billions of Euros from victims to organized crime including the notorious €5 billion One World–One Coin Ponzi scheme which was operated by EU citizens utilizing EU banks for over almost 5 years. Only on the day of the filing of this complaint did the EU act to remove One World–One Coin from its own Top Level Domain .EU where it had been operating with impunity.
Dr. Levy has long criticized the United Kingdom’s handling of cryptocurrency related claims. According to Dr. Levy, “The United Kingdom and European Union have rolled out a welcome sign for crypto criminals and provided them unhindered access to Top Level Domains like .EU and .IO, their banking system, companies registration, and have turned a blind eye to the largest transfer of wealth to international criminal organizations since World War Two.”
Levy and his clients seek intervention by the EU Ombudsman to prompt the EU Commission to hold crypto currencies, social media networks, domains, exchanges, and domain privacy providers accountable for funding a Cryptocurrency Security Fund to pay out compensation to victims of crypto currency criminals.
Recently, one big name money manager after another is on record telling people to buy hard assets. Why? Financial writer and precious metals expert Bill Holter says they all know what is coming. Holter contends,
“They understand that this is going to be the biggest monetary debasement in the history of history. They understand it’s hyperinflation that is on its way. They are late to the game, and they do manage billions and billions of dollars, and I don’t see how people talking about buying gold and buying silver are going to be able to get actual physical silver and physical gold in their hands or in their vaults.”
Holter is warning of a failure to deliver metal because demand is out-running supply. Holter says, “So far, this year . . . for gold, they have already EFP (Exchange for Physical) 4,200 tons just for the first eight months. . . . They don’t have the inventories to deliver. . . . The point being that is 4,200 tons in eight months. The world only produces 3,300 tons (of gold a year) and if you take out Russia and China, which do not export (gold), the whole total for the year is 2,800 tons. So, it looks like we are going to end up with 6,000 tons of gold EFP demand for delivery in a world that is only producing 2,800 tons. In silver, it’s worse. In silver in the first eight months, there has been 1.6 billion ounces EFP. That number is going to end up to about 2.4 billion of silver ounces (EFP) and the world produces less than 800 million ounces a year. The bottom line to what all this means is there is going to be a failure to deliver. Once there is a failure to deliver, only the Lord knows what kind of prices we are going to be looking at for gold and silver.”
Holter says a failure to deliver is not a maybe but a sure thing. Holter says, “Whether it is this year or the first few months of next year, it doesn’t matter. It is going to happen. . . . I can basically guarantee there is going to be a failure to deliver, and that failure to deliver is going to unmask and scare the crap out of the entire fractional reserve banking system and the fractional reserve commodity system. The whole thing is going to come down in a panic because somebody gets a failure to deliver. . . . If you listen to what Trump is saying, he wants a lower dollar. How much of a lower dollar does he want? He’s talking about debasing the currency to make the debt payable. . . . That is the most palatable way for any government to pay debt and that is to debase the currency and pay it off in monkey money.”
Join Greg Hunter as he goes One-on-One with precious metals expert Bill Holter
Unlike the unfounded narrative that cryptocurrency enables crime, big banks are more than happy to serve unsavory clients if it is lucrative enough for them. The latest example of this is a report that Jeffrey Epstein was apparently using his bank accounts to fund sex trafficking and possibly other crimes.
Follow the Money
The reported death of the Wall Street financier and convicted sex offender Jeffrey Epstein on Saturday morning in a Manhattan prison cell has left a lot of questions. Among these is how exactly he funded his criminal activities, which included sex trafficking of minors to be used by the rich and powerful. One matter that is not a mystery is how Epstein funded his perversions: he used the traditional fiat banking system, with all its extensive KYC and AML regulations.
The alleged suicide of Epstein shouldn’t stop the “Legions of lawyers, bankers and accountants” that have been digging into his financial affairs in recent weeks claims the New York Times. These include officials conducting internal reviews at the two big banks that worked with him for years, JP Morgan Chase and Deutsche Bank. The employees at both of these financial institutions have reportedly been going over their books in a long overdue attempt to understand how they got into business with the convicted criminal and what exactly he was using their banking services for. A person who was briefed on Deutsche Bank’s internal review reportedly said “it appeared that Mr. Epstein was using his accounts for sex trafficking and possibly other illegal activity.”
Deutsche Bank headquarters on Wall Street in Lower Manhattan, New York
Further, according to the report, compliance officers and other employees at both JP Morgan Chase and Deutsche Bank had strongly advised their higher-ups to stop doing business with Epstein years before his accounts were finally closed. This was suggested not due to the unpalatable nature of his businesses, but due to the risks associated with him such as hurting the bank’s brand and upsetting regulators. However, former employees at both banks said that “managers and executives rejected that advice and kept doing business with the lucrative client.”
Deutsche Bank Only Recently Closed Epstein’s Accounts
Jeffrey Epstein pleaded guilty and was convicted in court of law of both soliciting a prostitute and of procuring a minor for prostitution back in 2008. He served 13 months in custody with work release, as part of a plea deal, where federal prosecutes had identified 36 girls as young as 14 years old who had been victimized. His case was very hard to miss due to the fact that his name was tied to some of the most famous and powerful people in the world such as Donald Trump, former U.S. President Bill Clinton, the U.K.’s Prince Andrew, former Israeli Prime Minister Ehud Barak, and disgraced Hollywood star Kevin Spacey.
Despite all of this, it isn’t too hard to see why the higher-ups at the big banks didn’t want to let go of his business. While not much is known about the source of his money, Epstein definitely had a lot of it moving around. Among his confirmed assets is a private island in the U.S. Virgin Islands, a Manhattan mansion worth over $77 million, a Palm Beach estate worth over $12 million, additional real-estate properties in New Mexico and Paris, a private jet airplane and no less than 15 cars. Considering this, it isn’t that surprising that Deutsche Bank only cut its ties to Epstein when prosecutors were set to charge him again with operating a sex-trafficking ring of underage girls in June of this year.
A Chase Bank branch in Manhattan, New York
JP Morgan Chase worked with Epstein from the late 1990s until 2013 and Deutsche Bank served him from 2013 until June 2019. The latter bank has reportedly already started giving his complete transaction history to investigators while the former awaits receiving similar demands for his financial data from U.S. authorities.
In astatementon Saturday after the alleged suicide, Manhattan U.S. Attorney Geoffrey S. Berman expressed his commitment to the victims to keep the investigation ongoing, despite the demise of the defendant. This means that the public will hopefully get a detailed examination into the criminal banking activities of Epstein in due course.
Big Banks Have a Long History of Enabling Crime
Governments, central banks and international financial institutions have all been pushing a largely unfounded narrative in recent years that cryptocurrencies enable illicit activity. Parroted by the mainstream media, it was used as justification to crack down on exchanges and other crypto service providers with demands for less user privacy or outright bans. In contrast, the established banking system has a long and proven track record of enabling all sorts of crimes, despite its burdensome compliance requirements, and yet erring institutions receive nothing more than a fine equal to a slap on the wrist.
Mu Changchun, Deputy Chief in the Payment and Settlement Division of the People’s Bank of China (PBOC,) stated that the CBDC prototype exists and the PBOC’s Digital Money Research Group has already fully adopted the blockchain architecture for the currency. China’s CBDC will not rely entirely on a pure blockchain architecture, as this would not allow the currency to achieve the throughput required for retail usage.
According to Changchun, the currency has been in the research and development phase since 2014. At the meeting on Saturday, he said, “People’s Bank digital currency can now be said to be ready.”
The CBDC will employ a two-tier operational structure, per Changchun:
The People’s Bank of China is the upper level and the commercial banks are the second level. This dual delivery system is suitable for our national conditions. It can use existing resources to mobilize the enthusiasm of commercial banks and smoothly improve the acceptance of digital currency.
A two-tier system is preferable due to China’s complex economy, vast territory and large population. “From the perspective of improving accessibility and increasing public willingness to use, a two-tier operational framework should be adopted to deal with this difficulty,” Changchun said. He also welcomed the resources, talent and innovation capabilities of commercial businesses who will partner with the PBOC to roll out the currency. Finally, this system will help avoid concentration of risk and financial disintermediation.
At the same meeting, China UnionPay ChairmanShaofu Jun saidthat the goals of China’s CBDC would be difficult to achieve. While a CBDC could solve issues related to cross-border transactions, long lag times and legacy inefficiencies, the lack of clear operational processes and a detailed regulatory framework across countries will be challenging to overcome.
The U.S. Internal Revenue Service (IRS) announced Friday that it has begun sending letters to taxpayers who own cryptocurrency, advising them to pay any back taxes they may owe or to file amended tax returns regarding their holdings.
Ina news bulletin, the agency said that it began mailing what it called “educational letters” last week. According to the statement, there are three variations of the letter that were sent.
The IRS further said that it will have sent such letters to “more than 10,000 taxpayers” by the end of this month,” adding that “the names of these taxpayers were obtained through various ongoing IRS compliance efforts.”
“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Chuck Rettig said in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
In May, it wasreportedthat the IRS is beginning to work on new guidance regarding cryptocurrencies, its first such effort since 2014. A number of organizations and industry advocates have called on the agency in past years to update its guidance following its decision to treat cryptocurrencies as a form of intangible property for tax purposes.
On Thursday, a user of the r/bitcoin subredditdescribedreceiving such a letter. Lawyer Tyson Cross, writing forForbes, also detailed how a number of his crypto-focused clients have received this kind of letter from the IRS.
TheUnited States’Internal Revenue Service (IRS) is allegedly considering requiring tech giants to report on crypto activity by users, according to apresentationreportedly from an IRS presentation and provided by a Twitter user on July 9.
According to the documentsshared, the IRS hopes to use Grand Jury subpoenas on firms such as Apple, Google and Microsoft to check taxpayers’ download history for crypto-related applications.
Citing the document, Walter concluded that the tax authority is conducting exhaustive research into detection ofcriminaltax evasion cases involving crypto. As such, the IRS is considering carrying out interviews, open-source and social media searches, as well as electronic surveillance, the expert noted.
Specifically, the 181-page document reads:
“Grand Jury Subpoena should be considered for Apple, Google, and Microsoft for the Subject’s complete application download history. Each application’s function should be explored to determine whether or not the application can transmit, or otherwise allow, transactions in bitcoin.”
As Walter emphasized, the presentation envisions that IRS agents ensure that taxpayers are not notified about the obtained information regarding their use of cryptocurrencies to prevent detrimental to the investigation.
Cointelegraph notes that the IRS has not confirmed the authenticity of the presentation’s origin.
According to the documents provided, the IRS is hoping to serve subpoenas to check data from accounts in banks and Paypal for connection with crypto transactions. Additionally, the tax authority is considering reviewing social media giants such asFacebookand Twitter to find and record publicly available cryptocurrency addresses.
“There is a ton of other information in there about crypto in general, tracing transactions via the blockchain, limitations of the blockchain, etc. but what you need to know is that the IRS is working HARD to identify criminal tax cases involving cryptocurrency.”
As previously reported, the IRS currently considers cryptocurrenciesproperty. In late 2018, an advisory committee of the IRSexpressedits intent to provide additional guidelines for the taxation of crypto transactions.
Recently, Cointelegraph reported onSingapore’splan to exempt cryptocurrencies that are intended to function as a medium of exchange from Goods and Services Tax (GST).
The international financial establishment is known to express concern about the risks of money laundering when the crypto space is mentioned. A string of scandals indicates, however, that traditional banks are not only susceptible to the phenomenon but sometimes complicit, whether knowingly or inadvertently. New chapters have been added to the saga over the last few months that are hurting banks, bankers and their clients.
Deutsche Bank Prepares to Lay Off 20,000 Employees
Deutsche Bank, one of the biggest names associated with money laundering accusations, has been dogged by many problems during the past year. The leading German financial institution is now preparing for a major reorganization that may include the sacking of up to 20,000 employees, if the plan is approved at the end of this week.
The changes come after a failed merger with Germany’s Commerzbank a couple of months ago, which was eventually deemed too risky by the teams of both banks. It did not materialize, despite the support of the federal government in Berlin.
Many of the layoffs are expected to affect Deutsche Bank’s investment banking offices in London and New York. According to a BBC report, the German bank has 8,000 employees in the British capital. And the 20,000 jobs that are likely to be cut represent a fifth of the institution’s global staff.
Besides persistent problems with its investment business and unsatisfactory financial results, the banking giant has been suffering from its involvement in money laundering scandals. In November, 2018 its headquarters and other offices in Frankfurt wereraidedby law enforcement officers and representatives of the German tax authority.
The recent surge in bitcoin, and the entire cryptocurrency space accelerated over the weekend, coinciding with the latest massive protest in Hong Kong which may be among the catalysts for the aggressive buying, and sending bitcoin above $9,000 for the first time since May 10, 2018, a price that is almost triple where bitcoin traded at the start of the year, making it the best performing major asset class of 2019, with a market cap of $163 billion.
And as the price of bitcoin surge, naturally so does its volatility, which has quadrupled from its near all-time lows hit at the start of April to 95 for the 30-day historical vol, in the process making it once again a favorite of traders desperate for highly-volatile assets.
It’s not just Bitcoin’s volatility that has returned: so have volumes as what appears to be the latest reflation of the bitcoin bubble is drawing in investors from around the globe, hoping to make a quick profit. Only this time there is one major difference as JPMorgan explains.
According to JPMorgan’s Nikolaos Panigirtzoglou writes, there has been a sharp increase in reported trading volumes of Bitcoin and other cryptocurrencies over the past few months, with Bitcoin trading volumes on crypto exchanges increasing to $445bn in April from a 1Q19 average of $220bn per month, and in May volumes increased further to around $725bn. This compares to previous peak volumes in Dec17 and Jan18 of $420bn. Curiously, for the three largest three cryptocurrencies by market capitalization, Bitcoin, Ethereum and Ripple, the combined volumes for May stand at above $1tr compared to a previous peak in Jan18 of around $685bn, suggesting that all else equal, there is an even greater interest in the crypto space .
Meanwhile, this development comes at a time when the market value of outstanding bitcoins is around half of its Dec17 high, and the combined market value of all crypto currencies is around a third of its previous high. While a substantial part of the increase in volumes in dollar terms reflects an increase in the market value of bitcoin and other crypto currencies, the volumes in bitcoin terms are also significantly above their previous peaks.
But there is more here than meets the eye.
As JPM explains, taken at face value, this volume surge would suggest a dramatic increase in cryptocurrency activity. But over the past year or so, concerns have increasingly been expressed over how authentic the reported volumes really are. To wit:
… recently published work by Bitwise, a cryptocurrency asset manager, to the SEC as part of an application for a bitcoin ETF suggests that bitcoin trading volumes on many cryptocurrency exchanges are significantly overstated by ‘fake’ trading, e.g. exchanges reporting volume of trades that never took place or via wash trades, and that genuine trading volumes could be around 5% of the reported total. Similarly, the Blockchain Transparency Institute publish monthly market surveillance reports, and estimated in April 2019 that less than 1% of reported volume for some exchanges represented real trades.
If these estimates of the proportion of real trades are correct, i.e. “that only around 5% of trading is genuine,” that would imply that the genuine volumes of Bitcoin trading on cryptocurrency exchanges in May were around $36bn, rather than $725bn.
If this sharp revision in actual trading volumes is accurate, a critical implication, beyond the fact that the actual market size is markedly lower than reported numbers would suggest, is that as JPM notes, “the importance of the listed futures market has been significantly understated.” According to the Bitwise report, traded futures are credited as an important development in allowing short exposures that enabled arbitrageurs in properly engaging in arbitrage (and also resulted in a massive squeeze at the start of April that sent bitcoin breaking out again, and which we discussed previously), and that the futures share of spot bitcoin volumes increased sharply in April/May.
Indeed, when looking at aggregate volumes on both the CME and CBOE futures contracts (shown below), JPM estimates around $12bn of traded volume on these two futures exchanges in May. Indeed, the $12bn of bitcoin futures trading volume in May also represented a significant increase on the April’s $5.5bn and a 1Q19 monthly average of $1.8bn, suggesting that some rise in trading volume was genuine, even if the total volumes on cryptocurrency exchanges was likely vastly overstated.
The conclusion to this overstatement of trading volumes by cryptocurrency exchanges, and by implication theunderstatement of the importance of listed futures, suggests that in the two years since bitcoin’s last major spike in 2017 the “market structure has likely changed considerably… with a greater influence from institutional investors.”
This also means that whereas bitcoin’s historic surge to its all time high of $20,000 in December 2017 was largely retail driven, and thus extremely fickle as the subsequent crash showed, this time it is largely the result of institutional buying, which is far more stable and far less prone to sudden, painful shifts in sentiment and volatility.
In other words, “this time may be different” for bitcoin in a good way: because with institutions now piling into the crypto space, this is precisely the investor group that bitcoin bulls wanted from the beginning as it creates a far more stable price base for the future. Add to this the potential return of retail buying from east Asian (or even US) retail clients, and it is possible that what wepredicted in early April, namely that the 3rd bitcoin bubble is starting…
… may soon be confirmed, and that the next bitcoin bubble peak will be somewhere between $60,000 and $100,000.
Trade is a fundamental element of human survival. No one person can produce every single product or service necessary for a comfortable life, no matter how Spartan their attitude. Unless your goal is to desperately scratch an existence from your local terrain with no chance of progress in the future, you are going to need a network of other producers. For most of the history of human civilization, production was the basis for economy. All other elements were secondary.
At some point, as trade grows and thrives, a society is going to start looking for a store of value; something that represents the man-hours and effort and ingenuity a person put into their day. Something that is universally accepted within barter networks, something highly prized, that is tangible, that can be held in our hands and is impossible to replicate artificially. Enter precious metals.
Thus, the concept of “money” was born, and for the most part it functioned quite well for thousands of years. Unfortunately, there are people in our world that see economy as a tool for control rather than a vital process that should be left alone to develop naturally.
The idea of “fiat money”, money which has no tangibility and that can be created on a whim by a central source or authority, is rather new in the grand scheme of things. It is a bastardization of the original and much more stable money system that existed before that was anchored in hard commodities. While it claims to offer a more “liquid” store of value, the truth is that it is no store of value at all.
Purveyors of fiat, central banks and globalists, use ever increasing debt as a means to feed fiat, not to mention the hidden tax of price inflation. When central bankers get a hold of money, it is no longer a representation of work or value, but a system of enslavement that crushes our ability to produce effectively and to receive fair returns for our labor.
There are many people today in the liberty movement that understand this dynamic, but even in alternative economic circles there are some that do not understand the full picture when it comes to central banks and fiat mechanisms. There is a false notion that paper currencies are the life blood of the establishment and that they will seek to protect these currencies at all costs. This might have been true 20 years ago or more, but it is not true today. Things change.
The king of this delusion is the US dollar. As the world reserve currency it is thought by some to be “untouchable”, a pillar of the globalist structure that will be defended for many decades to come. The reality, however, is that the dollar is nothing more than another con game on paper to the globalists; a farce that they are happy to sacrifice in order to further their goals of complete centralization of world trade and therefore the complete centralization of control over human survival.
That is to say, the dollar is a stepping stone for them, nothing more.
The real goal of the globalists is an economic system in which they can monitor every transaction no matter how small; a system in which there is eventually only one currency, a currency that can be tracked, granted or taken away at a moment’s notice. Imagine a world in which your “store of value” is subject to constant scrutiny by a bureaucratic monstrosity, and there is no way to hide from them by using private trade as a backstop. Imagine a world in which you cannot hold your money in your hand, and access to your money can be denied with the push of a button if you step out of line. This is what the globalists really desire.
Some people might claim that this kind of system already exists, but they would be fooling themselves. Even though fiat currencies like the dollar are a cancer on free markets and true production, they still offer privacy to a point, and they can still be physically allocated and held in your hand making them harder to confiscate. The globalists want to take a bad thing and make it even worse.
So, the question arises – How do they plan to make the shift from the current fiat paper system to their “new world order” economy?
First and foremost, they will seek a controlled demolition of the dollar as the world reserve currency. They have accomplished this in the past with other reserve currencies, such as the Pound Sterling, which was carefully diminished over a period of two decades just after WWII through the use of treasury bond dumps by France and the US, as well as the forced removal of the sterling as the petro-currency. This was done to make way for the US dollar as a replacement after the Bretton Woods agreement in 1944.
The dollar did not achieve true world reserve status, though, until after the gold standard was completely abandoned by Nixon in the early 1970’s, at which point a deal was struck with Saudi Arabia making the dollar the petro-currency. Once the dollar was no longer anchored to gold and the world’s energy market was made dependent on it, the fate of the US economy was sealed.
Unlike Britain and the sterling, the US economy is hyper-dependent on the dollar’s world reserve status. While Britain suffered declining conditions for decades after the loss, including inflation and high interest rates, the US will experience far more acute pain. A complete lack of adequate manufacturing capability within US borders has turned our nation into a consumer based society rather than a society of producers. Meaning, we are dependent on the demand for our currency as a reserve in order to enjoy affordable goods from outside sources (i.e. other manufacturing based countries).
Add to this lack of production ability the fact that for the past decade the Federal Reserve has been pumping trillions of dollars into financial markets around the globe. This means trillions of dollar held overseas only on the promise that those dollars will be accepted by major exporters as a universal store of value. If faith in that promise is lost, those trillions could come flooding back into the US through various channels, and the buying power of the currency would crumble.
There is a delusion within the American mainstream that even if such an event were to occur, the transition could be handled with ease. It’s fantastical, I know, but never underestimate the cognitive dissonance of people blinded by bias.
The rebuilding of a production base within the US to offset the crisis of losing the world reserve currency would take many years; perhaps decades. And this is in the best case scenario. With a plummeting currency and extreme price inflation, the cost of establishing new production on a large scale would be immense. While local labor might become cheap (in comparison with inflation), all other elements of the economy would become very expensive.
In the worst case scenario there would be complete societal breakdown likely followed by an attempted totalitarian response by government. In which case, forget any domestically funded economic recovery. Any future recovery would have to be funded and managed from outside the US. And here is where we see the globalist plan taking shape.
The banking elites have hinted in the past how they might try to “reset” the global economy. As I’ve mentioned in many articles, the globalist run magazine The Economist in 1988discussed the removal of the dollarto make way for a global currency, a currency which would be introduced to the masses by 2018. This introduction did in fact take place as The Economist declared it would. Blockchain and digital currency systems, the intended foundation of the next globalist monetary structure, received unprecedented coverage the past two years. They are now a part of the public consciousness.
Here is how Brandon Smith, Alt-Market believes the process will unfold:
The 2008 crash in credit and housing markets led to unprecedented stimulus by central banks, with the Federal Reserve leading the pack as the greatest source of inflation. This program of bailouts and QE stimulus conjured an even bigger bubble, which many alternative analysts have dubbed “the everything bubble”.
The growing “everything bubble” encompasses not just stock markets or housing, but auto markets, credit markets, bond markets, and the dollar itself. All of these elements are now tied directly to Fed policy. The US economy is not only addicted to stimulus measures and near-zero interest rates; it will die without them.
The Fed knows this well. Chairman Jerome Powell hinted at the crisis that would evolve if the Fed ever cut off stimulus, unwound its balance sheet and hiked rates in the October 2012 Fed minutes.
Without constant and ever expanding stimulus measures, the false economy will implode. We are already seeing the effects as the Fed cuts tens-of-billions per month in assets from its balance sheet and hikes interest rates to their “neutral rate of inflation”. Auto markets, housing markets, and credit markets are in reversal, and stocks are witnessing the most instability since the 2008 crash. All of this was triggered by the Fed simply exerting incremental rate hikes and balance sheet cuts.
It is also important to note that almost every US stock market rally the past several months has taken place while the Fed’s balance sheet cuts were frozen. For example, for the past two-and-a-half weeks the Fed’s assets have onlydropped by around $8 billion; this is basically a flat line in the balance sheet. It should not be surprising given this pause in cuts (in tandem with convenient stimulus measures by China) that stocks spiked through early to mid-January.
That said, Fed tightening will start again, either by rate hikes, asset cuts, or both at the same time. The Fed’s purpose is to create a crisis. The Fed’s goal is to cause a crash. The Fed is a suicide bomber that does not care what happens to the US system.
But what about the dollar, specifically?
The Fed’s tightening policies do not only translate to crisis for US stocks or other markets. I see three primary ways in which the dollar can be dethroned as the world reserve.
1) Emerging economies have become addicted to Fed liquidity over the past ten years. Without continued access to the Fed’s easy money, nations like China and India are beginning to seek out alternatives to the dollar as a world reserve. Contrary to the popular belief that these countries would “never” be able to decouple from the US, the process has already begun. And, it is the Fed that has actually created the necessity for emerging markets to seek out other sources of liquidity besides the dollar.
2) Donald Trump’s trade war is yet another cover event for the loss of reserve status. I would note that the primary rationale for tariffs was to balance the trade deficit. The trade deficit with China has done the opposite and is continually expanding each month. This suggests much higher tariffs on China would be required to reduce the imbalance.
It must also be understood that the trade deficit with China has long been part of a larger agreement. China is one of the largest buyers of US debt in the world and has continued to utilize the dollar as the world reserve currency. If the trade war continues through this year, it is only a matter of time before China, already seeking dollar alternatives as the Fed tightens liquidity, will start using its US treasury and dollar holdings as leverage against us.
Bilateral agreements between multiple nations that cut out the dollar are being established regularly today. If China, the largest exporter/importer in the world, stops accepting the dollar as the world reserve, or if they start accepting other currencies in competition, then numerous other nations will follow their lead.
3) Finally, if the war of words between Trump and the Fed becomes something more, then this could be used by the establishment to undermine faith in US credit. If Trump seeks to shut down the Fed entirely, the globalists are handed yet another perfect distraction for the death of the dollar. I can see the headlines now – The “reset” could then be painted as a “rescue” of the global economy after the “destructive actions of populists” who “bumbled into fiscal destruction” because they were blinded by an “obsession with sovereignty” in a world that “requires centralization to survive”.
The specifics of the shift to a global currency are less clear, but again, we have hints from the globalists. The Economist suggests that the US economy will have to be taken down a few pegs, and that the IMF would step in as the arbiter of Forex markets through its SDR basket system. This plan was echoed recently by globalist Mohamed El-Erian in an article he wrote titled “New Life For The SDR?”. El-Erian also suggests that a global currency would help to combat the “rise of populism”.
The Economist notes that the SDR would only act as a “bridge” to the new global currency. Paper currencies would still exist for a time, but they would be pegged to the SDR exchange rates. Currently, the dollar is only worth around .71 SDR’s. In the event of the loss of world reserve status, expect this exchange rate to drop significantly.
I predict according to the current pace of the trade war, Fed liquidity tightening and de-dollarization that threats to the dollar’s world reserve status will hit the mainstream by 2020. The process of “resetting” the global monetary system would likely take at least another decade to complete. The globalist preoccupation with their “Agenda 2030” sustainable development initiatives suggests a decade long timeline.
Without ample resistance, the introduction of the cashless society will be presented as a natural and even “heroic” response by the globalists to save humanity from the “selfishness” of destructive nationalists. They will strut across the world stage as if they are saviors, rather than the villains they really are.
Crypto prices surged on Wednesday after Beijing-based Bitmain published its long awaited IPO prospectus, publicly disclosing for the first time just how enormously profitable the purveyor of crypto mining rigs and chips has become since it was founded in 2013 by crypto billionaires Jihan Wu and Micree Zhan. The company, which controls roughly 85% of the market for crypto mining rigs and chips, has seen its profits expand from just $12.3 million at the end of 2015 to more than $700 million during the first six months of 2018 alone. Importantly, its revenues and profits have continued to expand, even as the market for cryptocurrencies has cooled since the start of the year.
According toMarketWatch, the company’s profits increased by more than 800% from the prior year to $700 million. It revenues, meanwhile, expanded ten fold to $2.8 billion.
Bitmain was founded in 2013 by Wu and Zhan just as bitcoin was entering the mainstream. The price of a single coin peaked at around $2,000 in November of that year before plunging to around $200 following the spectacular collapse of Mt. Gox in February 2014. At the time, Gox was the largest crypto exchange in the world.
Speculation about an IPO has been metastasizing for years, but many believed that the secretive company would shelve its plans following the $600 billion drop in aggregate crypto valuations.
According to its prospectus, Bitmain’s business model revolves around the design of ASIC chips for both crypto mining and AI purposes. According to a consulting firm cited in the prospectus, Bitmain is one of the largest ASIC-based crypto mining company. Still, the success of its IPO is far from certain. AsBloombergpoints out, two of the company’s biggest rivals, Canaan Inc. and Ebang International Holdings Inc., are also pursuing IPOs. And some analysts cited by BBG fear that the company could lose its competitive edge. If it follows through with the IPO (which is a big if considering Hong Kong’s benchmark index has fallen 16% from its January highs), analysts will view the offering as the first big test of investor appetite for crypto firms working on an industrial scale.
Modern Portfolio Theory doesn’t work with cryptocurrencies.
In a cryptocurrency portfolio, it’s all about managing risk.
As the cryptocurrency space matures, more high-level allocation models will become relevant.
This idea was first discussed with members of my private investing community, Crypto Blue Chips. To get an exclusive ‘first look’ at my best ideas, start your free trial today >>
Why Modern Portfolio Theory doesn’t work with cryptos
Aside from the obvious (that cryptocurrencies are not companies, they’re just software and the network of people involved),MPTasks the portfolio manager to make some basic assumptions.
We are able to estimate the likely return of an asset (to compare it to the likely risk and determine the efficient frontier)
We look for assets that are not highly correlated to reduce risk
Both of these are a big problem for cryptocurrencies, because the probable return is somewhere between zero and 100x, and nearly every cryptocurrency in the top 20 is highly correlated with bitcoin (at least for now).
What about building a cryptocurrency portfolio based on sector?
I’d like to tell you that it’s possible to just look at the different categories ofcryptocurrency projectsout there, and just build a sector weighted portfolio like you might do with traditional equities. If that were possible, you might want to use a chart like this to narrow down your choices.
But unfortunately, we can’t have nice things. Recall that80% of ICOsin the last year are dead already or were simply scams in the first place (the real figure is probably over 90% now).
So, what can we do? We could just skip cryptocurrency all together, or we could take a different approach.
Building a cryptocurrency portfolio is about disciplined, rational reduction
When investing in cryptocurrencies, I suggest that you start off assuming everything is a scam and working backwards from there. Out of the 1900 or so cryptocurrencies listed on CMC, we might be able to argue for a handful as being legit projects that:
solve a real problem
aren’t a scam
didn’t start last week
have had their security model stress tested in the wild
have people working on them still
have an active community
In order to build your own cryptocurrency portfolio, I’m going to give you a list of questions to ask. This list is not exhaustive, but it’s a good place to start.
Can I replace the word “blockchain” with database?
This one comesfrom Andreas Antonopoulos. If the problem the project is trying to solve would work just as well without a blockchain, then we have a problem. Blockchains are slow, expensive data structures that when used properly can operate in a hostile environment with nobody at the helm.
If performance and control are important, a blockchain is probably not the correct tool for the job.
Is the code open source?
One of the main reasons that bitcoin has been successful is that the code isopen source. This allows the community to share ideas and work together to solve problems that they find interesting and even exciting. Projects that hide their code away should be viewed with suspicionas many bugscould be lingering behind the walled gardens. Remember, closed systems maximize control while open systems maximize innovation at the edge.
Can I rent enough hash power to 51% this network right now?
Many cryptocurrencies are secured by proof of work. However, not all coins are created equal. Mining secures a PoW coin, but it can also be its downfall. For example, Ethereum (ETH-USD) shares a mining algorithm with Ethereum Classic (ETC-USD). However, Ethereum has attracted 20x more hash power than Ethereum Classic, which means that if you go toNicehash, you can rent enough hash power to just take over Ethereum Classic for about $16,330 per hour. The reason for this is that the Ethash algorithm can be run on just about any GPU, so by using a marketplace for renting hash power, anyone that wants to can literally take over a the cryptocurrency of their choice if they pay the price.
However, not all coins can be hijacked in this way. Some coins like Bitcoin (BTC-USD) are so huge that only 1% of the necessary hardware could be rented for such an attack. Any coin that shares the SHA-256 algorithm is orders of magnitude easier to attack than bitcoin because bitcoin is the most profitable to mine, so that’s the network that the miners point their hardware at.
Bitcoin Cash (BCH-USD), for example, can be attacked with 1/14th the hardware that you would need to attack bitcoin, making it much less secure from a 51% attack standpoint.
Does the coin have a fancy new security model or data structure?
If it does, it might just be the next big thing. But, more likely the security model has major flaws that have yet to be discovered. Bitcoin’s blockchain and proof of work has been operating in the wild since 2009, and it has been attacked constantly.
Smaller cryptocurrencies have the disadvantage of not being in the spotlight, so their networks’ bandwidth and security are tested at only a fraction of the pressure placed on larger networks like Bitcoin and Ethereum.
This doesn’t mean that we should stop trying to innovate, we just need to understand that the risk/reward ratio for these new concepts should be seen as orders of magnitude higher than that of Bitcoin and Ethereum because of the fact that they just haven’t been around long enough, they haven’t grown large enough to really be put to the test.
Can this cryptocurrency be properly secured (preferably in a hardware wallet) in cold storage?
As I wrote about in my blog, part of the joy of investing in cryptocurrencies is understanding how to take custody of the assets. While there are many ways to secure cryptocurrency, my preference is to use a hardware wallet and store the coins offline (cold storage).
There are some really cool projects I’d like to invest in, but I just don’t want to deal with the mess of having to run full nodes of each project on my local machine, or worrying about if my paper wallet is safe.
A hardware wallet likeTrezororLedger Nano Scan store many of the top cryptocurrencies is a highly secure manner. As a fiduciary, I owe it to my investors to use the best security possible, so I rarely invest in cryptocurrencies that cannot be stored in a hardware wallet.
Is anyone using this cryptocurrency, and are there any software engineers working on the project still?
These seem like basic questions that you wouldn’t have to worry about if you were investing in a traditional company. I mean, nobody asks “I wonder if any software engineers at Amazon are writing code this month?” before buying Amazon (AMZN). But, with cryptocurrency things are a bit different.
Some projects I would like to invest in fail at this step. Either the number of transactions does not seem to be growing, or the development team seems to have wandered off.
Two projects I would be investing in if they were actively maintained are Dogecoin (DOGE-USD) and Litecoin (LTC-USD). See the development activity below.
With no active development team, these projects simply can’t survive.
Does the team behind this project inspire confidence, and can they be identified?
In order to reduce the odds that the cryptocurrency project that you’re thinking about investing inis a scam, it’s worthwhile to take a look at the founders. If you can’t find a way to identify them, and their past work, then what kind of recourse do you have if they just take the funds and vanish?
Is there a whitepaper, and does it make sense?
You can learn a lot about a cryptocurrency project from the whitepaper. In fact, I think it’s a great place to start. Also, you might want to check that the entire thing wasn’tcopied and pasted, because that’s a thing that happens all the time.
What is the token’s issuance model?
Bitcoin has a fixed issuance model that will result in 21 million tokens being created by the year 2140, but many other coins have no set maximum supply. Also, some of these ICOs have large portions of the tokens set aside for their foundation and early stage investors (and they probably bought it at a discounted rate before the rest of us even heard about the project).
Tokens that restrict the supply tend to be worth more as long as they can attract actual usage. It’s important to understand how new tokens are issued if you are trying to predict what they might be worth in the future if the project achieves the goals it set out for itself.
What the future of portfolio management might look like
I think that as the cryptocurrency market matures we will start being able to apply the more traditional valuation models. I think that when traditional assets start being tokenized, then it won’t be uncommon to have crypto assets in a traditional portfolio much in the same way that we have derivatives, ETFs, mutual funds and equities all in the same E-Trade (ETFC) account now.
Imagine having a basket of foreign currencies with some bitcoin thrown in, or a basket of utility companies that includes blockchain-based power tokens representing claims of future energy production.
I think that crypto assets will just become a tool, a technological means to an end in the future. Tokenizing existing assets and the discovery of new assets to tokenize may well define the digital revolution as we move into a world where the Internet of Things becomes a vivid reality.
It would be nice to apply modern portfolio theory to a cryptocurrency portfolio. However, the cryptocurrency market simply isn’t mature enough yet for this to be a reality. Today, the best we can do is look for signs of extraordinary risk and steer clear. This means taking a more skeptical approach and investing only in cryptocurrencies that might qualify as “Crypto Blue Chips.”
If you like this article, you will loveCrypto Blue Chips, where this idea was discussed first. Besides posting articles early, there’s research inCrypto Blue Chipsyou can’t get anywhere else, like the BVIPE, the Bitcoin Value Indicator Professional Edition, posted with updates every week. Also, you can follow along as I build a portfolio of cryptocurrencies that we’ll be holding for the next 1-3 years. Get in on the ground floor withCrypto Blue Chips.
We may have found the reason for Bitcoin’s persistent weakness over the past week.
After hitting a price above $8,000 thanks to recent Blackrock ETF speculation, the cryptocurrency has dropped 10% in the past week, dropping as low as $7,300 today, leaving traders stumped what was causing this latest selloff in the absence of market-moving news.
It turns out the reason may have been a good, old-fashioned margin call forced liquidation, because asBloomberg reportsa massive wrong-way bet left an unidentified bitcoin futures trader unable to cover losses, resulting in a margin call that has “bailed-in” counter parties forced to chip in and cover the shortfall, while threatening to crush confidence in yet another major cryptocurrency venues.
According to astatement posted by Hong Kong’s OKEx crypto exchange on Friday, a long position in Bitcoin futures that crossed on Monday, July 30, had a notional value of about $416 million. After Bitcoin prices dropped sharply in subsequent days, OKEx moved to liquidate the position on Tuesday, “but the exchange was unable to cover the trader’s shortfall as Bitcoin’s price slumped.”
The exchange, which identified the problem trader only by an anonymous ID number 2051247, said the position was initiated at 2 a.m. Hong Kong time on July 31.
“Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks,” OKEx said. “However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”
The exchange was forced to inject 2,500 Bitcoins, roughly $18 million at current prices, into an insurance fund to help minimize the impact on clients. And since OKEx has a “socialized clawback” policy for such instances, it also forced other futures traders with unrealized gains this week to give up about 18 percent of their profits.
As Bloomberg notes, “while clawbacks are not unprecedented at OKEx, the size of this week’s debacle has attracted lots of attention in crypto circles.”
The episode underscores the risks of trading on lightly regulated virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from traditional stock and bond markets. Crypto platforms have been dogged by everything from outages to hacks to market manipulation over the past few years, a period when spectacular swings in Bitcoin and its ilk attracted hordes of new traders from all over the world.
“Everyone is talking about it,” said Jake Smith, a Tokyo-based adviser to Bitcoin.com, in reference to the OKEx trade.
And while everyone also wants to now how much capital was actually at risk, the biggest question is just how much margin there was in the trade. The problem here is that the exchange – ranked No. 2 by traded value – allows clients to leverage their positions by as much as 20 times.
For those who rhetorcially tend to ask “what can possibly go wrong” after every bitcoin slump, well now you know.
What happens next?
OKEx, which requires traders to pass a quiz on its rules before they can begin investing in futures, outlined planned changes to its margin system and liquidation procedures that it said would “vastly minimize the size of forced liquidation positions” and make clawbacks less frequent.
According to Bloomberg, clawbacks are unique to crypto markets and expose the exchanges who use them to reputational risks when clients are forced to absorb losses, said Tiantian Kullander, a former Morgan Stanley trader who co-founded crypto trading firm Amber AI Group.
“It’s a weird mechanism,” Kullander said.
Finally, judging by the bounce in bitcoin, the market appears relieved that it has identified the culprit of the selling, and with no more liquidation overhang left, is once again pushing prices across the crypto space higher.
What is the next step when you have a speculative asset whose value (may go to zero or $250,000 ) in the near future? Why start writing insurance policies on it, of course! That’s the line of logic employed in the world of cryptocurrencies, as the newly formed crypto insurance business is booming.
To be sure, there is ample demand and soaring interest in crypto insurance, according toBloomberg. After all, with fat premiums and no insurer on record to date of ever paying out a claim, why wouldn’t there be?
Furthermore, one can rarely go a few weeks without a headline about a major crypto exchange getting hacked, sometimes with hundreds of millions of dollars being lost in the process. Such was the case with the hacks of Bitfinex and Mt. Gox. Remember this stud?
Mark Karpeles, Mt. Gox CEO
As a result of this “accident prone” asset class, major players in the insurance and finance industry believe that the future for crypto insurance is bright. AsBloombergnotes, a representative from Allianz said it “could be a big opportunity.” Which is why Allianz is offering the product:
“Insurance for cryptocurrency storage will be a big opportunity,” said Christian Weishuber, a spokesman for Allianz, which began offering individual coverage for digital-coin theft in the past year and is one of the few insurers that agreed to talk about the issue. “Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.”
In addition, two other major crypto-insurance shops – Marsh & McLennan and Aon – said business has been booming over the last year.
While the cost is still beyond reach for many fledgling companies, Marsh & McLennan and Aon, the two leading insurance brokers that help companies shop for crypto policies, say business has been brisk this year. For the first time, Marsh formed a team of 10 dedicated to servicing blockchain startups.
Aon, which claims to have over 50 percent of the market for crypto insurance, recently streamlined its standard policy form to speed up the underwriting process. It has also seen some insurers tweak general company policies to include crypto-specific protections.
Whil Marsh and Aon declined to identify their partners, people familiar with the matter say over a dozen underwriters, including Chubb and XL, currently provide coverage to crypto-related businesses. And here is a blast from the past: none other than AIG has also been adding crypto coverage into standard policy forms, and said it’s met with cryptocurrency custodians and trading platforms about coverage, however, the firm “declined to say how much in crypto-related premiums it’s taken in.”
There may be a simple explanation for the enthusiasm to sell insurance: Marsh and Aon said that, so far, they are not aware of any insurance companies that have had to actually pay out on any claims, even as 2018 is supposed to be the “busiest year for hacks on record”. It’s probably safe to say that it won’t be long before claims are paid out. Big ones.
With 2018 on track to be the busiest year for hacks on record, the potential for a reputational black eye is perhaps one reason many insurers have declined to speak publicly about crypto. Lloyd’s of London, the world’s oldest insurance market, published a bulletin this month with guidance on crypto coverage and asked its agents to “proceed with a level of caution that recognizes the risks.”
Meanwhile, demand for insurance will only grow as it gives start-ups an air of credibility when try to raise capital, providing some modest cover for a business that has generally been speculative and regarded as somewhat dangerous.
It’s no small irony that the crypto industry, which originally sprung out of a techno-utopian desire to liberate its users from the traditional financial system, is embracing insurance as a way to go mainstream.
“I see it is a required step,” saidLucas Nuzzi, director of technology research at Digital Asset Research. Coverage can reduce investor concerns and make it easier to work with banks. “It definitely helps legitimize the industry.”
For example, Trustology, a London-based startup focused on crypto custody services, is in talks to obtain coverage that would insure its customer accounts up to 85,000 pounds — the same standard as a U.K. bank account — to help attract more clients. It’s also looking at self-insuring client funds.
And while even major crypto exchanges like Coinbase are starting to buy this type of insurance, in the case of the most popular US crypto exchange, it is only on a “fraction” of their holdings.
Coinbase, one of the most widely used crypto exchanges, buys insurance for a fraction of the digital coins it holds. Funds stored in so-called hot wallets, which may contain up to 2 percent of client assets and are used in active trading, are covered. Coinbase’s disclosures don’t provide details on how much coverage is provided for its remaining coin deposits, which are stored offline as a security measure.
Finally, selling crypto insurance for now remains a goldmine, with insurance companies able to charge a significant premiums, as underwriters can charge a crypto-related company upwards of five times or more than your average business for coverage against loss or theft, according to Bloomberg.
That said, like with any other other financial security boom, where derivatives of derivatives wind up in bloom during the first stage, many are skeptical about how long of a runway the field of crypto insurance will have, especially given the fact that the underlying asset value would will likely be for the determined by regulators in the future – and the decision will likely prove to be extremely volatile, leading to a painful bust for the insurance industry.
More than a thousand ofcryptoprojects are “already dead” as of June 30, 2018, according to a recent TechCrunchreport. The news outlet has based its claim on data from two websites:CoinopsyandDeadCoins.
Coinopsy provides daily reviews of various cryptocurrencies, including ones that are already “dead.” It defines a “dead” token as exhibiting at least one of the following:
“abandoned, scammed, website dead, no nodes, wallet issues, no social updates, low volume or developers have walked away from the project.”
According to Coinopsy’s list, there are 247 “dead” coins as of press time. These include the notoriousBitconnectthat wasshut downin January 2018 and is described by the website as “the most successful ponzi-scheme in crypto so far.”
DeadCoins similarly has a 830-item long list of “dead” cryptocurrencies. Among them is the recent Titanium Blockchain Infrastructure Services initial coin offering (ICO) that wasshut dowby the U.S. Securities and Exchange Commission (SEC) for fraudulent practices.
According to the SEC’s press release, Titanium has raised $21 million from investors from the U.S. and other countries. In its statement, the SEC warned investors about ICOs as an extremely risky type of investment:
“Having filed multiple cases involving allegedly fraudulent ICOs, we again encourage investors to be especially cautious when considering these as investments.”
As CointelegraphreportedFriday, the volume of ICOs has reached $13.7 billion in 2018 so far, which is already twice as much as the market amounted to in the entire 2017. According to TechCrunch, scam and dead ICOs raised $1 billion in 2017.
On June 21, Nasdaq CEO Adena Friedmanwarnedthat ICOs pose “serious risks” for retail investors, claiming that projects that raise money this way have “almost no oversight.”
Earlier in June, crypto evangelist John McAfeesaidthat he will stop promoting ICOs due to alleged threats from the SEC.
The Digital Currency Research Lab at the People’s Bank of China has filed more than 40 patent applications so far – all as part of an aim to create a digital currency combining the core features of cryptocurrency and the existing monetary system.
A national digital fiat currency, say what?
Data from China’s State Intellectual Property Office (SIPO) revealed two new patent applications on Friday, pushing the total number submitted by the lab to 41 over the 12 months since itslaunch.
Each of the 41 patent applications focuses on a certain aspect of a digital currency system, and, when combined, would create a technology that issues a digital currency, as well as provides a wallet that stores and transacts the asset in an “end-to-end” fashion.
For instance, the most recently revealed patent application explains how the envisioned digital wallet would allow users to check any transactions made through the service, while earlier documents offered details on how the wallet can facilitate transactions.
The ultimate goal, according to PBoC’s patents, is to “break the silo between blockchain-based cryptocurrency and the existing monetary system” so that the digital currency can sport cryptocurrency-like features, while being widely used in the existing financial structure.
Last week’s patents further explain that the envisioned wallet would not be limited, like a typical cryptocurrency wallet, to merely storing the private key to a certain asset. Nor would it be like another mobile payment service that only reflects a number on an application’s front-end interface without users actually holding the assets in a peer-to-peer manner.
Instead, the patents indicates the wallet would store a digital currency issued by the central bank or any authorized central entity that is encrypted like a cryptocurrency with private keys, offers multi-signature security and is held by users in a decentralized way.
The research lab said in one of the documents that it believes it is building a mechanism that makes a crypto-featured digital currency more applicable in the financial world.
The hybrid approach is also in line with opinions shared by the PBoC’s vice governorFan YifeiandYao Qian, the head of the research lab, who have both argued for a balance between the two polars of centralization and decentralization.
Overall, the patent applications filed so far signal the continuous efforts made by China’s central bank to develop its own central bank digital currency, as well as to potentially widen the application’s role among other central institutions.
The lab notably commented in a patent application released in November 2017:
“The virtual currencies issued by private entities are fundamental flaws given their volatility, low public trust, and limited useable scope. … Therefore, it’s inevitable for the central bank to launch its own digital currency to upscale the existing circulation of the fiat currency.”
Read one of the most recent patent applications below:
Some people seem to believe that Bitcoin might be worthless, we discuss their arguments.
If there was value in Bitcoin, how would we know?
Shared delusions, are they useful?
The case for Bitcoin having no value at all
(Hans Hauge) If you’ve readanythingI’vewrittenso far, you know that I’m long Bitcoin (BTC-USD). However, that doesn’t mean I’ve turned a blind eye to the crowd that says it’s all an illusion, that Bitcoin is intrinsically worthless.
Let’s take a look at who is making these arguments, and what they’re saying.
If I understand correctly, Mr. Buffet believes that Bitcoin is super tasty but very poisonous, like a Big Mac times itself, and Charlie Munger is trying to say that the Bitcoin market is pure FOMO, or the Fear of Missing Out. Therefore, Bitcoin is doomed.
Putting these ideas to the test
I hope you are a data driven person like me. I believe there’s no better way to have a clear understanding when people’s tempers are raging than to just look at data and slowly and carefully think about what makes sense.
Let’s start with Jamie Dimon’s argument that all governments in the world will ban Bitcoin. How does this argument stack up? Let’s look at what’s going on in the three largest economies in the world.
All governments to ban Bitcoin?
While China has placed a temporary ban on Bitcoin exchanges and ICOs, China’s state TV recently said that blockchain could beten times more valuable that the internet. While it may seem that China is falling in line with Mr. Dimon’s prediction, it’s worth noting that when the latest ban went into effect, business didn’t stop, it just moved to places with a more friendly regulatory environment, such asSwitzerland, JapanandSouth Korea.
In Japan, eleven Bitcoin exchanges are recognized by theFSA, andBitcoin is legal tender. This would seem to be at odds with the idea that every government in the world is going to ban Bitcoin.
When governments move too quickly to ban new technology, the country they represent ends up getting left behind. Coinbase for example, has20 million users and has traded over 150 billion dollarsof cryptocurrencies to date. This kind of economic activity is creating jobs and driving innovation.
Will governments regulate cryptocurrency exchanges? Of course, and they already are.
Will every government in the world ban cryptocurrency outright? I’m not convinced it’s going to happen, especially with what we’re seeing in the US and Japan so far.
I think people forget that Bitcoin is not some magical beast that lives in isolation. It’s a network with many stakeholders and it represents something different to each group. Bitcoin has created an ecosystem that includesBitcoin Miners, Software Engineers, Exchanges, Cloud infrastructure likeBlockchian as a Service, Merchants, Users, and of course, the speculators and the scammers.
Let’s look at some data.
FOMO or subject of scholarly research?
If Bitcoin was just FOMO, then surely academic interest in the subject would be small, and certainly not growing over time. What’s the big deal after all?
FOMO or a life raft for those living in oppressive regimes?
If Bitcoin was just speculation, surely the countries with the highest search volume for the term “Bitcoin” would be wealthy countries where people are throwing money around, rather than in troubled places where a censorship resistant currency might be of use. As you can see, with the exception Finland in 2012, the interest is overwhelming coming from troubled geographic areas.
Number one Country by Search Volume for the term “Bitcoin”
To say that Bitcoin has no value is to say that academics (students and professors), governments, venture capitalists, software engineers, hiring managers, and people living in the most troubled areas of the world are completely off their rockers because they dare to challenge our assumptions about what value is and the ways in which it might be transferred.
Is Bitcoin a shared delusion? Sure, but so are lines of latitude and longitude, global time standards, our existing money system, right and wrong, cultural norms, beauty, art and hope. The more important question is, does this shared delusion give us something back? Do we gain something by believing in it?
For me, the answer is clear. I think Bitcoin is one of the most powerful forces for the rights of the individual. I think Bitcoin can at onceweaken the oppressors of the downtroddenand create opportunity for the bold.
It may challenge our assumptions that money might come from the crowd, rather than from on high. But, maybe this time it’s up to us to save ourselves? Ask yourself what it might mean to live in a world where currencies exist that reach the entire globe and yet don’t require the backing of a military. I don’t know for sure what it means, but I’ve decided to follow this path and find out for myself, rather than relying on the old guard to hand down truth to me.
There’s an old saying on Wall Street that when times are good, you should focus on the return on your capital, but when times are bad, you should only care about the return of your capital. A flight to quality asset then is anything that tends to go up in times of turmoil because investors perceive it as a safe place to park their money.
Upon first glance, Bitcoin is a terrible candidate for such a role. It’s volatile, hard to understand, and difficult to access given how it exists outside of the traditional banking system.
So why would anyone consider it desirable during a crisis? Because it exists outside of the traditional banking system.
One of the first parabolic up-moves for the cryptocoin began with a banking crisis in Cypress. Back in 2013, while still reeling from the aftermath of the financial crisis, the tiny Mediterranean country found its banking systemteetering, and reached out to the bigger European powers for help.
But instead of offering them a bailout, the EU came back with something more along the lines of a bail-in, as it demanded that Cypriot banks confiscate a portion of their customers deposits to shore up their balance sheets. To add insult to injury, they also imposed capital controls that prevented people from moving their money to a safer jurisdiction.
As you can see on the chart below, a decentralized form of money like Bitcoin, despite its drawbacks, can suddenly look very appealing when the centralized system starts to falter.
Crypto skeptics who tell us that digital money should not be worth anything often forget that fiat money like the Euro is also in of itself worthless. It’s only valuable when someone else is willing to trade a good or service for it. But you can’t get anything in exchange for money that the government is taking or locking up, which is why the Cypriot crisis brought a lot ofattentionto the then relatively unknown Bitcoin.
Government officials don’t like cryptocurrency because they transfer the sovereignty of money from their control to a decentralized consensus mechanism, a transfer that they view as a downgrade in the quality of money. If our existing system of money and banking was always stable, they would have a point.
Buteverytimethereis acrisis, it reminds the public that the folks in charge are not as smart as they think they are. When those same leaders respond to the crisis withdraconian capital controls (or selective bailouts for theironceandfutureemployers on Wall Street) they remind the public that they aren’t as fair as they think they are, either. Bitcoin might be volatile and hard to understand, but it’s always fair, because math does not discriminate, nor does it change the rules when people start to panic.
So why bring this issue up now?Because there is financial trouble brewing in certain corners of the global financial system, and if things continue to deteriorate, this year might serve as an important test of the crypto economy.
IranandVenezuelaare in the midst of the kinds of hyper inflationary currency death spirals that bring societies to their knees. In Argentina, the peso hasfallento an all-time low against the dollar as inflation and interest rates spike. Turkey is having problems ofits own, and China continues to do everything it can to prevent its citizens from liberating their own money.
Some of this weakness was to be expected, because the Federal Reserve is now removing the liquidity it has provided for the past decade. But there’s a bigger issue in play, as the perennial economic mismanagement of developing nations is now rubbing up against the increasing political instability (Brexit, Trump, Catalonia, Five Star) of developed ones.
In the old days, the two best candidates for flight to quality assets were gold and the Dollar. But the former is hard to get a hold of and even harder to store, and the latter is no panacea either. When the Argentinian government last devalued its currency back in 2001, it first forced all local banks to convert the dollar-denominated accounts of its citizens to the Peso. Even the citizens that were smart enough not to trust the local currency had their savings destroyed, learning the valuable lesson that dollars in the bank is not the same as dollars under the mattress.
One of the most important takeaways from past financial crisis is that when the stuff hits the fan, banks are nothing more than a policy tool for the government.
So can a cryptocurrency like Bitcoin be considered a flight to quality asset for certain countries? Given everything we’ve learned in the past 20 years, a better question to ask might be how could it not.
From “Bitcoin is a fraud” in September to “Busted for Bitcoin fraud” in April.
Reuters reportsthat JPMorgan Chase & Co has been hit with a lawsuit in Manhattan federal court accusing it of charging surprise fees when it stopped letting customers buy cryptocurrency with credit cards in late January and began treating the purchases as cash advances.
Simply put, the bank switched from charging regular interest rates to charging, higher, cash advance rates on purchases of cryptocurrencies without notice to customers about the change.
The named plaintiff in the lawsuit, Idaho resident Brady Tucker, was hit with $143.30 in fees and $20.61 in surprise interest charges by Chase for five cryptocurrency transactions between Jan. 27 and Feb. 2, his lawsuit said.
With no advance warning, Chase “stuck the plaintiff with the bill, after the fact of his transactions, and insisted that he pay it,” the lawsuit said.
Hundreds or possibly thousands of other Chase customers were hit with the charges, Tucker said.
The lawsuit is asking for actual damages and statutory damages of $1 million.
Wall Street rethinks blockchain projects as euphoria meets reality
NEW YORK (Reuters) – Wall Street has been much more excited about the system underpinning bitcoin than the cryptocurrency itself, but the global financial industry has not yet been able to do much with the technology known as blockchain.
Reuters has found several blockchain projects launched by major financial institutions that have been shelved, as development of the technology enters a hype-meets-reality phase.
The casualties include projects by the Depository Trust & Clearing Corporation (DTCC), BNP Paribas SA (BNPP.PA) and SIX Group, Reuters has found.
These were among the wave of blockchain tests touted by the financial industry over the past few years, as firms bet the new technology would displace much of the sector’s infrastructure, cutting out middlemen, speeding transactions and reducing costs for things like securities and payments processing.
Yet as some projects were developed, companies pulled back for various reasons – from costs to industry readiness, underscoring that, for all its potential, blockchain is still in its early days.
DTCC, known as Wall Street’s bookkeeper, recently put the brakes on a blockchain system for the clearing and settlement of repurchase, or repo, agreement transactions, said Murray Pozmanter, head of clearing agency services at the DTCC.
The project, which had successfully tested with startup Digital Asset Holdings (DA), was shelved because banks and other potential users believed the same results could be achieved more cheaply using current technology, he said.
“Basically, it became a solution in search of a problem,” he said.
Post-trade services provider, SIX Securities Services, a unit of the group that operates Switzerland’s stock exchange, has also decided not take into production a prototype built by DA for the processing of securities, SIX spokesman Jürg Schneider, told Reuters.
“We wanted to go into another direction,” Schneider said.
The partnership with DA, run by former JPMorgan Chase & Co (JPM.N) executive Blythe Masters, was announced in 2016.
French bank BNP Paribas in 2016 said its securities services division had partnered with startups including SmartAngels to build a platform for private small businesses to manage their securities.
The bank stopped work on the project, and will instead team up with other financial institutions on another blockchain initiative called LiquidShare, said a source familiar with the matter. “Creating an enterprise-wide robust blockchain platform requires the full cooperation of the whole post trade ecosystem,” the source said.
PROOFS OF CONCEPT
The DTCC, BNP Paribas and SIX tests were among a barrage of blockchain “proofs of concept” announced with great fanfare by financial institutions.
“A large part of the problem has been expectation management, or rather lack thereof by many vendors and large consultancies that made claims that could not be fulfilled in the time spans they had said on stage at fintech events,” said Tim Swanson, founder of technology advisory Post Oak Labs.
Reuters reported last week JPMorgan was considering spinning off its marquee blockchain project Quorum. In July a partnership between settlement provider Euroclear and startup Paxos to develop a blockchain service was dissolved.
Still, other projects are moving forward.
Pozmanter said the DTCC is still examining another project with DA and that it is close to testing a blockchain-based trade information warehouse set to launch next year.
“We’re still bullish on the technology,” Pozmanter said.
The repo test with DA “met all its stated goals” and led to a new project that DTCC is examining, said DA spokeswoman Vera Newhouse.
SIX is working on a blockchain project with Nasdaq (NDAQ.O) and Australia’s stock exchange ASX Ltd (ASX.AX) said in December that DA will help replace its registry, settlement and clearing system, By one of the most ambitious projects to receive a green light.
The Legendary Trace Mayer – Bitcoin’s Cold Winter: How Many Will Get Wrecked While Some Reap Riches
After an epic rise from $162 up to $19,886 in just over two years, the price of Bitcoin fell by nearly 70% between December 17, 2017 and February 6, 2018, to under $6,000. Alternative cryptocurrencies (altcoins) came under tremendous pressure too, and some of them lost 80-90% of their recently achieved all-time highs. Meanwhile, at least Bitcoin was able to recover some of those losses and temporarily reached $11,300 again. But over the past three weeks, the whole sector has came under tremendous pressure again.
Steven Seagal – actor, Zen master, musician, director, martial arts instructor and now crypto ambassador – has reportedly walked away from the Bitcoiin project, along with its anonymous founders, after closing out an ICO that may or may not have raised its targeted $75 million.
No one knows, really, and that seems to be a recurring problem with ICOs, highlighting the danger of celebrity-sponsored coins that seem exciting but offer no protection from potential fraud.
Seagal may have been the face of the alt coin, but the founders remain masked.
Rolled out in January this year, Bitcoiin andBitcoiin2Genset out to raise $75 million during its initial coin offering (ICO), which was scheduled to wrap up on 30 March until the plug was pulled a week early, with both Seagal and the mysterious founders exiting,according to Cointelegraph.
No one knows how much they raised, buttheir websitesuggests they hit their mark. The problem is, there no way to verify that.
Thefounders claimthat they have withdrawn their association with the company to help establish total decentralization, explaining that Bitcoiin will become an anonymous cryptocurrency controlled by no one, with a new CEO appointed to lead the website.
“As Bitcoiin goes through the conversion phase from token to mineable coin we wish to advise that Bitcoiin will join the likes of the original Bitcoin and become a truly open source. Therefore a big thank you to the Founders and to our Brand Ambassador whom we wish all the best in their future endeavors. However, from this point on Bitcoiin will function within its ecosystem and become a genuinely anonymous cryptocurrency with no individual or individuals having control over the entity!”
And Seagal has remained tight-lipped.
So Seagal ostensibly helped give birth to Bitcoiin, and now it’s time to set it free to grown independently. But many will wonder whether this is practical crypto parenting, or a trip down Ponzi scheme lane.
Following his appointment as the coin’s brand ambassador, the U.S. Securities and Exchange Commission (SEC)ruledthat “Steven Seagal has to ensure that the Bitcoiin investments are appropriate and in compliance with federal and state securities laws.”
The SEC hasn’t been at all keen on celebrity involvement in promoting cryptocurrencies, issuingearlier warningsabout ICOs with celebrity ambassadors.
In recent months, celebrities such as actors Jamie Foxx and William Shatner, boxer Floyd Mayweather and hotel heiress Paris Hilton, among others, have publicly endorsed several projects ahead of their respective token sales.
U.S. regulators targeted Bitcoin and Steven Seagal earlier this month, following a March 7th securitiesfraudcease and desist order issued by New Jersey. Shortly afterwards, Tennessee followed suit with its own investorwarning.
BehindMLM, a blog that tracks marketing schemes, claims that Bitcoiin is essentially a Ponzi scheme that will end in disaster, much like Bitconnect.
“B2G will likely follow the trajectory of other altcoin Ponzi schemes. A flurry of initial trading will see the value briefly pump, before reality sets in and B2G plummets to $0,” BehindMLM wrote.
Bitconnectcurrently faces a mounting series of lawsuits and regulatory action following its quick rise and fall as one of the most notorious crypto exit scams.
Over the past few months, theSEC has hinted at a crackdownon ICOs. The SEC has recently reiterated its earlier position that many “tokens” sold in ICOs are in fact securities and must be treated as such and register with the regulatory body.
ICO proceeds havesurged, from $96.3 million in 2016 to little under $4 billion last year. More than 180 new ICOs are scheduled to launch in 2018 and they’ve already flown past regulatory radar.
The SEC’s crypto statements have become increasingly vehement as the dangers of fraud compound daily. Last month, the agency reportedly sentsubpoenasto dozens of tech companies and individuals involved in cryptocurrency.
Sky news reportsthat Twitter is preparing to prohibit a range of cryptocurrency advertisements amid looming regulatory intervention in the sector.
The microblogging platform is following similar moves by Facebook and Google which have restricted financial advertisements due to concerns about illicit activities.
Sky News understands that the new advertising policy will be implemented in two weeks and currently stands to prohibit advertisements for initial coin offerings (ICOs), token sales, and cryptocurrency wallets globally.
The reaction was swift, just as we have seen to the other crypto ad bans… smashing Bitcoin back below $7500 (into mystery-dip-buyer territory)…
But Ethereum and Ripple have been the worst performers since the crypto ad bans began…
In upstate-New York, the City of Plattsburgh is moving toward installing a moratorium on commercial cryptocurrency mining operations, amid concerns from the council that it could drain the city’s electricity supplies.
The WaterTown Daily Times reportsthat the problem is that mining for cryptocurrency, such as Bitcoin, absorbs a tremendous amount of energy in generating the virtual currency. Municipal Lighting Department Manager Bill Treacy says there are two mining farms in the city that they know of – one in the former Imperial Mill and one in Skyway Plaza, and there may be some smaller private mining operations in households in the city, he said.
The mining farms in the City of Plattsburgh have cropped up over the past year, officials say; and at times they have used up to 11.2 megawatts of power per month, which can be about 10 percent of the city’s power supply — more than is consumed by Georgia-Pacific, one of the city’s largest users.
This is a problem because, as part of the Municipal Electric Utility Association since the 1950s, the city is allotted a certain amount of inexpensive hydro power generated on the St. Lawrence River.
The cheap power has allowed the city to maintain attractive electric rates for households and businesses for more than half a century.
At one time, the city was touted as having some of the lowest rates in the nation.
But when usage is high, the system is in jeopardy of going over its allotment of inexpensive hydro power.
When that happens, the city must buy much more-expensive power on the open market to supplement its supply, which drives up the cost for consumers, Treacy said.
The hydro power costs 4.92 cents per megawatt hour, compared with 37 cents for alternative power. And that means ‘average’ Plattsburghians are facing notably higher costs due to the mining operations.
When the city has to purchase more power, its customers see a spike in their monthly bills.
Treacy said the average home will probably see an increase of $30 to $40 or more in their monthly bill.
“People are surprised when their bills are so high because they say that they turn the lights off when it is cold to save energy, but lights don’t really use much power,” he said.
“It’s the electric heat that is costly.”
Read said the moratorium is proposed not only to give the city time to explore the cost impact, but for health and safety factors.
Pursuant to the authority and provisions of Section 10 of the Municipal Home Rule Law of the State of New York and the statutory powers vested in the Common Council of the City of Plattsburgh to regulate and control land use and to protect the health, safety and welfare of its residents, the Common Council of the City of Plattsburgh hereby declares an eighteen (18) month moratorium, on all applications or proceedings for applications, for the issuance of approvals or permits for the commercial cryptocurrency mining operations in the City of Plattsburgh. This moratorium will allow time for the zoning code and municipal lighting department regulations to be amended to regulate this potential use.
It is the purpose of this Local Law to allow the City of Plattsburgh the opportunity to consider zoning and land use laws and municipal lighting department regulations before commercial cryptocurrency mining operations results in irreversible change to the character and direction of the City.
Further, it is the purpose of this Local Law to allow the City of Plattsburgh time to address through planning and legislation, the promotion of the protection, order, conduct, safety health and well-being of the residents of the City which are presented as heightened risks associated with commercial cryptocurrency mining operations.
It is the purpose of this Local Law to facilitate the adoption of land use and zoning and/or municipal lighting department regulations to protect and enhance the City’s natural, historic, cultural and electrical resources.
As WCAX reports, one of the mining operators, David Bowman of the Plattsburgh BTC, suggested a solution:
“You know you need to like protect people in the town from being adversely affected by increased electricity rates but I think there are ways to do that like possibly charging the miners more,”
“I think it’s not a great idea to just completely ban the whole thing– it’s just too new.”
Yet no one interviewed the Bitcoin miners. We wonder why?
Since bitcoin first seeped into the public consciousness in 2013, the stereotypical image of the cryptocurrency trader is the 25-year-old tech bro who uses phrases like “YOLO” and “FOMO” when describing his trading strategy and general investing philosophy.
In more recent years, the image of the mom-and-pop crypto trader has taken hold,as Mrs. Watanabe– the archetypal Japanese and South Korean house wife once known for trading foreign exchange – has migrated to trading bitcoin and ethereum.
But as theFinancial Timespointed out in a story about financial professionals dabbling in crypto markets, the hoodie-wearing twenty something described above isn’t entirely representative of the crypto community. In fact, many former Wall Street professionals – some with backgrounds working at hedge funds or quantitative trading shops – have embraced cryptocurrency trading.
And while the allure of obscene returns is obviously one reason for the attraction, one venture capitalist interviewed by the FT offered an even more revealing answer:
He embraced crypto after becoming disillusioned with traditional markets, which “no longer make sense” thanks to nearly a decade of central bank intervention.
“I’ve been out of the stock market because it stopped making sense to me,” he says. Central bank support for the markets plus the trend of passive investing have turned it into a game with unclear rules.
“Over the past few years or so, everyone has just been buying indexes and they haven’t been doing price discovery. They’re just investing in a trend of something going up and up and up,” he says.
Until very recently, volatility in global stock markets had fallen to one of the lowest levels in history – making life difficult for quantitative traders who leverage up and play for small moves.
But in the crypto market, circumstances couldn’t be more different. Such high volatility is essentially a quantitative traders’ dream.
“In a days worth of cryptocurrency movement you have a week or a month of equity market movement or a decade of country debt,” he said.
Another apt description came from a hedge fund trader who said financial professionals are drawn to bitcoin for the same reasons they’re drawn to the poker table.
“It’s fun,” one hedge fund trader said, adding that she did not want “fomo,” the acronym for ‘fear of missing out’. One London-based banker was more blunt: it was gambling for people who could afford to lose a bit of money. “That’s it. Nothing else.”
Only one thing matters in bubble markets: sentiment
Yesterday saw Jerome Powell sworn into office as the new Chairman of the Federal Reserve, replacing Janet Yellen. Looking at the sea of red across Monday’s financial markets, Mr. Powell is very likely *not* having the sort of first day on the job he was hoping for…
Jerome H. Powell, new Chairman of the Federal Reserve.
Also having a rough start to the week is anyone with a long stock position or a cryptocurrency portfolio.
The Dow Jones closed down over 1,200 points today, building off of Friday’s plunge of 666 points. The relentless ascension of stock prices has suddenly jolted into reverse, delivering the biggest 2-day drop stocks have seen in years.
But that’s nothing compared to the bloodletting we’re seeing in the cryptocurrency space. The price of Bitcoin just broke below $7,000 moments ago, now nearly two-thirds lower from its $19,500 high reached in mid-December. Other coins, like Ripple, are seeing losses of closer to 80% over the same time period. That’s a tremendous amount of carnage in such a short window of time.
And while stocks and cryptos are very different asset classes, the underlying force driving their price corrections is the same — a change in sentiment.
Both markets had entered bubble territory (stocks much longer ago than the cryptos), and once they did, their continued price action became dependent on sentiment much more so than any underlying fundamentals.
The Anatomy Of A Price Bubble
History is quite clear on how bubble markets behave.
On the way up, a virtuous cycle is created where quick, out sized gains become the rationale that attracts more capital into the market, driving prices up further and even faster. A mania ensues where everyone who missed out on the earlier gains jumps in to buy regardless of the price, desperate not to be left behind (this is called fear of missing out, or “FOMO”).
This mania produces a last, magnificent spike in price — called a “blow-off” top — which is then immediately followed by an equally sharp reversal. The reversal occurs because there are simply no remaining new desperate investors left to sell to. The marginal buyer has suddenly switched from the “greater fool” to the increasingly cautious investor.
Those sitting on early gains and looking to cash out near the top start selling. They don’t mind dropping the price a bit to get out. So the price continues downwards, spooking more and more folks to start selling what they have. Suddenly, the virtuous cycle that drove prices to their zenith has now metastasized into a vicious cycle of selling, driving prices lower and lower as panicking investors give up on their dreams of easy riches and increasingly scramble to limit their mounting losses.
In the end, the market price retraces nearly all of the gains made, leaving a small cadre of now-rich early investors who managed to get out near the top, and a large despondent pool of ‘everyone else’.
We’ve seen this same compressed bell-curve shape in every major asset bubble in financial history:
And we’re seeing it play out in real-time now in both stocks and cryptos.
The Bursting Crypto Bubble
It’s amazing how fast asset price bubbles can pop.
Just a month ago, the Internet was replete with articles proclaiming the new age of cryptocurrencies. Every day, fresh stories were circulated of individuals and companies making overnight fortunes on their crypto bets, shaking their heads at all the rubes who simply “didn’t get” why It’s different this time.
Here at PeakProsperity.com the demand for educational content on cryptocurrencies from our audience rose to a loud crescendo.
We did our best to provide answers as factually as we could through articles and webinars, though we tried very hard not to be seen as encouraging folks to pile in wantonly. A big reason for this is we’re more experienced than most in identifying what asset bubbles look like.
To us, the run-up in the cryptocurrencies seen over 2017 had all the classic hallmarks of an asset price bubble — irrespective of the blockchain’s potential to unlock tremendous long-term economic value. Prices had simply risen way too far way too fast. Which is why we issueda cautionary warningin early December that concluded:
So, if you’ve been feeling like the loser who missed the Bitcoin party bus, you’ve likely done yourself a favor by not buying in over the past few weeks. It is highly, highly likely for the reasons mentioned above that a painful downwards price correction is imminent. One that will end in tears for all the recent FOMO-driven panic buyers.
And now that time has shown this warning to have been prescient in both its accuracy and timeliness, we can clearly see that Bitcoin is following the classic price trajectory of the asset price bubble curve. The chart below compares Bitcoin’s current price to that of several of history’s most notorious bubbles:
This chart (which is from Feb 2, so it doesn’t capture Bitcoin’s further decline below $7k) shows that Bitcoin is now about 2/3 of its way through the bubble life-cycle, and about half-way through its fall from its apex.
Projecting from the paths of previous bubbles, we shouldn’t be surprised if Bitcoin’s price ends up somewhere in the vicinity of $2,500-$3,000 by the time the dust settles.
Did The Stock Market Bubble Just “Pop”?
Despite the extreme drop in the stock market over the past two days, any sort of material bubble retracement has yet to begin — which should give you an appreciation of how overstretched its current valuation is.
Look at this chart of the S&P 500 index. Today’s height dwarfs those of the previous two bubbles the index has experienced this century.
The period from 2017 on sure looks like the acceleration seen during a blow-off top. If indeed so, does the 6% drop we’ve just seen over the past two trading days signify the turning point has now arrived?
Crazily, the carnage we’ve seen in the stock market over the past two days is just barely visible in this chart. If indeed the top is in and we begin retracing the classic bubble curve, the absolute value of the losses that will ensue will be gargantuan.
If the S&P only retraces down to the HIGHS of its previous two bubbles (around 1,500), it would need to fall over 43% from where it just closed today. And history suggests a full retracement would put the index closer to 750-1,000 — at least two-thirds lower than its current valuation.
How Spooked Is The Herd?
As a reminder, bubbles are psychological phenomena. They are created when perception clouds judgment to the point where it concludes “Fundamentals don’t matter”.
And they don’t. At least, not while the mania phase is playing out.
But once the last manic buyer (the “greatest” fool) has joined the party, there’s no one left to dupe. And as the meteoric price increase stops and then reverses, the herd becomes increasingly skittish until a full-blown stampede occurs.
We’ve been watching that stampede happen in the crypto space over the past 4 weeks. We may have just seen it start in the stock markets.
How much farther may prices fall from here? And how quickly?
History gives us a good guide for estimating, as we’ve done above. But the actual trajectory will be determined by how spooked the herd is.
For a market that has known no fear for nearly eight years now, a little panic can quickly escalate to an out-of-control selling frenzy.
Want proof? We saw it late today in the complete collapse in XIV, the inverse-VIX (i.e. short volatility) ETN that has been one of Wall Street’s most crowded trades of late. It lost over 90% of its value at the market close:
The repercussions of this are going to send seismic shock waves through the markets as a tsunami of margin calls erupts. A cascading wave of sell-orders that pushes the market further into the red at an accelerating pace from here is a real possibility that can not be dismissed at this point.
Those concerned about what may happen next should read our premium reportIs This It?issued over the past weekend.
In it, we examine the congregating perfect storm of crash triggers — rising interest rates, a fast-weakening dollar, a sudden return of volatility to the markets after a decade of absence, rising oil prices — and calculate whether the S&P’s sudden 6% rout is the start of a 2008-style market melt-down (or worse).
Make no mistake: these are sick, distorted, deformed and liquidity-addicted bubble markets. They’ve gotten entirely too dependent on continued largess from the central banks.
That is now ending.
After so many years of such extreme market manipulation finally gives way, the coming losses will be staggeringly enormous.
The chief concern of any prudent investor right now should be: How do I avoid being collateral damage in the coming reckoning?
A 20-year-old college student from Busan committed suicide this week after losing nearly 200 million won in cryptocurrency.
Korean media reports the student had dropped out of college and was working as a social worker, but he was suffering from depression and insomnia due to the recent drop in cryptocurrency in the country.
He was found lying on his bed Thursday with a plastic compression pack around his head when found by his mother in his apartment. A 13L gas tank of helium was also found in his room according to local media.
“As we approach the 8400-8500 level, watch for volume to pick up. One of two things will happen, it will reverse sharply or drive through that level to find another level of value below. If we stall here and a lull in the market occurs, price will consolidate, and then move lower”
‘No one can predict the future, but everyone can predict the futures’
The CME (NASDAQ:CME) and Cboe/CFE (NASDAQ:CBOE), two large, well respected, USA regulated futures exchanges, recently started trading Bitcoin futures. These venues make it possible to trade on Bitcoin’s value without being exposed to the uncertainties of the mostly unregulated Bitcoin exchanges.
To understand Bitcoin futures you need to recognize, among some other things, that these futures are not in the business of predicting Bitcoin’s price.
Bitcoin Futures are Not Trying to Predict the Future!
It’s reasonable to assume that a product named a future is attempting to predict the future. For Bitcoin futures, this is definitely not what they deliver. The core utility of the futures markets is not predicting the future prices of their product but rather the secure delivery of a product at a known price, quality, and date. If there’s product seasonality (e.g., specific harvest times) or foreseeable shortages/abundances then future’s prices may reflect that but neither of these factors applies to Bitcoin.
I’m not saying that Bitcoin futures won’t be used by speculators making bets on Bitcoin-they certainly will be- but when you see Bitcoin futures trading higher or lower than the current Bitcoin exchange values (spot value) it’s not a prediction-it’s a reflection of the inner workings of the futures market.
How Are Bitcoin futures prices established?
If you look at the quotes for Bitcoin futures you’ll see at least three things, the expiration code (shorthand for a specific expiration date ) the bid (buy price) and the ask (sell price). If you’re ever confused as to which one to use in your situation it’s easy to sort out-start with the price that’s worse for you.
Important agents interacting with those prices are operating in one of three roles: individual speculator, market maker, or arbitrageur. A key role is market maker-a firm that has agreed to simultaneously act as both a buyer and seller for a specific security. When companies sign up for this role they agree to keep the bid/ask prices relatively close to each other-for example even if they aren’t keen on selling Bitcoins at the moment they can’t just set the ask price to an outrageous level. The agreed-upon maximum bid/ask ranges might be tied to market conditions (e.g., wider when deemed a “fast market”) and might allow time-outs but in general, the market maker agrees to act as a buffer between supply and demand.
The Market Makers:
The existence of market makers (e.g.,Virtu Financial) refutes a common assertion about futures-that there’s always a loser for every winner, that it’s a zero-sum game. It’s true that derivatives like stock options and futures are created in matched pairs-a long and a short contract. If two speculators own those two contracts the profits on one side are offset by losses on the other but market makers are not speculators. In general, they’re not betting on the direction of the market. They act as intermediaries, selling to buyers at the higher ask price and buying from sellers at the lower bid price- collecting the difference.
Market makers are challenged in fast markets-when either buyers or sellers are dominating and prices are moving rapidly. When this happens market makers are obligated to continue quoting bid and ask prices that maintain some semblance of an orderly market. If they start accumulating uncomfortably large net long or short inventories they may start hedging their positions to protect themselves. For example, if they are short Bitcoin futures they can buy Bitcoin futures with different expirations or directly buy Bitcoins to hedge their positions. The hedged portion of the market maker’s portfolio is not sensitive to Bitcoin price movements-their profit/losses on the short side are offset by their long positions.
The market maker’s ability to hedge out their exposure demonstrates that futures aren’t inherently a zero sum gain. They can accommodate the market and still be profitable-regardless of the market’s direction.
The arbitrageur is hyper-focused on the price difference between the Bitcoin future and the exchange price. If those prices differ enough they can lock in risk-free profits. You can imagine how much capital is available if risk-free profits are in the offing…
The arbitrageur very carefully calculates the costs of buying or shorting Bitcoin futures while selling short or buying actual Bitcoins.
These calculations include
Time value of money required for margin deposits
Transaction costs (bid/ask spread)
Contract expiration settlement price risk (Bitcoin futures are cash settled)
Borrow costs for shorting Bitcoin if going short
The amount of profit that their bosses expect from them.
Normally commodity futures arbitrageurs have to account for things like storage costs (e.g. warehouses, silos), insurance (in-case the storage facility is robbed or burns down), and seasonal price variations but none of these apply to Bitcoin, so somewhat ironically the crazy Bitcoin market is simpler for them.
Knowing their estimated costs and profit requirements the arbitrageur determines a minimum difference they need between the futures’ prices and the spot price before they will enter the market. They then monitor the price difference between Bitcoin futures and the Bitcoin exchanges and if large enough they act to profit on that gap. For example, if a specific Bitcoin future (e.g., February contract) is trading sufficiently higher than the current Bitcoin exchange price they will short that Bitcoin future and hedge their position by buying Bitcoins on the exchange. At that point, if they have achieved trade prices within their targets, they have locked in a guaranteed profit. They will hold those positions until contract expiration (or until they can cover their short futures and sell Bitcoins at a profit).
They’ll do the complementary transaction if the price of a specific future is enough lower than spot price. They’ll buy futures and short Bitcoins to lock in profits in that case.
Arbitrageurs provide a critical role in futures markets because they’re the adults in the room that keep futures prices attuned to Bitcoin exchange prices. If there are multiple futures providers (Cboe and CME in this case) they’ll also act to keep the futures from the various exchanges aligned with each other.
If Bitcoin futures prices get too high relative to spot arbitragers are natural sellers and if the futures prices get too low they are natural buyers. Their buying and selling actions naturally counteract price distortions between markets. If they’re somehow prevented from acting (e.g., if shorting Bitcoin was forbidden) then the futures market would likely become decoupled from the underlying spot price-not a good thing.
The Term Structure:
A key attribute of a futures market is how its contract’s prices vary by expiration date. The succession of futures prices over time is called the “term structure”. If supply is stable (no seasonality or shortages) then typically futures prices will increase with expirations further in the future. This term structure configuration is called “contango” and it accounts for the fact that carry costs (e.g., time value of money) and profit expectations increase with time. Unless there are big changes in interest rates or the way that Bitcoin exchanges work I expect the level of contango in the Bitcoin futures term structure to be small. Bitcoins don’t cost much to hodl (once you have your hardware wallet) and there’s no apparent seasonality. The chart below from VIX Central shows a typical Bitcoin term structure (click on chart to get current data):
Click chart for interactive version.
Cboe vs CME: Sizes & Settlement:
There are two USA regulated Bitcoin futures exchanges in operation. TheCME’s contractunit is five Bitcoins whereas theCboe’s contractunit is one-that’s the biggest difference between these futures. The upfront money to buy or sell short a CME contract will be about five times higher than the Cboe contract. Larger investors won’t care but this will be an issue for smaller investors. Another difference is the spot/settlement process that the exchanges use. In the case of Cboe futures, the contracts will be settled to a 4 pm ETGemini exchange auction priceon the day of expiration, for the CME futures the settlement price is acomplex calculationusing an hour of volume weighted data from multiple exchanges (currently Bitstamp, itBit, Kraken, and GDAX). With the CME’s approach, it will be harder to manipulate the settlement price but it doesn’t give arbitrageurs a physical mechanism to trade their positions-possibly an issue.
There’s nothing to prevent people from closing out their contracts before final settlement but typically there is some premium remaining until the very end.
Unlike many commodity futures, Bitcoin futures are cash settled rather than physically settled. Cash settlement is a relatively new development in futures trading,first introduced in 1981for Eurodollar futures, that addresses the problem of how to settle futures contracts on things that are difficult/impossible to deliver physicially-things like interest rates, large stock indexes (e.g., S&P 500), and volatility indexes (Cboe’s VIX). Futures physical settlement involves actual shipment/change of ownership of the underlying product to the contract holder but in practice, it’s rarely used (~2% of the time). Instead, most organizations that are using futures to hedge prices of future production/usage will make separate arrangements with suppliers/customers for physical delivery and just use the futures to protect against contrary price changes. In practice, the final settlement price of the contract can be used to provide the desired price protection regardless of whether the futures contract specifies physically delivery or cash-settlement.
While “physical” delivery of Bitcoins as part of a futures contract would certainly be possible it raises regulatory and security issues in today’s environment where the cybercurrency exchanges are mostly unregulated, somewhat unreliable, and theft due to security hacks is distressingly common. By selecting cash settlement the CME and Cboe completely avoid the transfer of custody issues and shift those problems to somebody else-namely the market makers and arbitrageur.
One traditional attraction of trading futures is the ability to use relatively small amounts of money to potentially achieve outsized returns. In many futures markets the margin, the amount of money that your broker requires up-front before executing the trade can be quite small compared to the ultimate value of the contract. For example, as of 22-Dec-2017, each E-mini S&P 500 contract was worth $134K ($50*S&P 500 index value)-this “list price” of the contract is called its notional value. The CME only requires you to maintain a minimum margin of $4.5K (3.4% of notional) to control this contract (brokers often require additional margin). Margin requirements this low are only possible because the volatility of the S&P 500 is well understood and your margin account balance is adjusted at the end of every trading day to account for the winnings or losses of the day. If your account balance falls below the margin minimum of $4.5K you’ll need to quickly add money to your account or your position will be summarily closed out by your broker. On the plus side, if you’ve predicted the S&P’s direction correctly your profits will be that same as if you completely owned the underlying stocks in the index. A +1% daily move in the S&P500 would yield $1340 in profit even though you only have $4500 invested- a 29% return-this multiplier effect is called leverage.
Currently, Bitcoin futures have very high margin requirements. The Cboe requires 40% of the notional amount formaintenance margin, the CME requires 43%. Your broker will likely require more than that. The culprit behind these high requirements is Bitcoin’s high volatility-until that calms down the exchanges will protect themselves by requiring a bunch of up-front money. If you don’t come up with the money for a margin call they want to close out your position without leaving a negative balance.
Because of the high margin requirements, Bitcoin futures don’t offer much leverage compared to just buying Bitcoins outright. However, Bitcoin futures do offer the trader time-tested exchanges that are not nearly as susceptible to hacks, thefts, and unscheduled downtime.
In the movie “Trading Places,” there’s awild scenewhere fortunes are made and lost in the orange juice future pit ina matter of minutes. This scene epitomizes what most of us envision futures trading to look like. The movie depicts a situation where the supply of oranges from the next harvest is unknown-and that is the source of the craziness.
Bitcoins don’t have seasonal variabilities-supply as it’s quantity is always known. This supply stability makes Bitcoin futures a lot less dramatic but in the case of Bitcoins this is a real plus-there’s already plenty of drama in the exchanges-the futures market will be the safe and quiet space. A different sort of trading places with guys like this …
Taleb: Bitcoin Is “An Excellent Idea” And “Insurance Against An Orwellian Future”
Foreword to the book It may fail but we now know how to do itby Saifedean Ammous
Let us follow the logic of things from the beginning. Or, rather, from the end: modern times. We are, as I am writing these lines, witnessing a complete riot against some class of experts, in domains that are too difficult for us to understand, such as macroeconomic reality, and in which not only the expert is not an expert, but he doesn’t know it. That previous Federal Reserve bosses, Greenspan and Bernanke, had little grasp of empirical reality is something we only discovered a bit too late: one can macroBS longer than microBS, which is why we need to be careful on who to endow with centralized macro decisions.
What makes it worse is that all central banks operated under the same model, making it a perfect monoculture.
In the complex domain, expertise doesn’t concentrate: under organic reality, things work in a distributed way, as Hayek has convincingly demonstrated. But Hayek used the notion of distributed knowledge. Well, it looks like we do not even need that thing called knowledge for things to work well. Nor do we need individual rationality. All we need is structure.
It doesn’t mean all participants have a democratic sharing of decisions. One motivated participant can disproportionately move the needle (what I have studied as the asymmetry of the minority rule). But every participant has the option to be that player.
Somehow, under scale transformation, emerges a miraculous effect: rational markets do not require any individual trader to be rational. In fact they work well under zero-intelligence –a zero intelligence crowd, under the right design, works better than a Soviet-style management composed to maximally intelligent humans.
Which is why Bitcoin is an excellent idea. It fulfills the needs of the complex system, not because it is a cryptocurrency, but precisely because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it has now a track record of several years, enough for it to be an animal in its own right.
For other cryptocurrencies to compete, they need to have such a Hayekian property.
Bitcoin is a currency without a government. But, one may ask, didn’t we have gold, silver and other metals, another class of currencies without a government? Not quite. When you trade gold, you trade “loco” Hong Kong and end up receiving a claim on a stock there, which you might need to move to New Jersey. Banks control the custodian game and governments control banks (or, rather, bankers and government officials are, to be polite, tight together). So Bitcoin has a huge advantage over gold in transactions: clearance does not require a specific custodian. No government can control what code you have in your head.
Finally, Bitcoin will go through hick-ups (hiccups). It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated expresso macchiato at your local virtue-signaling coffee chain. It may be too volatile to be a currency, for now. But it is the first organic currency.
But its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.
Binance is the largest cryptocurrency exchange in the world. Started only six months ago, they claim to clear an average 40,000 transactions per second, harvesting billions in fees for themselves.
CEO of Binance, Zhao ChengPeng talks about his vision for the future of cryptocurrency. He also offers an unique look at the process which Binance uses to select new coins to list on their exchange. This talk was given at Blockchain Revolution Conference, hosted by Jibrel Network on 17th Jan 2018
Many people are convinced that cryptocurrency will crash sooner or later and investors should at least consider the possibility that this could happen.
What to do if you believe in the future of cryptocurrency and are currently invested?
Having experienced the previous Bitcoin bear market from the end of 2013 until 2015, I will share some lessons I learned.
Down from a maximum market capitalization of about $800 billion, the cryptocurrency market has been falling to less than $600 billion in a less than 2 weeks. At moments like these, it can seem like the sky is falling. Almost all cryptocurrencies have fallen dramatically in a very short time period. The big three Bitcoin (COIN), Ethereum and Ripple are all down more than 25% from their all time highs. At the time this article gets published it could already be very different, but fact is that we reached a period of extreme volatility. What should investors who believe in the future of cryptocurrency do?
A short retrospective: the previous cryptocurrency bear market
When looking at the total market capitalization of cryptocurrency, it seems that the market has exploded in 2017. Though cryptocurrencies (especially Bitcoin) have a longer history, it was only during the previous year that the market really took off. Just look at the graph below, it makes you feel that cryptocurrency was virtually non-existent before the beginning of 2017.
This makes us almost forget that cryptocurrency already experienced some dramatic downturns in the past. It is barely visible in the graph above, but let us take a look what happens when we zoom in on the time period from the end of 2013 until 2015.
As we can see from the graph, from the end of 2013 total market capitalization of more than $15 billion dropped by about 75% to a bottom of around $4 billion in 2015. I think it is fair to say that this was a major bear market. Though there were heavy fluctuations in the price of cryptocurrency during this bear market, the entire process was much more gradual than you would expect of a market crash. Keep in mind that during this time period, a very big percentage of the cryptocurrency market capitalization consisted of Bitcoin only.
We can learn from this that, contrary to what many people are claiming, the expected ‘crash’ in cryptocurrency might as well prove to be a long bear market instead like in 2013-14.
My own experience during this bear market
At the end of 2013, I bought a limited amount of Bitcoin. Before buying I read a lot about the topic and I believed in the future of cryptocurrency. On top of this, I saw that the value of Bitcoin was booming and would not mind to get a quick win if the value kept rising quickly. But my main intention was to stay invested for a longer period of time.
At first, the value of my investment went up quickly. But of course, I did not foresee the huge bear market which started not long after I invested. At one point in time, my investment was down by about 75%. The only way I was able to stomach this bear market was by mentally writing off the entire investment. I still believed in Bitcoin though and had hope that it would recover eventually. It goes without saying that I am very happy that I didn’t sell in desperation. In hindsight, this probably means that I managed my risk tolerance in the right way, if I would have bought more Bitcoin I would have likely sold a big part of it during the downturn. A crash in cryptocurrency is different from a stock market crash: good companies still continue to pay dividend and make profit, even if their value drops dramatically. Bonds will still pay their coupon rate as long as the debtor doesn’t default. Cryptocurrency does not produce any of such income and can theoretically go to zero.
This is the reason why it is so important to manage your risk tolerance: honestly consider a worst case scenario and only buy cryptocurrency with money you can truly miss. Never buy crypto with borrowed money! You have the potential to win big, but might also lose much more than you own. People who went into debts to buy Bitcoin at the end of 2013 likely got slaughtered.
What options do investors have?
I am assuming that people who are invested in cryptocurrency believe in the long term viability of it. This article is not written for short term traders. There are a couple of things you can do when the crash or the bear market arrives.
Option 1: Sell
The first option is to sell, wait until the crash is over and maybe invest again. This strategy has the glaring downside that you might mistime and miss a lot of profit. Even worse, there might be no crash or bear market at all. But this option is especially attractive if your risk exposure is relatively high or if you are already sitting on huge profits.
Option 2: Buy the dip
If you truly believe in your investment, you can buy the dip. The difficulty of this strategy is that it stretches your exposure to risk. You might end up with a much larger risk than you intended, so be careful! When the market recovers quickly, this might be a winning strategy though.
Option 3: Wait and postpone the decision
It is said that doing nothing is often the best strategy when it comes to investing. Re-evaluation of the potential options is something which most investors do all the time, and when you are not sure, not doing anything seems like an attractive choice. Make sure your exposure to risk is within your tolerance when choosing this option!
Option 4: Protect your capital
This can be done in different ways:buying put optionsfor instance is a way to ensure you will no longer be affected by a huge downturn. Diversifying your investment between multiple cryptocurrencies is also a solid strategy to not depend on a single cryptocoin. You could also buy put options on Bitcoin and go long a different cryptocurrency if you believe the second will outperform. Also, consider your exposure to stocks, bonds and cash. There are many possibilities to diversify, but no single one is the best, they all have their advantages and disadvantages.
1. The predicted crash, if it arrives, might actually prove to be a long lasting bear market.
2. Only stay invested if you would be able to stomach a 100% loss of your crypto investment.
3. Never, and I really mean never ever, buy cryptocurrency on credit. If you did so, make this undone as soon as possible.
4. Surviving a possible crash is all about managing your risk tolerance.
5. Consider protecting your investment by diversification or buying protection.
6. Timing the market is very difficult. Do not invest to get rich quickly (unless you are a trader and really know what you’re doing).
7. If you do not believe a crash or a bear market is coming, by all means invest! But be sure to manage your risk tolerance and at least consider the possibility of a crash. It will happen eventually.
The intensifying energy consumption of the bitcoin network is becoming a concern for environmentalists who have begun to question whether digital currencies should be considered a socially responsible investment. As we pointed out last month, Digiconomist’s Bitcoin Energy Consumption Index stood at 29.05TWh.
That’s the equivalent of 0.13% of total global electricity consumption. While that may not sound like a lot, it means Bitcoin mining is now using more electricity than 159 individual countries, including Ireland and Nigeria.
As the share of the world’s electricity consumed by miners of bitcoin and other cryptocurrencies rises, miners will likely face pressure – both economic and social – to find efficiencies wherever they can.
In anticipation of this trend, a crypto startup called Comino is marketing a mining rig that also functions as a heater.
Back in October, the Next Web published areportabout the company and their new product, the Comino N1. In launching the product – priced at an affordable $5,000 per rig – the company is hoping t make it easier for novices and those who have only a glancing familiarity with crypto technology to start mining coin.
A reporter fromThe Next Webtested out the miner – and found that it both the heating and mining functions worked well. He even used it to heat his room during the winter.
After running the crypto-heater for a little over a month now, we are finally ready to share our experience with the device…
Once we installed the mining rig in our office, which practically included connecting the crypto-heater to the internet via the web-based dashboard system developed by Comino, it automatically created a wallet and began mining Ethereum. As easy as this.
Of course, if you already have a wallet, you still have the option to connect it to the dashboard. You can also connect any other mining rig to the Comino dashboard, in case you want to follow all of your mining efforts in one place.
Among other things, the online dashboard shows a number of statistics the Comino developers had programmed to monitor, including the current and average hashrate at which the miner is solving cryptographic puzzles, the current and average temperature at which it operates, as well as the unpaid balance of Ethereum you’ve accumulated. It also shows stats for the temperature of each separate GPU.
Throughout this one-month trial, the only issue I experienced with the miner was that – for some reason – its ambient temperature sensor inaccurately picked up the temperature of the GPUs inside (which had just taken a break from mining); this prevented the device from booting up again, until it cooled down a little.
And in case you were wondering about how reliable the Comino was as a heater : it certainly kept the temperature high enough to save some energy on heating bills, but not enough to make you turn on the air conditioner. Which is exactly what you want from a a machine that was built to bank on crypto.
The Comino N1 maintains an average hashrate of about 200 MH/s, and an average temperature of approximately 60 Celcius – about 140 degrees Farenheight.
Since installing the miner on Nov. 16,TNWreported that it has so far transferred a total of 1.2 ether to the company’s designated wallet. Since Ethereum is currently trading around $700 a coin, the miner would pay for itself in eight months, assuming the value of Ethereum doesn’t crash, or that an influx of new mining capacity decreases the miner’s efficiency.
In 1791, the first Secretary of the Treasury of the US, Alexander Hamilton, convinced then-new president George Washington to create a central bank for the country.
Secretary of State Thomas Jefferson opposed the idea, as he felt that it would lead to speculation, financial manipulation, and corruption. He was correct, and in 1811, its charter was not renewed by Congress.
Then, the US got itself into economic trouble over the War of 1812 and needed money. In 1816, a Second Bank of the United States was created. Andrew Jackson took the same view as Mister Jefferson before him and, in 1836, succeeded in getting the bank dissolved.
Then, in 1913, the leading bankers of the US succeeded in pushing through a third central bank, the Federal Reserve. At that time, critics echoed the sentiments of Messrs. Jefferson and Jackson, but their warnings were not heeded. For over 100 years, the US has been saddled by a central bank, which has been manifestly guilty of speculation, financial manipulation, and corruption, just as predicted by Mister Jefferson.
From its inception, one of the goals of the bank was to create inflation. And, here, it’s important to emphasize the term “goals.” Inflation was not an accidental by-product of the Fed – it was a goal.
Over the last century, the Fed has often stated that inflation is both normal and necessary. And yet, historically, it has often been the case that an individual could go through his entire lifetime without inflation, without detriment to his economic life.
Yet, whenever the American people suffer as a result of inflation, the Fed is quick to advise them that, without it, the country could not function correctly.
In order to illustrate this, the Fed has even come up with its own illustration “explaining” inflation. Here it is, for your edification:
If the reader is of an age that he can remember the inventions of Rube Goldberg, who designed absurdly complicated machinery that accomplished little or nothing, he might see the resemblance of a Rube Goldberg design in the above illustration.
And yet, the Fed’s illustration can be regarded as effective. After spending several minutes taking in the above complex relationships, an individual would be unlikely to ask, “What did they leave out of the illustration?”
Well, what’s missing is the Fed itself.
As stated above, back in 1913, one of the goals in the creation of the Fed was to have an entity that had the power to create currency, which would mean the power to create inflation.
It’s a given that all governments tax their people. Governments are, by their very nature, parasitical entities that produce nothing but live off the production of others. And, so, it can be expected that any government will increase taxes as much and as often as it can get away with it. The problem is that, at some point, those being taxed rebel, and the government is either overthrown or the tax must be diminished. This dynamic has existed for thousands of years.
However, inflation is a bit of a magic trick. Now, remember, a magician does no magic. What he does is create an illusion, often through the employment of a distraction, which fools the audience into failing to understand what he’s really doing.
And, for a central bank, inflation is the ideal magic trick. The public do not see inflation as a tax; the magician has presented it as a normal and even necessary condition of a healthy economy.
However, what inflation (which has traditionally been defined as the increase in the amount of currency in circulation) really accomplishes is to devalue the currency through oversupply. And, of course, anyone who keeps his wealth (however large or small) in currency units loses a portion of their wealth with each devaluation.
In the 100-plus years since the creation of the Federal Reserve, the Fed has steadily inflated the US dollar. Over time, this has resulted in the dollar being devalued by over 97%.
The dollar is now virtually played out in value and is due for disposal. In order to continue to “tax” the American people through inflation, a reset is needed, with a new currency, which can then also be steadily devalued through inflation.
Once the above process is understood, it’s understandable if the individual feels that his government, along with the Fed, has been robbing him all his life. He’s right—it has.
And it’s done so without ever needing to point a gun to his head.
The magic trick has been an eminently successful one, and there’s no reason to assume that the average person will ever unmask and denounce the magician. However, the individual who understands the trick can choose to mitigate his losses. He or she can take measures to remove their wealth from any state that steadily imposes inflation upon their subjects and store it in physically possessed gold, silver and private cryptocurrency keys.
And they said bitcoin would never work as a currency ツ
While that might be true for small transactions – for now – real-estate markets across the US are increasingly demonstrating that bitcoin is a viable medium of exchange. Case in point: the seller of a luxury Miami condo will only accept payment in bitcoin. The asking price –according to real-estate listings site Redfin-33 bitcoins, or about $550,000 at bitcoin’s present valuation.
According to Redfin, this is the first time a seller is exclusively accepting payment in bitcoin. The seller’s identity wasn’t immediately clear.
It begins: Miami condo on sale for 33 bitcoins – seller won't accept any other currency. First time that's happened in U.S., per Redfin https://t.co/hAvnpcL5zX
But while this might be the first time that Redfin has noticed the phenomenon, home sellers have been asking to be paid in bitcoin since at least 2013, when an anonymous seller of a luxury condo in the Trump Soho of all places listed the price as 24,700 bitcoin, according to theDaily News.While this sale was the first that was documented in the media, it’s also notable that it occurred before the first bitcoin bubble burst.
Also over the summer, a realtor in Texas revealed that one of her clients had accepted payment for their home in bitcoin. The number of coins – and the identity of the seller and buyer – weren’t disclosed.
And as we recently reported, more realtors in hot markets like New York City and Miami are demanding to be paid in cryptocurrency, sometimes exclusively.
This trend in broader crypto acceptance – contrary to mainstream media reports – is undoubtedly a factor behind the unprecedented price appreciation which has seen bitcoin soar from $1,000 to $19,000 in 2017.
Meanwhile, any buyer who has accepted bitcoin as payment and kept it, has so far managed to generate a staggering profit, given the digital currency’s aggressive appreciation. The real test will come after the digital currency inevitably tanks again.
Bitcoin is all the rage after it crossed over $10,000, a 10-bagger for the year, sparking many to look at what it is, what it isn’t, and why it’s become so popular.
Note my observations are those of a layman – which may be more useful than those of a programmer – but also those of a skeptic, which I’ll get to at the end.
First, what is Bitcoin? Well, the idea of digital money goes back to the first digits, financial mainframes. In fact, the “money” in use today throughout the financial system have long been no more than virtual 1’s and 0’s on a spinning hard drive somewhere, but the idea of Bitcoin-money, private-money, goes back further still. I mean, what is “money”? At its core, it’s no more than the most tradable good in a given society, a trading chit we use as a measurement tool, a token recording how much value we created or are owed. Arguably the first money was not gold, not seashells or even barter, but a promise. Let me borrow your net and I’ll give you a couple fish from the work. Why? Because you might break the net or I might use it, so I need to get paid for my risk, reward for my effort in making and storing the net to begin with.
Somoney at its most austere is simply a promise. But a promise to whom for what? And that’s the problem. No matter what good you use, people place differing values on it, different time-preferences, and most especially ways to cheat, game the system, and renege. This is bad among businesses, banks – who are after all only men – especially bad among governments, but worst of all among government and banks combined. Because, should the banks lie, renege, default, abuse their privilege, who then would hold them to task?
In the past, over and over, groups have created their own “money”. The whole 19th century was marked by general stores extending credit, bank notes issued by thousands of private banks, each with their own strength and solvency and geography and discounted accordingly. In the 20th century, with central banks controlling money, many cities issued local “scrip” – promises to pay – in Detroit in the Depression, or California in the budget crunch of 2009, or “Ithaca Dollars” in NY as a sort of ongoing Ivy League experiment. But the problem with these only highlight the problems with money generally:who can issue them? Everyone? A central authority? Can they deliver goods? And what can they buy, not just in value but in location?
Ithaca Dollars or California Tax Vouchers are not much good to buy oil from Texas or tea from China. People will always prefer a good that is accepted everywhere, with no decay and no discount, because ultimately the money flows away, offshore or to central taxation, which makes local currencies ever-less valuable. But even if successful it leads to a new set of problems: if Detroit or Ithaca Dollars were in high demand, there would be ever-stronger incentive to counterfeit, cheat, and double-spend them. Thus from the Renaissance to now we used reputable banks backed by force of governments, through the Gold standard and the Fiat age until today.
Enter The Hackers.
It’s not that these problems are unknown, or haven’t been approached or attempted before. Every generation, when they find the banks + government take a percentage for their costs to insure the system, thinks how can we do away with these guys, who both take too much and end up in an unapproachable seat of power? I mean, aren’t we supposed to be a Democracy? How can we have a fair society if the Iron Bank is both backing all governments at once, on both sides of a war? What good is it to work if compounding interest invariably leads to their winning Boardwalk and Park Place 100% of the time? But despite several digital attempts – some immediately shut down by government – no one had a solution until Satoshi Nakamoto.
We don’t know who Satoshi Nakamoto is, but since several of the well-meaning developers were immediately jailed for even attempting private money on reasons arguably groundless, we can suppose he had good incentive to remain anonymous. And speculation aside, it doesn’t matter: Satoshi’s addition was not “Bitcoin” per se, but simply an idea that made private currency possible. The domain Bitcoin.org was registered in 2008, showing intent, and the open-source code was promoted to a small cryptography group in January 2009. But what was it? What did it solve?
Double-spending.Basically, the problem of money comes down to trust. Trust between individuals, between the system, but also partly trust in non-interference of governments or other powerful groups. Bitcoin is a trust machine.
How Does It Work?
Well, the basic problem of cheating was one of not creating fake, hidden registers of value, as the U.S. Government, J.P. Morgan, and the Comex do every day. If they asked Yellen to type some extra zeros on the U.S. ledger, print a few pallets of $100 bills to send to Ukraine, who would know? Who could stop them? So with Bitcoin, the “value”, the register is created by essentially solving a math problem, akin to discovering prime numbers. Why do something so pointless? Simple: math doesn’t lie. Unlike U.S. Dollars, there are only so many prime numbers. We can be certain you won’t reach 11-digits and discover an unexpected trove of a thousand primes in the row. Can’t happen. However useless, Math is certainty. In this case, math is also limited. It’s also known and provable, unlike the U.S. budget or Federal Reserve accounting.
The second problem of cheating was someone simply claiming chits they did not own. This was solved by having the participants talk back and forth with each other, creating a public record or ledger. In fact, Bitcoin is nothing more than a very, very long accounting ledger of where every coin came from, and how every coin has moved since then, something computers do very well. These accounting lines register amongst all participants using a process of confirmed consensus.
Double-spending is when someone writes a check either against money they don’t have (yet) and round-robin in the money for the one second of clearing, or else write a check against money they DO have, but then cancel the check before it clears, walking away with the goods. In a standard commerce, the bank backfills fraud and loss and the government arrests, tries, and imprisons people, but it’s no small cost to do so. Although there is still a small possibility of double-spending, Satoshi’s plan effectively closed the issue: the ledger is either written, or unwritten. There is no time in the middle to exploit.
Great for him, but if I buy coins by Satoshi and the original cryptogroup, won’t I just be transferring all my value to make them rich? Although Bitcoin supply may be limited by mathematics, this is the issuer problem. It is solved because as a free, open source code, everyone has an equal opportunity to solve the next calculation.
Bitcoin starts with the original 50 coins mined in 2009, so yes, early adopters get more: but they took more risk and trouble back when it was a novelty valuable only as proof-of-concept. The original cash transaction was between hackers to buy two pizzas for 10,000 BTC ($98M today). Why shouldn’t they get preference? At the same time, we are not buying all 20 Million eventual coins from Satoshi and his close friends, which is arguably the case with the Federal Reserve and other central banks. Bitcoin is bought and created from equal participants who have been actively mining as the coins appear, that is, from doing electronic work.
This leads to the next challenge: why would anyone bother keeping their computers on to process this increasingly long accounting ledger? Electricity isn’t free. The process of “mining” is the recording of Bitcoin transactions. The discovery of coins therefore effectively pays for the time and trouble of participating in a public accounting experiment. Even should that stop, the act of using Bitcoin itself cannot be accomplished without turning on a node and adding lines to process the ledger. So we can reasonably expect that people will keep Bitcoin software “on” to help us all get Bitcoin work done. That’s why it’s a group project: public domain shareware.
What if they shut it down? What if it’s hacked? This leads to the next problem: resiliency. You have to go back a step and understand what Bitcoin is: a ledger. Anyone can store one, and in fact participants MUST store one. If Bitcoin were “shut off” as it were, it would be stored with each and every miner until they turned their computers back on. If it’s “off” there’s no problem, because no one transferred any Bitcoin. If it’s “on” then people somewhere are recording transactions. Think of it like a bowling group keeping a yearly prize of the ugliest shirt. Is there an actual shirt? No, the shirt is not the prize. Is there a gold trophy? No, “prize” is simply the knowledge of who won it. There is no “there”, no physical object at all. Strangely, that’s why it works.
This is important for the next problem: intervention. Many private monies have been attempted, notably e-gold within Bitcoin’s own origin. But the problem was, if there was anything real, like a gold bar, it could be encumbered, confiscated, and stolen. You’d have to trust the vault, the owner, the auditor and we’re back in the old system. At the same time, if Satoshi were keeping the Bitcoin record and had any human power over it at all, government could imprison him, pass a law, create a cease-and-desist, or demand he tamper with the record, which they did with e-gold. But Satoshi does not have that power, and no one else does either.
Why? Precisely because Bitcoin DOESN’T exist. It’s not a real thing. Or rather, the only “real” thing is the ledger itself which is already public to everyone everywhere. You can’t demand the secret keys to Bitcoin privacy because it’s already completely, entirely public. What would a government demand? Suppose they ordered a miner to alter the record: the other miners would instantly reject it and it would fail. Suppose they confiscated the ledger: they now own what everyone already has. Suppose they unplugged it: they would have to unplug the entire internet, and everything else on it, or every Bitcoin node, one-by-one, worldwide. If any nodes were ever turned on, all Bitcoin would exist again.
Can they track them down? Not really. In theory, Bitcoin can be written on paper without an Internet. In practice, any public or private keys certainly can be. So even chasing down the Internet it would be very difficult to stop it given sufficient motivation, like the Venezuelan hyperinflation where they are chasing down miners, wallets, and participants, and failing despite overwhelming force.
What about privacy? A completely public ledger recording every person and every transaction seems like a police state’s dream of enforcement and taxation. Is it private? Yes and no. The Bitcoin ledger is not written like “Senator Smith spent .0001 BTC on August 21st, 2015 to buy a sex toy from Guangzhou,” but Wallet #Hash2# transferred .00017 BTC to wallet #Hash3# at UTC 13:43:12 21:11:2017 – or not even that: it’s encrypted. Who is #Hash2#? You can go back, but it will only say #Hash2# exists and was created on Time:Date. Who is #Hash3#? The ledger only says #Hash3# was created a minute ago to receive the transaction. In fact, #Hash2# may have been created solely to mask the coin transferred from #Hash1#. So is it anonymous? Not exactly. Given enough nodes, enough access to the world’s routers, enough encryption, you might see #Hash2# was created in Pawtucket, and if #Hash2# is not using active countermeasures, perhaps begin to bring a cloudy metadata of #Hash2# possible transactions into focus, tying it to Amazon, then a home address, but the time and resources required to break through would be astronomical.
What about theft? Yes, like anything else it can be stolen. If you break into my house and tie me up, you can probably get the keys. This is also true online as you must log on, type a password that can be logged on a screen that can be logged over a network that can be logged, but think again about what you’re doing: does it make sense to break into every participant’s computer one by one? Most Bitcoin is held by a few early adopters, and probably those wallets were lost when their hard drives crashed, the users lost their passwords, or died before this computer experiment had any value. We know for a fact that all of Satoshi’s original coins, 2.2 million of them, have NEVER been spent, never moved on the ledger, suggesting either death or the austerity of a saint.
So even today hacking a wallet, is far more likely to net $1.00 than $1M. Take a page from Willie Sutton: when asked why he robbed banks, he said, “that’s where the money is.” So today. Where is the real money stolen, transferred? From the ’08 bailout, the kiting of fake bonds in the market, the MF Globals, the rigging of LIBOR or the fake purchase of EU bonds. You know, where the money is. At $160B market cap, Bitcoin is still one week’s purchase of central bank bond buying, i.e. a rounding error, no money at all. Hack a home wallet? I guess, but hacking Uber or Equifax once is a lot easier than hacking 100,000 wallets on 100,000 different computers. At least you know you’ll get something.
But MT Gox was hacked and 650,000 coins went missing. Surely Coinbase, Gemini, Poloniex are the same. Well…not exactly…
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Part 2 – “This System Is Garbage, How Do We Fix It?”
You have to understand what exchanges are and are not. An exchange is a central point where owners post collateral and thereby join and trade on the exchange. The exchange backs the trades with their solvency and reputation, but it’s not a barter system, and it’s not free: the exchange has to make money too. Look at the Comex, which reaches back to the early history of commodities exchange which was founded to match buyers of say, wheat, like General Mills, with producers, the farmers. But why not just have the farmer drive to the local silo and sell there? Two reasons: one, unlike manufacturing, harvests are lumpy. To have everyone buy or sell at one time of the year would cripple the demand for money in that season. This may be why market crashes happen historically at harvest when the demand for money (i.e. Deflation) was highest. Secondly, however, suppose the weather turned bad: all farmers would be ruined simultaneously.
Suppose the weather then recovered: the previous low prices are erased and any who delayed selling would be rich. This sort of random, uncontrolled, uninsurable event is no way to run an economy, so they added a small group of speculators into the middle. You could sell wheat today for delivery in June, and the buyer would lock in a price. This had the effect of moderating prices, insuring both buyers AND sellers, at the small cost of paying the traders and speculators for their time, basically providing insurance. But the exchange is neither buyer, seller, nor speculator. They only keep the doors open to trade and vet the participants. What’s not immediately apparent is these Contracts of Wheat are only wheat promises, not wheat itself. Although amounts vary, almost all commodities trade contracts in excess of what is actually delivered, and what may exist on earth. I mean the wheat they’re selling, millions of tons, haven’t even been planted yet. So they are synthetic wheat, fantasy wheat that the exchange is selling.
A Bitcoin exchange is the same thing. You post your Bitcoin to the exchange, and trade it within the exchange with other customers like you. But none of the Bitcoin you trade on the exchange is yours, just like none of the wheat traded is actual wheat moving on trucks between silos. They are Bitcoin vouchers, Bitcoin PROMISES, not actual Bitcoin. So? So although prices are being set on the exchanges – slightly different prices in each one – none of the transfers are recorded on the actual Bitcoin Ledger. So how do you think exchanges stay open? Like Brokers and Banks, they take in the Bitcoin at say 100 units, but claim within themselves to have 104.
Why? Like any other fractional reserve system, they know that at any given moment 104 users will not demand delivery. This is their “float” and their profit, which they need to have, and this works well as far as it goes. However, it leads to the problem at Mt. Gox, and indeed Bear Sterns, Lehman and DeutscheBank: a sudden lack of confidence will always lead to a collapse, leaving a number of claims unfulfilled. That’s the bank run you know so well from Mary Poppins’ “Fidelity Fiduciary Bank”. It is suspected to be particularly bad in the case of Mt. Gox, which was unregulated. How unregulated? Well, not only were there zero laws concerning Bitcoin, but MTGOX actually stands for “Magic The Gathering Online eXchange”; that is, they were traders of comic books and Pokemon cards, not a brokerage. Prepare accordingly.
The important thing here is that an exchange is not Bitcoin. On an exchange, you own a claim on Bitcoin, through the legal entity of the exchange, subject only to jurisdiction and bankruptcy law. You do not own Bitcoin. But maybe Mt.Gox didn’t inflate their holdings but was indeed hacked? Yes, as an exchange, they can be hacked. Now you only need infiltrate one central point to gain access to millions of coins and although their security is far better, it’s now worth a hacker’s time. Arguably, most coins are held on an exchange, which is one reason for the incredibly skewed numbers regarding Bitcoin concentration. Just remember, if you don’t hold it, you don’t own it. In a hack, your coins are gone.
If the exchange is lying or gets in trouble, your coins are gone. If someone is embezzling, your coins are gone. If the Government stops the exchange, your coins are gone. If the economy cracks, the exchange will be cash-strapped and your coins are frozen and/or gone. None of these are true if YOU own your coins in a true peer-to-peer manner, but few do. But this is also true of paper dollars, gold bars, safe deposit boxes, and everything else of value. This accounts for some of the variety of opinions on the safety of Bitcoin. So if Polinex or Coinbase gets “hacked” it doesn’t mean “Bitcoin” was hacked any more than if the Comex or MF Global fails, that corn or Yen were “hacked”. The exchange is not Bitcoin: it’s the exchange. There are exchange risks and Bitcoin risks. Being a ledger Bitcoin is wide open and public. How would you hack it? You already have it. And so does everybody else.
So we’ve covered the main aspects of Bitcoin and why it is eligible to be money. Classically, money has these things:
1. Durable- the medium of exchange must not weather, rot, fall apart, or become unusable.
2. Portable- relative to its size, it must be easily movable and hold a large amount of value.
3. Divisible- it should be relatively easy to divide with all parts identical.
4. Intrinsically Valuable- should be valuable in itself and its value should be independent of any other object. Essentially, the item must be rare.
5. Money is a “Unit of Account”, that is, people measure other things, time and value, using the units of value to THINK about the world, and thus is an part of psychology. Strangely that makes this both the weakest and strongest aspect of:
6. “The Network Effect”. Its social and monetary inertia. That is, it’s money to you because you believe other people will accept it in exchange.
1. Bitcoin is durable and anti-fragile. As long as there is an Internet – or even without one – it can continue to exist without decay, written on a clay tablet with a stylus.
2. Bitcoin is more portable than anything on earth. A single number — which can be memorized – can transport $160B across a border with only your mind, or across the world on the Internet. Its portability is not subject to any inspection or confiscation, unlike silver, gold, or diamonds.
3. Bitcoin is not infinitely divisible, but neither is gold or silver, which have a discrete number of atoms. At the moment the smallest Bitcoin denomination or “Satoshi” is 0.00000001 Bitcoin or about a millionth of a penny. That’s pretty small, but with a software change it can become smaller. In that way, Bitcoin, subject only to math is MORE divisible than silver or gold, and far easier. As numbers all Bitcoin are exactly the same.
4. Bitcoin has intrinsic value. Actually, the problem is NOTHING has “intrinsic” value. Things have value only because they are useful to yourself personally or because someone else wants them. Water is valuable on a desert island and gold is worthless. In fact, gold has few uses and is fundamentally a rock we dig up from one hole to bury in another, yet we say it has “intrinsic” value – which is good as Number 4 said it had to be unrelated to any other object, i.e. useless. Bitcoin and Gold are certainly useless. Like gold, Bitcoin may not have “Intrinsic value” but it DOES have intrinsic cost, that is, the cost in time and energy it took to mine it. Like gold, Bitcoin has a cost to mine measurable in BTU’s. As nothing has value outside of human action, you can’t say the electric cost in dollars is a price-floor, but suggests a floor, and that would be equally true of gold, silver, copper, etc. In fact, Bitcoin is more rare than Rhodium: we mine rare metals at 2%/year while the number of Bitcoins stops at 22 Million. Strangely, due to math, computer digits are made harder to get and have than real things.
5. Bitcoin is a unit of account. As a psychological effect, it’s difficult to quantify. Which comes first, the use of a thing, or its pricing? Neither, they grow together as one replaces another, side-by-side. This happened when gold replaced iron or salt or when bank notes replaced physical gold, or even when the U.S. moved from Pounds and Pence to Dollars and Cents. At first it was adopted by a few, but managed to get a critical mass, accepted, and eventually adopted by the population and entirely forgotten. At the moment Bitcoin enthusiasts do in fact mentally price things in Bitcoins, especially on exchanges where cross-crypto prices are marked vs BTC. Some never use their home currency at all, living entirely according to crypto-prices until home conversion at the moment of sale, or as hundreds or thousands of businesses are now accepting cryptocurrencies, even beyond. For them it is a unit of account the way Fahrenheit is a unit within the United States.
6. Bitcoin has the network effect. That is, it is widely accepted and publicly considered money. It’s in the news, has a wide following worldwide, and exchanges are signing up 40,000 new users a month. It’s accepted by thousands of vendors and can be used for purchases at Microsoft, Tesla, PayPal, Overstock, or with some work, Amazon. It’s translatable through point-of-sale vendor Square, and from many debit card providers such as Shift. At this point it is already very close to being money, i.e. a commonly accepted good. Note that without special arrangements none of these vendors will accept silver coins, nor price products in them. I expect if Mark Dice offered a candy bar, a silver bar, or a Bitcoin barcode, more people would pick the Bitcoin. In that way Bitcoin is more money than gold and silver are. You could say the same thing about Canadian Dollars or Thai Bhat: they’re respected currencies, but not accepted by everyone, everywhere. For that matter, neither are U.S. dollars.
Note what is not on the list: money is not a unit created or regulated by a central authority, although governments would like us to think so. In fact, no central authority is necessary or even desirable. For centuries the lack of monetary authority was historic fact, back with medieval markets through to private banks, until 1913, 1933, 1971, and the modern evolution into today’s near-total digital fiat. Besides the technical challenge, eliminating their overhead, oversight, control and corruption is the point of Bitcoin. And right now the government’s response to Bitcoin is a strange mixture of antipathy, ignorance, oppression, and opportunity. At $160 Billion it hardly merits the interest of a nation with a $500 Billion trade deficit, and that’s spread worldwide.
This leads into one of the spurious claims on Bitcoin: that it’s a refuge for drug smugglers and illegal activities. I assure you mathematically, that is not true. According to the U.N. the world drug trade is $435B, 4 times the total, and strictly theoretical value of Bitcoin, coins locked, lost, and all. Besides if you owned $160B coins, who would you transfer them to? You’re the only user. $435B/year can only be trafficked by major banks like as HSBC, who have paid public fines because money flows that large can’t be hidden. This is so well-known the U.N. suggested the drug-money flows may be one reason global banks were solvent in ‘08. Even $160B misrepresents Bitcoin because it had a 10-fold increase this year alone. So imagine $16B total market cap. That’s half the size of the yearly budget of Los Angeles, one city. Even that overstates it, because through most of its life it’s been around $250, so imagine a $4B market cap, the budget of West Virginia.
So you’re a drug dealer in illicit trades and you sell to your customers because all your buyers have Bitcoin accounts? Your pushers have street terminals? This doesn’t make sense. And remember as much as the price of Bitcoin has risen 40-fold, the number of participants has too. Even now, even with Coinbase, even with Dell and Overstock, even with BTC $10,000 almost no one has Bitcoin, even in N.Y.C. or S.F.. So who are these supposed illegal people with illegal activities that couldn’t fit any significant value?
That’s not to say illegal activities don’t happen, but it’s the other half of the spurious argument to say people don’t do illegal acts using cash, personal influence, offshore havens, international banks like Wells Fargo, or lately, Amazon Gift Cards and Tide Detergent. As long as there is crime, mediums of value will be used to pay for it. But comparing Bitcoin with a $16B market cap to the existing banking system which the U.N. openly declares is being supported by the transfer of illicit drug funds is insanity.
Let’s look at it another way: would you rather: a) transfer drugs using cash or secret bank records that can be erased or altered later or b) an public worldwide record of every transaction, where if one DEA bust could get your codes, they could be tracked backwards some distance through the buy chain? I thought so. Bitcoin is the LEAST best choice for illegal activities, and at the personal level where we’re being accused, it’s even worse than cash.
We showed that Bitcoin can be money, but we already have a monetary and financial system. What you’re talking about is building another system next to the existing one, and doubling the costs and confusions. That’s great as a mental exercise but why would anyone do that?
In a word: 2008.
It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.
So given that Bitcoin is unfamiliar, less accepted, harder to use, costs real money to keep online, why does it keep gaining traction, and rising in price with increasing speed? No one would build a Bitcoin. Ever. No one would ever use a Bitcoin. Ever. It’s too much work and too much nuisance. Like any product, they would only use Bitcoin because it solves expensive problems confronting us each day. The only chance Bitcoin would have is if our present system failed us, and fails more every day. They, our present system-keepers, are the ones who are giving Bitcoin exponentially more value. They are the ones who could stop Bitcoin and shut it down by fixing the present, easy, familiar system. But they won’t.
Where Has Our Present System Gone Wrong?
The criticisms of the existing monetary system are short but glaring. First, everyone is disturbed by the constant increase in quantity. And this is more than an offhand accusation. In 2007 the Fed had $750B in assets. In 2017 they have $4.7 Trillion, a 7-fold increase. Where did that money come from? Nowhere. They printed it up, digitally.
The TARP audit ultimately showed $23 trillion created. Nor was the distribution the same. Who received the money the Fed printed? Bondholders, Large Corporations, Hedge Funds and the like. Pa’s Diner? Not so much. So unlike Bitcoin, there not only was a sudden, secret, unapproved, unexpected, unaccountable increase in quantity, but little to no chance for the population to also “mine” some of these new “coins”. Which leads to this:
Near-perfect income disparity, with near-perfect distribution of new “coins” to those with access to the “development team”, and zero or even negative returns for those without inside access. Does this seem like a winning model you could sell to the public? Nor is this unique to the U.S.; Japan had long ago put such methods to use, and by 2017 the Bank of Japan owns a mind-bending 75% of Japanese ETFs:
So this unelected, unaccountable bank, which creates its coin from nothing without limit or restraint, now owns 75% of the actual hard labor, assets, indeed, the entire wealth HISTORY of Japan?
It took from the Edo Period in 1603 through Japan-takes-the-world 1980s until 2017 to create the wealth of Japan, and Kuroda only 6 years to buy it all? What madness is this?
Nor is Europe better. Mario Draghi has now printed so much money, he has run out of bonds to buy. This is in a Eurozone with a debt measuring Trillions, with $10 Trillion of that yielding negative rates. That’s a direct transfer from all savers to all debtors, and still the economy is sinking fast. Aside from how via these bonds, the ECB came to own all the houses, businesses, and governments of Europe in a few short years, does this sound like a business model you want to participate in?
So the volume of issuance is bad, and unfairness of who the coins are issued to is as bad as humanly possible, giving incredible advantages to issuers to transfer all wealth to themselves, either new or existing.
But if the currency is functional day-to-day, surely the issuance can be overlooked. Is it? Inflation is devilishly hard to measure, but here’s a chart of commodities:
The US Dollar:
or vs Gold (/silver):
Does that look stable to you? And not that Bitcoin is stable, but at least Bitcoin goes UP at the same rate these charts are going DOWN. One store coupon declines in value at 4% a year, or may even start negative, while the other gives steady gains to loyal customers. Which business model would you prefer?
But that’s not all…
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Part 3 – “A System With No Justice, No Order, No Rules, & No Predictability”
The money, the unaccountable, uninhibited release of tokens can do more than just buy centuries of hard labor in seconds, it‘s also a method of control. Banks, our present issuers of money, can approve or destroy businesses by denying loans. They can do this to individuals, like denying loans to unpopular figures, or to whole sectors, like gun shops. They can also offer money for free to Amazon, Facebook, and Tesla, which have no profitable business model or any hope of getting one, and deny loans to power plants, railroads, farms, and bridges as they fall into the Mississippi.
The result is banks and their attending insiders are a de facto Committee of Central Planners in the great Soviet style. What is fashionable and exciting to them can happen, and what they dislike or disapprove of for any reason can never happen. And once on a completely fiat system, this is how capital is allocated through our entire system: badly. What’s worse has been a 20-year turn toward Disaster Capitalism, whereby loans are extended to a business, sector, person, or nation, and then suddenly cut off, leading to the rapid foreclosure and confiscation of companies, assets, or continents by the “Development Team.”
Imagine a Bitcoin where Satoshi could erase your coins in your wallet for giving him a bad haircut. Or because he likes your wife. Nor is there any help for independent nations like Iran, or even nuclear powers like Russia. Both have been cut off, their funds suspended at a whim with no recourse. Even being a fellow insider is no insurance, as the NY banks cut off Lehman from funds they were owed, driving it into bankruptcy to buy the pieces in receivership. Unpopular Billionaires are treated likewise. This is a system with no justice, no order, no rules, and no predictability. Anyone within it is at grave and total risk. And yet before Bitcoin it was the only system we had, short of returning to the 19th century, it was the only way for modern commerce to deliver food, water, power, or function at all.
This is seen in its abuses, but also by its effects. The present system not only controls whether you are a winner or loser, whether you may go or stay, whether you may live or die, but also tracks every purchase, every location, in effect, every action throughout your entire life. These records will describe what books you read, what movies you watch, what associates you have, in real time Already these daily actions are being approved or denied. Take out a variable-rate jumbo loan? We’ll give you 110% of the value, paying you to be irresponsible (we’ll foreclose later). Want to buy gas when driving through Cheyenne 3:30 at night? Sorry, we disabled your card as a suspicious transaction. Sorry about you dying there of crime or of cold; we didn’t know and didn’t care. All your base are belong to us.
You say you don’t care if JP Morgan has your pay stubs to disturbing porn sites and Uber purchases to see your mistress? Well the future Mayor of Atlanta will, and he hasn’t graduated college yet. With those records it’s child’s play to blackmail policemen, reporters, judges, senators, or generals, even Presidents. And all those future Presidents are making those purchases right now, the ones that can be spun into political hay, real or unreal. So if you don’t worry what everyone knows about you, that’s fine, but imagine reading the open bank records, the life histories of every political opponent from now until doomsday. Then Don’t. Do. It. The people who have those records – not you – then have not just all the assets, not just all the money, but all the power and influence. Forever.
Are you signing up for that? Bitcoin doesn’t. Bitcoin doesn’t care who you are and with some care can make it very difficult to track you. And without tracking you, it makes it impossible to boycott you. And without a central repository, it’s impossible to march in with tanks and make them give you the records, turn money on or off, to make other people live or die and bend to your will by violence.
No one will care about that, because no one cares about it now unless, like Russia or China, it’s directed at them personally and then it’s too late. The real adoption of Bitcoin is far more mundane.
The long-term interest rate is 5%. Historically banks would lend at 8%, pay at 4%, and be on the golf course by 5. No one thought much about it because like a public utility, banking was a slow, boring affair of letting business do business. You know, farming, mining, manufacturing, all that stuff we no longer do. For decades, centuries even, banking was 5%-15% of a nation’s GDP, facilitating borrowers and lenders and timescales, paying for themselves with the business efficiencies they engender.
All that changed after WWII. Banks rose in proportion to the rest of the economy, passing the average, then the previous high, then when that level reached “Irrational Exuberance”, Greenspan started the printing presses, free money was created, and Senators and Presidents whose bank records were visible suddenly repealed Glass-Steagall. An economy stretched to breaking with free, centrally-allocated and misallocated money crashed and shrank, yet the banks– now known as the FIRE stocks: Finance, Insurance, and Real Estate – kept growing. How can banks and finance keep growing with a shrinking economy? By selling their only product: debt.
So why would people pick Bitcoin? It costs less and does more. Amongst adopters, it’s simpler and more direct. It pays the right people and not the wrong ones. It rewards good behavior instead of bad, and can help producers instead of parasites. It’s equitable instead of hierarchical. What else? While not Bitcoin proper, as a truth machine Blockchain technology is the prime cure for the present system’s main problem: fraud. There is so much fraud at the moment, libraries of books have been written merely recording the highlights of fraud since 2001. But merely recording the epic, world-wide, multi-trillion dollar frauds clearly does not cure it. Like other human problems, no one cares about your problems, only your solutions, and Blockchain has the solution.
While the details of fraud are complex, the essence of fraud is quite simple: you lie about something in order to steal it. That’s it. It could be small or large, simple or complex, but basically fraud is all about claiming what didn’t happen. However, the Blockchain is all about truth, that is, creating consensus about what happened, and then preserving it. Take the Robosigning scandal: accidental or deliberate, the mortgage brokers, banks, and MBS funds lost the paperwork for millions of houses. A house could be paid off could be foreclosed, as happened, or it could be owned 5 times, as happened. Like the Sneeches, no one knew which one was who, and the only certainty was that the official authority – county courthouses – did not know because to register there would have cost Wall Street and inconvenient millions or billions in shared tax stamps.
The system broke down, and to this day no one has attempted to define ownership, choosing instead to usher all the questionable (and therefore worthless) material into the central bank and hiding it there until the mortgage terms expire, forcing the taxpayers to bail out a multi-trillion dollar bank fraud at full value. And this is just one messy example. The S&L crisis was not dissimilar, nor are we accounting for constant overhead of fees, mortgage transfers, re-surveys, and title searches nationwide.
With Blockchain it’s simple: you take line one, write the information, the owner, title, date, and transfer, and share it with a group. They confirm it and add mortgage #2, then #3 and so on. It’s a public ledger like the courthouse, but the system pays the fees. It also can’t be tampered with, as everyone has a copy and there is no central place to bribe, steal, and subvert as happened in 2006 but also in history like the 1930s or the railroad and mining boom of the 1800s. If there are questions, you refer to the consensus If it’s transferred, it is transferred on the ledger. If it isn’t on the ledger, it isn’t transferred, same as the courthouse. Essentially, that’s what “ownership” is: the consensus that you own something. Therefore you do not have a mortgage due disappear, or 4 different owners clamoring to get paid or take possession of the same property, or the financial terrorism of shattering the system if you even attempt to prosecute fraud.
It’s not just mortgages: stocks have the same problem. Since the digital age began, the problem of clearing stock trades has steadily increased. Eventually, the NYSE trading volume was so large they couldn’t clear at all, and the SEC let trading houses net their internal trades, only rectifying the mismatches between brokerages. Eventually, that was too large, and they created the DTCC as a central holder and clearing house. Yet, in an age of online trading and high-frequency trading mainframes, it became apparent there was no way to clear even residual trades, and they effectively no longer try, and the SEC, instead of forcing them to compliance, lets them. There are 300M failed stock trades a day and $50B a day in bond failures, or $12 Trillion year in bonds alone. And so? If you sell your stocks and bonds, the brokerage makes it come out whole, so what?
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Part 4 – “Without It, You’re Talking Mad Max”
Well, all parts of the system rely on accurate record-keeping.
Look at voting rights: we had a security company where 20% more people voted than there were shares. Think you could direct corporate, even national power that way? Without records of transfer, how do you know you own it? Morgan transferred a stock to Schwab but forgot to clear it. Doesn’t that mean it’s listed in both Morgan and Schwab? In fact, didn’t you just double-count and double-value that share? Suppose you fail to clear just a few each day. Before long, compounding the double ownership leads to pension funds owning 2% fake shares, then 5%, then 10%, until stock market and the national value itself becomes unreal. And how would you unwind it?
Work backwards to 1999 where the original drop happened? Remove 10% of CALPERs or Chicago’s already devastated pension money? How about the GDP and national assets that 10% represents? Do you tell Sachs they now need to raise $100B more in capital reserves because they didn’t have the assets they thought they have? Think I’m exaggerating? There have been several companies who tired of these games and took themselves back private, buying up every share…only to find their stock trading briskly the next morning. When that can happen without even a comment, you know fraud knows no bounds, a story Financial Sense called “The Crime of the Century.” No one blinked.
But it doesn’t stop there. You don’t only buy stocks, you sell them. And you can sell them by borrowing them from a shareholder. But what if there’s no record of delivery? You can short or sell a stock without owning any. And the more you sell, the more it drives the price down and the more money you make. In fact, profits are infinite if you can sell enough that the company goes bankrupt: you never have to repay the stock at all. And this “naked” short selling can only occur if there’s openly bad recording and enough failures-to-deliver to hide it. You could literally own nothing, borrow nothing, post nothing, and with no more than insider access to an exchange, drive a company out of business. That’s how crucial recording is.
And while for appearance’s sake, they only attack and destroy small plausibly weak stocks, Overstock.com with a $1.45B market cap fought these naked short sellers for years. Publicly, openly, vocally, with the SEC. Besides eroding their capital, besides their legal fees, besides that e.g. Amazon could pay to have their competition run out of business with fraudulent shorting, the unlimited incentive to short instead of long on small companies could suppress the entire stock market, indeed the national wealth and GDP. It may account for some of the small caps under performing their potential for years, and why an out sized portion of stock value to be in just the 5 protected FAANG or DOW 30 stocks. …We don’t know, because we have no honesty, no accounting, and nothing to compare it to. But no one cares, because it’s been going on for 20 years, and if they cared, they’d do something about it. Again, no one cares about your problems, only your solutions. Even if the nation falls.
Look at it from their point of view: if you’re a business owner, now you can’t rationally list your corporation. Your stock could be manipulated; your business could be bankrupted for no reason at all. We’ve seen the NYSE shrink as businesses start to list in more honest jurisdictions, and even Presidents can’t convince them to come back. Traders and Fund Managers retire in public interviews, telling the world there is no longer any sense or price discovery, and therefore there is market madness.
Yet we just said that to clean up the market would discover 10%, 20%, 40% fake shares, fake business values, fake pension values, therefore fake GDP values, and fake GDP to Debt ratios, and therefore would perhaps lead to an accurate Debt to GDP of 140%, which would crash the U.S. dollar and possibly the nation. Would a complete U.S. financial collapse lead to a nuclear war? And it all goes back to fraud we didn’t stop 20 years ago. How do you solve the problem? The only way out without collapse is to build an honest system parallel to the existing system and slowly transfer assets from the rotten, sinking ship to the new one. The captains of the old ship may not like it, but look at the incentives. No one can tolerate the old ship except the pirate captain; even the crew, the stock traders, don’t want or control it any more.
However, what if you created an honest stock market Blockchain that actually had the stock certificates and actually transferred them, cheaply and reliably without false duplication? This is what is happening in the Jamaican Stock Market. A new company can choose to list on the stock Blockchain and avoid the old system. Other companies or even the whole exchange can clean up the books, slowly, stock by stock, and move it to the new honest system. Because they’re honest? No way! No one cares about truth or honesty, clearly. Because they can sell their stock exchange as superior, solving the existing problems. Stopping fraud, theft, the stealing or crippling of companies, fake voting, depression of Main Street and outsiders in favor of Wall Street and insiders, this is what Blockchain can do. In short, it would work better, cheaper.
What Else Can Blockchain Do?
Blockchain is just software written by programmers so it’s as versatile as any other software. So why not program things into it with a “Smart Contract”? Suppose you make a bet: IF the Packers beat the Lions on November 12, 2017, THEN I will pay you $50. You set up the contract, and the bot itself can look for the headlines and transfer the money when the conditions are met.
That’s pointless but how about this: You run a jewelry business on Etsy and need to buy $500 in beads from Hong Kong. Normally, you would need to pay an importer, a currency exchange, bank account, tire transfer, escrow account, and a lawyer, or their proxies within the system, plus two weeks’ clearing time. That’s a lot of overhead for a small transaction. In contrast, a smart contract such as Ethereum could post the value of the coin (escrow), and when Long Beach or FedEx confirms delivery, releases the Ethereum, a coin of value, to the seller in Hong Kong. Instantly. Why? The existing financial system is charging too much and doing too little. That’s a huge incentive to get around their slow, overpriced monopoly.
Once you cut the costs, have a more direct method, and reduce the time to minutes, not weeks, the choice is obvious, which may explain why Microsoft, Intel, and others are deep in ETH development. Why overpay for bad service, and support the overpriced bonuses of men who will use their power to turn on or shut off your livelihood at will? Blockchain costs less and does more. Being just software, there are many other software products serving hundreds of other business plans. These use-coins are generally called “Tokens”, whereas“Coins” are meant to be pure currencies. There are Tokens for a wide variety of business purposes: online gambling? Yes. Tokens to buy marijuana in certain states? Sure.
But how about a Token like Populous that contains the credit information of small businesses worldwide, so you can make modest income lending against their accounts receivable? You get more income, business worldwide gets better service and lower costs. Why? The existing financial system is charging too much and doing too little. How about a Token like Salt for personal loans and perfecting collateral? They will lend cash against your Cryptocurrencies, because if your loan falls short, they can sell your collateral instantly. No foreclosures, no repossessions, no overhead.
This is what banks do when they hold your savings and checking accounts, yet sell you a personal loan. But the banks are giving you no interest on savings, while charging origination fees and high interest. They’re charging too much and doing too little. Well, you say, this sounds too good to be true: a parallel system to replace our existing corrupt, broken, overpriced one. One that doesn’t have to confront existing power or reform the system, but beyond price appreciation has its own incentives to join? Surely there are problems.
Oh, yes. So many problems. The first is often mentioned: it’s fine that Bitcoin is a finite commodity with only 22M coins, and if Bitcoin were the only coin, that would work. But there are over 1,000 coins now, and more every day. Isn’t that just another avenue to unlimited issuance and inflation by unlimited, unregistered people? Well, yes and no. It’s true that anyone can start their own Bitcoin – Litecoin for example is a faster duplicate of Bitcoin – but it’s also true that anyone can start their own Facebook. MySpace certainly did.
So why don’t they? Basically because of financial inertia, the Network Effect, a coin you start and only you use is worthless. The value is in the belief that other people will use it. Without that, you’re banished to MySpace Siberia. Still, with a 1,000 coins, don’t they all compete? Yes, and that’s a good thing, not bad. This is no different than the competing Bank Notes of the 19th century. If you like this bank and believe in them, you prefer their notes to others. Or you might use one note in Missouri and another in Louisiana. So with Cryptos. You might choose Bitcoin, with slow traffic and high costs to pay for a house. But you would choose Litecoin to pay for coffee.
You already do this, no different than using cash to buy a hot dog, your debit card for groceries, and a bank transfer for a car. It’s overlooked because they’re all called “dollars,” but they’re not. One is currency, one is a short-term credit, and one is a banking ledger. Because of the Network Effect, you can’t have 1,000 equal coins and have them all work. The market will prefer some over others until there are only a few, just as AskJeeves and Infoseek gave way to Google, which may someday give way to someone else. Just as you can’t start a new Google today, there are only a few top coins, easily updated, and little space for new coins.
In addition, the “1,000 coins” are not actually coins. Most of the new coins are Tokens, which are not “currencies” like Bitcoin and a means of exchange, but business models and services. Like Bank Notes, the market is self-limiting, but evolving. But if there are a variety of coins, and like Litecoin they can suddenly appear and change, what reassurance do you have that your Bitcoin “money” is worth anything? Like 19th century Bank Notes or AskJeeves, your responsibility is to be aware of the market and the changing values and react accordingly. And in a mature market, “everyone knows” the histories and reputations, but in a young market, like Dell and Gateway in 1992, no one knows. But that’s also why there is more profit now as well as more risk. But we’re also watching volatility and risk in Pounds, Lira, Gold, or even outright defaults like Argentine Pesos or Rubles. We already carry that risk, but it’s familiar and taken for granted.
If coins can just “change” and “fork” whenever they want, then isn’t it like buying Australian Dollars, then waking up and finding they’re Yen? Yes and no. Like other cryptos, Bitcoin is just software written by men. So a group of developers may think Bitcoin should remain the same while the old team thinks it should be improved so much that they do the work, write the updates, and release it. Well you have a “fork”, but what happens next is the Network Effect. So you’re a miner and a user of Bitcoin. You now have a choice: do you use the new software, the old software, or both? Everyone expected one to be adopted, and the old one to wither into oblivion. Since a Fork gives you one unit of each, the eventual outcome was a wash within the user group. But that doesn’t seem to be happening.
Ethereum forked, and Ethereum Classic still exists, and trades steadily but far less. Bitcoin Cash Forked and although 1/10th the price, both are trading briskly. No one knows what will happen, because it’s never existed before. So yes, you could wake up and find you don’t like what Bitcoin decided to do, just as you could wake up and not like your new bank manager or CFO of Dell, and then you sell that asset and choose another. That’s your responsibility. That’s competition.
Besides unexpectedly finding both forks have value, there is an upside to the downside. If some new advance in speed or encryption appears in Litecoin or Dash, Bitcoin can also adopt it. This not only improves the market, but reduces sudden upsets as new advances shouldn’t unseat popular coins but are adopted by them. Indeed, this was the purpose of Bitcoin Cash fork: to improve speed and cost. Yet now they both exist for different purposes in the market. Another objection is that cryptos depend on electricity and an expensive, functioning Internet. True. But while I’m no fan of technology, which is full of problems, so does everything else. Without electricity, the western world would stop, with no water, no heat, and no light.
Without Internet, our just-in-time inventory halts, food and parts stop moving, banking and commerce fail. You’re talking Mad Max. TEOTWAWKI. That’s a grave problem, but not unique to Bitcoin.
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Part 5 – “We’ll Be Lucky To Survive On Our Own”
Bitcoin can be stolen. Although “Bitcoin” can’t be hacked, it’s only software and has many vulnerabilities. If held on an exchange, you have legal and financial risk. If held at home, you could have a hard drive fail and lose your passwords. If it’s on a hardware fob like a Trezor, the circuits could fail. For a robust system, computers themselves are pretty fragile. You could write down your passwords on paper, and have a house fire. You could print out several copies, but if any of the copies are found, they have full access to your account and stolen without you knowing. You could have your passwords stolen by your family, or have a trojan take a screen or keystroke capture.
Hackers could find a vulnerability not in Bitcoin, but in Android or AppleOS, slowly load the virus on 10,000 devices, then steal 10,000 passwords and clear 10,000 accounts in an hour. There are so many things that can go wrong, not because of the software, but at the point where you interface with the software. Every vault has a door. The door is what makes a vault useful, but is also the vault’s weakness. This is no different than leaving blank checks around, losing your debit card, or leaving cash on your dashboard, but it’s not true that there are no drawbacks. However the risks are less obvious and more unfamiliar.
Bitcoin isn’t truly anonymous. If someone, the NSA, wanted to track your drug purchases on SilkRoad, they could follow the router traffic, they could steal or work out your keys, they could eventually identify your wallet, and from there have a perfect legal record of all your transactions. Defenders will say that wallets are anonymous, that like Swiss accounts, we have a number, but not a name, and you can create new numbers, new wallets endlessly at will. Fair enough, but if I can see the transfers from the old to the new, it can be tracked. If I can get your account number by any means, I can see the flows. To some extent it’s speculation because we don’t know what technology they have available to crack codes, to see into routers, Internet traffic and servers.
Could there be a hidden exploit not in “Bitcoin” but in AES256 or the Internet itself? Maybe. Are there secret code-breaking mainframes? Possibly. But given enough interest, we can be sure that they could always get a warrant and enter your house, hack your computer, and watch your keyboard. However, this is no different than cash. If necessary, they can already track every serial number of every bill as it leaves an ATM or a drug sting. Then you follow those serial numbers as they are deposited and reappear. I expect Bitcoin is not very different, and like cash, is only casually anonymous. But is this a problem with cash? Or with Bitcoin? Your intent as a citizen is to follow the law, pay your taxes, and not hurt others. If government or other power centers are willing to expend that much effort to track you, perhaps the problem should be addressed with proper oversight on warrants and privacy.
Bitcoin is slow and expensive. Very true. Bitcoin Core has gotten so outsized from its origins that it may soon cost $5 to buy a $1 coffee and 48 hours to confirm the purchase. That’s clearly not cheaper, faster, OR better. It’s worse: far, far worse. Nor can it improve. Since Blockchain writes the ledger, the longer the ledger, the bigger it is. Technically, it can only clear a few transactions per second. This problem may not doom it, but it would relegate it to only huge, slow transactions like moving container ships. That is, a form of digital gold note. We don’t actually ship gold or whatever to pay for transactions; it just sits in the background, an asset. Per Satoshi, Bitcoin is a “Digital Asset.”
And the core team seems to like this more secure, higher value direction, where these obstacles are acceptable. But without a larger, deeper market, it’s the plaything of billionaires and then who sets the price? It becomes another experiment, an antique. Luckily, the story doesn’t stop there. Because it’s only software, you can always change it if you can convince the participants to use the new version. Bitcoin Cash is a fork that it larger, faster, and cheaper, reducing the limitations for now. And it can become Segwit2 or Cash2 later if the community agrees. But by design Bitcoin is not meant to be instant nor free, and probably never will be. Like gold, it is meant to be expensive, vaulted, and rarely moved. If you want fast and cheap, LiteCoin, Dash, and many others are vying to be the digital silver or digital payment card. That’s not very different from the gold standard, or even payments today.
Bitcoin is a huge electric and Internet drain. This is true. However, it’s also misrepresented. What is the electric overhead of every bank, every terminal, every mainframe on the NYSE, every point-of-sale card machine, every cash register and router in retail? Don’t we use an awful lot of electric to keep those running? What about their cost, the repairmen, the creation of new systems every year from mine to market, from idea to update release, to replace them? We also personally have our computers and routers, the whole Internet on and idling. What’s the base cost? Is it fair to compare as if it were a pasture before Bitcoin arrived?
We built the existing system this way because it gained efficiency. Time in the clearing, price in not running typewriters and mail worldwide, and of course taxes. We’re talking about creating a parallel financial system here. If the old one is replaced, is the new one better, or worse? Mining takes a lot of power, but the math in Bitcoin is meant to get increasingly harder to compensate for increasing computer speed. The computers are supposed to be on to confirm transactions. That means that the more people use it, the more power consumed, but that’s true of everything. The more people that drive cars, the more gas is used. So is the car doing something useful and being used well? Is it replacing a less efficient horse, or just wasting energy better used elsewhere? These are complex questions.
At the least, Bitcoin uses far, far too much energy in the design, and because of the speculation, far too many people are mining it without using it. However, all of the subsequent coins were concerned about this, and their power consumption is far, far less. As Bitcoin is near its hardest stage and stops at 22 Million, power consumption is near peak, but should stabilize, or even fork to a low-energy proof-of-stake model. As Bitcoin is not well-suited to worldwide transactions, it should be replaced with less-power intensive alternatives, and because of this, may get smaller. And if it replaces some of the existing system, it can generate an offset. But yes, if it uses too much power, is too inefficient by design, it will be too expensive, abandoned, and fail.
Are Cryptos a scam? Probably not: we pointed out some legitimate uses above for both coins and tokens. But there’s one coin that arguably is a Ponzi, a dozen coins that are scams, scores that are terrible ideas like Pets.com and will fail, and another dozen good, well-meaning tokens that are honest but ultimately won’t succeed. Yet, like the .Com 90’s, there are probably some like Apple that rise far more than it seems they should, and by surviving, effectively give 16% compounded returns for 40 years, front-loaded. That’s the nature of business. But are many coins and tokens open scams that run off with your money? Yes. Are others worthless? Yes. It’s also true of the stock and bond market and can’t be helped. Buyer beware.
Is Bitcoin a Ponzi? It’s not a Ponzi by definition because there is no central thief, nor are new investors paying off old investors. So is it a fraud, misrepresenting a few hours of electricity as worth $10,000? Well, that depends on what you think its value is. Is it providing value, a service? If so, what is that service worth to you? We already said it has the operational elements of money, with the addition of being extremely transmissible and transportable. If that has value to you, fine, if not, perhaps gold or bonds are more appropriate. But that’s the problem of what gives Bitcoin value.
A stock or bond you can look at the underlying asset, the profit or income flows, the book value. But Canadian or New Zealand dollars? What gives them value? They’re also backed by nothing. What gives gold value? It has no income, just popularity. Likewise Bitcoin: what gives it value is that other people want it. If they stop wanting it, it has no value, but that’s psychological and can’t be directly measured. With that in mind, is its fair value $1K or $1B? No one knows. Can its value fall from $10k to $5k? Yes, and it has many times. Only the market, that is, we can decide what it’s worth to us, and the market is small and immature, with no price history and prone to wild swings.
Shouldn’t the exchanges set the price? Yes, and they do, but how is that accomplished? We already said the Exchanges do internal trading off-ledger, outside Bitcoin. So aren’t they setting the price on the exchange instead of the people setting the price peer-to-peer? It would seem so. So aren’t they subject to market manipulation? Although at the moment they have a fairer design, and smaller pipelines to the larger market of money, yes. So if they launch a Bitcoin future, a tracker, a triple-short ETF, internally inflate their holdings, wouldn’t that make it subject to corruption and thus back into the existing system?
No one knows: it’s never been done before. I suspect not, but only because the people want Bitcoin specifically because it is Outside-system, Anti-fraud and watch these things carefully. But it’s run by humans and reflect human nature: that means over time some new form of exchange and corruption can grow up around it as before. While the ability to rig Bitcoin is limited because the quantity of Bitcoin is limited and riggers must first buy Bitcoin fairly, the Exchanges and the price-setting are an issue, and especially into the future.
Central Banks and existing powers can outlaw or replace it. Bitcoin is still small, almost irrelevant, yet it has been driven down or outlawed in several places, for example North Korea, Venezuela, and New York. That’s right New York, you’re in proud company. North Korea outlaws everything and there is little internet access, so that’s no example. New York is simply regulating Bitcoin which creates business obstacles, but is still available via the few companies willing to do extensive paperwork. Venezuela, however, is actively suppressing Bitcoin which competes with the Bolivar, and is in fact seeking out and shutting down miners.
They do this on the premise that Bitcoin is consuming valuable (and free) national electric that could be better used powering a small town. Point taken. However, Bitcoin users are able to defend themselves against a terrible, lingering hyperinflation that is starving the nation to death, cutting off food, medicine, and services. Mining Bitcoin with national electric – or even having any – can be the difference between life or death. With Bitcoin, you can order food and medicine on Amazon. Without it, you can’t. So a ferocious national government has attempted to halt Bitcoin at gunpoint from both the users and the vendors. Like other currency oppressions, the USD in Zimbabwe for example, it hasn’t worked. Bitcoin is suppressed, but when the need for commerce is high enough, people make a way.
So maybe they will replace it with their own coin. Go ahead: this is a free market, freely competing. Banks already made a coin called Ripple, which trades in volume on exchanges, but is not open and public. If people choose it, I can’t stop them. Suppressing Bitcoin may make the incentives to choose the legal option far higher. But ultimately the point of Bitcoin is to be open, fair, and uncontrolled. A coin that is closed, controlled, and operated by some untrustworthy men has no incentive. But it can happen: people have chosen against their better interest before.
And that’s my real reservation. Suppose Bitcoin works. Suppose it replaces currency. Suppose it is adequately private. Suppose can be made fast enough, cheap enough, and slim enough. Suppose the old system fades and we all get used to having our lives entirely on the Blockchain. Your every post is perfectly recorded and provably yours on Steemit. Your every photograph is saved and stamped to you. Every medical experience is indelibly written. Every purchase, every trade, it’s all on a blockchain somewhere. And even suppose it’s private. What then? I mean, isn’t this the system we had in 1900, under the former society and former gold standard? So what happened?
Being comfortable and familiar with Blockchain ledgers, taking them as for granted as Millennials do Facebook, and someone says, “Hey, rather than waste power on this inefficient, creaking system of writing everywhere for a fraction of the power the Federal Reserve Block can keep it for you. Think of the whales.” Sound silly? That’s exactly what they did in 1913, and again in 1933 – replace a direct, messy, competitive system with a more efficient one run by smarter men. The people didn’t protest then any more than they do now, so why would we expect them to in 2050 or 2070? No one cares about corruption and murder: we’re only moving to this system now because it’s better and cheaper. If the Fed Reserve Block is cheaper, won’t we move then?
I can’t solve the next generation’s problems. We’ll be lucky to survive our own. But I can warn you that even now this generation will never accept a digital mark without which you cannot buy or sell, not voluntarily and not by force. It’s too far to reach and social trust is too compromised. But could they get us halfway there and just make it official later, when everything’s fixed again? I think absolutely.
Once that’s in, you can finish all the plans written in the bank and government white papers: perfect, inescapable taxation. Perfect, indelible records of everyone you talked to, everything you said, everything you bought, everywhere you were, everyone you know. Not today, but in the future. And that is the purgatory or paradise they seek today. The price of Liberty is eternal vigilance. The system we have wasn’t always bad: a small cadre of bad men worked tirelessly while complacent citizens shirked their duty. So when we move to a new system softly, without real purge, real morality, real reform, what makes you think the same thing won’t happen to your new system? Only far, far more dangerous. But I can’t prevent that. Think, and plan accordingly.
CBOE Global Markets Inc and CME Group Inc will launch futures contracts on bitcoin on Dec. 10 and Dec. 17 respectively. Here are some of the differences between the products to be offered by the exchange operators.
The CBOE Bitcoin Futures Contract will use the ticker XBT and will equal one bitcoin.
The CME Bitcoin Futures Contract will use the ticker BTC and will equal five bitcoins.
PRICING AND SETTLEMENT
Both Cboe’s and CME’s bitcoin futures contracts will be settled in U.S. dollars, allowing exposure to the bitcoin without actually having to hold any of the cryptocurrency.
Cboe’s contract will be priced off of a single auction at 4 p.m. Eastern time (2100 GMT) on the final settlement date on the Gemini cryptocurrency exchange.
CME’s contract will be priced off of the CME Bitcoin Reference Rate, an index that references pricing data from cryptocurrency exchanges, currently made up of Bitstamp, GDAX, itBit and Kraken.
Cboe’s XBT contract will trade on CFE, with regular trading hours of 9:30 a.m. to 4:15 p.m. Eastern time on Mondays and 9:30 a.m. to 4:15 p.m Tuesday through Friday. Extended hours will be 6 p.m. Sunday to 9:30 a.m. Monday, and 4:30 p.m. Monday through to 9:30 a.m. Friday.
CME’s BTC will trade on CME Globex and CME ClearPort Sunday to Friday from 6 p.m. – 5 p.m. Eastern time with a one-hour break each day beginning at 5 p.m.
MARGIN RATE AND CLEARING
Cboe’s contract will clear through the Options Clearing Corporation and a 44 percent margin rate will apply.
CME’s contract will clear through CME ClearPort and will have a 35 percent initial margin rate.
Cboe said it may list up to four weekly contracts, three near-term serial months, and three months on the March quarterly cycle.
CME said it will list monthly contracts for the nearest two months in the March quarterly cycle (March, June, Sept., Dec.) plus the nearest two serial months not in the March quarterly cycle.
PRICE LIMITS AND TRADING HALTS
Cboe will halt trading in its contract for 2 minutes if the best bid in the XBT futures contract closest to expiration is 10 percent or more above or below the daily settlement price of that contract on the prior business day.
Once trading resumes, if the best bid in the XBT futures contract closest to expiration is 20 percent or more above or below the daily settlement price of that contract on the prior business day, the futures will be halted for 5 minutes.
CME will apply price limits, also known as circuit breakers, to its bitcoin futures of 7 percent, 13 percent, and 20 percent to the futures fixing price. Trading will not be allowed outside of the 20 percent price limit.
The last few months have seen increasing notice being paid to Bitcoin (and the broader cryptocurrency space) by those that control the status quo.
At first it was simple ‘negative’-speak – “you’d be a fool to buy Bitcoin”-esque comments spewed forth from the truly ignorant or intentionally-ignorant (this group included bank CEOs, asset managers, payments systems, and remittance services) but to no avail, those fools saw the value of their bitcoins surge…Like the Winklevoss twins…
But this week has seen a new group of establishmentarians jump on to the offensive against anti-decentralization, de-control, pro-freedom cryptocurrencies – urging bans, crackdowns, fatwas, taxation, creating their own cryptocurrencies, demanding citizens sell, and outright confiscation (this group includes governments world wide and their mainstream media mouthpieces)…
India’s finance minister, Arun Jaitley, has clarified that the government does not recognize bitcoin as legal tender. According to theEconomic Times, when asked about the government’s plans to regulate the cryptocurrency, Jaitley told reporters, “recommendations are being worked at.” He continued:
“The government’s position is clear, we don’t recognize this as legal currency as of now.”
Concerned over bitcoin’s anonymity and its potential illicit uses, justices issued a notice to the central bank and other agencies asking them to answer a petition on the matter, reports indicated.
Turkeyhas claimed Bitcoin is in fact “not compatible” with Islam due to its government being unable to control it.
In a statement from a meeting of the state Directorate of Religious Affairs (Diyanet), lawmakers said that Bitcoin’s “speculative” nature meant that buying and selling it was inappropriate for Muslims.
“Buying and selling virtual currencies is not compatible with religion at this time because of the fact that their valuation is open to speculation. They can be easily used in illegal activities like money laundering, and they are not under the state’s audit and surveillance,”Euronewstranslates the statement republished by local news outletEnson Haber.
Diyanet added that the same principles of “unsuitability” in particular applied to Ethereum.
Kim Dong-yeon, South Korea’s deputy prime minister and the minister of strategy and finance, revealed earlier this week that the government is investigating various methods to better regulate the local Bitcoin market and tax Bitcoin users accordingly.
While theSouth Koreangovernment and its local financial authorities are actively discussing the possibility of enforcing a policy on Bitcointaxation, at a press conference, Deputy Prime Minister Kim stated that the government does not intend to include any Bitcoin taxation policy in 2018’s amendment of the tax law.
A Dutch news paper urges its citizens to sell their bitcoins patriotically because cryptocurrencies can undermine government and destabilize the economy.
A bitcoin world can destabilize the real economy, a euro is also solidified trust.
First, the bitcoin undermines the government because a lot of transactions are about money laundering and tax avoidance. Another problem is that the profits of new bitcoins that come with it do not benefit the government (as with normal money creation), but are absorbed in heavily environmentally harmful computer power.
Central banks also have less influence on keeping the economy stable. In times of crisis, central banks can, through their influence on ordinary banks, ease credit conditions and encourage people to consume. The bank has no control over the bitcoin economy and an economic crisis can become deeper.
The investor has air in his hands when the bitcoin crashes, but also when the company turns out to produce baked air.
Putting money in an empty type of asset is “very, very worrying,” Robert Ophele, chairman of France’s market regulator. Bitcoin has no link to the real economy, Ophele says in a panel discussion at the Paris Europlace Financial Forum, warning that cryptocurrencies are a way to commit cybercrimes, allowing access to illicit goods and services.
If bitcoin was a currency, “it would be a bad one,” Ophel exclaimed, as it poses major challenge for central banks and regulators.
TheTelegraph reportedjust around the time of the big drop, UK “ministers are launching a crackdown on the virtual currency Bitcoin amid growing concern it is being used to launder money and dodge tax.”
Taking a page out of the Chinese playbook, the UK Treasury has announced plans to regulate the Bitcoin that will force traders in so-called crypto-currencies to disclose their identities and report suspicious activity.
According to the Telegraph, while “until now, anybody buying and selling Bitcoins and other digital currencies have been able to do so anonymously, making it attractive to criminals and tax avoiders. But the Treasury has now said it intends to begin regulating the virtual currency, which has a total value of £145 billion, to bring it in line with rules on anti-money laundering and counter-terrorism financial legislation.“
John Mann, a member of the Treasury select committee, said he expected to hold an inquiry into the need for better regulation of Bitcoin and other alternative currencies in the new year.
He said: “These new forms of exchange are expanding rapidly and we’ve got to make sure we don’t get left behind – that’s particularly important in terms of money-laundering, terrorism or pure theft.
“I’m not convinced that the regulatory authorities are keeping up to speed. I would be surprised if the committee doesn’t have an inquiry next year. “It would be timely to have a proper look at what this means. It may be that we want speed up our use of these kinds of thing in this country, but that makes it all the more important that we don’t have a regulatory lag.”
The proposed changes come amid increasing fears that Bitcoin is being used by gangs to launder the proceeds of crime while also attracting currency speculators – with the value of the coin soaring in the past 12 months.
In other words, the same reason why the IRS is cracking down on Coinbase clients in the US is also why UK and European regulators are joining China in cracking down on capital flight.
The US Senate Judiciary Committee is currently tackling bill S.1241 that aims to criminalize the intentional concealment of ownership or control of a financial account. The bill also would amend the definition of ‘financial account’ and ‘financial institution’ to include digital currencies and digital exchanges, respectively. According to ranking committee memberSenator Dianne Feinstein, the proposed bill is needed to modernize existing AML laws.
The bill would amend the definition of ‘financial institution,’ inSection 53412(a)of title 31, United States Code, to include:
“An issuer, redeemer, or cashier of prepaid access devices, digital currency, or any digital exchanger or tumbler of digital currency.”
If passed, the bill would likely have far-reaching effects for users of digital currencies both in the US and abroad.
Earlier reports also indicate that the White House isactively monitoring cryptocurrencieswhich could only mean more attempts to regulate the world’s first successful decentralized monetary system. With the growing involvement of Wall Street and the ever escalating media attention, it is not surprising that governments are stepping up their attempts to regulate digital currency.
But as usual, any regulation-related-headline that the machines instantly sell, is bid back up, since it seems the algorithms have not figured out that there is no real way to ‘stop’ Bitcoin… which is exactly why the world’s elite are so desperate.
Several industry commentators have issued their opinions on the various proposed laws.Tone Vaysclaimed that he expects a confrontation between the Bitcoin team, including the holders and users, and the US government.
“It’s bad… I think it’s gonna end in a very confrontational way between Bitcoin – even Bitcoin holders and users – and the US Government.”
Bitcoin is the fastest growing bank in the world yet has no employees or branches
After ‘crashing’ earlier in the week, Bitcoin soared in the last 24 hours following confirmation from the CFTC that it has approved regulated futures (and options) trading on CME, CBOE, and Cantor. This sent the price back above $11,000 and shifted the cryptocurrency to become the sixth most-circulated currency in the world.
Bitcoin had, by all accounts, a remarkably volatile week, losing $3 bln in market cap in just 90 minutes as the price slid from $11,400 to close to $9,000 (on some exchanges it flash-crashed to the low $8,000s). Nevertheless, within 36 hours, the cryptocurrency has rebounded to over $11,000.
As CoinTelegraph reports,the CFTC news quickly rippled out across the industry and media, with a stream of delighted bullish statements gracing Twitter and other platforms.
“It’s an orgy” is how one strategist described the breaking news that US regulators have approved Bitcoin futures to start this month.
Digital Currency Group CEO Barry Silbert said on CNBC: “I think it is going to enable finally the approval of Bitcoin ETFs, and other digital currency ETFs, which is game-changing,” he added.
And Bitcoin prices jumped…
At a value of Bitcoin at around $11,000 each, the total value of all Bitcoins in circulation is around $180 billion, which asCoinTelegraph detailsmeansBitcoin is now the sixth most circulatedcurrency in the world, behind five super powers, and outranking thePound, theRuble, and theWon, accordingto the Bank for International Settlements.
While the number is substantial, should Bitcoin rise to $15,000, it will overtake the next highest circulating currency, the Rupee. The other four currencies outranking Bitcoin are the Yen, Yuan, Euro, and Dollar, all of which have dramatically greater levels of currency in circulation (the Dollar, for example, stands at $1.4 tln).
These numbers are, of course, somewhat skewed, because the value of notes in circulation is not reflective of the total value of a currency. Nevertheless, the numbers reveal the substantial power of Bitcoin in terms of currency interactions.
* * *
New Definition Of A Billionaire: Someone who positively impacts the lives of billions of people.
The price of the largest cryptocurrency soared 16% over the weekend, bursting through $8,000 and $9,000 at a record pace and nearing the Maginot Line so many predicted at $10,000.
$0000 – $1000: 1789 days $1000- $2000: 1271 days $2000- $3000: 23 days $3000- $4000: 62 days $4000- $5000: 61 days $5000- $6000: 8 days $6000- $7000: 13 days $7000- $8000: 14 days $8000- $9000: 9 days
Bitcoin highs over the Thanksgiving holiday weekend at $9,721…
The 16% surge is, however, only the 4th biggest jump this year as Bitcoin is up 950% year-to-date.
As the price has soared, more and more mainstream interest has grown with one major exchange – Coinbase – now having more client accounts that Charles Schwab
“The Coinbase data is evidence that adoption is not slowing down,” Alistair Milne, the Monaco-based manager of the Altana Digital Currency Fund, told Reuters.
Furthermore, “promises of bitcoin futures opening the door to institutional money are supercharging the price,” said Charles Hayter, founder of cryptocurrency data analysis website Cryptocompare.
Notably, as Bitcoin tops $160 billion, the market cap of all cryptocurrencies topped $300 billion for the first time – making their estimated market value greater than that of Wal-Mart.
However, as Reuters reports , the staggering price increases seen in the crypto-market have led to multiple warnings from central bankers, investment bankers and other investors that it has reached bubble territory.
Some say that this could prompt regulators in the West to crack down on the market in a similar fashion to China, where bitcoin exchanges were shut down earlier this year.
“Regulators know the rewards of cryptocurrency and blockchain could be huge but (they) have more than one eye on the catastrophic ramifications if good governance, stability and control are not preserved,” said David Futter, a fintech partner at law firm Ashurst, in London.
“If the carrot of self-regulation proves insufficient, the regulators will not hesitate to use their stick.”
Most critically though it is the central bankers that matter and they appear confused by crytpocurrencies’ surge – some unable to sleep due to the disruptive change looming and others dismissive of the ‘bubble’. As Reuters reports, it keeps them awake at night because these private currencies threaten their control of the banking system and money supply, which could undermine the monetary policies they use to manage inflation.
“The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” European Central Bank policymaker Ewald Nowotny told Reuters.
“So we’re trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated.”
“Bitcoin is a sort of tulip,” ECB Vice President Vitor Constancio said in September, comparing it to the Dutch 17th century trading bubble.
“It’s an instrument of speculation.”
China and South Korea, where cryptocurrency speculation is popular, banned fundraising through token launches, whereby a newly cryptocurrency is sold to finance a product development.
Russia’s central bank said it would block websites selling bitcoin and its rivals while the ECB told European Union lawmakers last year:
“they should not seek… to promote the use of virtual currencies” because these could “in principle affect the central banks’ control over the supply of money” and inflation.
But St. Louis Fed President James Bullard admitted to Reuters in a recent interview what the real concern was:
“(We could) wake up one day and most of the big banks have been eviscerated and most of that activity has moved elsewhere.”
Yet Japan in April recognized bitcoin as legal tender and approved several companies as operators of cryptocurrency exchanges but required them register with the government.
Finally, in an effort to counter the private decentralized cryptocurrencies, some central banks such as Sweden’s Riksbank and the Bank of England are also looking at the merits of introducing their own digital currency.
But not everyone is concerned…
$BTC a hair under $10k and $ETH a hair under $500. It's official: if someone calls crypto a scam or a bubble, you can literally slap them in the face.
While US exchanges anxiously await the $10,000 as some sell-the-news event, Korean exchanges are already trading above $10,000 and holding it…
Considerations: Bitcoin is not a Ponzi scheme because it doesn’t owe money to anyone, right? Bitcoin is not in a bubble because there has never been such thing as a tech adoption bubble. What we have here is a classic case of demand exceeding a finite supply.
Shinhan, the second largest commercial bank in South Korea by market valuation andconsumer base, has initiated the testing phase of its bitcoin vault and wallet services.
Why a Major South Korean Bank Decided to Launch a Bitcoin Vault and Wallet Platform
A representative of Shinhan Bank told Naver News, a media outlet operated by South Korea’s most widely used search engine, that the bank has come to a corporate decision to launch a bitcoin vault and wallet platform as a response to the recent hacking attacks of leading South Korean cryptocurrency exchanges including Bithumb.
In June, South Korea’s Bithumb, the world’s largest cryptocurrency exchange by trading volume, suffered a security breach that affected 30,000 users. As a consequence, the bank refunded $1 million in funds and provided an extra $1 million to the 30,000 users as a compensation for the hacking attack they had experienced.
In an official statement provided to Naver, a Shinhan representativesaid:
“Shinhan is testing a virtual bitcoin vault platform wherein the private keys of bitcoin addresses and wallets are managed and issued by the bank. The bank intends to provide the vault service for free and charge a fee for withdrawals.”
Given that Shinhan serves millions of active users and tens of thousands of corporations in South Korea, the integration of a bitcoin vault and wallet platform into the existing infrastructure of the Shinhan banking system would immediately introduce bitcoin to the general consumers within the region. Such exposure of bitcoin to the mainstream within South Korea, a leading bitcoin market, would significantly increase in the rate of adoption of bitcoin in the country.
Shinhan to Become First Commercial Bank to Introduce Bitcoin Vault and Wallet Service
If Shinhan launches its bitcoin vault and wallet platform by mid-2018 as planned, the company will become the first regulated and large-scale commercial bank to provide bitcoin vault and wallet service.
At this stage, whether Shinhan will offer bitcoin brokerage and trading services to enable their existing clients and customers to purchase or sell bitcoin remains unclear. It is likely that Shinhan will partner with cryptocurrency exchanges within South Korea such as Bithumb, Coinone, and Korbit to provide liquidity to Shinhan’s client base.
Earlier this month, Choe Heung-sik, chief of the Financial Supervisory Service (FSS), stated that the South Korean government will not impose strict regulations on cryptocurrency exchanges in the foreseeable future.
“Though we are monitoring the practice of cryptocurrency trading, we don’t have plans right now to directly supervise exchanges. Supervision will come only after the legal recognition of digital tokens as a legitimate currency,”saidChoe.
The integration and adoption of bitcoin by the country’s second largest bank would mean that bitcoin has already become a legitimate currency. As such, upon the integration of bitcoin by Shinhan, it is also likely that the South Korean government will regulate bitcoin, like Japan has done in March.
Back in September, we reported on a major milestone in bitcoin’s evolution into a respectable medium of exchange for large purchases: A Dallas real estate agent had negotiated the first all-bitcoin purchase of a US home on record. Few details about the home or the identity of the buyers were released. However, given bitcoin’s blistering rise since then – the value of a single coin has more than doubled – it’s reasonable to assume that, whoever they are, they probably regret pulling the trigger on their dream home, seeing as, if they had just waited two more months, they could’ve bought two. Indeed, the unknown seller of the home reportedly earned $1.3 million from the bitcoin they accepted as payment in the transaction.
At the time, we predicted that it wouldn’t be long before settling real-estate transactions in bitcoin would be commonplace, something we imagine could help further inflate real-estate prices in trendy markets like San Francisco, while also potentially attracting real-estate speculators to also dabble in bitcoin.
As if according to some preordained plan, Cryptocoins News reported this weekend that real-estate agents in bothMiamiandNew York Cityare warming to bitcoin, and some have even convinced their clients to accept payment in the digital currency.
Eric Fernandez, owner of Sol/Mar Real Estate, recently listed a $3.5 million penthouse condo at the Blue Diamond in Miami Beach, Fla. saying the owners would accept payment in bitcoin or Ethereum, according to the Miami New Times.
Fernandez believes it is only a matter of time before bitcoin acceptance for real estate purchases gains popularity.
Fernandez is not the only real estate agent who expects more homes to be bought with digital currency. Bitcoin is achieving cult status for international buyers. Some believe Miami will lead this trend.
Another Miami realtor, Stephan Burke, who listed a Coral Gables mansion for sale in August, said the seller would accept bitcoin. Burke pointed out that Miami is an ideal market for bitcoin since it offers investors from South America, Canada, Asia and Russia a way to quickly purchase property.
* * *
Manhattan realtors are also jumping on the bitcoin bandwagon, according to Ben Shaoul, of Magnum Real Estate Group.
We were approached by a buyer who has been collecting bitcoin for many years and was interested in using it to buy property.
Since then there have been a further two to three customers who have approached the developer to see if they can purchase luxury condos with the cryptocurrency. Prices for these properties range in price from $700,000 to $1.5 million.
The United Kingdom has also recorded a few examples of sellers accepting payment in bitcoin for their homes, with at least one case of a seller accepting payment only in bitcoin.
Last month, a Notting Hill mansion in London was put up for sale with the asking price of $17 million, believed to be a first for the metropolitan city. In this case, though, the seller is only accepting bitcoin. In the last week it has been reported that a 49-year-old man has put his £80,000 house up for sale, with the option of accepting the digital currency.
Meawhile,a UK co-living companyhas announced that it will begin accepting down payments made in bitcoin, making it that much easier for traders hooked on effortless, outstanding returns to speculate in another bubble-prone market: UK housing.
Of course, bitcoin’s sometimes-extreme volatility presents risks. But the NYC realtors say they’re not worried.
“Would you stop investing in stock markets? No, you wouldn’t. Each person is going to have a risk assessed judgement on whether or not they want to invest in bitcoin,” one realtor said.
And now that traders can easily purchase futures contracts allowing them to profit off of declines in the bitcoin price, sellers can purchase protection to offset some of the risk.
Bitcoin trade in Japan accounts for about half of the global trade volume. That number has surged since the government passed a new law earlier this year, recognizing bitcoin as a legal form of currency. CNBC’s Akiko Fujita reports.
A surprise political move by Zimbabwean president Robert Mugabe, who fired his deputyEmmerson Mnangagwa, has played havoc on the US dollar/bond note parallel exchange rate, as well as on Bitcoin price in the country.
Unsurprisingly, with this latest political coup by the entrenched president, there is much speculation and worry about the already fragile and almost non-existent fiat currency system. Zimbabwe operates on bond notes linked to the US dollar.
Traders have been trying to move out of monetary assets as even on the dollar there is a 62 percent premium.
It has meant that investors are trapped by the currency shortages, seeking an alternative to exit the country – such as Bitcoin. Despite hitting a price of over $13,000 traders say that Bitcoin is booming as it is the strongest alternative.
Collapse of banking
Zimbabwe is beginning to act like an interesting case study for what happens when a country begins to collapse around its monetary system – it is alsobeing witnessed in Venezuela.
Moving money out of Zimbabwe is starting to become impossible, and as people try and flee monetarilyout of the crumbling state, they are finding refuge in Bitcoin.
Soon, banks in Zimbabwe have stated that Visa debit cards would no longer be usable for international payments without prior arrangements and pre-funding with hard currency.
“You will be required to make prior limit arrangements with the bank,” Stanbic said in a message to depositors last week.
Econet Wireless has also stopped foreign payments on its MasterCard linked EcoCash mobile money debit card.
Bitcoin as a refuge
Because of the decentralized nature of Bitcoin, there is no impact on it from this political upheaval, in fact, it is only benefiting from it. The Bitcoin premium of almost 100 percent is not because of thepolitical issues, rather the high demand surrounding worry of collapse.
Bitcoin again shows its potential and power when the banking system again shows its potential for mass collapse and hysteria.
The blockchain is a digital, decentralized, distributed ledger.
Most explanations for the importance of the blockchain start with Bitcoin and the history of money. But money is just the first use case of the blockchain. And it is unlikely to be the most important.
It might seem strange that a ledger — a dull and practical document associated mainly with accounting — would be described as a revolutionary technology. But the blockchain matters because ledgers matter.
Ledgers All The Way Down
Ledgers are everywhere. Ledgers do more than just record accounting transactions. A ledger consists simply of data structured by rules. Any time we need a consensus about facts, we use a ledger. Ledgers record the facts underpinning the modern economy.
Ledgers confirm ownership. Property title registers map who owns what and whether their land is subject to any caveats or encumbrances. Hernando de Sotohas documentedhow the poor suffer when they own property that has not been confirmed in a ledger. The firm is a ledger, as a network of ownership, employment and production relationships with a single purpose. A club is a ledger, structuring who benefits and who does not.
Ledgers confirm identity. Businesses have identities recorded on government ledgers to track their existence and their status under tax law. The register of Births Deaths and Marriages records the existence of individuals at key moments, and uses that information to confirm identities when those individuals are interacting with the world.
Ledgers confirm status. Citizenship is a ledger, recording who has the rights and is subject to obligations due to national membership. The electoral roll is a ledger, allowing (and, in Australia, obliging) those who are on that roll a vote. Employment is a ledger, giving those employed a contractual claim on payment in return for work.
Ledgers confirm authority. Ledgers identify who can validly sit in parliament, who can access what bank account, who can work with children, who can enter restricted areas.
At their most fundamental level, ledgers map economic and social relationships.
Agreement about the facts and when they change — that is, a consensus about what is in the ledger, and a trust that the ledger is accurate — is one of the fundamental bases of market capitalism.
Ownership, Possession, And Ledgers
Let’s make a distinction here that is crucial but easy to miss: between ownership and possession.
Take passports. Each country asserts the right to control who crosses its borders, and each country maintains a ledger of which of its citizens have the right to travel. A passport is a physical item — call it a token — that refers back to this ledger.
In the pre-digital world, possession indicated ownership of that right. The Australian passport ledger consisted of index cards held in by the government of each state. Border agents presented with a passport could surmise that the traveler who held it was listed on a distant ledger as allowed to travel. Of course this left border control highly exposed to fraud.
A Belgian passport held by the Australian National Archives, A435 1944/4/2579
Possession implies ownership, but possession is not ownership. Now modern passports allow the authorities to confirm ownership directly. Their digital features allow airlines and immigration authorities to query the national passport database and determine that a passenger is free to travel.
Passports are a relatively straightforward example of this distinction. But as Bitcoin has shown: money is a ledger, too.
Possession of a banknote token indicates ownership. In the nineteenth century the possessor — ‘bearer’ — of a banknote had a right to draw on the issuing bank the value of the note. These banknotes were direct liabilities for the issuing bank, and were recorded on the banks’ ledger. A regime of possession indicating ownership meant that banknotes were susceptible to be both stolen and forged.
In our era fiat currencies a five dollar bill cannot be returned to the central bank for gold. But the relationship remains — the value of the bill is dependent on a social consensus about the stability of the currency and government that issued it. Banknotes are not wealth, as Zimbabweans and Yugoslavians and Weimar Republic Germans have unfortunately learned. A bill is a call on a relationship in a (now synthetic) ledger and if that relationship collapses, so does the value of the bill.
Evolution Of The Ledger
For all its importance, ledger technology has been mostly unchanged … until now.
A fragment of a late Babylonian cuneiform ledger, held by the British Museum, 58278
The first major change to ledgers appeared in the fourteenth century with the invention of double entry bookkeeping. By recording both debits and credits, double entry bookkeeping conserved data across multiple (distributed) ledgers, and allowed for the reconciliation of information between ledgers.
The nineteenth century saw the next advance in ledger technology with the rise of large corporate firms and large bureaucracies. These centralized ledgers enabled dramatic increases in organizational size and scope, but relied entirely on trust in the centralized institutions.
In the late twentieth century ledgers moved from analog to digital ledgers. For example, in the 1970s the Australian passport ledger was digitized and centralized. A database allows for more complex distribution, calculation, analysis and tracking. A database is computable and searchable.
But a database still relies on trust; a digitized ledger is only as reliable as the organization that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger.
Blockchain And The Economic Institutions Of Capitalism
The economic structure of modern capitalism has evolved in order service these ledgers.
Oliver Williamson, the 2009 Nobel laureate in economics, argued that people produce and exchange in markets, firms, or governments depending on the relative transactions costs of each institution. Williamson’s transactions cost approach provides a key to understanding what institutions manage ledgers and why.
Governments maintain ledgers of authority, privilege, responsibility and access. Governments are the trusted entity that keeps databases of citizenship and the right to travel, taxation obligations, social security entitlements, and property ownership. Where a ledger requires coercion in order to be enforced, the government is required.
Firms also maintain ledgers: proprietary ledgers of employment and responsibility, of the ownership and deployment of physical and human capital, of suppliers and customers, of intellectual property and corporate privilege. A firm is often described as a ‘nexus of contracts’. But the value of the firm comes from the way that nexus is ordered and structured — the firm is in fact a ledger of contracts and capital.
Firms and governments can use blockchains to make their work more efficient and reliable. Multinational firms and networks of firms need to reconcile transactions on a global basis and blockchains can allow them to do so near-instantaneously. Governments can use the immutability of the blockchain to guarantee that property titles and identity records are accurate and untampered. Well-designed permissioning rules on blockchain applications can give citizens and consumers more control over their data.
But blockchains also compete against firms and governments. The blockchain is an institutional technology. It is a new way to maintain a ledger — that is, coordinate economic activity — distinct from firms and governments.
The new economic institutions of capitalism
Blockchains can be used by firms, but they can also replace firms. A ledger of contracts and capital can now be decentralized and distributed in a way they could not before. Ledgers of identity, permission, privilege and entitlement can be maintained and enforced without the need for government backing.
This is what institutional cryptoeconomics studies: the institutional consequences of cryptographically secure and trustless ledgers.
Classical and neoclassical economists understand the purpose of economics as studying the production and distribution of scarce resources, and the factors which underpinned that production and distribution.
Institutional economics understands the economy as made of rules. Rules (like laws, languages, property rights, regulations, social norms, and ideologies) allow dispersed and opportunistic people to coordinate their activity together. Rules facilitate exchange — economic exchange but also social and political exchange as well.
What has come to be called cryptoeconomics focuses on the economic principles and theory underpinning the blockchain and alternative blockchain implementations. It looks at game theory and incentive design as they relate to blockchain mechanism design.
By contrast,institutional cryptoeconomics looks at the institutional economics of the blockchain and cryptoeconomy. Like its close cousin institutional economics, the economy is a system to coordinate exchange. But rather than looking at rules, institutional cryptoeconomics focuses on ledgers: data structured by rules.
Institutional cryptoeconomics is interested in the rules that govern ledgers, the social, political, and economic institutions that have developed to service those ledgers, and how the invention of the blockchain changes the patterns of ledgers throughout society.
The Economic Consequences Of The Blockchain
Institutional cryptoeconomics gives us the tools to understand what is happening in the blockchain revolution — and what we can’t predict.
Blockchains are an experimental technology. Where the blockchain can be used is an entrepreneurial question. Some ledgers will move onto the blockchain. Some entrepreneurs will try to move ledgers onto the blockchain and fail. Not everything is a blockchain use case. We probably haven’t yet seen the blockchain killer app yet. Nor can we predict what the combination of ledgers, cryptography, peer to peer networking will throw up in the future.
This process is going to be extremely disruptive. The global economy faces (what we expect will be) a lengthy period of uncertainty about how the facts that underpin it will be restructured, dismantled, and reorganized.
The best uses of the blockchain have to be ‘discovered’. Then they have to be implemented in a real world political and economic system that has deep, established institutions that already service ledgers. That second part will not be cost free.
Ledgers are so pervasive — and the possible applications of the blockchain so all-encompassing — that some of the most fundamental principles governing our society are up for grabs.
Institutional Creative Destruction
We’ve been through revolutions like this before.
It is common to compare the invention of Bitcoin and the blockchain with the internet. The blockchain is Internet 2.0 — or Internet 4.0. The internet is a powerful tool that has revolutionized the way we interact and do business. But if anything the comparison undersells the blockchain. The internet has allowed us to communicate and exchange better — more quickly, more efficiently.
But the blockchain allows us to exchange differently. A better metaphor for the blockchain is the invention of mechanical time.
Before mechanical time, human activity was temporally regulated by nature: the crow of the rooster in the morning, the slow descent into darkness at night. As the economic historian Douglas W. Allen argues, the problem was variability: “there was simply too much variance in the measurement of time … to have a useful meaning in many daily activities”.
The 12th century Jayrun Water Clock
“The effect of the reduction in the variance of time measurement was felt everywhere”, Allen writes. Mechanical time opened up entirely new categories of economic organization that had until then been not just impossible, but unimaginable. Mechanical time allowed trade and exchange to be synchronized across great distances. It allowed for production and transport to be coordinated. It allowed for the day to be structured, for work to be compensated according to the amount of time worked — and for workers to know that they were being compensated fairly. Both employers and employees could look at a standard, independent instrument to verify that a contract had been performed.
Complete And Incomplete Smart Contracts
Oliver Williamson and Ronald Coase (who was also an economics Nobel prize winner, in 1991) put contracts at the heart of economic and business organization. Contracts are at the center of institutional cryptoeconomics. It is here that blockchains have the most revolutionary implications.
Smart contracts on the blockchain allows for contractual agreements to be automatically, autonomously, and securely executed. Smart contracts can eliminate an entire class of work that currently maintains, enforces and confirms that contracts are executed — accountants, auditors, lawyers, and indeed much of the legal system.
But the smart contracts are limited by what can be specified in the algorithm. Economists have focused on the distinction between complete and incomplete contracts.
A complete contract specifies what is to occur under every possible contingency. An incomplete contract allows the terms of the contract to be renegotiated in the case of unexpected events. Incomplete contracts provide one explanation for why some exchanges take place in firms, and why others take place in markets, and provides a further guide to questions surrounding vertical integration and the size of the firm.
Complete contracts are impossible to execute, while incomplete contracts are expensive. The blockchain, though smart contracts, lowers the information costs and transactions costs associated with many incomplete contracts and so expands the scale and scope of economic activity that can be undertaken. It allows markets to operate where before only large firms could operate, and it allows business and markets to operate where before only government could operate.
The precise details of how and when this will occur is a challenge and a problem for entrepreneurs to resolve. Currently, oracles provide a link between the algorithmic world of the blockchain and the real world, trusted entities that convert information into data that can be processed by a smart contract.
The real gains to be made in the blockchain revolution, we suggest, are in developing better and more powerful oracles — converting incomplete contracts to contracts that are sufficiently complete to be written algorithmically and executed on the blockchain.
The merchant revolution of the middle ages was made possible by the development of merchant courts — effectively trusted oracles — that allowed traders to enforce agreements privately. For blockchain, that revolution seems yet to come.
The blockchain economy puts pressure on government processes in a whole host of ways, from taxation, to regulation, to service delivery.
Investigating these changes is an ongoing project of ours. But consider, for instance, how we regulate banks.
Prudential controls have evolved to ensure the safety and soundness of financial institutions that interact with the public. Typically these controls (for example, liquidity and capital requirements) have been justified by the fact that depositors and shareholders are unable to observe the bank’s ledger. The depositors and shareholders are unable to discipline the firm and its management.
Bank runs occur when depositors discover (or simply imagine) that their bank might not be able to cover their deposits, and they rush to withdraw their money.
The bank run in Mary Poppins (1964)
One possible application of the blockchain would allow depositors and shareholders to continuously monitor the bank’s reserves and lendings, substantially eliminating the information asymmetries between them and the bank management.
In this world, market discipline would be possible. Public trust in the immutability of the blockchain would ensure no false bank runs occurred. The role of the regulator might be limited to certifying the blockchain was correctly and securely structured.
A more far reaching application would be a cryptobank — an autonomous blockchain application that borrows short and lends long, perhaps matching borrowers with lenders directly. A cryptobank structured algorithmically by smart contracts would have the same transparency properties as the bank with a public blockchain ledger but with other features that might completely neglect the need for regulators. For example, a cryptobank could be self-liquidating. At the moment the cryptobank began trading while insolvent, the underlying assets would be automatically disbursed to shareholders and depositors.
It is unclear what regulatory role government should have in this world.
Tyler Cowen and Alex Tabarrok have arguedthat much government regulation appears to be designed to resolve asymmetric information problems — problems that, in a world of information ubiquity, often do not exist any more. Blockchain applications significantly increase this information ubiquity, and make that information more transparent, permanent, and accessible.
Blockchains have their uses in what is being called ‘regtech’ — the application of technology to the traditional regulatory functions of auditing, compliance, and market surveillance. And we ought not to dismiss the possibility that there will be new economic problems that demand new consumer protections or market controls in the blockchain world.
Nevertheless, the restructuring and recreation of basic economic forms like banks will put pressure not just on how regulation is enforced, but what the regulation should do.
Whither Big Business?
The implications for big business are likely to be just as profound. Business size is often driven by the need to cover the costs of business hierarchy — in turn due to incomplete contracts and technological necessity of large scale financial investment. That business model has meant that shareholder capitalism is the dominant form of business organization. The ability to write more complete contracts on the blockchain means that entrepreneurs and innovators will be able to maintain ownership and control of their human capital and profit at the same time. The nexus between operating a successful business and access to financial capital has been weakening over time, but now might even be broken. The age of human capitalism is dawning.
Entrepreneurs will be able to write a valuable app and release it into the “wild” ready to be employed by anyone and everyone who needs that functionality. The entrepreneur in turn simply observe micro-payments accumulating in their wallet. A designer could release their design into the “wild” and final consumers could download that design to their 3D printer and have the product almost immediately. This business model could see more (localized) manufacturing occur than at present.
The ability of consumers to interact directly with producers or designers will limit the role that middlemen play in the economy. Logistics firms, however, will continue to prosper, but the advent of driverless transportation will see disruption to industry too.
Bear in mind, any disruption of business will also disrupt the company tax base. It may become difficult for government to tax business at all — so we might see greater pressure on sales (consumption) taxes and even poll taxes.
The blockchain and associated technological changes will massively disrupt current economic conditions. The industrial revolution ushered in a world where business models were predicated on hierarchy and financial capitalism. The blockchain revolution will see an economy dominated by human capitalism and greater individual autonomy.
How that unfolds is unclear at present. Entrepreneurs and innovators will resolve uncertainty, as always, through a process of trial and error. No doubt great fortunes will be made and lost before we know exactly how this disruption will unfold.
Our contribution is that we have a clearer understanding of a model that can be deployed to provide clarity to the disruption as and when it occurs.
In his remarks, Thiel said that while he is “skeptical of most [cryptocurrencies],” he believes bitcoin has a promising future depending on the trajectory it takes…
“I’m skeptical of most of them (cryptocurrencies), I do think people who criticize are a little bit… underestimating bitcoin especially because… it’s like a reserve form of money, it’s like gold, and it’s just a store of value. You don’t need to use it to make payments,” Thiel said.
The PayPal founder and venture capitalist compared some of bitcoin’s features to gold.
“If bitcoin ends up being the cyber equivalent of gold and it has a great potential left and it’s a very different kind of thing from what people in Silicon Valley focus on – companies, not algorithms not protocols, but this might be maybe one exception that is very underestimated,” the Silicon Valley elite said.
Even so, in Thiel’s opinion, like gold, it’s difficult to mine, making it more worthwhile…
“You can ask the same questions about gold. What is gold based on? Why is gold valuable?…
It’s a tangible asset but it’s also hard to mine. So if it was easy to mine then it wouldn’t be that valuable and we would just have way more gold.
So bitcoin is also, it’s mineable, like gold it’s hard to mine, it’s actually harder to mine than gold and so in that sense it’s more constrained,” he said.
In September, JPMorgan CEO Jamie Dimon famously called bitcoin a “fraud” and said it will eventually blow up.
“The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart,” Dimon said while speaking at an investor conference.
However, Thiel proposed a different take:
“The argument it’s based on is the security of the math which tells you it can never be diluted by government… it can’t be hacked and it’s a form of money that’s… secure in an absolute way.”
Those who see governments banning ownership of bitcoin are ignoring the political power and influence of those who are snapping up most of the bitcoin.
To really understand an asset, we have to examine not just the asset itself but who owns it, and who can afford to own it. These attributes will illuminate the political and financial power wielded by the owners of the asset class.
And once we know what sort of political/financial power is in the hands of those owning the asset class, we can predict the limits of political restrictions that can be imposed on that ownership.
As an example, consider home ownership, i.e. ownership of a principal residence. Home ownership topped out in 2004, when over 69% of all households “owned” a residence. (Owned is in quotes because many of these households had no actual equity in the house once the housing bubble popped.)
The rate of home ownership has declined to 63%, which is still roughly two-thirds of all households. Clearly, homeowners constitute a powerful political force. Any politico seeking to impose restrictions or additional taxes on homeowners has to be careful not to rouse this super-majority into political action.
But raw numbers of owners of an asset class are only one measure of political power. Since ours is a pay-to-play form of representational democracy in which wealth buys political influence via campaign contributions, philanthro-capitalism, revolving doors between political office and lucrative corporate positions, etc., wealth casts the votes that count.
I am always amused when essayists claim “the government” will do whatever benefits the government most. While this is broadly true, this ignores the reality that wealthy individuals and corporations own the processes of governance.
More accurately, we can say that government will do whatever benefits those who control the levers of power most, which is quite different than claiming that the government acts solely to further its own interests. More specifically, it furthers what those at the top of the wealth-power pyramid have set as the government’s interests.
Which brings us to the interesting question, will governments ban bitcoin as a threat to their power? A great many observers claim that yes, governments will ban bitcoin because it represents a threat to their control of the fiat currencies they issue.
But since government will do whatever most benefits those who control the levers of power, the question becomes, does bitcoin benefit those holding the levers of power? If the answer is yes, then we can predict government will not ban bitcoin (and other cryptocurrencies) because those with the final say will nix any proposal to ban bitcoin.
We can also predict that any restrictions that are imposed will likely be aimed at collecting capital gains taxes on gains made in cryptocurrencies rather than banning ownership.
Since the wealthy already pay the lion’s share of federal income taxes (payroll taxes are of course paid by employees and employers), their over-riding interests are wealth preservation and capital appreciation, with lowering their tax burdens playing third fiddle in the grand scheme of maintaining their wealth and power.
Indeed, paying taxes inoculates them to some degree from social disorder and political revolt.
Xapo was founded by Argentinian entrepreneur and current CEO Wences Casares, whom Quartz describes as “patient zero” of bitcoin among Silicon Valley’s elite. Cesares reportedly gave Bill Gates and Reed Hoffman their first bitcoins.
Their first bitcoins. That suggests the billionaires have added to their initial gifts of BTC.
The appeal to the wealthy is obvious: any investment denominated in fiat currencies can be devalued overnight by devaluations of the currency via diktat or currency crisis. Bitcoin has the advantage of being decentralized and independent of centrally-issued currencies.
I submit that not only are the wealthy the likeliest buyers of bitcoin for this reason, they are the only group that can afford to buy a bunch of bitcoin as a hedge or speculative investment. Lance Roberts of Real Investment Advice recently produced some charts based on the Federal Reserve’s 2016 Survey of Consumer Finances (SCF) report– Fed Admits The Failure Of Prosperity For The Bottom 90%.
Put another way: how many families can afford to buy a bunch of bitcoin?
Here is a chart of median value of family financial assets: note that this is far below the 2000 peak and the housing bubble of 2006-07:
Here is mean family financial assets broken out by income category: note that virtually all the gains have accrued to the top 10%, whose net worth soared from $1.5 million in 2009 to over $2.2 million in 2016, a gain of $700,000.
As you’d expect, the report starts off on a rosy note: GDP rose by 2.2% a year, unemployment declined to 5%, and the median family income rose 10% between 2013 and 2016.
Blah blah blah. Meanwhile, on page 10, it’s revealed that the top 1% receives 24% of all income, and the families between 90% and 99% receive 26.5%, for a total of 50.5% of all income flowing to the top 10%.
The top 1% owns 38.6% of all wealth, and the families between 90% and 99% own 38.5%, so the top 10% owns 77% of total wealth.
On page 13, we find that the total median net worth of all families between 40% and 60% went from $57,000 to $88,000, a gain of $21,000, while the median net worth of families in the 60% to 80% bracket rose from $166,000 to $170,000, a grand total of $4,000.
Meanwhile, back in La-La Land, the median net worth of the top 10% soared by $468,000, from $1.16 million to $1.62 million.
Which family has the wherewithal to buy a bunch of bitcoin at $5,900 each as a hedge or investment, the one that gained $4,000 in net worth, the one that gained $21,000 in net worth or the one that gained $468,000?
You see the point: the likely buyers of enough bitcoin to count are the politically powerful financial elite. If any politico was foolish enough to propose banning bitcoin, a few friendly phone calls from major financial backers would be made to impress upon the politico the importance of blockchain technology and cryptocurrencies to the U.S. economy.
Heck, the financial backer might just suggest that all future campaign contributions to the politico will be made in bitcoin to drive the point home.
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 isdependent 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-blockchainEnterprise 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 …
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 theabstract. 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 Ethereum 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.
Everyone’s ADD, including me. I get attracted by shiny objects. I first noticed Bitcoin as a shiny object in mid-2013. I went down the rabbit hole far enough for The Wall Street Journal to call me “Wall Street’s Bitcoin expert” while they live bloggeda Bitcoin conference call I hosted. I invested inChangeTip. I bought and soldBitcoinWallet.com. Unfortunately, by late-2014, nine months in to a severe Bitcoin price decline, my focus wandered to new shiny objects.
Fast forward to 2017, and my mind wandered to a new shiny object, ICOs. Once again, I got the four smartest people I could find on the topic,and held a conference callon June 29th during which I had my crypto epiphany.
Crypto is now so shiny, so luminous, I can’t divert my eyes. I’m living and breathing crypto 24/7. Reading every thoughtful post I can find. Meeting anyone thoughtful on the topic. Holding morecrypto conference calls.And writing and writing on crypto, because that’s the best way to learn.
After 3 months going down the rabbit hole a second time, here’s what I learned…
1. I’m A One Eyed Man In The Land of Other One Eyed People
We’re still so early, that much about what people are saying and writing about crypto is more theory than fact. Lots of people (including me) compare thethe crypto bubble to the Internet bubble. But the parallels between the development of crypto and the development Internet are everywhere I look. Take this snippet from Wikipedia’s “History of the Internet’’:
“With so many different network methods, something was needed to unify them.Robert E. KahnofDARPAandARPANETrecruitedVinton Cerfof Stanford to work with him on the problem. By 1973, they had worked out a fundamental reformulation, where the differences between network protocols were hidden by using a commoninternetwork protocol…..”
As a non-techie, that sounds exactly like a paragraph I read yesterday on Medium. But an important difference about the evolution of crypto and the evolution of the internet is how public crypto’s early evolution is. There were maybe a few thousand people who cared about what Cerf was doing in the early days of the Internet. So it was done out of the public’s eye. It wasn’t until 1994, 21 years after Cerf’s 1973 solution, that Netscape introduced it’s browser, and most people learned about the internet.
Crypto is evolving in its early days in a public way, so it’s messy, and theoretical, and dense. So if you feel like you don’t really understand crypto, join the crowd. Neither of us would have understood much if we sat in the room with Vint Cerf in 1973.
2. Bitcoin Is A Confidence Game, Utility Tokens Are Awesome But Legally Challenging, Security Tokens Are Going To Be Huge
The chart below provides a simple way to think about the three types of cryptocurrencies.
On the currency side, while Bitcoin is a crypto leader in payments, it’s rise in it’s value has little to do with the currency applications of Bitcoin, and all to do with it being a store of value. Therefore, Bitcoin is simplya confidence game as are ALL store of values. As with other assets, the higher Bitcoin’s value goes, the more confident investors become, which is another factor driving bubbles. After being used as a store of value for thousands of years, it’s easier to believe in gold as a store of value (hence the rocks have a total market cap/are storing over $7 trillion in value vs. $75 billion for Bitcoin today). I believe Bitcoin will continue to gain share of value storage. I’m a HODLer.
Utility Tokens likeCivicwhich provide a digital good in return for the token (in Civic’s case they provide businesses and individuals the tools to control and protect identities) are an exciting new way to fuel ecosystems. However, in theSAFT White Paperpublished by Cooley and Protocol Labs last week, a whole section is titled “Pre-functional Utility Token Sales Are More Likely to Pass the Howey Test”, which is another way of saying the SEC is likely to deem them a security. Hence they propose the SAFT as an instrument to address this risk.
The third type of token are Security Tokens, which are similar to shares, as they convey ownership interests. The cool thing about Security Tokens is that they’re liquid (assuming there’s someone who wants to buy them and security laws are addressed), and companies can access a global investor base when raising capital/doing an ICO. While most of the ICOs to date have been Utility Tokens, because of the massive advantages that Security Tokens have over traditional capital raising, I think the total market cap of all security tokens will be much larger than the total market cap of all utility tokens.
3. Blockchain Technology Is Going To Be A Disruptive Force Across Industries
This postin Blockchain Hub gives a great detailed overview of the three types of blockchains? – ?public blockchains (like Bitcoin and Ethereum), federated blockchains (like R3 and EWF), and private blockchains (e.g. platforms likeMultichain).
This postbyCB Insightshighlights 30 industries that blockchain could transform, and the companies leading the disruption.
4. DECENTRALIZATION Is Potentially The Most Disruptive Force
Blockchains, cryptocurrencies, together with other smart contracts are enabling Decentralization, which is the REALLY disruptive thing. The chart below is widely known in crypto. It’s often disparaged as too simplistic to be meaningful, but I find it helpful.
Governments and businesses have largely functioned via centralization. Someone or some organization sits in the middle, making the rules, and taking a toll (either taxes or fees) for providing a function. We can now leverage technology, take out the middleman, and enable highly functional decentralized entities (like bitcoin).
Take life insurance. I believe, in the future, throughsmart contractsand the blockchain, decentralized structures will provide life insurance, saving buyers of life insurance the $10’s of billions of tolls (sales commissions, profits, …) that insurance companies takes for sitting in the middle.
ICOs are funding a growing list of real-world decentralized companies.Auguris building a decentralized prediction market.PROPSis a decentralized economy for digital video. OpenBazaar is a decentralized peer-to-peer marketplace.Aragonis a decentralized provider of tools to enable more efficient decentralized companies.
Decentralization is the lens through which I now look at everything. It’s the most important thing I’ve learned about over the last three months.
It seems to make sense that, all else being equal, the industries most at risk for disruption from decentralization are where the middlemen charge the highest tolls. Below isa list from Forbesof the 10 industries with the highest net margins in 2016:
Even though investment managers are getting disrupted by ETFs and robo -advisors, they’re still churning out nice margins. Certainly my own industry (venture capital) is at risk:
But I don’t think VCs aren’t going away anytime soon, particularly VCs that focus on crypto and invest in ICOs. In addition, ICO investors see name VCs as a positive signal (e.g. Filecoin). So VCs may be diminished, but the good ones will adapt and innovate.
The biggest sign that it’s not a bubble, is that almost everyone says it’s a bubble. By way of background, I’m a VC and former Wall Street equity analyst, and I think it’s a bubble because I see ICOs trading at 50X-100X+ what I think they would be valued at if they were funded by VCs or traded publicly. And history says it’s not different this time.Here’s a great bookon the last 800 years of people saying “it’s different” this time to justify lofty valuations.
I say “so what” because I believe inAmara’s Law: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. This is part of the reason we get bubbles. We get overexcited about a new technology and we drive up prices beyond any reasonable valuation. Bubble’s go on for years. The internet bubble lasted 5+ years.
But the more important part of Amara’s law is that we underestimate the effect of a technology in the long run. The internet is more impactful, and a greater wealth creator than anyone imagined. The internet brought us $3 trillion of wealth just inFAMGA. What’s the value to be created from crypto, blockchain, and decentralization? Today, the cryptocurrency market cap is around $150 billion. Could that figure go down 78% like the NASDAQ did in the 30 months after it peaked on March 10th, 2000? Sure. And that would be painful. But I’m playing the long game. It was a good strategy with the internet, and it should be a good strategy today with crypto.
6. Governance Is The Biggest Risk To Bitcoin
Regulatory risk is obviously significant on a country-by-country basis, or within the U.S. on a state-by-state basis re all cryptocurrency. We’ve seen what happened in China. Korea and other countries are also clamping down. In the U.S. theSEC DAO Reportwas a big step forward for ICOs given the incredible amount of detail and guidance the SEC gave in the report, without it being an enforcement action. Crypto’s next onthe SEC agenda on October 12th.But at the end of the day, governments are going to do what’s in their best interests.
While there is significant regulatory risk, I believe governance is the greatest risk to Bitcoin and other decentralized entities. Bitcoin is essentially governed by exit (h/tAri Paul). While there’s a consensus mechanism, if people don’t like the consensus, they have three choices. They can 1)suck it up, 2) they can sell their bitcoins and leave, or 3) they can take the open source code and fork it. Forking comes with both technical risk and community risk. The Segwit2X debate, which could result in a hard fork November 18, is just the latest example of Bitcoin’s risk from governance by exit. The Balkanization of Bitcoin won’t be a good thing for the community.
After Jamie Dimon said “Bitcoin is a fraud”, my Twitter stream was filled with Dimon haters. I read what he said, which brought nothing new to the conversation other than his opinion, and moved on. Maybe Dimon doesn’t even believe what he’s saying. Maybe he’s justtalking up his own book. I don’t know, I don’t care, and I won’t spend time defending the industry from haters or dissecting the reasons the haters hate (unless they’re bringing something new to the conversation).
I want to spend my time preaching to the choir. I want to spend my time learning from, helping, and investing in the believers. As an industry, we have a lot of work ahead of us to achieve the massive world-changing potential of blockchain, cryptocurrency, and decentralization. I’m getting to it.
Once again the unintended consequences of government intervention are exposed…
In 2010 – following the release of sensitive government documents related to wars in Afghanistan and Iraq – John McCain and Joe Lieberman led a bipartisan attempt to cut off WikiLeaks funding by forcing ‘traditional’ payment systems to block them.
7 years later and the price of Bitcoin has … risen … 50,000%!
As CoinTelegraph concludes, Wikileaks has been on the forefront of revealing government corruption, and Assange has lived as a fugitive in the Ecuadorian Embassy in London since 2012. With all the anti-government rhetoric, it’s no wonder Assange is not friendly with pro-government fiat currencies. Wikileaks and its founder represent the sort of non-governmental control that Bitcoin is founded upon.
And while governments around the world play ‘pass the hot potato’ with their regulatory crackdowns on cryptocurrencies, it appears – after denouncing Bitcoin earlier in the week – that Russia has accepted the inevitability of digital currencies… and created its own.
As CoinTelegraph reports, Russian President Vladimir Putin has officially stated that Russia will issue its own ‘CryptoRuble’ at a closed door meeting in Moscow, according to local news sources.
The news broke through Minister of Communications Nikolay Nikiforov.
According to the official, the state issued cryptocurrency cannot be mined and will be issued and controlled and maintained only by the authorities.
The CryptoRubles can be exchanged for regular Rubles at any time, though if the holder is unable to explain where the CryptoRubles came from, a 13 percent tax will be levied.
The same tax will be applied to any earned difference between the price of the purchase of the token and the price of the sale. Nikiforov said:
“I confidently declare that we run CryptoRuble for one simple reason: if we do not, then after 2 months our neighbors in the EurAsEC will.”
While the announcement means that Russia will enter the cryptocurrency world, it is in no way an affirmation or legalization ofBitcoinor any other decentralized cryptocurrency. On the contrary, Putin quite recently called for acomplete ban on all cryptocurrencieswithin Russia. The statement from Putin seemed apparently to contradict the earliercommentsfrom other ministers who seemed pro-crypto, but only with regulations, as well as Putin’srecent meetings with Buterinand others.
Now, with the issuance of the CryptoRuble, the apparent contradiction has been made clear.
The guy who made tens of millions of dollars misleading American retirees into buying worthless pink sheet stocks says he agrees with J.P. Morgan Chase & Co. CEO Jamie Dimon’s comment that bitcoin is “a fraud.”
Jordan Belfort, the inspiration for Leonardo DiCaprio’s character in the 2013 Martin Scorsese film “The Wolf of Wall Street,” toldthe Streetthat he believes Dimon is right, adding that bitcoin “isn’t a great model.”
In what may eventually be revealed as an important distinction, Belfort’s take was somewhat more nuanced than Dimon’s. While the JPM CEO predicted that all digital currencies would eventually become worthless, Belfort said there might be room for one.
“I’m not saying cryptocurrencies, there won’t be one – there will be one – but there has to be some backing by some central governments out there.
If any digital currency demonstrates long-term viability, it will probably be one that’s backed by a central bank.”
Two weeks ago, Dimon sent the priceof bitcoin tumbling when he called the digital currency a fraud and said he would fire any JPM traders caught trading it. He added that it made people like his daughter feel like “geniuses” for buying in early.
“It’s a fraud. It’s making stupid people, such as my daughter, feel like they’re geniuses. It’s going to get somebody killed. I’ll fire anyone who touches it.”
Surprisingly, given bitcoin’s role in helping disrupt the financial services industry, not every Wall Street CEO shares Dimon’s dim view on the digital currency. Two days ago, Morgan Stanley CEO James Gorman toldWSJ that he believes Dimon is wrong and that “bitcoin is certainly more than a fad.” However, he conceded that “there is a government risk to it” – alluding to Chinese authorities’ decision to shutter local bitcoin exchanges. Joining Dimon and Belfort in the skeptics’ corner is Bridgewater Associates FounderRay Dalio, who said last week that he believes bitcoin is in a bubble.
Circling back to Belfort, he explained tothe Streetthat he just couldn’t wrap his head around bitcoin…
“Basically, the idea that it’s being backed by nothing other than a program that creates artificial scarcity it seems kind of bizarre to me.”
He also claimed that he knows people who lost money in the Mt. Gox hack, and that the incident served as a wakeup call.
“They could steal it from you I know people who have lost all their money like that…”
Of course, Dimon’s statement didn’t stop JP Morgan Securities from transacting in a bitcoin-linked exchange-traded product traded on Nasdaq Stockholm, prompting an algorithmic liquidity provider called Blockswater to sue Dimon for “spreading false and misleading information” about bitcoin.
Traders, meanwhile, have continued to vote with their wallets: Bitcoin finally filled the “Dimon gap” yesterday, and has continued to climb on Thursday…
So Jamie and the Wolf on Wall Street agree. Do we need to know anymore?
The hype around ICOs or initial coin offerings has reached fever pitch in the US, with celebs like Paris Hiltonendorsing new digital currenciesand mainstream outlets such as CNBC offering viewers advice on how to build their own “cryptocurrency portfolio.” In China, though, the authorities have had enough, and today the Chinese government took the bold move of banning ICOs all together.
The ruling comes from China’s central bank, whichissued a statementcriticizing ICOs for “disrupting” the country’s financial order. The regulator described initial coin offerings as “a form of unapproved illegal public financing” that “raises suspicions” of fraud and criminal activity, reports theFinancial Times. Although the valuation of bitcoin fell in response to the news, the regulation does not directly target the popular cryptocurrency.
In the past year, there has been a boom in ICOs, driven in part by the soaring value of more established cryptocurrencies. While projects like Bitcoin aim to offer an alternative to state-backed currencies, ICOs often have narrower and more gimmicky uses. Lydian Coin, for example, (the ICO that Paris Hilton endorsed this morning) is supposed to be used solely for buyingadvertising campaigns; whileFilecoin(an ICO backed by the Winklevoss twins) is a digital token that’s exchanged for data storage.
Financial experts say ICOs range in quality from serious (if overambitious) attempts to build new digital currencies, to projects that are little more than pyramid schemes. The Financial Times’ Alphaville blogcomparedICOs to Kickstarter campaigns for “crypto-nerds,” where investors are persuaded to fork over cash for a product that hasn’t yet been built and that could go nowhere.
If investment in ICOs constitutes a bubble, though, it hasn’t burst yet. It’sestimatedthat coin offerings have raised $1.6 billion in 2017 alone, with 65 launches in Chinatotalingsome 2.6 billion yuan or $398 million (according to a report from the National Committee of Experts on the Internet Financial Security Technology). This rush of money is why the technology has invited the wrath of Chinese regulators, who are enforcing the government’s orders to make “financial security” a top priority.
Similar regulation may soon be coming to America, too. This July, the US Securities and Exchange Commission (SEC) warned that ICOs were being used tosidestep the law, and last week the agency issued another statement describing coin offerings as “potential scams.”
Jehan Chu, a partner at Kenetic Capital who advises on the sale of tokens,told Bloombergthat “China needed to act first “due to its size.” However, he added that today’s news is “somewhat in step with … what we’re starting to see in other jurisdictions — the short story is we all know regulations are coming.”
By quick way of review, here’s the key chart. As you can see, the $USD staged a large bull market run in 2014 as the [Foreign] Federal Reserve wound down its QE program. The greenback was then range bound for three years until this month when it broke down in a big way.
US Dollar ($USD) dropping below critical support.
Here’s the $USD’s chart running back 40 years. I call this the “single most important chart in the world,” because how the $USD moves has a massive impact on all other asset classes.
As you can see the $USD broke out of a massive 40 year falling wedge pattern [between 2014-2016]. This initial breakout has failed to reach its ultimate target (120) and is now rolling over for a retest of the upper trendline in the mid-to low-80s.
The Long Term [40 year] Chart Of The $USD
What happens when new currency is created with few limits by central and commercial banks?
Far too much debt and currency are created.
Central Bank Balance Sheets have increased by $10 trillion in the last decade and $1 trillion YTD in 2017.
What happens when an extra $10 trillion in central bank debt plus another $80 trillion or so in other global debt is created in a decade?
Prices rise because each unit of fiat currency purchases less.
Market Early 2007 Early 2017
NASDAQ Composite 2,400 6,000
S&P 500 Index 1,400 2,370
T-Bond 110 150
Gold 700 1,250
Silver 13 18
Crude Oil 60 50
Now might be a good time to grab some physical gold, silver and cold stored Crypto.
Russia’s largest exchange group has announced plans to trade cryptocurrencies on the Moscow Exchange.
The central depository for the Moscow Exchange, National Settlement Depository (NSD), announced that it is developing a platform to provide accounting services for digital assets like cryptocurrencies.
The platform looks to be build a unit of account, very important in the volatile crypto-space, for people to value their assets in and have access to through a wallet platform.
In short, the Moscow Exchange is taking a page out of Dan Larimer’sBitSharesand its OpenLedger exchange to provide trading and accounting and banking servicesall validated and accessible through the blockchain.
In essence, by the end of 2018, cryptos will be trading on the Moscow Exchange and integrated into the banking system to stand beside stocks, bonds and other derivative assets.
CEO Eddie Astanin:
“Our goal is to create a secure and user-friendly accounting infrastructure for digital assets. We consider the platform would not only provide technological and legal protection of all parties involved, but also extend variety of post-trade services for investors, custodians and new institutions emerging in this sector of economy.”
Building Blockchains off the Putin/Buterin Meeting
This is yet another example of Russia’s rapid response to the changing environment of cryptos. Vladimir Putin’s meeting with Ethereum designer, Vitalik Buterin, in May at the St. Petersburg International Economic Forum must have been truly eye-opening for Putin.
Since then I can almost not keep up with the news flow coming out of Russia relative to the widespread adoption of the blockchain to rapidly modernize those areas of its economy that need it in order to compete over the next generation or two.
Putin, ever the long-game strategist, must have had a ‘eureka’ moment talking with Buterin about Ethereum for people close to the Kremlin to be reacting this quickly.
But this goes deeper than just banking modernization, which is a priority for the Russian government. These moves into crypto are direct responses to the new sanctions placed on Russia by the U.S.
These are moves to make Russia a diversified destination for capital fleeing the chaos of the Western political breakdown that we are watching unfold before our eyes in real time.
There has been a lot of smoke about Russia (and China) backing their national currencies with Gold. And, while as a gold bug, I appreciate this sentiment I also understand that Russia couldn’t do that in this environment without creating insane capital flow issues in the current environment.
The better plan is to loosen central bank policy, issue some ruble-denominated debt (or yuan) while building up the crypto infrastructure to absorb those capital flows without creating dislocations within the ruble market.
This creates a more natural and organic flow of capital into the country without it causing social upheaval. Like the announcement of Russian Miner Coin, his move by the NSD is just another building block in the foundation of a more resilient Russian financial system to better coordinate the flow of capital and smooth the development of the chain of production.
This, in turn, limits the effects of U.S. sanctions. Once the market comes to the conclusion that Russia treats capital better than the U.S. does, the current trickle will become a torrent. And Russia has to be ready to handle this.
Diversifying into the blockchain is one of those important avenues.
While many of the largest cryptocurrencies are fading modestly this morning, Bitcoin is holding on to dramatic agains which saw the largest virtual currency spike to as high as $4190 as Yen, Yuan, and Won trading activity dominated volumes.
Bitcoin Cash remains in 4th place overall by market cap but Bitcoin is the only currency higher among the top 5 this morning.
Soaring past $4000…
As CoinTelegraph reports, the trading of Bitcoin in Japanese yen has accounted for almost 46 percent of total trade volume worldwide. The trading of Bitcoin in US dollar accounted for around 25 percent, while the trading of Bitcoin in South Korean won and Chinese yuan accounted for approximately 12 percent each.
The Fund seeks to achieve its investment objective by investing, under normal circumstances, in U.S. exchange-traded bitcoin-linked derivative instruments (“Bitcoin Instruments”) and pooled investment vehicles and exchange-traded products that provide exposure to bitcoin (together with Bitcoin Instruments, “Bitcoin Investments”).
The Fund is an actively managed exchange-traded fund (“ETF”) and should not be confused with one that is designed to track the performance of a specified index.
The Fund’s strategy seeks to provide total return by actively managing the Fund’s investments in Bitcoin Investments.
Bitcoin’s solid performance in early August reflected that of gold’s amidst the selloff in stocks and bonds around the world due to the growing apprehensions over North Korea’s nuclear threat.
And the latest moves this weekend in the crypto world suggest gold will open well north of $1300 tonight.
Bitcoin is now up almost 35% since the August 1st fork, and up over 90% from the mid-July fork-fears panic low. Buying was heavy in the overnight Asian session but surged once again this morning, seemingly after US CPI data disappointed, lifting the price to a new record high of $3547.
As we noted earlier,“The real demand for bitcoin will not be known until a global financial crisis guts confidence in central banks and politicized capital controls.”
This is Bitcoin’s best week since pre-Brexit anxiety sent the virtual currency surging in June 2016…
Coinbase CEO Brian Armstrong noted: “Digital currencies are having their ‘Netscape’ moment…The pace of innovation has been accelerating and we are now seeing exciting projects and companies being built on top of digital currencies.”
As CoinTelegraph also notes, recent tension between the US and North Korea has played its part on the global market, rattling some of the major asset classes. However, not being pegged, or controlled by any centralized force, Bitcoin was totally unaffected by the news.
Cryptocurrencies are famous for their volatility, but the non-correlation between the global market slipping and cryptocurrencies mostly staying up shows that these decentralized forms of currency won’t be affected like traditional assets.
Having‘nailed’ the price action recently in Bitcoin(calling the recent pull back, extension beyond $3,000, with a target of $3,915), Goldman notes that it’s getting harder for institutional investors to ignore the rise of cryptocurrencies.
Last month Goldman’s chief technician, Sheba Jafari, issued their forecast of where bitcoin is headed next. Recall, that as wefirst reported three weeks ago,Jafari said that “due to popular demand, it’s worth taking a quick look at Bitcoin here” and warned that “the market has come close (enough?) to reaching its extended (2.618) target for a 3rd of V-waves from the inception low at 3,134.” She concluded that she was “wary of a near-term top ahead of 3,134” and urged clients to “consider re-establishing bullish exposure between 2,330 and no lower than 1,915.”
She was right: on the very day the note came out, both bitcoin and ethereum hit their all time highs and shortly after suffered their biggest drop in over two years.
So what does Jafari thinks will happen next? According to the Goldman technician, Bitcoin is now “in wave IV of a sequence that started at the late-’10/early-’11 lows. Wave III came close enough to reaching its 2.618 extended target at 3,135. Wave IV has already retraced between 23.6% and 38.2% of the move since Jan. ‘15 to 2,330/ 1,915.”
What does this mean for the uninitiated? In short, while bitcoin remains in Wave IV, it could go up… or down. She explains:
It’s worth keeping in mind that fourth waves tend to be messy/complex. This means that it could remain sideways/overlapping for a little while longer. At this point, it’s important to look for either an ABC pattern or a more triangular ABCDE. The former would target somewhere close to 1,856; providing a much cleaner setup from which to consider getting back into the uptrend. The latter would hold within a 2,076/3,000 range for an extended period of time.
However, at that point the next major breakout higher would take place, one which would take bitcoin as high as $3,915.
Either way, eventually expecting one more leg higher; a 5th wave. From current levels, [Bitcoin] has a minimum target that goes out to 3,212 (if equal to the length of wave I). There’s potential to extend as far as 3,915 (if 1.618 times the length of wave I). It just might take time to get there.
Goldman’s analyst concludes with the following summary: “[Bitcoin] could consolidate sideways for a while longer. Shouldn’t go much further than 1,857. Eventually targetingat least 3,212.“
And now, Goldman offers an FAQ for the institutional investor…
The debate has shifted from the legitimacy of the ‘fiat of the internet’ to how fast new entrants are raising funds. The hype cycle is in full effect with Bitcoin, the first, largest and most widely recognized cryptocurrency up almost 200% YTD (v 11% for the S&P 500) and a host of other emerging ‘alt coins’ growing in scope and presence (witness the growth of Ethereum).
Whether or not you believe in the merit of investing in cryptocurrencies (you know who you are) real dollars are at work here and warrant watching especially in light of the growing world of initial coin offerings (ICOs) and fundraising that now exceeds Internet Angel and Seed investing.
1. Two Sides To The Coin: Is Cryptocurrency a “Currency” or “Commodity”?
Answer: It depends who you ask. The complexity exists because coins have attributes of a currency (e.g. presented and trusted by some medium of exchange) and commodity (e.g. limited resource). The classification of cryptocurrencies varies by country, government and even application. In the U.S., the IRS has ruled that virtual currency does not have legal tender status in any jurisdiction. For tax purposes, the IRS treats virtual currency as property.
2. How Big Is The Cryptocurrency Market?
Answer: Nearly $120 billion. Bitcoin remains the largest and accounts for nearly 50% of the total market cap (Exhibit 5).
There are currently over 800 cryptocurrencies out there, though just 9 have a market cap in excess of $1 billion.
While its growth has been impressive, the aggregate market cap of cryptocurrencies equates to less than 2% of the value of all the mined gold in the world.
3. What Is Ethereum?
Answer: A Platform 1st, a Cryptocurrency 2nd. Ethereum differs primarily from Bitcoin in the latter is set up to be an alternative to ‘real money’ while the former is more of a platform set up to run any decentralized application and automatically execute “smart contracts” when certain conditions are met. Ethereum offers a digital currency like Bitcoin – called Ether – but this is just one component of its smart contract execution and primarily used to facilitate and reward using the network. However, the rise of Ethereum has not come without setbacks, including the ~$60 million hack of “The DAO”, a venture capital like organization with the mission of “investing” in Ethereum-related start-ups and projects (and is no longer operational today).
4. How Does One Trade Cryptocurrencies in the United States?
Answer: Digital Exchanges, Block Trades and (soon to be) Options. Individual investors can trade virtual coins on various online exchanges. Institutional traders have largely stayed out of the cryptocurrency market due to its relatively small size, structure of mandates and volatility, but block trading exists to facilitate the execution of larger orders. In addition, Bitcoin options exist and are traded on offshore exchanges. Futures and options may also be coming to the US soon. On August 2, 2017, the CBOE entered an agreement with Gemini Trust Co to allow cash-settled Bitcoin futures on CBOE Futures Exchange in 4Q-17 or early 2018.
5. What is an Initial Coin Offering (ICO)?
Answer: Fundraiser through token sales. The amount of money funding ICOs has grown exponentially and the speed at which money is raised via a white paper and internet browser has sounded the alarm bells from parties including the SEC and the People’s Bank of China. According to Coin Schedule, ICOs have raised $1.25 billion this year, outpacing global Angel & Seed stage Internet VC funding in recent months.
The Tezos blockchain raised a record breaking $232 million worth of Bitcoin and Ether through an ICO completed last month. The next closest? Bancor’s ICO which raised $150 million in mid-June. And the speed of ICOs is an added benefit: Gnosis raised more than $12 million in under 15 minutes.
It’s been about a decade since the term “mortgage arbitrage” made headlines. It’s back.
In the clearest sign yet of just how late far the investing cycle the developed world finds itself,the FT writes that wealthy British homeowners are again borrowing against their property to invest in bonds, equities, alternative investments or commercial property as the low cost of debt creates opportunities for “mortgage arbitrage”. And while taking out a mortgage to invest in “safer” arbs like corporate bonds, commercial real estate or private equity would be at least understandable, if not excusable, in the current low-yield regime, some more extreme “investment” decisions suggest that the madness and euphoria that marked the peak of the last asset bubble is back: because while growing numbers are prepared to risk using their primary residence as collateral, some are ready to gamble on extremely volatile assets like bitcoin, wine and cars.
One broker said a mortgage-free homeowner with a house valued at £10m had taken out a fixed-rate loan of just under £2m to buy bitcoin, the crypto currency that has seen huge volatility in recent months. Others have invested in classic cars or fine wine. One former banker took out a £500,000 mortgage, not for investment purposes, but to provide a fund for routine spending and other eventualities.
To be sure, while these are extreme – and for now rare – examples of investor euphoria, even the more mundane “mortgage arbitrageurs” are willing to take major gambles: “Interest rates of less than 2 per cent on two- and five-year fixed-rate home loans are tempting high-income, mortgage-free homeowners to raise money against their property in the hope they can profit from higher rates of return elsewhere.”
Simon Gammon, director at mortgage broker Knight Frank Finance, said the arbitrage had emerged as a trend among financially sophisticated clients as mortgage rates fell.
“We’re a specialist lender at the top end but we’re seeing up to a dozen of these deals a month,” he said. “This is something that has come about because of the current environment of low rates.”
How prevalent is this behavior which peaked during the last housing/credit bubble?
Mark Pattanshetti, a mortgage manager at broker Largemortgageloans.com, said the number of borrowers taking out loans to fund investments had risen by about 50% since 2009. “Borrowers have realized the cost of debt is cheap and it isn’t going to get much cheaper,” he said. Unfortunately, what borrowers are forgetting is that home prices can drop as mortgage rates rise, while risk assets – impossible as it may sound – can correct sharply, hitting borrowers with the double whammy of rising LTVs as inbound margin calls force them to liquidate into a sliding market.
Ironically, anecdotal evidence suggests that this troubling behavior has been prompted be declining UK home prices – until recently one of the best performing British assets. This has been the result of Brexit-related concerns, a decline in Chinese and other foreign investors rushing after UK real estate, as well as concerns that the BOE will soon raise rates, resulting in increasingly more “for sale” signs.
As the FT notes, “for debt-free homeowners, remortgaging during the years of booming house prices was often a means of raising cash to carry out home improvements or expand a buy-to-let portfolio. But slowing house price growth and a regulatory and tax crackdown on landlords have made these options less attractive.
Hugh Wade-Jones, group managing director of mortgage broker Enness, said: “It’s accepted that property is no longer going to be the all-conquering investment, doubling every 10 years, so people are looking elsewhere for returns.”
In addition to bitcoin, cars and wines, borrowers with housing equity are putting money into everything from bonds and private equity and commercial property, brokers told the FT. David Adams, managing director of John Taylor, a Mayfair-based estate agent, said investors were borrowing against London residential properties to fund investment in commercial and mixed use developments from Southampton to Birmingham at returns of 6 to 7 per cent.
“Wealthy investors are no longer chasing capital gain. There is a switch to yield,” Adams said.
According to Knight Frank’s Gammon, the practice typically appealed to those with investment experience. “People who have not needed to borrow have looked at the rates available — and we’ve now got five-year fixed rates from 1.65 per cent — and said if I can’t make 1.65 per cent or more from my money, then I don’t know what I’m doing.”
Unfortunately, should home prices in the near future tumble while risk assets slide, crushing the “experienced” investors, that’s exactly what one can conclude.
Making it easier for the “smart investors” to bury themselves with margin calls, there are no regulations prohibiting this kind of behavior:
There is nothing in mortgage regulation to prevent someone raising a loan on a mortgage-free property for personal investments, as long as the lender assesses that the loan is affordable and not being used, for instance, to prop up a business generating income for its repayment.
Lenders, however, may choose to apply criteria that restrict the use of capital raised through a mortgage, although private banks are typically more relaxed about non-property investments than high street banks. For bigger mortgages, lenders will also moderate risk by insisting that the size of the loan does not exceed 60 per cent of the property’s value.
Naturally, it doesn’t take a big drop in the value of the property coupled with a slide in the “alternative investment” to wipe out the LTV buffer, pushing the value of the loan above the underlying collateral. That said, “the Financial Conduct Authority, which regulates mortgage lenders, declined to comment on individuals borrowing against their house for personal investments.”
In a tangent, the FT then focuses on the tax considerations of this risky behavior.
Unlike gains on a principal private residence, any gains on investments would be subject to capital gains tax (CGT). A wealthy homeowner may therefore seek to transfer borrowed funds to a spouse who has not used his or her annual CGT allowance. If the investment is designed to provide a stream of income, there could be a case for a transfer to a spouse who pays the basic rate of income tax, advisers said.
Nimesh Shah, a tax adviser at accountants Blick Rothenberg, said that if a homeowner took out a loan to invest in commercial property — and this was specified as the purpose of the loan — residential mortgage interest could potentially be offset against the commercial rental income.
Of course, the above assumes capital appreciation and therefore, capital gains. For now nobody is worrying on the more unpleasant outcome, one where there are no gains to book taxes again. Then again, in a wholesale wipeout at least the “smart money” will have years and years of NOLs carryforward losses to offset any future income taxes. Just like Donald Trump.
Exploring Potential Implications For Company & Market
(SRSrocco Report) The world’s second largest primary silver mine, Tahoe Resources Escobal Mine, was forced to shut down operations in Guatemala by a ruling from the country’s Supreme Court. This was due to a provisional decision by the Guatemalan Supreme court in respect of a request by CALAS, an anti-mining group, for an order to temporarily suspend the license to operate the Escobal Mine until there is a full hearing. (picture courtesy of Tahoe Resources)
While this story has been out for a few days, I believe there is a great deal of misinformation on the Mainstream and Alternative media about the current situation and future outcome of Tahoe’s flagship Escobal Mine. Some analysis suggests that this is just a small speed-bump for Tahoe, so when they are able to address disputed regulatory issues, production and profits will shortly return once again.
While Tahoe is preparing for a three-month mine suspension, Haywood analysts project no production from the mine for the remainder of 2017.
Here we can see that the company (Tahoe) is very optimistic that production at Escobal will start back in three months, while Haywood analysts forecast operations won’t likely resume this year. So, who should we believe, or which forecast is more correct? Before we get into the details, let’s first look at the impact of suspending the 2nd largest primary silver mine in the world on the market.
A Shutdown Of The Escobal Mine, Ranked #2 In The World, Would Remove 21 Million Oz Of Supply
According to the 2017 World Silver Survey, Tahoe Resources Escobal Mine ranked #2, behind Fresnillo PLC’s Saucito Mine in primary silver production in 2016. Here are the top five producing primary silver mines in 2016 (Moz – million ounces):
Saucito (Mexico) = 21.9 Moz
Escobal (Guatemala) = 21.2 Moz
Dukat (Russia) = 19.8 Moz
Cannington (Australia) = 18.2 Moz
Uchucchacua (Peru) = 16.2 Moz
Furthermore, the data in the 2017 World Silver Survey reports that a total of 265 million oz (Moz) of primary silver was produced last year. Thus, the Escobal Mine represents 8% of total global primary silver mine supply. If Haywood Analysts are correct that production at Escobal may not resume in 2017, than the mine is likely to lose nearly half of the 20-21 Moz forecasted for 2017.
While this is not a great deal of silver compared to total world silver supply of 886 Moz (in 2016), if the Escobal Mine is shut for a longer period of time, or indefinitely, it could impact the silver market over the next few years.
So, again… the big question for investors is, HOW LONG will the ESCOBAL MINE be shut down? Well, let’s look at some information and data that seems to be overlooked by the Mainstream and Alternative media.
What Is The True Nature & Future Impact Of The Suspension Of Tahoe’s Escobal Mine?
First… after the Guatemalan Supreme Court suspended operations at Escobal, Tahoe’s stock price took a real beating falling 33% that day. In the past week, Tahoe’s stock price decline 40%:
A lot of investors were caught by surprise as Tahoe Resources has been making a lot of money from its mines, especially from its Escobal Silver Mine in Guatemala. For example, in 2016 Tahoe Resources reported profits of $118 million on revenue of $784 million. That is a stunning 15% margin of profit… and the majority of that profit was from the Escobal Mine.
Second …. the rich profits from the Escobal Mine came at a cost. And the cost was in the way of “serious human rights violations through its operations”, stated by several sources. Unfortunately, many investors that follow the Mainstream financial media do not understand that the Escobal Mine has been, and continues to be, a subject of human rights abuse and violations from day one.
Escobal will become a big player with forecasted silver production in 2014 of 18-20 million oz. Unfortunately for Tahoe Resources, the locals are not too happy with their Escobal mine. There have been murders and killings on both sides of the protest.
This is by no means a small matter by a few disenfranchised locals:
(Guatemala City/Ottawa) Contrary toTahoe Resources’ recent claims, tens of thousands of people oppose its Escobal project in southeastern Guatemala. Repression and violence have been the outcome of company and government efforts to install the project without social support. A recent high-court decision in Guatemala reinforces the legitimacy and importance of local decision-making processes.
More than half of the communities in the municipality of San Rafael las Flores, where the Escobal project is located, have declared opposition to the mine. In five neighbouring municipalities, in the departments of Santa Rosa and Jalapa, a majority have voted against the mine in municipal referenda, in which tens of thousands of people participated. The most recent vote took place on November 10th in the municipality of Jalapa, department of Jalapa. Over 23,000 people participated with 98.3% voting against mining and 1.7% in favour.
This is a perfect example of what Jim Sinclair states “As the wrong way to go about starting up a mining project in a foreign country.” Jim believes you must have the support of the locals, or the project will be doomed for failure.
And it didn’t help Tahoe Resources PR one bit when their contracted head of security, Alberto Rotondo gave direct orders to assassinate members of the community of San Rafael Las Flores.
“The preliminary investigations found that Rotondo gave the order to attack the community, he also ordered the crime scene to be cleaned up and change the police report.”
The information reveals Rotondo making several statements: “God dam dogs, they do not understand that the mine generates jobs”. “We must eliminate these animals’ pieces of shit”. “We can not allow people to establish resistance, another Puya no”. “Kill house sons of Bitches”
Rotondo was apprehended at the airport La Aurora, when he trying to flee the country. Wire tapping of conversations between him and his son reveal that he planned to leave Guatemala for a while, because “I ordered to kill some of these sons of Bitches.”
What seems to be missing from the current license suspension of the Escobal Mine is the extremely negative history it has had with the local community. As stated above, Tahoe’s former contracted head of Security, Alberto Rontondo gave the direct order to assassinate members of the San Rafael Las Flores community.
While the wire-tapped conversation between Alberto Rontondo and his son, where he says, “I ordered to kill some of these sons of Bitches”, was published in the media, it didn’t get much coverage in the Mainstream press. This was BAD NEWS for a large corporate mining company, so many news agencies seemed to just ignore it.
So…. the assumption by many WESTERN investors that Tahoe Resources is only dealing with pesky legal regulatory issues, is a seriously inaccurate assessment that could cost them dearly going forward. Now, I am not saying that Tahoe’s Escobal Mine will not be able to return to operating status, but there are more serious issues that are coming to light that could be quite detrimental for the company going forward.
For example…. according to the website,Tahoe On Trial, they published the following:
The legal cases against Tahoe Resources are being carried out in a larger context of opposition to the Escobal mine. The violence, repression, and criminalization community leaders continue to face is not limited to what transpired on April 27, 2013.
THE ESCOBAL PROJECT DEPENDS ON A MILITARIZED SECURITY STRATEGY TO SUPPRESS OPPOSITION AND HAS LED TO VIOLENCE AND CRIMINALIZATION.
in 2011, Tahoe Resources hired a US security and defense contractor – International Security and Defense Management, LLC – that boasts experience with corporations working in war zones like Iraq and Afghanistan to develop a security plan that has treated peaceful protest and community leaders as if they were armed insurgents.
In June 2012, Tahoe sued the Guatemalan government, stating that protests were hindering its operations and that the State was not doing enough to allow its activities to proceed.
Between 2011 and 2013, some 90 people were slapped with unfounded criminal charges and made to endure legal processes causing them distress and hardship. Several spent months in jail before being cleared of all charges.
This is just the tip of the ESCOBAL MINE PROTEST ICEBERG… I could fill pages. However, those who believe the protests have gone away and now the public is totally supportive of the Escobal Mine, are completely being deluded.
…Police have used teargas to clear a public road near the town of Casillas, in south-east Guatemala, of protesters blocking access to Canadian miner Tahoe Resources’ controversial Escobal mine…
This proves that the public protests continue even as the Escobal Mine in in its fourth year of full commercial production.
I would imagine some readers-investors are probably thinking… “Well, this is just a matter for the local and federal governments to deal with in getting the LOCAL PEOPLE to BEHAVE, so they will leave the Escobal Mine alone to continue producing lots of silver and profits.” Well, that is one opinion, but if you think that is a WISE ONE… think again. Several large Funds have dropped Tahoe Resources from their portfolios due to what they term as, “A HIGH RISK .”
Tahoe Resources is one of fourteen companies featured as a dangerous investment in the fifth edition of ‘Dirty Profits’ launched today in Hamburg, Germany and edited by the organization Facing Finance.
The publication identifies two billion-dollar European pension funds that have divested from the company, the Netherlands’ Pensioenfonds (PGB) and Norway’s Norges Bank Investment Management. The group calls for binding regulations on financial institutions and for the elimination of this and other harmful investments from their portfolios.
Problems cited include Tahoe Resources’ lack of respect for communities that have peacefully and democratically expressed their opposition to its Escobal mine in southeastern Guatemala, and a campaign of persecution through unfounded legal cases, violent incidents and militarization.
….The article about Tahoe Resources further describes how the company was granted a permit to put the mine into operation with disregard for over 200 individual complaints submitted against the license on the basis of environmental concerns. The officials responsible for this decision resigned in mid-2015 over serious allegations of corruption.
As we can see, the disinvestment of Tahoe Resources by two large European Funds should be a WARNING to investors that things may not be ROSEY for the company going forward.
Please understand, I am not only painting a negative picture for Tahoe, but rather providing additional information that seems to be missing from the Mainstream press. Thus, investors are making decisions without the COMPLETE information or story.
To be honest, as a silver analyst, I like the Escobal Mine’s performance. It is one of the most profitable primary silver mines in the world. However, I view this performance in a vacuum. By that, I mean based on the production and financial data alone. If we include the public and environmental issues, the Escobal Mine seems to be a very BAD DEAL for many of the local people that live adjacent to the mine.
I believe the suspension of Tahoe’s Escobal Mine by the Guatemalan Supreme Court may open a CAN OF WORMS that many individuals or companies invested in Tahoe do not realize or understand.
On the other hand, Tahoe might be able to work with the local people and Guatemalan government to resume operations. That being said, investors need to understand that the Escobal primary silver mine is a much HIGHER RISK than other silver mining companies. So, it would be wise to learn as much as one can before making a longer term investment in the company.
(MarketWatch) Bitcoin $55,000? Fundstrat’s Tom Lee, one of the biggest equity bears among the major Wall Street strategists, says it’s possible, but not necessarily for the reasons many bitcoin bulls have suggested.
“One of the drivers is crypto-currencies are cannibalizing demand for gold GCQ7, +0.12% ” Lee wrote in a report. “Based on our model, we estimate that bitcoin’s value per unit could be $20,000 to $55,000 by 2022 — hence, investors need to identify strategies to leverage this potential rise in crypto-currencies.”
That’s a major jump from the $2,530 level that bitcoin BTCUSD, -0.84% fetched recently. Of course, this would be on top of what’s already been an impressive stretch, with the price more than doubling since the start of the year.
Lee predicts investors will look to bitcoin as a gold substitute, and the fact that the amount of available bitcoin is reaching its limit makes this supply/demand story even more compelling for those looking to turn profits in the crypto market.
“Bitcoin supply will grow even slower than gold,” Lee said. “Hence, the scarcity of bitcoin is becoming increasingly attractive relative to gold.”
Another driver could come from central banks, which he expects will consider buying bitcoin if the total market cap hits $500 billion.
“This is a game changer, enhancing the legitimacy of the currency and likely accelerating the substitution for gold,” Lee wrote.
The trick is that there aren’t very many ways to play bitcoin, other than via direct investment or the bitcoin ETF GBTC, -1.75% he said, adding that “we will identify other opportunities in the future.”
How Bitcoin (and other cryptocurrencies) actually work
Speculative booms are often poor guides to future valuations and the maturation trajectory of a new sector.
Charles Hugh Smith recently came across a December 1996 San Jose Mercury News article on tech pioneers’ attempts to carry the pre-browser Internet’s bulletin board community vibe over to the new-fangled World Wide Web.
In effect, the article is talking about social media a decade before MySpace and Facebook and 15 years before the maturation of social media.
(Apple was $25 per share in December 1996. Adjusted for splits, that’s about the cost of a cup of coffee.)
So what’s the point of digging up this ancient tech history?
— Technology changes in ways that are difficult to predict, even to visionaries who understand present-day technologies.
— The sources of great future fortunes are only visible in a rear view mirror.
Many of the tech and biotech companies listed in the financial pages of December 1996 no longer exist. Their industries changed, and they vanished or were bought up, often for pennies on the dollar of their heyday valuations.
Which brings us to cryptocurrencies, which entered the world with bitcoin in early 2009.
Now there are hundreds of cryptocurrencies, and a speculative boom has pushed bitcoin from around $600 a year ago to $2600 and Ethereum, another leading cryptocurrency, from around $10 last year to $370.
Where are cryptocurrencies in the evolution from new technology to speculative boom to
maturation? Judging by valuation leaps from $10 to $370, the technology is clearly in the speculative boom phase.
If recent tech history is any guide, speculative boom phases are often poor guides to future valuations and the maturation trajectory of a new sector.
Anyone remember “push” technologies circa 1997? This was the hottest thing going, and valuations of early companies went ballistic. Then the fad passed and some new innovation became The Next Big Thing.
All of which is to say: nobody can predict the future course of cryptocurrencies, other than to say that speculative booms eventually end and technologies mature into forms that solve real business problems in uniquely cheap and robust ways no other technology can match.
So while we can’t predict the future forms of cryptocurrencies that will dominate the mature marketplace, we can predict that markets will sort the wheat from the chaff by a winnowing the entries down to those that solve real business problems (i.e. address scarcities) in ways that are cheap and robust and that cannot be solved by other technologies.
The ‘Anything Goes’ Speculative Boom
Technologies with potentially mass applications often spark speculative booms. The advent of radio generated a speculative boom just as heady as any recent tech frenzy.
Many people decry the current speculative frenzy in cryptocurrencies, and others warn the whole thing is a Ponzi scheme, a fad, and a bubble in which the gullible sheep are being led to slaughter.
Tribalism is running hot in the cryptocurrencies space, with promoters and detractors of the various cryptocurrencies doing battle in online forums: bitcoin is doomed by FUD (fear, uncertainty and doubt) about its warring camps, or it’s the gold standard; Ethereum is either fundamentally flawed or the platform destined to dominate, and so on.
The technological issues are thorny and obtuse to non-programmers, and the eventual utility of the many cryptocurrencies is still an open question/in development.
It’s difficult for non-experts to sort out all these claims. What’s steak and what’s sizzle? We can’t be sure a new entrant is actually a blockchain or if its promoters are using blockchain as the selling buzzword.
Even more confusing are the debates over decentralization. One of the key advances of the bitcoin blockchain technology is its decentralized mode of operation: the blockchain is distributed on servers all over the planet, and those paying for the electricity to run those servers are paid for this service with bitcoin that is “mined” by the process of maintaining the blockchain. No central committee organizes this process.
Critics have noted that the mining of bitcoin is now dominated by large companies in China, who act as an informal “central committee” in that they can block any changes to the protocols governing the blockchain.
Others claim that competing cryptocurrencies such as Ethereum are centrally managed, despite defenders’ claims to the contrary.
Meanwhile, fortunes are being made as speculators jump from one cryptocurrency to the next as ICOs (initial coin offerings) proliferate. Since the new coins must typically be purchased with existing cryptocurrencies, this demand has been one driver of soaring prices for Ethereum.
As if all this wasn’t confusing enough, the many differences between various cryptocurrencies are difficult to understand and assess.
While bitcoin was designed to be a currency, and nothing but a currency, other cryptocurrencies such as Ethereum are not just currencies, they are platforms for other uses of blockchain technologies, for example, the much-touted smart contracts. This potential for applications beyond currencies is the reason why the big corporations have formed the Enterprise Ethereum Alliance (https://entethalliance.org/).
Despite the impressive credentials of the Alliance, real-world applications that are available to ordinary consumers and small enterprises using these blockchain technologies are still in development: there’s lots of sizzle but no steak yet.
Who Will The Winner(s) Be?
How can non-experts sort out what sizzle will fizzle and what sizzle will become dominant? The short answer is: we can’t. An experienced programmer who has actually worked on the bitcoin blockchain, Ethereum and Dash (to name three leading cryptocurrencies) would be well-placed to explain the trade-offs in each (and yes, there are always trade-offs), but precious few such qualified folks are available for unbiased commentary as tribalism has snared many developers into biases that are not always advertised upfront.
So what’s a non-expert to make of this swirl of speculation, skepticism, tribalism, confusing
technological claims and counterclaims and the unavoidable uncertainties of the exhilarating but dangerously speculative boom phase?
There is no way to predict the course of specific cryptocurrencies, or the potential emergence of a new cryptocurrency that leaves all the existing versions in the dust, or governments’ future actions to endorse or criminalize cryptocurrencies. But what we can do — now, in the present — is analyze present-day cryptocurrencies through the filters of scarcity and utility.
InPart 2: The Value Drivers Of Cryptocurrency, we analyze the necessary success requirements a cryptocurrency will need to excel on in order to become adopted at a mass, mainstream level. Once this happens (which increasingly looks like a matter of “when” not “if”), the resultant price increase of the winning coin(s) will highly likely be geometric and meteoric.
Sadly, the most probable catalyst for this will be a collapse of the current global fiat currency regime — something that increasingly looks more and more inevitable. This will destroy a staggering amount of the (paper) wealth currently held by today’s households. Which makes developing a fully-informed understanding of the cryptocurrency landscape now — today — an extremely important requirement for any prudent investor.
The bitcoin price is up roughly 10X over the past two years, so it is understandable why some people believe it is overvalued. If you do a Google search on “Bitcoin Bubble,” you will find nearly 700,000 results. People love to proclaim that bitcoin is a bubble, especially those that missed the inflation of said bubble.
But are they correct? Is it too late to get on board the bitcoin rocket?
Only time will tell, but I suspect that the price of bitcoin will climb many multiples higher before reaching a top. We have yet to see a mania phase and in fact, less than 5% of the investing public owns any bitcoin. The vast majority still have no idea what blockchain technology is or how to acquire bitcoin.
The market cap of bitcoin, now that the price has risen to $2,700, is around $45 billion. A decade ago, the term billion meant something. You didn’t really hear much talk of trillions. But thanks to our central planners and their lackeys in government, trillions are now the new billions. At any rate, let’s take a look at bitcoin’s valuation versus other markets in order to put things into perspective:
Despite the rapid rise in the bitcoin price, it is still worth no more than the wealth of Google (NASDAQ:GOOG) co-founder Larry Page alone. Bill Gates could buy all of the bitcoin in existence, twice over. The total value of all bitcoin is just 1/10th of Amazon’s (NASDAQ:AMZN) market cap or 1/17th of Apple’s (NASDAQ:AAPL) market cap.
While the price of a Bitcoin surpasses that of an ounce of gold for the first time earlier this year, the total value of gold is still 200 times the value of bitcoin. Even if we take into account the value of all cryptocurrencies at around $100 billion, Apple is still worth 4 times this number and the gold market is valued at more than 80 times all cryptocurrencies combined!
The total market value of publicly traded shares at stock exchanges around the world is $66.8 trillion. This is nearly 1,500 times the valuation of bitcoin or 670 times the valuation of all cryptocurrencies combined.
When we move into central bank funny money,the total amount of money in the world is $84 trillion,or roughly 800 times the value of all cryptocurrencies in existence. In physical coins and notes, the total global money supply is $31 trillion or 310 times the value of all cryptocurrencies.
So, while the meteoric rise of bitcoin has led to a significant market valuation, it is still small relative to other markets or even relative to the wealth of a single software entrepreneur. What happens when even a small percentage of the $67 trillion invested in stocks or $83.6 trillion in central bank money begins to move into bitcoin and other cryptocurrencies?
This possibility is not nearly as far-fetched as it may seem on the surface. People are losing trust in government/central bank money and other traditional measures of wealth. As this trend accelerates, I believe an increasing amount of money will flow into bitcoin and other cryptocurrencies, pushing their valuations many times higher than today.
Is bitcoin overvalued? Are the cryptocurrency markets in a bubble about to burst?
Nope, not by a long shot. At the very least, I believe these markets need to reach parity with the gold market, which implies an increase in the valuation of cryptocurrenciesof at least 80 times the current valuation. That would turn an investment of just $12,500 into $1 million!
So even if you’ve missed the incredible bull market in cryptocurrencies thus far, I believe there is still plenty of upside ahead. While I continue to hold bitcoin and Ethereum has core positions, I am especially bullish on a number of altcoins that I think will outperform bitcoin by a wide margin over the next 12-24 months.
Two years ago, Bitcoin was considered a fringe technology for libertarians and computer geeks. Now, Bitcoin and other cryptocurrencies, such as Ethereum, are gaining mainstream adoption. However, mainstream adoption has been propelled by financial speculation instead of by demand for a privately minted and deflationary medium of exchange. After the Fed’s rate hike this week, Bitcoin and alternative cryptocurrencies, such as Ethereum and Dash dropped in value instantly. Bitcoin, for example, dropped by approximately 16% in value while other coins dropped by approximately 25%. However, Bitcoin’s price recovered to the previous high within 18 hours.
Contrary to popular belief that Bitcoin is deflationary, the currency currently has an annual inflation rate of approximately 4%. The reason that Bitcoin allows investors to hedge the expansionary monetary policies adhered to by central banks is because the demand for Bitcoin is growing at a pace that is higher than the increase in the supply of Bitcoin. As explained in aMises Daily article written by Frank Shostak in 2002, the term inflation was originally used to describe an increase in the money supply. Today, the term inflation refers to a general increase in prices.
If the original definition is applied, then Bitcoin is an inflationary currency. However, as I discussed in the 2017 edition ofIn Gold We Trust, the supply of newly minted Bitcoin follows a predictable inflation rate that diminishes over time. Satoshi modeled the flow of new Bitcoin as a Poisson process, which will result in a discernible inflation rate compared to the stock of existing Bitcoin by 2020. Every four years, the amount of Bitcoin minted annually is halved. The last programmed “halving” occurred in June of 2016. Therefore, the next halving will occur in 2020. The inverse of the inflation rate, the StFR, also indicates the decreasing flow of newly minted coins into the Bitcoin economy. The stock to flow ratio (StFR) of Bitcoin is currently 25 years; however, the StFR ratio will increase to approximately 56 years. This means that the StFR of Bitcoin should surpass gold’s during the next five years. Prior to January 3, 2009, no Bitcoin existed. Therefore, Bitcoin’s StFR was effectively zero. However, the rapid reduction in the amount of Bitcoin mining over time results in an increasing StFR over time. By 2024, only 3.125 Bitcoin will be mined every ten minutes resulting in a StFR of approximately 119 years.
If the new meaning of inflation is applied, then Bitcoin is deflationary because the purchasing power of each unit increases overtime.
When I began investing in Bitcoin in 2014, a Model S Tesla worth $70,000 cost 230 Bitcoin. Today, a Model S Tesla worth $70,000 costs 28 Bitcoin. On June 11 of this year, the price of Bitcoin reached a new all-time high above $3,000 after trading at approximately $2,300 two weeks ago. Furthermore, Bitcoin’s market capitalization of $40 billion is expected to rise further as the uncertainty surrounding this technology decreases. Bitcoin’s price data only covers the past six years, which means there is basically no data available for statistical analysis.
TheEllsberg paradoxshows that people prefer outcomes with known probability distributions compared to outcomes where the probabilities are unknown. The estimation error associated with forecasts of Bitcoin’s risks and returns may be negatively biasing the price downward. As time passes, people will become more “experienced” with Bitcoin, which may reduce uncertainty and the subsequent discount it wields on the price of Bitcoin.
An economic downturn occurs approximately once every ten years in the US, and it has been a decade since the 2007/2008 financial meltdown. If the economy cannot handle the increase in rates, and the Fed is forced to reverse their decision, the price of Bitcoin and other cryptocurrencies are likely to respond positively. Although the cryptocurrency market took a steep plunge after Janet Yellen’s second rate hike of 2017, prices fully recovered within a day. The quick rebound underscores the lack of assets that allow investors to accumulate wealth safely. Negative interest rates in Europe and fiat demonetization in developing countries are still driving demand for Bitcoin and alternative cryptocurrencies. Although Bitcoin was initially ridiculed as money for computer nerds and a conduit for illegal activity, investors are beginning to see the potential for this technology to be an integral part of wealth management from the perspective of portfolio diversification.
I was wrong about Ethereum because it’s such a good store of value…
no wait, let me try again.
I was wrong about Ethereum because it’s such a decentra…
I was wrong about Ethereum because everyone is using it as a supercomputer…
I do admit I didn’t see this Ethereum bubble coming, but then again I wrongly assumed that no startup would need or even dare to ask $50 million in funding and I also wrongly assumed that people would use common sense and that leading developers would speak out against this sort of practice. Quite the opposite it seems.
Ethereum’s sole use case at the moment is ICOs and token creation.
What’s driving the Ethereum price?
Greed from speculators, investors and developers.
Can you blame them?
Speculators and investors: No.
So let’s think for a minute and think what determines the price? Supply + demand. Pretty straightforward.
Supply: the tokens that are available on the market, right? But with every ICO there are more tokens that are being “locked up”. Obviously the projects will liquidate some, to get fiat to pay for development of their project, but they also see the rising price of Ethereum. So at that point greed takes over and they think, totally understandable, “We should probably just cash out what we really need and keep the rest in ETH, that’s only going up anyway it seems.” And obviously there are new coins being mined, but if you look at the amount of ETH these ICOs raise, at this point, it’s just a drop in a bucket.
Demand: You have the normal investors (who are already very late to the game at this point… as usual), but the buy pressure that these ICOs are creating is crazy and scary. Take TenX for example, it’s an upcoming ICO at the end of the month. The cap is 200,000 ETH (at current ETH price of $370) that’s $74,000,000 for a startup. Here’s the best part: it’s only 51% of the tokens. Effectively giving it an instant $150 million valuation (if it sells out, which it probably will). Another example is Bancor, a friend of mine runs a trading group, he collected 1,100+ BTC to put into Bancor. This needs to be converted into ETH before the sale starts. These are decent size players, but not even the big whales who participate in these ICOs.
What will the price do next?
It can go quite a bit higher, there are so many coins being taken off the market by these ICOs, that it can still continue for a while and everyone is seeing this and thinking: “Why aren’t I doing an ICO”. There are lots more coming.
At one point it will crash, hard. What the trigger will be? Bug(s) in smart contracts, major hack, big ICO startup that fails/fucks up, network split, even something as silly as not having a decent ICO for a couple of weeks which creates sell pressure from miners and ICO projects can cause a big crash. It’s not a question of “if”, it’s a question of “when”. That being said: Markets can remain irrational for quite a long time.
Usually when a bubble like this pops we could easily see 70–80% loss of value (for reference: Bitcoin went from $1,200 to $170 after 2013–2014 bubble). This is however quite the unusual situation and I’m not sure to what kind of bubble I can really compare it.
I’m sure most of you have seen “Wolf of Wall Street”. Just re-watch this clip and see if you find any similarities with the current situation. (bonus clip)
What I really find interesting is what the ICO startups will do, Bitcoin had hodlers and investors mainly, individuals who most of the time had a fulltime job and didn’t need to sell. With Ethereum there is this huge amount being held by companies who need to pay bills. Will they panic dump to secure a “healthy” amount of fiat funding, will they try to hold through a bear cycle?
Everyone loves making money, you can’t blame traders or investors from taking advantage of this hype. That would be silly. People will buy literally anything if they can make a quick buck out of it.
The responsibility here is with the developers, Consensys and the Ethereum Foundation but they don’t take responsibility since they’re getting more money. This will end with the regulators stepping in.
The reason why I say that it’s with developers, Consensys and the Ethereum Foundation is simple:
The developers of a project assign these crazy token sale caps, more money than any startup would ever need.
The Ethereum foundation members+ core developers use their own celeb status to actively promote these projects as advisors, for which they’re compensated well, luring in people who have no clue what they’re buying.
Consensys promotes all of this since it’s the marketing branch of Ethereum. The more fools that buy in, the better.
Let me illustrate this with an example. Have you heard of primalbase? It’s an ICO with a token for shared work spaces. Why would a shared work space need its own token? It doesn’t, it really really really doesn’t. Let’s take a look at the advisors:
First thing that an advisor should’ve said in this case was: “Don’t do it, it’s stupid, it makes no sense.” But well there we have Mr Ethereum himself.
We all know that Vitalik has a cult-like following with the Ethereum investors so it will be very easy for primal base to launch their ICO and use Vitalik’s face and name to get itself funded.
This is just one example, if you go through all of these ICOs you find a lot of familiar names and faces. Nothing wrong with being an advisor, but when you’re just sending people to the slaughterhouse…
The sad part is that a lot of people will lose a lot of money on this, some of them obviously more than they can afford to lose, that’s how it always goes. The regulators will step in after this bubble pops and what scares me is the fact that it will damage all of crypto, including Bitcoin, not just Ethereum and its ICO’s.
But you’re just an Ethereum hater
I’ve heard all the accusations:
I hate Ethereum because I’m a Bitcoin Maximalist. I’m not, I like other projects too, like Siacoin for example.
I hate Ethereum because I missed out. I did miss out on the crowdsale, but I traded plenty of Ethereum and it’s ICOs and made some nice profit.
I hate Ethereum because I don’t understand it. Really? Do you? The only smart contracts running on it are ICO token sales. Or contracts to buy ICO tokens the second they become available.
I hate Ethereum because I’m jealous of Vitalik. No, it’s impressive what he did at his young age. At the same time I think he’s largely responsible for this bubble and he has made a lot of mistakes. We all make mistakes, but bailing out your friends from the DAO while other hacks and losses aren’t compensated or fixed just shows total lack of integrity. Or it’s everything or it’s nothing. And when it comes to immutability in crypto, it should be nothing.
For the people that are scared that Ethereum will replace Bitcoin
Ethereum is not a store of value. It isn’t capped. Yes, I know they’re planning to switch to PoS (which it already kind of is). Do you think they managed to create the first software implementation ever without any bugs? Doing such a major change on a (currently) $30 billion market is completely irresponsible, borderline insanity. Even if we assume that there are no bugs, what about the miners? The miners who bought their equipment to mine Ethereum, the miners that supported the network for years. “But they knew we were switching to PoS.” Of course they knew, and do you think they’ll just give up on such a profitable coin? Some might switch immediately to Zcash and Ethereum Classic but there will be another fork and we’ll have ETHPoS and ETHPoW, with of course all the Ethereum tokens being on both chains. Even Ethereum developers think that his is a very likely scenario.
Ethereum’s fees are lower. They are, sometimes, by a bit. If you’re trying to send something when no token sale is active obviously, else you have people spending $100’s to get in on the token sale and clog up the network. Also doesn’t apply when you send something from exchanges since for example with Poloniex it’s about $1.9 vs $0.28 for Bitcoin. Oh and another exception is when you actually use it for smart contracts, which require more gas to process than a normal transactions from account A to account B. You know.. the actual reason why Ethereum was created.
Ethereum is not decentralized. Bitcoin isn’t as decentralized as it should be, we all know that, but compared to most other coins, Bitcoin is very decentralized. Vitalik has called himself a benevolent dictator in the past. He is the single point of failure in this project and if he gets compromised in any way that’s the end. There is no way of knowing if this happens and since people blindly follow everything he says, he has the power to do anything. Satoshi was smart enough to remove himself from the Bitcoin project.
Ethereum is not immutable. Don’t have to spend much time on this: see DAO and split that lead to Ethereum and Ethereum Classic.
Ethereum has the Enterprise Ethereum Alliance. But but but.. all those big banks use Ethereum. No, they don’t. They use “an” Ethereum, which is a (private) fork of Ethereum. By that definition 99% of all altcoins are using Bitcoin. Still a separate chain. The fact that we’re talking about a private blockchain here actually makes altcoins more like Bitcoin than “an Ethereum” that EEA uses like Ethereum. You can compare it to 2013–2014 when some companies started to get interested in blockchain vs Bitcoin, only difference here is that for Ethereum it’s part of their marketing campaign to lure in potential investors.
If you think I’m just full of crap, which is fair, I am just some random popular guy on Twitter who has been around from before Ethereum. Have a look at what Vlad has to say about the current state of Ethereum here and here. Vlad Zamfir is probably the smartest guy on the Ethereum team, and I say this while I don’t agree with him on many of his opinions, I do respect him.
If you’re an actual developer, be realistic and honest with your investors. Do you really ever need more than $5 mill? Finish a MVP first and then do a tokensale, if you really really need to do an ICO. Plenty of rich crypto investors and traders now that would love to be part of your project and who would be happy to just invest for equity. Yes, it will probably be less than what you can get in an ICO, but at least you didn’t sell out and it shows you actually really care about your product/service/…
If you’re a trader or investor, be realistic about the bubble. I know you hear this a 100 times when you’re trading but: don’t invest what you can’t afford to lose. I have some Ethereum, not as a long term investment, but because the price is going up and I need it to invest in tokens which I can quickly flip as soon as they come on the market. That’s just the type of market we’re in. Everyone is making a lot of money, awesome right? What could potentially go wrong.
(The International Reporter, Editor’s Note): Let me remind Bundesbank and all the other banks, that after the 2008 crisis and the ‘too big to fail”criminality that since then has stolen tax payers money globally, that nobody is interested in the banking industry anymore. Along with their compounding interest rates they are seen as liars, cheats, thieves and outright criminals cashing in on the misfortune of others. Digital currencies are far safer…so far… and are the only outlet since these same criminals have been rigging the precious metals prices, currencies exchange rates and the markets in general to their own benefit and to the detriment of everyone else.
* * *
(ZeroHedge) When global financial markets crash, it won’t be just “Trump’s fault” (and perhaps the quants and HFTs who switch from BTFD to STFR ) to keep the heat away from the Fed and central banks for blowing the biggest asset bubble in history: according to the head of the German central bank, Jens Weidmann, another “pre-crash” culprit emerged after he warned that digital currencies such as bitcoin would worsen the next financial crisis.
As theFT reports, speaking in Frankfurt on Wednesday the Bundesbank’s president acknowledged the creation of an official digital currency by a central bank would assure the public that their money was safe. However, he warned that this could come at the expense of private banks’ ability to survive bank runs and financial panics.
As Citigroup’sHans Lorenzen showed yesterday, as a result of the global liquidity glut, which has pushed conventional assets to all time highs, a tangent has been a scramble for “alternatives” and resulted in the creation and dramatic rise of countless digital currencies such as Bitcoin and Ethereum. Citi effectively blamed the central banks for the cryptocoinphenomenon.
Weidmann had a different take, and instead he focused on the consequences of this shift towards digitalisation which the Bundesbank president predicted, would be the main challenge faced by central banks. In an ironic twist, in order to challenge the “unofficial” digital currencies that have propagated in recent years, central banks have also been called on to create distinct official digital currencies, and allow citizens to bypass private sector lenders. As Weidmann explained, this will only make the next crisis worse:
Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent. This is an feature which will become relevant especially in times of crisis – when there will be a strong incentive for money holders to switch bank deposits into the official digital currency simply at the push of a button. But what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier.
Essentially, Weidmann warned that digital currencies – whose flow can not be blocked by conventional means – make an instant bank run far more likely, and in creating the conditions for a run on bank deposits lenders would be short of liquidity and struggle to make loans.
“My personal take on this is that central banks should strive to make existing payment systems more efficient and still faster than they already are – instant payment is the buzzword here,” the Bundesbank president said. “I am pretty confident that this will reduce most citizens’ interest in digital currencies.”
Which, considering the all time highs in both Bitcoin and Ethereum, would suggest that citizens faith and confidence in the existing “payment systems”, and thus central banks, are at all time lows.
I have read many articles lately claiming that Bitcoin is in a bubble. Some proclaim it similar to the famous Great Tulip bubble of 1637… but that comparison is only for those who do not understand the significance of what is happening currently with blockchain technology. If you are new to Bitcoin and blockchain technology, I would suggest that it’s highly important for you to take the time to research the basics of how it works and why it’s different – simply Google “how does Bitcoin work.”
The main argument of those who proclaim it to be in a bubble is that the people buying it at these prices are not buying it for its original purpose – which they believe to be enabling transactions. Yes, it is being used for transactions, much more than 100,000 businesses now take Bitcoin for transactions. But instead naysayers believe that others are buying it as an “investment” and thus will surely be burned.
For me, and I believe most who understand what is happening, we are not buying it for either of those reasons. We own it because we see it acting as a “store of value,” where nothing else priced in dollars is. With interest rates artificially low (manipulated by central banks), a normal person cannot earn even near the pace of actual inflation with any type of traditional savings account. Bonds are artificially in a bubble, stocks are artificially in a bubble, real estate is in yet another bubble, everywhere one who understands bubble dynamics looks they see a bubble (but not Bitcoin, people are trading in their worth less and less dollars for them). The bubble is the dollar – the world’s “reserve” and “petro” dollar is being drowned by central banks all over the globe, not just our own “FED.”
And thus there is no store of value to be found. This is a terribly ugly situation for people who believe in hard work and saving to get ahead; to someday retire comfortably. Retirees on fixed incomes simply cannot, and will not be able to keep up as the impossible math of dollar debt continues on its vertical ascent.
We would love to love gold and silver, but those too, are manipulated by central banks who own the majority of it. They manipulate and derivative the markets to artificially keep devaluation of the dollar hidden.
Control of the dollar is centralized with the banks, that’s why we refer to them as “central” banks. All the power and control resides with them; as private individuals were wrongly, and illegally, given the power to “coin” money with the Federal Reserve Act of 1913.
What makes Bitcoin a better store of value?
1. It is decentralized. This is huge! It means that it is not under the control of central banks, and thus cannot be manipulated directly by them. This is THE MOST IMPORTANT aspect, it is a game changer as it changes the WHO is behind it – something that gold and silver do not do because central banks have printed “money” to buy the majority of it.
Caution – Central banks may be able to indirectly manipulate blockchain currencies in the future if they create ETFs and other derivatives based upon them. This, however, will not change the underlying store of value, and when it happens I would encourage you not to own the derivative, but to instead buy Bitcoin directly, again because it’s not in control of the central banks, is decentralized versus their centralized everything which makes them vulnerable. Yes – Central Banks can print dollars and use them to buy Bitcoin, but that will only drive the price up and cause others to enter as well. In the end they cannot manipulate what they don’t control.
Even if central banks were to “ban” exchanges in one country, all one will have to do is join an exchange overseas. This has the central banks trumped, it cannot be stopped.
To better understand the power of decentralization, please take the time to watch the video at the end of this post, or (click on this link).
2. Unlike tulips, dollars, or even precious metals, Bitcoin is strictly limited in its supply. This is where the math comes in. Bitcoin was founded in 2008 and there will ultimately be only 21 million Bitcoin ever mined. Today we are approaching the 80% mark, the remaining 20% will take years to mine, and the “mining” gets more difficult and slow as we go.
This is a hard feature built into the coding. It’s what makes Bitcoin a store of value – the more money that comes in, the more each Bitcoin is worth. As I type, that is $2,774.00 per Bitcoin according to Coinbase where you can go to open an account, much like a brokerage account (there are currently 7.3 million Coinbase users). Of course you can buy Bitcoin in any increment, you don’t have to buy them in whole units.
People all over the world can buy, own, and transact in Bitcoin. There are now 7.3 billion people on the planet, so if all 21 million Bitcoin were distributed evenly to every person on the planet, each person would have only .0028767 of one bitcoin!
Another way of stating that math is that only 1 person out of every 347.6 people can possibly ever own a whole Bitcoin.
Today the market cap of Bitcoin is $45.17 Billion. The more money that comes in, the higher the market cap, the higher the price of Bitcoin.
Many analysts start to compare Bitcoin’s market cap with that of large companies like Apple, whose current market cap is 18 times that of Bitcoin’s at $810 Billion.
But here’s the deal. Bitcoin is not a company, it is a form of money. Unlike dollars, there will not be an endless supply. In fact, if you took the entire M2 money supply of the United States, currently $13.5 trillion, and put it all into Bitcoin instead, then each Bitcoin would be worth $642,857. But Bitcoin is not just traded in dollars – it’s traded in every currency in the world. And right now global M2 money supply is calculated as roughly $72 trillion, or $3.4 million per Bitcoin.
It’s true that other blockchain currencies are springing up like daisies, or tulips. But their market caps combined are just now rivaling that of Bitcoin’s. So, yes, they will be “diluting” bitcoin’s math. Not all crypto currencies have hard limits to their supply, and that will mean that they will always be worth less. Right now Ethereum is in second place with a market cap of about $24 billion compared to Bitcoin’s $45 billion. Litecoin is another cryptocurrency designed to be “silver” compared to Bitcoin’s “gold.” There will only be 84 million Litecoins ever mined, exactly 4 times the amount of Bitcoins. However, Litecoins are currently trading for roughly 1/100th the price of Bitcoin, I would expect the math to eventually catch up as more people become aware of Litecoin’s also limited supply.
3. Bitcoin is a better store of value because it is secure. Decentralization and encryption make it secure. It can be stored in electronic cyber “vaults” where you keep a hard copy of the encryption cypher. This means that your exchange can be hacked, your computer hacked, but your bitcoin don’t actually reside in either! They reside on someone else’s computer somewhere – and only you have the code to get to it. Thus they cannot be confiscated by a government, a banker, or a hacker.
I liken this to the pursuit of freedom versus the pursuit of security. When you pursue freedom, you get security at very little cost. That’s what decentralization does. Bitcoin is the pursuit of freedom – whereas centralized systems, such as central banking, or even socialism, are the pursuit of security and the abandonment of freedom.
4. Bitcoin transactions are stored on a public ledger, all confirmed transactions are included in the blockchain. Again, decentralized bookkeeping is less vulnerable and more secure than centralized legers. This is where Ethereum, another blockchain currency, shines. Ethereum is built upon an encrypted ledger and can be used for many purposes, not just as a currency.
One use is that these encrypted ledgers will enable safe and secure online voting one day soon.
Someday Bitcoin will, in fact, be in a bubble. But that day is not now, not even close. The great thing about all cryptocurrencies is that they can and do exist alongside of whatever “money” we use for our transactions. They also exist alongside of gold/silver, and may in fact be drawing money that otherwise would be seeking a store of value there.
So I say, let competition reign! I will use dollars for transactions because I have to (for now), but I will use cryptocurrencies, gold, and silver to park my dollars so that the central banks cannot destroy their value. And that in a nutshell is why Bitcoin is NOT in a bubble, and won’t be for quite some time.
That said, do expect many sharp pullbacks along the way. Remember that NOTHING moves in a straight line, EVERYTHING moves in waves. You need to pullback to fuel the next push higher – this is true with all waves. The chart shape is definitely showing parabolic growth, but I expect that when looked at across many more years this will simply be a part of building a base.
So how will we know that a true bubble has formed? For me I know that cryptocurrencies are the future and that they will trade alongside sovereign currencies and will eventually replace them. I will NOT own any cryptocurrency created or “managed” by a bank. Until the market cap of Bitcoin rivals that of the United States, I will not be convinced that growth has stalled. There are, of course, other signs we can look for.
As a review, here are HYMAN MINSKY’S SEVEN BUBBLE STAGES:
The late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:
Stage One – Disturbance:
Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet (Bitcoin). It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.
Stage Two – Expansion/Prices Start to Increase:
Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.
*I THINK THIS IS WHERE BITCOIN IS NOW
Stage Three – Euphoria/Easy Credit:
Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel (central banks creating it still like mad). Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there (not yet with Bitcoin). Without cheap and easy credit, the outsiders can’t participate.
The rise in cheap and easy credit is often associated with financial innovation. Many times, a new way of financing is developed that does not reflect the risk involved. In 1929, stock prices were propelled into the stratosphere with the ability to trade via a margin account. Housing prices today skyrocketed as interest-only, variable rate, and reverse amortization mortgages emerged as a viable means for financing overpriced real estate purchases. The latest financing strategy is 40, or even 50 year mortgages.
Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.
(I believe stage 4 is still in the distant future for Bitcoin)
Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”
This stage can be cruel, as the very people who shouldn’t be buying are. They are the ones who will be hurt the most. The true professionals have found their ‘greater fool’ and are well on their way to the next ‘hot’ sector. Those who did not enter the market are caught in a dilemma. They know that they have missed the beginning of the bubble. They are bombarded daily with stories of easy riches and friends who are amassing great wealth. The strong will not enter at stage five and reconcile themselves to the missed opportunity. The ‘fool’ may even realize that prices can’t keep rising forever… however, they just can’t act on their knowledge. Everything appears safe as long as they quit at least one day before the bubble bursts. The weak provide the final fuel for the fire and eventually get burned late in stage six or seven.
Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end.
(This is where I believe Stocks, Bonds, Real Estate, Auto prices, Student loans, etc. are today; although it is wise to remember that the best performing markets in terms of percentage rise are the ones where hyperinflation is occurring – Zimbabwe, Nigeria, and today Venezuela. An interesting thought is that we may see cryptocurrencies appear to be inflating while real assets move to another round of deflation – dollars seek safety/store of value)
Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.
(When this happens to stocks, I expect Bitcoin and other cryptos to benefit).
Do you have any specific investment picks for the second half?
I don’t. Investors should tighten risk-management strategies to their portfolios. I expect the FANG stocks and the Nasdaq to have a big selloff. They could easily fall 30% or 40%. But I don’t want to end my Roundtable career on a bearish note. [Zulauf announced at the January Roundtable that he is “retiring” from the panel after this year.]
Once the bear market is over and the recession or economic crisis passes, stocks will go up again.
FANG Stocks just took out Friday’s flash-crash lows…
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