Tag Archives: Bitcoin

Swiss Bank Becomes First To Offer Bitcoin To Its Clients

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A Swiss bank is now offering to buy bitcoins for its clients. As of Wednesday, investors can ask their asset manager at Falcon Private Bank, a boutique investment firm headquartered in Zurich, to purchase and store bitcoin on their behalf – a first for conventional banks. Despite the cryptocurrency’s infamous volatility, this is another indication that is here to stay.

“We have various clients that are interested in buying bitcoin for investment purposes, and we’re making it very convenient for them,” says Arthur Vayloyan, the global head of products and services at Falcon. Because Falcon will be doing the buying and storing of the digital coins, its customers won’t require any specialist knowledge to switch their cash into bitcoin. The Swiss financial authority, FINMA, granted Falcon regulatory approval on Tuesday.

But some worry that people may be underestimating the importance of decentralisation to the digital currency. Traditional banks that hold large sums of bitcoin for their customers will be obvious targets for hackers. “It’s a lot easier to steal digital currency than a traditional currency,” say Andreas Antonopoulos, host of the Let’s Talk Bitcoin podcast.

Spaced out

“This is why decentralisation is so important,” Antonopoulos says. Indeed, Bitcoin is built on decentralization. Instead of central banks and governments, Bitcoin relies on a network of computers that anyone can join to check the legitimacy of transactions. Every Bitcoin is accounted for on a digital ledger called the blockchain that records how many coins each digital wallet holds.

Whenever currency changes hands, everyone on the network updates their copy of the blockchain too. Underpinning the whole system is some complex mathematics that makes it incredibly difficult to deceive or control without infeasible amounts of computing power.

The wallets are decentralized too. Instead of bank accounts, anyone can create and store their own bitcoin wallet. Because there is no centralised collection of wallets, there is no central target for hackers to try to steal large amounts of digital currency. Or at least that’s the idea (in practice centralised pockets can emerge).

Put lots of wallets in the same place, and the system may no longer hold. If a thousand people each hold a single bitcoin, a certain level of security will be sufficient protection. However, if one place holds a thousand bitcoin, you increase the appeal to hackers a thousand-fold too, which means you have to similarly up the security. “But there is no way to do this. By putting in more eggs you make the basket weaker,” says Antonopoulos.

Hack attack

We have seen this problem before in exchanges, where people trade different digital and traditional currencies. The biggest of these until 2014 was Mount Gox, which at the time was handling more than half of all bitcoin transactions. In February of that year, 850,000 bitcoins corresponding to $450 million at the time went missing, with most thought to have been stolen by hackers.

Only a few years ago, many conventional banks still thought that bitcoin was doomed to fail, but as the price has soared and it has continued to survive, it has become too attractive for investors to resist. In 2012, you could buy a bitcoin for less than $10, last month they were selling for a record high of $3000. Illustrating the currency’s volatility, it’s currently trading at just under $2500, but overall has tripled in value in the last year alone.

Users of Falcon’s bitcoin service will have to sign a waiver to show that they understand the risks, as they would with other high risk investments. In future, the bank plans to expand to other digital currencies.

We’ve definitely come a long way since Mt. Gox …

By Timothy Revell | New Scientist

Bitcoin The New Gold? Yes, Says A Wall Street Strategist Who Sees A 21-Fold Surge

When Central Banks start buying, watch out

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(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

By Shawn Langlois | MarketWatch

Understanding the Cryptocurrency Boom (and its Volatility)

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.
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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.
In Part 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.

Is Bitcoin A Bubble Set To Burst?

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:

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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 cryptocurrencies of 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.

By Jason Hamlin | Seeking Alpha

Central Banks Are Driving Many To Cryptocurrencies

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.

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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 a Mises 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 of In 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.

Risk Assessments

The Ellsberg paradox shows 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.

Demelza Hays via The Mises Institute | Clipped From ZeroHedge

Cryptocurrencies Will Make The Next Crisis Worse … For Banksters

(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 the FT 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’s Hans 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 cryptocoin phenomenon.

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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.

* * *

The Next Financial Crisis Has Already Arrived In Europe, And People Are Starting To Freak Out

 

The Math Of Bitcoin And Why It’s Not Yet In A Bubble [video]

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.

Pursue 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.

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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).

By Nathan Martin | Economic Edge Blog