(Neils Christensen) The debate between gold and 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.
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.
In a 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 was reported that 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 subreddit described receiving such a letter. Lawyer Tyson Cross, writing for Forbes, also detailed how a number of his crypto-focused clients have received this kind of letter from the IRS.
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 we predicted 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.
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.
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), MPT asks 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).
Image Source: Sifrdata
Cryptocurrency projects by sector
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 of cryptocurrency projects out 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.
Image Source: Twitter
Or, perhaps one like this.
Image Source: Reddit
But unfortunately, we can’t have nice things. Recall that 80% of ICOs in 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 comes from 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 is open 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 suspicion as many bugs could 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 to Nicehash, 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.
See chart below.
Image Source: Crypto51
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.
Image Source: Twitter
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.
Some examples of this are the tangle, block lattice, and delegated proof of stake. They might be great ideas, they might even be the future, but betting on them now is a different animal than investing in Bitcoin.
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 like Trezor or Ledger Nano S can 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.
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 in is 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’t copied 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 love Crypto Blue Chips, where this idea was discussed first. Besides posting articles early, there’s research in Crypto Blue Chips you 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 with Crypto 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 as Bloomberg reports a 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 a statement 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.
Chinese yuan image via Shutterstock
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 its launch.
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 governor Fan Yifei and Yao 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 read anything I’ve written so 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.
Jamie Dimon – J.P. Morgan Chase CEO
In September of 2017, Jamie Dimon said:
So, if I understand correctly, Mr. Dimon’s argument is that every government in the world will soon block all cryptocurrencies. Therefore, Bitcoin is doomed.
Warren Buffet and Charlie Munger of Berkshire Hathaway
In May, 2018, Warren Buffet said that Bitcoin was:
And Charlie Munger said:
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 be ten 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 as Switzerland, Japan and South Korea.
- In Japan, eleven Bitcoin exchanges are recognized by the FSA, and Bitcoin is legal tender. This would seem to be at odds with the idea that every government in the world is going to ban Bitcoin.
- In the United States, the largest Bitcoin exchange, Coinbase, is backed by ICE, the parent company of the New York Stock Exchange and the Federal reserve has said that they welcome anonymous cryptocurrencies. Bitcoin is classified as a digital asset and exchanges are regulated and must follow KYC and AML. While Bitcoin is not classified as a currency in the US, it certainly isn’t illegal. Saying that the government is going to completely ban Bitcoin is pure speculation, and I hardly think that ICE or the Federal reserve share Mr. Dimon’s opinion. Did you know that ICE is even building its own Bitcoin exchange?
When governments move too quickly to ban new technology, the country they represent ends up getting left behind. Coinbase for example, has 20 million users and has traded over 150 billion dollars of 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.
Final thoughts on J.P. Morgan
Mr. Dimon’s comments would make more sense if they were, I don’t know, maybe trying to patent Bitcoin’s technology and make their own version. But, that would be kind of unethical, don’t you think? I guess it’s not really surprising since J.P. Morgan (JPM) has been fined more than 29 billion dollars for abusing the market since the year 2000. But, Bitcoin is the fraud?
Bitcoin value is based on nothing but FOMO?
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 includes Bitcoin Miners, Software Engineers, Exchanges, Cloud infrastructure like Blockchian 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?
|Year||Number of Scholarly Articles Mentioning “Bitcoin”|
Data Source: Google Scholar
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.
|Year||Number one Country by Search Volume for the term “Bitcoin”|
Data Source: Google Trends
FOMO or a source of jobs and innovation?
If Bitcoin was just FOMO, surely it wouldn’t be creating jobs, and certainly it wouldn’t be one of the fastest growing fields in technology.
Image Source: Burning Glass
FOMO or the new obsession of Venture Capitalists?
If Bitcoin was just FOMO, then why are VC firms investing more in blockchain startups each year? Maybe some of them are caught up in the craze, but just look at the chart below.
Image Source: Statista
A shared delusion?
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 once weaken the oppressors of the downtrodden and 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.
2018 might be the year we find out.
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 system teetering, 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 of attention to 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.
But every time there is a crisis, 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 with draconian capital controls (or selective bailouts for their once and future employers 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.
Iran and Venezuela are in the midst of the kinds of hyper inflationary currency death spirals that bring societies to their knees. In Argentina, the peso has fallen to an all-time low against the dollar as inflation and interest rates spike. Turkey is having problems of its 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.
Oh, the irony…
Jamie Dimon has come a long way in seven months…
From “Bitcoin is a fraud” in September to “Busted for Bitcoin fraud” in April.
Reuters reports that 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.
Full Docket below…
Facebook started it – banning crypto/ICO ads on Jan 30th, then came Google – copying Facebook’s ban on March 14h; and now, less than a week later, Twitter is virtue-signalling support for the crypto-crackdown, planning its own ban on ads.
Sky news reports that 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…
… is food next?
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 the Financial Times pointed 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.”
We’re not sure the surprising number of people who bought bitcoin on their credit cards last year would agree.
“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”
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 it by 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.
- Did a bear market in cryptocurrency just start?
- 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 options for 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 a report about 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 from The Next Web tested 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, TNW reported 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.
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.
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 the Daily 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.
Part 1 – Bitcoin Is A Trust Machine
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.
So money 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…
* * *
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.
* * *
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 the Economic 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.
Turkey has 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,” Euronews translates the statement republished by local news outlet Enson 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 the South Korean government and its local financial authorities are actively discussing the possibility of enforcing a policy on Bitcoin taxation, 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.
The Telegraph reported just 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 member Senator Dianne Feinstein, the proposed bill is needed to modernize existing AML laws.
The bill would amend the definition of ‘financial institution,’ in Section 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 is actively monitoring cryptocurrencies which 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 Vays claimed 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 as CoinTelegraph details means Bitcoin is now the sixth most circulated currency in the world, behind five super powers, and outranking the Pound, the Ruble, and the Won, according to 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.
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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…
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.
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 both Miami and New York City are 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 company has 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.
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 Soto has documented how 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.
Ledgers appear at the dawn of written communication. Ledgers and writing developed simultaneously in the Ancient Near East to record production, trade, and debt. Clay tablets baked with cuneiform script detailed units of rations, taxes, workers and so forth. The first international ‘community’ was arranged through a structured network of alliances that functioned a lot like a distributed ledger.
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 argued that 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.
Outspoken billionaire investor Peter Thiel told attendees at the Future Investment Initiative in Riyadh, Saudi Arabia, that people are “underestimating” bitcoin and that it has “great potential left,” comparing the cryptocurrency bitcoin to gold.
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.
I was struck by this quote from the recent Zero Hedge article A Look Inside The Secret Swiss Bunker Where The Ultra Rich Hide Their Bitcoins:
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.
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.
My vision of cryptocurrency, laid out in my book A Radically Beneficial World: Automation, Technology & Creating Jobs for All, is of a truly decentralized currency that directly funds work that addresses scarcities in localized community economies. The reality of existing cryptocurrencies is that they are probably being snapped up for buy-and-hold storage by the wealthy.
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 blogged a Bitcoin conference call I hosted. I invested in ChangeTip. I bought and sold BitcoinWallet.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 call on 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 more crypto 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 the the 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. Kahn of DARPA and ARPANET recruited Vinton Cerf of 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 common internetwork 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.
Another sign that it’s early is that foundational parts of crypto theory like Joel Manegro’s Fat Protocol post , which has been repeated ad infinitum, is being questioned and rethought by Teemu Paivinen, Jake Brukhman and others (h/t Yannick Roux).
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 simply a 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 like Civic which 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 the SAFT White Paper published 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 post in 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 like Multichain).
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, through smart contracts and 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. Augur is building a decentralized prediction market. PROPS is a decentralized economy for digital video. OpenBazaar is a decentralized peer-to-peer marketplace. Aragon is 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 is a list from Forbes of 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.
To learn more about decentralization, read Vitalik’s “The Meaning of Decentralization” which goes in to the the three different dimensions of decentralization:
5. It’s A Bubble….So What
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 book on the last 800 years of people saying “it’s different” this time to justify lofty valuations.
I say “so what” because I believe in Amara’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 in FAMGA. 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. the SEC DAO Report was 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 on the 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/t Ari 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.
7. Don’t Hate The Haters. Love The HODL’ers
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 just talking 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.
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,” told the Street that 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 price of 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 told WSJ 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 Founder Ray Dalio, who said last week that he believes bitcoin is in a bubble.
Circling back to Belfort, he explained to the Street that 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?
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.
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.Question:
What happens when new currency is created with few limits by central and commercial banks?
Far too much debt and currency are created.
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.
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.
Additionally, anticipated demand is being priced in after VanEck filed for an ‘active strategy’ Bitcoin ETF:
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.
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 we first 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 targeting at 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.
Latest on Cryptocurrency …
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.
“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.
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 …
When Central Banks start buying, watch out
(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.
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 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.
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 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.
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.
(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.
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(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.
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.
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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).
Bitcoin’s 150% surge since the beginning of the year has caught the attention of “Mrs. Watanabe,” the metaphorical Japanese housewife investor, and a legion of South Korean retirees who’re hoping to escape rock-bottom interest rates by investing in cryptocurrencies, according to Reuters.
Retail investors in Asia, many of whom are already regular investors in stock and futures markets, are turning to bitcoin in droves. Trading volume on Asia-based exchanges exploded following a Japanese law that officially designated bitcoin as legal currency. And now that the largest Chinese exchanges have reinstated customer withdrawals, the bitcoin market in China will likely stabilize, and the price will likely rise as a result.
Bitcoin was recently trading in South Korea at a $400 premium to its value on US-based exchanges, in part due to tough money-laundering rules that make it difficult to move bitcoin in and out of those markets, Reuters reports.
One of the retail traders interviewed by Reuters said she started with bitcoin because she’s worried she won’t be able to rely on her pension.
“After I first heard about the bitcoin scheme, I was so excited I couldn’t sleep. It’s like buying a dream,” said Mutsuko Higo, a 55-year-old Japanese social insurance and labor consultant who bought around 200,000 yen ($1800) worth of bitcoin in March to supplement her retirement savings.”
“Everyone says we can’t rely on Japanese pensions anymore,” she said. “This worries me, so I started bitcoins.”
Another trader noted that most South Korean buyers see bitcoin as an investment; few plan to use it for payments purposes.
The risks for these traders are high, Reuters says, alluding to the collapse of Mt. Gox, which led to hundreds of millions of dollars in losses for its customers.
The digital currency is largely unregulated in Asia. In Hong Kong, exchanges operate with a money-changer’s license, while in South Korea they are regulated like online shopping malls, Reuters says.
There’s also a burgeoning cottage industry of seminars, social media and blogs all designed to promote bitcoin or bitcoin-like schemes. The cryptocurrency world is rife with scams, and pyramid schemes are becoming increasingly common.
Police in South Korea last month uncovered a $55 million cryptocurrency pyramid scheme that sucked in thousands of homemakers, workers and self-employed businessmen seduced by slick marketing and promises of wealth, Reuters reported.
Seminars in Tokyo, Seoul and Hong Kong promote schemes that require investors to pay an upfront membership fee of as much as $9,000, according to Reuters. Investors in these scams are encouraged to promote the cryptocurrency and bring in new members in return for some bitcoins and other benefits.
One Tokyo scheme offered members-only shopping websites that accept bitcoin, 24-hour car assistance and computer problems, and bitcoin-based gifts when a member gets married, has a baby – or even dies, according to marketing materials seen by Reuters.
Leonhard Weese, president of the Bitcoin Association of Hong Kong and a bitcoin investor, warned amateur investors against speculating in the digital currency.
“Trading carries huge risk: there is no investor protection and plenty of market manipulation and insider trading. Some of the exchanges cannot be trusted in my opinion.”
Regulators in China have already cracked down on money laundering at local exchanges. South Korea’s Financial Services Commission has set up a task force to explore regulating cryptocurrencies, but it has not set a timeline for publishing its conclusions, Reuters reported.
And Japan’s Financial Services Agency (FSA) supervises bitcoin exchanges, but not traders or investors.
“The government is not guaranteeing the value of cryptocurrencies. We are asking for bitcoin exchanges to fully explain the risk of sharp price moves,” an FSA official told Reuters.
Bitcoin was trading $2,529 on Coinbase Sunday, while it traded at $2,593 on Bitflyer, one of the largest Japanese exchanges.
One Japanese finance blogger said his most popular article has been an explanation of bitcoin. Readership of the article doubled last month when bitcoin was on its record run.
Rachel Poole, a Hong Kong-based kindergarten teacher, said she read about bitcoin in the press, and bought five bitcoins in March for around HK$40,000 ($5,100) after studying blogs on the topic. She kept four as an investment and has made HK$12,000 tax-free trading the fifth after classes.
“I wish I’d done it earlier,” she said.
Clif High – Crypto Currencies Break Loose, then Gold & Silver (video)
Where does Internet data mining expert Clif High see Bitcoin going in the hyperinflation we are heading into? Clif High says, “I’ve got what you call a strike point, a numeric value our data sets are aiming at that shows Bitcoin should be about $13,800 sometime in early February of 2018. That will basically be a fivefold increase at what we are at now. . . . I always thought cryptos would have to break out first in order to upset . . . the structure of the central banks so silver and gold could break loose. I suspect silver will break loose. The rocket shot on that will be staggering, but bear in mind I am the Internet’s worst silver forecaster. I have had silver at $600 per ounce in our data since 2003. If that occurs, look at how shocking and rapid that rise is going to be.”
High goes on to say, “Gold and silver are the most undervalued assets on the planet.” . . . And he predicts “by early February, gold will be at $4,800 per ounce and silver will be around $600 per ounce.”
High also says, “The Fed can’t kill crypto currencies . . . The elites are fearful because they can’t control crypto currencies, and they can’t suppress them. There will be no more source of free printed money for bribing people. . . . When the dollar dies, the corruption and crime will be revealed.”
Join Greg Hunter as he goes One-on-One with Internet data mining expert Clif High of HalfPastHuman.com.
Skepticism is always a wise default position to start one’s inquiry, but if no knowledge is being acquired, skepticism quickly morphs into stubborn ignorance.
Bitcoin et al. are not the equivalent of Beanie Babies. Cryptocurrencies have utility value. They facilitate international payments for goods and services.
The primary cryptocurrencies are not a scam. Advertising a flawless Beanie Baby and shipping a defective Beanie Baby is a scam. Advertising a mortgage-backed security as low-risk and delivering a guaranteed-to-default stew of toxic mortgages is a scam.
The primary cryptocurrencies (bitcoin, Ethereum and Dash) have transparent rules for emitting currency. The core characteristic of a scam is the asymmetry between what the seller knows (the product is garbage) and what the buyer knows (garsh, this mortgage-backed security is low-risk–look at the rating).
Both buyers and sellers of primary cryptocurrencies are in a WYSIWYG market: what you see is what you get. While a Beanie Baby scam might use cryptocurrencies as a means of exchange, this doesn’t make primary cryptocurrencies a scam, any more than using dollars to transact a scam makes the dollar itself a scam.
Bubbles occur when everyone and their sister is trading/buying into a “hot” market. Bubbles pop when the pool of greater fools willing and able to pay nose-bleed valuations runs dry. In other words, when everyone with the desire and means to buy in and has already bought in, there’s nobody left to buy in at a higher price (except for central banks, of course).
At that point, normal selling quickly pushes prices off the cliff as there is no longer a bid from buyers, only frantic sellers trying to cash in their winnings at the gambling hall.
While a few of my global correspondents own/use the primary cryptocurrencies, and a few speculate in the pool of hundreds of lesser cryptocurrencies, I know of only one friend/ relative /colleague / neighbor who owns cryptocurrency.
When only one of your circle of acquaintances, colleagues, friends, neighbors and extended family own an asset, there is no way that asset can be in a bubble, as the pool of potential buyers is thousands of times larger than the pool of present owners.
I discussed The Network Effect last year: The Network Effect, Jobs and Entrepreneurial Vitality (April 7, 2016):
The Network Effect is expressed mathematically in Metcalfe’s Law: the value of a communications network is proportional to the square of the number of connected devices/users of the system.
The Network Effect cannot be fully captured by Metcalfe’s Law, as the value of the network rises with the number of users in communication with others and with the synergies created by networks of users within the larger network, for example, ecosystems of suppliers and customers.
In other words, the Network Effect is not simply the value created by connected users; more importantly, it is the value created by the information and knowledge shared by users in sub-networks and in the entire network.
This is The Smith Corollary to Metcalfe’s Law: the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network.
In the context of the primary cryptocurrencies, the network effect (and The Smith Corollary to Metcalfe’s Law) is one core driver of valuation: the more individuals and organizations that start using cryptocurrencies, the higher the utility value and financial value of those networks (cryptocurrencies).
In other words, cryptocurrencies are not just stores of value and means of exchange–they are networks.
The true potential value of cryptocurrencies will not become visible until the global economy experiences a catastrophic collapse of debt and/or a major fiat currency. These events are already baked into the future, in my view; nothing can possibly alter the eventual collapse of the current debt/credit bubble and the fiat currencies that are being issued to inflate those bubbles.
The skeptics will continue declaring bitcoin a bubble that’s bound to pop at $3,000, $5,000, $10,000 and beyond. When the skeptics fall silent, the potential for a bubble will be in place.
When all the former skeptics start buying in at any price, just to preserve what’s left of their fast-melting purchasing power in other currencies, then we might see the beginning stages of a real bubble.
The wild card in cryptocurrencies is the role of Big Institutional Money. When hedge funds, insurance companies, corporations, investment banks, sovereign wealth funds etc. start adding bitcoin et al. as core institutional holdings, the price may well surprise all but the most giddy prognosticators.
The Network Effect can become geometric/exponential very quickly. It’s something to ponder while researching the subject with a healthy skepticism.
Back on February 27, when bitcoin was trading in the mid-teens, we wrote “Step aside bitcoin, there is a new blockchain kid in town.”
In recent days, the world’s second most popular digital currency, Ethereum, has been surging (despite its embarrassing hack last June when some $59 million worth of “ethers” were stolen forcing the blockchain to implement a hard fork to undo the damage), prompting many to wonder if some big announcement was imminent. It appears that yet again someone “leaked” because on Monday, an alliance of some of the world’s most advanced financial and tech companies including JPMorgan Chase, Microsoft, Intel and more than two dozen other companies teamed up to develop standards and technology to make it easier for enterprises to use blockchain code Ethereum – not bitcoin – in the latest push by large firms to move toward the holy grail of a post-central bank world in which every transaction is duly tracked: a distributed ledger systems.
Commenting on the sharp – for the time – rise in ETH price (which had moved from $13 to $15), we said “the move may be just the beginning if most corporations adopt Ethereum as the distributed ledger standard: Accenture released a report last month arguing that blockchain technology could save the 10 largest banks $8 billion to $12 billion a year in infrastructure costs — or 30 percent of their total costs in that area.” Since then most corporations have indeed adopted Ethereum as the distributed ledger standard.
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Three months later, and with Ethereum 15x higher at $230, Bloomberg today writes: “Step aside, bitcoin. There’s another digital token in town that’s winning over the hearts and wallets of cryptocurrency enthusiasts across the globe.”
It’s not just the lede that is familiar, it’s everything else too, especially the forecast.
The value of ether – the digital currency linked to the ethereum blockchain – could surpass that of bitcoin by the end of 2018, according to Olaf Carlson-Wee, chief executive officer of cryptocurrency hedge fund Polychain Capital who was interviewed by Bloomberg.
“What we’ve seen in ethereum is a much richer, organic developer ecosystem develop very, very quickly, which is what has driven ethereum’s price growth, which has actually been much more aggressive than bitcoin,” said Carlson-Wee, in an interview on Bloomberg Television Tuesday.
As we previously reported, while Ethereum suffered an embarrassing hack last summer resulting in the theft in millions of ether, the cryptocurrency has drawn the interest of industries from finance to health care because its blockchain does far more than let bitcoin users send value from one person to another. “Its advocates think it could be a universally accessible machine for running businesses, as the technology allows people to do more complex actions in a shared and decentralized manner.“
Which is why ethereum is gaining increasingly more converts. Carlson-Wee wasn’t the first to forecast a bright future for ethereum. Fred Wilson, co-founder and managing partner at Union Square Ventures, laid out an even more ambitious timeline for the cryptocurrency in an interview earlier this month.
“The market cap of ethereum will bypass the market cap of bitcoin by the end of the year,” said Wilson, who is also chairman of the board at Etsy.
In fact, if one looks at the relative market share of various cryptocurrencues, and extrapolates current trends, ethereum could surpass bitcoin in just a few months.
Bitcoin currently dominates a little less than half of the digital currency market, down from almost 90 percent three months ago, according to Coinmarketcap.com data. Meanwhile, ethereum has quadrupled its share, which now represents more than a quarter of the pie.
Indicatively, as of this moment, the market cap of Bitcoin is $37 billion, 75% higher than Ethereum. If the optimsitic forecasts are accurate, Ethereum, which is currently offered at $230, will cost roughly $400 next time we look at it, if not more. What is more interesting is that while bitcoin hit an all time high of approximately $2900 one week ago, it has failed to recapture the highs, even as ethereum has continued surging ever higher, perhaps a sign of a broad momentum shift from the legacy “cryptocoin” to the “up and comer.”
“We’re absolutely still in the infrastructure building phase,” Carlson-Wee said. “But I do think within one to two years, we’ll start to see the first viral applications that are user facing.”
In any case, for readers interested in putting money into either extremely volatile crypto, be prepared, in fact assume, a complete loss of your investment as chasing such speculative manias rarely has a happy ending. Then again, trying to time the peak of any bubble is a fool’s endeavor. Just look at the S&P.
Bitcoin’s growth has started to catch up to its fundamentals, which is likely what has been driving its astronomical gain as of late, he said. Others have attributed the surge to speculation, as well as increased interest in Asia and adoption by established companies.
Impressive performance aside, more than $150 has been knocked off bitcoin’s price since late last week amid concerns about transaction speed, safety and a possible price bubble.
You might have been hearing about Bitcoin more frequently in the past few years. Recently it made a lot of news because of the ransomware attacks that affected countries around the world by demanding Bitcoin ransom to release embargoed documents on computers. So what the heck is Bitcoin, and how does it work?
First, let’s get this out of the way: bitcoin is money. It’s money as much as the dollar or euro or yen is money. And it’s fully interconvertible with these or any other currencies. Bitcoin is different than these national currencies in many key ways, however, because Bitcoin is a type of digital money that basically runs itself without any government intervention and minimal regulation.
Bitcoin is both the network for using the currency as well as the currency itself. It’s usually denoted Bitcoin (big B) when talking about the network and bitcoin (small b) when talking about the actual currency. For example, I have about four bitcoin in my online wallet, and I use the Bitcoin network to send payments.
How do you get bitcoin? There are two ways: Either you buy bitcoin, or you mine bitcoin. Buying bitcoin is quite easy. There are many online exchanges that will sell you bitcoin in exchange for whatever currency you normally use (dollars, etc.). I use Coinbase to buy my bitcoin, and it’s the most mainstream and scrutinized of the current exchanges. It was founded by Wall Street types in order to help Bitcoin become more mainstream. There are many others you can use, such as Kraken or CoinMama.
You can also buy bitcoin in person at various bitcoin ATMs around the world. There are now about 1,200 such ATMs in 60 countries around the world, and they’re growing rapidly. Here’s a site that allows you to find the nearest ATM.
Last, you can buy bitcoin through real people by using localbitcoins.com to find people in your area who will sell you bitcoin without going through an online exchange at all.
The second way to get bitcoin is by ”mining” them. You mine bitcoin using fast computers specially built for doing this. These specialized machines crunch numbers to discover the right codes. Every 10 minutes, the Bitcoin network releases a new block of bitcoin and the party or parties who discovered the right codes gets that block of coins (currently 12.5 coins per block). Bitmain is one of the bigger mining machine manufacturers and their newest model, the T9, sells for about one bitcoin.
This number crunching for “mining” is why bitcoin is referred to as a “crypto currency”: it’s all about using very large numbers that take massive computing power to preserve the integrity of the system and avoid hacking. The Bitcoin system basically turns electricity into money.
So far, Bitcoin has never been hacked. There’s a common misconception that it has. Many companies that buy and sell bitcoin — bitcoin exchanges — have been hacked. Most famously, MtGox, one of the earliest exchanges, was hacked in 2013 and people lost a lot of money. But even then the Bitcoin network wasn’t hacked. Only the exchange was hacked.
That said, security is very important for those buying and selling bitcoin because the code itself is the currency. It’s a string of numbers and letters called a “hash key.” If someone has your hash keys, they have your bitcoin. There’s nothing extra beyond the hash key.
Your bitcoin are kept generally in an online wallet at an exchange like Coinbase or Xapo. Here’s a site that compares the security of the various means for storing bitcoin. Coinbase wins that comparison currently for online wallets and the Ledger Nano wins for hardware wallets.
You can also keep your bitcoin in an online “vault,” which adds extra layers of security for bitcoin that you don’t plan to use for a while. For example, it takes a couple of days to withdraw bitcoin from the Coinbase vault, and various types of authentication are required before the transaction is complete.
For those who want to take matters more into their own hands and avoid having to trust an online wallet or vault, you can keep your bitcoin in a physical hard drive, or you can even just write your codes by hand on paper and keep them in your physical wallet in your pocket.
Personally, I use a variety of online wallets and vaults in order to prevent any single mishap or hack from hitting me too hard. I can’t be bothered with keeping the codes offline but maybe I will one day as an extra layer of security.
How much is Bitcoin worth?
The price of one bitcoin has grown from nothing in 2009 when the Bitcoin network was created to more than $1,800 in May. If you had invested $1,000 in bitcoin in 2010, you would be sitting on more than $12 million now. How has it gone up so much? Well, because increasing numbers of investors have decided to place their confidence in the system.
We can look at the stats to get a good feel for how fast Bitcoin has grown. Blockchain.info keeps detailed stats.
» The number of bitcoin in circulation has grown from zero in the beginning of 2009 to almost 16.5 million now, with only about 4.5 million more to mine (but this will take about a century to complete because mining becomes intentionally more and more difficult).
» The Bitcoin price grew from nothing to almost $1,200 at the end of 2013, plummeted to around $200 in 2014, and rose again to more than $1,800 in May.
» Bitcoin’s market capitalization has gyrated similarly, but is now about $30 billion, up from zero in 2009 and $12 billion at the end of 2016, and is enjoying a strong upward trend in 2017.
» All crypto currencies combined now have a market cap over $60 billion, including Ripple, Ethereum, Litcoin and many others, many of which are also on very strong upward trajectories.
» The number of Bitcoin wallet users (required to buy and conduct business using bitcoin) has grown from zero in 2009 to more than 7 million by mid-2016 and 14 million now.
» Bitcoin daily transactions have grown from nothing in 2009 to 210,000 in mid-2016 and more than 350,000 by May.
So we’re seeing the Bitcoin system roughly doubling in size each year, and there’s little reason to believe that this rate of growth will slow down at this point. If anything, it’s likely to increase.
What does “deflationary” currency mean?
Bitcoin is different than regular money in that there’s a limit to how many can be created: just 21 million. Ever. The idea behind this limit is that the value of this currency can’t be inflated away by policymakers. The dollar loses about 2 percent in value each year because of planned inflation, and this provides a strong incentive to invest rather than save — and that’s literally why the Federal Reserve has a target inflation rate of 2 to 3 percent.
Bitcoin is the opposite: It’s designed to always increase in value, so simply buying and holding may be a very good investment strategy. This is why Bitcoin is described as a “deflationary” currency rather than an inflationary currency.
There’s also a limit on how small each Bitcoin can be divided: into 100 million parts. This tiny part of a bitcoin is called a satoshi, in honor of its mysterious and anonymous creator Satoshi Nakamoto.
What is the blockchain?
The magic ingredient in Bitcoin is the distribution of trust in a vast electronic network. This distribution moots the need for the “centralization of trust” that is the function of central banks like the Federal Reserve. Central banks issue money, control interest rates and act as a lender of last resort in “fiat currency” systems like in the United States. The distribution of trust to the network performs these roles in the Bitcoin ecosystem. This trust network is called the “blockchain,” and it is the heart of Bitcoin.
The blockchain is an electronic record (ledger) of all bitcoin transactions that is stored on every node of the ever-increasing network of the Bitcoin ecosystem. Because it is completely distributed and constantly updated in real time, using very difficult cryptographic keys that require massive amounts of computing power, the blockchain can’t be shut down by any outside force. This fully decentralized system renders Bitcoin as a system practically immune from hackers. As mentioned above, individual bitcoin exchanges can and have been hacked, but Bitcoin itself has never been hacked.
The beauty of the blockchain and Bitcoin ecosystem is that it allows any person or people using it to avoid the centralized (and often abusive) power of central banks and of national governments entirely. ABN Amro bank chief said it well in 2015: “What the Internet has done for information and the way we communicate, the blockchain will do for value and the way we look at trust. The financial world is going to flip upside-down.”
We are witnessing that upside-down flip right now in real time. This is why we’ve seen literally $30 billion in new money come into the Bitcoin and other crypto currency space in the past six months alone.
Obviously, the decentralized nature and independence from government influence has appealed to libertarians and techno-optimists since Bitcoin’s creation. Bitcoin long has had a bad rep because it’s been used by various versions of the Silk Road website to buy and sell drugs and other illegal items. But there’s far more to Bitcoin than illegal drugs.
Bitcoin is now accepted by thousands of companies and vendors around the world. Japan recently recognized Bitcoin as a legitimate currency, and this means that more than 260,000 stores in Japan soon will start accepting Bitcoin.
We are very likely seeing the beginning of a very large wave of growth for Bitcoin and other crypto currencies like Ethereum.
Investing in Bitcoin
How should you invest in Bitcoin? I’ve always advised people that you shouldn’t invest anything in Bitcoin that you don’t mind losing. That’s generally still good advice because this currency and the technology behind it are still very new. They could just disappear for a variety of reasons.
But the highly positive trends in terms of wallet growth, acceptance by businesses and governments, as well as market cap and price, discussed above have led me recently to change my mind a little and suggest that Bitcoin should in fact be a part of any smart investor’s portfolio.
It shouldn’t be a large part, but it should definitely be a part of it. With returns like we’ve seen on Bitcoin in the past eight years, it’s reasonable to accept some risk.
Will Bitcoin change the world?
The last thing I’ll look at is the revolutionary potential for Bitcoin and other cryptocurrencies in terms of how they may change the world. I wrote a piece in 2015 looking at how Bitcoin may stop China from replacing the United States on the world stage. This would be a good thing and could happen if enough Chinese simply start to prefer using bitcoin instead of yuan to conduct business. If China can’t control its currency it can’t control the world.
I also looked in a piece last year at whether Bitcoin is likely to be the future of money more generally. I concluded then and still believe that Bitcoin (or maybe some other coin built on the blockchain) will probably either grow in the next couple of decades to become a global currency or shrink down such that it becomes just an interesting historical footnote.
What happens if Bitcoin or something like it does replace national fiat currencies around the world? First, it makes it much harder for nations to raise massive amounts of money through printing or borrowing. This means that deficit spending will shrink or even go away. And, according to at least some Bitcoin libertarian optimists, this would also stop nations from waging war as much because they’d have to finance such wars as they go, with real money, rather than using deficit spending. A more peaceful world would indeed be a nice consequence of the Bitcoin revolution.
In closing, Bitcoin is a potentially transformative new type of currency that promises to create a more borderless and peaceful world, and an increasing flow of information and goods. It also may well lead to many unpredictable effects that we’ll simply have to sit back and watch as they unfold.
In February 2016 we explained, correctly in retrospect, that the reason behind the unprecedented surge in Vancouver home prices was the seemingly constant flood of “hot Chinese money” desperate to park itself as far away from China’s banking system, and into offshore real-estate. This is how we laid out the stylized sequence of events that culminated with Vancouver home prices surging by over 20%:
- Chinese investors smuggled out millions in embezzled cash, hot money or perfectly legal funds, bypassing the $50,000/year limit in legal capital outflows.
- They make “all cash” purchases, usually sight unseen, using third parties intermediaries to preserve their anonymity, or directly in person, in cities like Vancouver, New York, London or San Francisco.
- The house becomes a new “Swiss bank account”, providing the promise of an anonymous store of value and retaining the cash equivalent value of the original capital outflow.
- Then the owners disappear, never to be heard from or seen again.
Separately, in mid-2015, when bitcoin was still trading in the low $200s, we also predicted that in an attempt to bypass China’s increasingly more draconian capital controls, Chinese oligarchs and ordinary savers would increasingly turn to what at the time was a largely unregulated medium of exchange: bitcoin.
we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.
With one bitcoin now going for roughly $1,800 – and with the PBOC repeatedly cracking down on all forms of bitcoin cross-border flow – this prediction also turned out to be right.
So putting the two together, at least one enterprising Canadian homeowner has decided to make life for potential Chinese buyers especially easy, and in a posting on the Hong Kong edition of Craigslist, has listed a relatively modest Vancouver house for the price of 2,099 bitcoin.
At today’s exchange rate of US$1,737 for one bitcoin, the US dollar equivalent price is roughly $3.6 million or C$4.9 million. So what does nearly five million Canadian dollars buy enterprising Chinese investors who are willing to pay up for the convenience of bypassing currency conversion into Canadian dollars altogether? This:
- For months we have been getting messages and e-mails about Bitcoin.
- We have long been advocate for buying the BTC dips and riding it out for the longer term.
- We explain why we think everyone’s BTC strategy should simply be: “Buy one Bitcoin and forget about it”.
By Parke Shall
That is our simple bitcoin advice. “Buy one and forget about it for a while.” Your loss today is going to be capped at about $1400 but, as was said in Back to the Future, “if this thing hits 88 miles per hour, you’re going to see some serious s***.”
We wanted to take the time to write a small note today about our continued thinking on bitcoin and why we think a small investment in perhaps just one bitcoin could be a prudent strategy for asset diversification for any investor.
Hopefully, our track record on the digital currency also helps our credibility today. In the past, we have advocated for buying any and all dips in the digital currency making the argument time and time again that we believed bitcoin would continue to appreciate regardless of small aberrations that have occurred along the way. For instance in December of last year, we predicted bitcoin would soar through $1200 this year.
The conclusion has generally been the same in each of our bitcoin articles: we expect demand for bitcoin to continue to rise and, with a limited supply, and we expected this demand will push the price significantly higher. This is the dynamic we have seen during the course of bitcoin’s life cycle thus far,
Many people have been deterred from investing or purchasing bitcoin at these levels because of how much the prices has appreciated so far. This is akin to not wanting to buy a stock while it is on its way up, despite its best years possibly being ahead of it. If you didn’t buy at $700 like we advocated, then yes, you missed out on a double. But who is to say that if you don’t buy here at around $1400 you won’t miss another double? In fact, we think the reality is that an investment in bitcoin today could pay off many multiples in the future as long as, as an investor, you have patience.
We also don’t think owning gold is a bad idea either. We are not sure why this argument of gold versus bitcoin started, but we own both. We like to think of them as our “old-school” and our “new school” hedges. Gold is an “old-school” hedge because it is actually a physical asset that you can reach out and touch that has been intertwined with economics for thousands of years. It has a great track record of demand and comes in finite amounts, therefore making it a great hedge against anything and everything that is “new school” in the market, from Keynesian theory to bitcoin.
Bitcoin obviously has the biggest track for potential appreciation, we believe. While gold may not go up 10 times in the event of a catastrophe or a risk off event, it still may appreciate significantly. We believe bitcoin, on the other hand, actually has the potential to appreciate over 100 times in the future, if it holds up. By that, we mean that there is definitely a theoretical case for the asset to appreciate this much, although there is probably a cautious likelihood of it happening. In other words, and not to sound hyperbolic, Bitcoin going to $1 million may not prove to be a total impossibility.
This appreciation may occur without a catastrophe or without a risk off event. In other words, we like bitcoin not only as an investment in the financial technology and not only as an investment in a digital currency but also as an investment in a hedge against central banks and the markets.
1. We know that blockchain is at the core of what makes Bitcoin tick. Companies and governments have continued to invest in blockchain, and we believe that owning Bitcoin is another way to invest in one of the earliest and possibly the most well known blockchain project out there. Therefore, an investment in Bitcoin is an investment in Blockchain.
2. Not unlike gold, people use Bitcoin because they want less government and less regulation in their lives. Buying Bitcoin is a way to, at least for now, shore up a method of transacting value outside of the “system”. Gold offers the same benefits and is tangible, which is why we like owning both gold and Bitcoin as hedges against the “system”.
We have gotten numerous questions over the last year or so about what our strategy would be if we were new to investing in bitcoin. Put simply, the strategy would be to “buy one bit coin and just leave it”. One of a couple scenarios are going to happen.
The first situation is the worst. Let’s assume bitcoin winds up going to zero eventually and is somehow either rejected as a digital currency or disproven as a financial technology. In that case, you take a 100% loss. Sorry. At least your risk was defined.
The second situation is one where bitcoin is adopted in somewhat of the same fashion as it has been adopted of recent. Its use starts to drift from outside the mainstream to inside the mainstream and the price continues to appreciate. This is a case where you’d likely see appreciation in a bitcoin that you purchased today.
Finally, the third situation. We call this the grand slam. Bitcoin is unanimously excepted as the first and only prominent digital currency. It becomes a full-scale hedge, adopted by a significant portion of the population, against central banking systems and finance as we know it today. Given the fact that only about 20 million bitcoin will be issued in total, there will be a severe dry up in supply as billions of people worldwide look to get their share of the digital currency. This is a situation where the currency could appreciate 100 times what its worth now or more. Obviously, this is the most speculative of the three situations but could be a reality if an investor has enough patience to wait it out. This type of situation could take 15 to 30 years and this is why the title of this article is “buy one bitcoin and forget about it“.
Again, bitcoin does not come without risk.
Relative to other assets you may hold, like stocks, options and other currencies, Bitcoin is going to be extraordinarily volatile. Due to the fact that it is easily in the digital currency’s life cycle and that it has yet to be proven on a wide scale, investors can expect significant volatility, sometimes 20%+ in one day’s time, for the capital they have invested in Bitcoin.
Also, it is an all digital currency meaning that it needs digital infrastructure to survive. In a catastrophic scenario where our infrastructure is compromised, we have no idea what would happen to bitcoin. It isn’t tangible and you can’t physically hold it, which are two of its major detracting points versus gold. However, we see buying bitcoin at $1400 as a speculative investment that could yield immense results in the future if you have the wherewithal and you have the strength to hold it over time.
In proof we trust
Blockchain technology will revolutionize far more than money: it will change your life. Here’s how it actually works,
The impact of record-keeping on the course of history cannot be overstated. For example, the act of preserving Judaism and Christianity in written form enabled both to outlive the plethora of other contemporary religions, which were preserved only orally. William the Conqueror’s Domesday Book, compiled in 1086, was still being used to settle land disputes as late as the 1960s. Today there is a new system of digital record-keeping. Its impact could be equally large. It is called the blockchain.
Imagine an enormous digital record. Anyone with internet access can look at the information within: it is open for all to see. Nobody is in charge of this record. It is not maintained by a person, a company or a government department, but by 8,000-9,000 computers at different locations around the world in a distributed network. Participation is quite voluntary. The computers’ owners choose to add their machines to the network because, in exchange for their computer’s services, they sometimes receive payment. You can add your computer to the network, if you so wish.
All the information in the record is permanent – it cannot be changed – and each of the computers keeps a copy of the record to ensure this. If you wanted to hack the system, you would have to hack every computer on the network – and this has so far proved impossible, despite many trying, including the US National Security Agency’s finest. The collective power of all these computers is greater than the world’s top 500 supercomputers combined.
New information is added to the record every few minutes, but it can be added only when all the computers signal their approval, which they do as soon as they have satisfactory proof that the information to be added is correct. Everybody knows how the system works, but nobody can change how it works. It is fully automated. Human decision-making or behavior doesn’t enter into it.
If a company or a government department were in charge of the record, it would be vulnerable – if the company went bust or the government department shut down, for example. But with a distributed record there is no single point of vulnerability. It is decentralized. At times, some computers might go awry, but that doesn’t matter. The copies on all the other computers and their unanimous approval for new information to be added will mean the record itself is safe.
This is possibly the most significant and detailed record in all history, an open-source structure of permanent memory, which grows organically. It is known as the block chain. It is the breakthrough tech behind the digital cash system, Bitcoin, but its impact will soon be far wider than just alternative money.
Many struggle to understand what is so special about Bitcoin. We all have accounts online with pounds, dollars, euros or some other national currency. That money is completely digital, it doesn’t exist in the real world – it is just numbers in a digital ledger somewhere. Only about 3 per cent of national currency actually exists in physical form; the rest is digital. I have supermarket rewards points and air miles as well. These don’t exist physically either, but they are still tokens to be exchanged for some kind of good or service, albeit with a limited scope; so they’re money too. Why has the world got so excited about Bitcoin?
To understand this, it is important to distinguish between money and cash.
If I’m standing in a shop and I give the shopkeeper 50 pence for a bar of chocolate, that is a cash transaction. The money passes straight from me to him and it involves nobody else: it is direct and frictionless. But if I buy that bar of chocolate with a credit card, the transaction involves a payment processor of some kind (often more than one). There is, in other words, a middle man.
The same goes for those pounds, dollars or euros I have in the accounts online. I have to go through a middle man if I want to spend them – perhaps a bank, PayPal or a credit-card company. If I want to spend those supermarket rewards points or those air miles, there is the supermarket or airline to go through.
Since the early 1980s, computer coders had been trying to find a way of digitally replicating the cash transaction – that direct, frictionless, A-to-B transaction – but nobody could find a way. The problem was known as the problem of ‘double-spending’. If I send you an email, a photo or a video – any form of computer code – you can, if you want, copy and paste that code and send it to one or a hundred or a million different people. But if you can do that with money, the money quickly becomes useless. Nobody could find a way around it without using a middle man of some kind to verify and process transactions, at which point it is no longer cash. By the mid 2000s, coders had all but given up on the idea. It was deemed unsolvable. Then, in late 2008, quietly announced on an out-of-the-way mailing list, along came Bitcoin.
On a dollar bill you will see the words: ‘In God we trust.’ Bitcoin aficionados are fond of saying: ‘In proof we trust’
By late 2009, coders were waking up to the fact that its inventor, Satoshi Nakamoto, had cracked the problem of double spending. The solution was the block chain, the automated record with nobody in charge. It replaces the middle man. Rather than a bank process a transaction, transactions are processed by those 8,000-9,000 computers distributed across the Bitcoin network in the collective tradition of open-source collaboration. When those computers have their cryptographic and mathematical proof (a process that takes very little time), they approve the transaction and it is then complete. The payment information – the time, the amount, the wallet addresses – is added to the database; or, to use correct terminology, another block of data is added to the chain of information – hence the name block chain. It is, simply, a chain of information blocks.
Money requires trust – trust in central banks, commercial banks, other large institutions, trust in the paper itself. On a dollar bill you will see the words: ‘In God we trust.’ Bitcoin aficionados are fond of saying: ‘In proof we trust.’ The block chain, which works transparently by automation and mathematical and cryptographic proof, has removed the need for that trust. It has enabled people to pay digital cash directly from one person to another, as easily as you might send a text or an email, with no need for a middle man.
So the best way to understand Bitcoin is, simply: cash for the internet. It is not going to replace the US dollar or anything like that, as some of the diehard advocates will tell you, but it does have many uses. And, on a practical level, it works.
Testament to this is the rise of the online black market. Perhaps £1 million-worth of illegal goods and services are traded through dark marketplaces every day and the means of payment is Bitcoin. Bitcoin has facilitated this rapid rise. (I should stress that even though every Bitcoin transaction, no matter how small, is recorded on the blockchain, the identity of the person making that transaction can be hidden if desired – hence its appeal). In the financial grand scheme of things, £1 million a day is not very much, but the fact that ordinary people on the black market are using Bitcoin on a practical, day-to-day basis as a way of paying for goods and services demonstrates that the tech works. I’m not endorsing black markets, but it’s worth noting that they are often the first to embrace a new tech. They were the first to turn the internet to profit, for example. Without deep pools of debt or venture capital to fall back on, black markets have to make new tech work quickly and practically.
But Bitcoin’s potential use goes far beyond dark markets. Consider why we might want to use cash in the physical world. You use it for small payments – a bar of chocolate or a newspaper from your corner shop, for example. There is the same need online. I might want to read an article in The Times. I don’t want to take out an annual subscription – but I do want to read that article. Wouldn’t it be nice to have a system where I could make a micropayment to read that article? It is not worth a payment processor’s time to process a payment that small, but with internet cash, you don’t need a processor. You can pay cash and it costs nothing to process – it is direct. This potential use could usher in a new era of paid content. No longer will online content-providers have to be so squeezed, and give out so much material for nothing in the hope of somehow recouping later, now that the tech is there to make and receive payment for small amounts in exchange for content.
We also use cash for quick payments, direct payments and tipping. You are walking past a busker, for example, and you throw him a coin. Soon you will able to tip an online content-provider for his or her YouTube video, song or blog entry, again as easily and quickly as you click ‘like’ on the screen. Even if I pay my restaurant bill with a card, I’ll often tip the waiter in cash. That way I know the waiter will receive the money rather than some unscrupulous employer. I like to pay cash in markets, where a lot of small businesses start out because a cash payment goes directly to the business owner without middle men shaving off their percentages. The same principle of quick, cheap, direct payment will apply online. Cheap processing costs are essential for low-margin businesses. Internet cash will have a use there, too. It also has potential use in the remittance business, which is currently dominated by the likes of Western Union. For those working oversees who want to send money home, remittance and foreign exchange charges can often amount to as much as 20 per cent of the amount transferred. With Bitcoin that cost can be removed.
Some of us also use cash for payments we want kept private. Private does not necessarily mean illegal. You might be buying a present for your wedding anniversary and don’t want your spouse to know. You might be making a donation to a cause or charity and want anonymity. You might be doing something naughty: many of those who had their Ashley Madison details leaked would have preferred to have been able to pay for their membership with cash – and thus have preserved their anonymity.
More significantly, cash is vital to the 3.5 billion people – half of the world’s population – who are ‘un-banked’, shut out of the financial system and so excluded from e-commerce. With Bitcoin, the only barrier to entry is internet access.
Bitcoin is currently experiencing some governance and scalability issues. Even so, the tech works, and coders are now developing ways to use block chain tech for purposes beyond an alternative money system. From 2017, you will start to see some of the early applications creeping into your electronic lives.
One application is in decentralized messaging. Just as you can send cash to somebody else with no intermediary using Bitcoin, so can you send messages – without Gmail, iMessage, WhatsApp, or whoever the provider is, having access to what’s being said. The same goes for social media. What you say will be between you and your friends or followers. Twitter or Facebook will have no access to it. The implications for privacy are enormous, raising a range of issues in the ongoing government surveillance discussion.
We’ll see decentralized storage and cloud computing as well, considerably reducing the risk of storing data with a single provider. A company called Trustonic is working on a new block chain-based mobile phone operating system to compete with Android and Mac OS.
Just as the block chain records where a bitcoin is at any given moment, and thus who owns it, so can block chain be used to record the ownership of any asset and then to trade ownership of that asset. This has huge implications for the way stocks, bonds and futures, indeed all financial assets, are registered and traded. Registrars, stock markets, investment banks – disruption lies ahead for all of them. Their monopolies are all under threat from block chain technology.
Land and property ownership can also be recorded and traded on a block chain. Honduras, where ownership disputes over beachfront property are commonplace, is already developing ways to record its land registries on a block chain. In the UK, as much as 50 per cent of land is still unregistered, according to the investigative reporter Kevin Cahill’s book Who Owns Britain? (2001). The ownership of vehicles, tickets, diamonds, gold – just about anything – can be recorded and traded using block chain technology – even the contents of your music and film libraries (though copyright law may inhibit that). Block chain tokens will be as good as any deed of ownership – and will be significantly cheaper to provide.
The Peruvian economist Hernando de Soto Polar has won many prizes for his work on ownership. His central thesis is that lack of clear property title is what has held back so many in the Third World for so long. Who owns what needs to be clear, recognized and protected – otherwise there will be no investment and development will be limited. But if ownership is clear, people can trade, exchange and prosper. The block chain will, its keenest advocates hope, go some way to addressing that.
Smart contracts could disrupt the legal profession and make it affordable to all, just as the internet has done with music and publishing
Once ownership is clear, then contract rights and property rights follow. This brings us to the next wave of development in block chain tech: automated contracts, or to use the jargon, ‘smart contracts’, a term coined by the US programmer Nick Szabo. We are moving beyond ownership into contracts that simultaneously represent ownership of a property and the conditions that come with that ownership. It is all very well knowing that a bond, say, is owned by a certain person, but that bond may come with certain conditions – it might generate interest, it might need to be repaid by a certain time, it might incur penalties, if certain criteria are not met. These conditions could be encoded in a block chain and all the corresponding actions automated.
Whether it is the initial agreement, the arbitration of a dispute or its execution, every stage of a contract has, historically, been evaluated and acted on by people. A smart contract automates the rules, checks the conditions and then acts on them, minimizing human involvement – and thus cost. Even complicated business arrangements can be coded and packaged as a smart contract for a fraction of the cost of drafting, disputing or executing a traditional contract.
One of the criticisms of the current legal system is that only the very rich or those on legal aid can afford it: everyone else is excluded. Smart contracts have the potential to disrupt the legal profession and make it affordable to all, just as the internet has done with both music and publishing.
This all has enormous implications for the way we do business. It is possible that block chain tech will do the work of bankers, lawyers, administrators and registrars to a much higher standard for a fraction of the price.
As well as ownership, block chain tech can prove authenticity. From notarization – the authentication of documents – to certification, the applications are multi fold. It is of particular use to manufacturers, particularly of designer goods and top-end electrical goods, where the value is the brand. We will know that this is a genuine Louis Vuitton bag, because it was recorded on the block chain at the time of its manufacture.
Block chain tech will also have a role to play in the authentication of you. At the moment, we use a system of usernames and passwords to prove identity online. It is clunky and vulnerable to fraud. We won’t be using that for much longer. One company is even looking at a block chain tech system to replace current car- and home-locking systems. Once inside your home, block chain tech will find use in the internet of things, linking your home network to the cloud and the electrical devices around your home.
From identity, it is a small step to reputation. Think of the importance of a TripAdvisor or eBay rating, or a positive Amazon review. Online reputation has become essential to a seller’s business model and has brought about a wholesale improvement in standards. Thanks to TripAdvisor, what was an ordinary hotel will now treat you like a king or queen in order to ensure you give it five stars. The service you get from an Uber driver is likely to be much better than that of an ordinary cabbie, because he or she wants a good rating.
There will be no suspect recounts in Florida! The block chain will also usher in the possibility of more direct democracy
The feedback system has been fundamental to the success of the online black market, too. Bad sellers get bad ratings. Good sellers get good ones. Buyers go to the sellers with good ratings. The black market is no longer the rip-off shop without recourse it once was. The feedback system has made the role of trading standards authorities, consumer protection groups and other business regulators redundant. They look clunky, slow and out of date.
Once your online reputation can be stored on the block chain (ie not held by one company such as TripAdvisor, but decentralized) everyone will want a good one. The need to preserve and protect reputation will mean, simply, that people behave better. Sony is looking at ways to harness this whereby your education reputation is put on the block chain – the grades you got at school, your university degree, your work experience, your qualifications, your resumé, the endorsements you receive from people you’ve done business with. LinkedIn is probably doing something similar. There is an obvious use for this in medical records too, but also in criminal records – not just for individuals, but for companies. If, say, a mining company has a bad reputation for polluting the environment, it might be less likely to win a commission for a project, or to get permission to build it.
We are also seeing the development of new voting apps. The implications of this are enormous. Elections and referenda are expensive undertakings – the campaigning, the staff, the counting of the ballot papers. But you will soon be able to vote from your mobile phone in a way that is 10 times more secure than the current US or UK systems, at a fraction of the cost and fraud-free. What’s more, you will be able to audit your vote to make sure it is counted, while preserving your anonymity. Not even a corrupt government will be able to manipulate such a system, once it is in place. There will be no suspect recounts in Florida! The block chain will also usher in the possibility of more direct democracy: once the cost and possibility of fraud are eliminated, there are fewer excuses for not going back to the electorate on key issues.
Few have seen this coming, but this new technology is about to change the way we interact online. The revolution will not be televised, it will be cryptographically time-stamped on the block chain. And the block chain, originally devised to solve the conundrum of digital cash, could prove to be something much more significant: a digital Domesday Book for the 21st century, and so much more.
- With the second hack of Swift, the day of firewalls and permission systems are suddenly numbered.
- This time it wasn’t hacked data — it was the banks’ money that was hacked.
- Bank security is rapidly deteriorating.
- It is time to adopt some kind of distributed ledger.
I see the bad moon arising. I see trouble on the way. I see earthquakes and lightnin’. I see bad times today.
— Creedence Clearwater Revival
The SWIFT payment system failed again this week. The tone of Swift’s announcement intimated the end of life on the planet earth as we know it. Swift’s description of the system’s attackers was apocalyptic, and did nothing to minimize the skills of the attackers, adding that the funds seized might be, of course, reinvested to give the hackers a kind of turboboost of evil. My sources tell me the culprit is Brainiac from the planet Zod.
Of course there is nothing funny about this situation, even if Swift’s “chicken little” corporate reaction was pretty funny. The real lesson of this event is deadly earnest and, I believe, fully anticipated by most specialists in the security of our financial system. This event, though, was the Fat Lady’s Song. The banks, exchanges, clearers like Swift, DDTC, and so on, are going to have to share something with the public that insiders already know.
The party is over for the old, permissioned, firewall based, electronic fortress, concept of trust-in-payments systems. And the alternative is very far from obvious.
The buzzwords, the sweethearts of the fintech movement, are systems known as distributed ledgers. Two words are about to become part of everyone’s vocabulary: Bitcoin and blockchain. There are multitudes of manifestations of these two intimately related electronic phenomena. If you are new to the subject of Bitcoin and blockchain, the learning curve is steep.
The significance of the second Swift failure is this. Trust-based systems, such as those upon which the current payments systems operate, are becoming more expensive to protect at a rapidly increasing rate. The horse race between hackers and firewall builders is being won by hackers in spite of the rapidly increasing spending on internet security.
And these most recent hacks took bank’s money, not customer money. That is a game changer.
Since God invented dirt, the banks have been soooo regretful about the lengthy delays and inefficiencies inherent in our transactions system. They’re so sorry, they tell us, about the three days you wait between transactions and payments. And they really regret all those fees that you pay and inconveniences you experience with foreign exchange transactions.
What bunk. The banks, as a whole, make hundreds of billions a year on these inefficiencies.
The point of the article is this. Now that the bank’s own money is being stolen, the financial world will be singing from one hymnal. The time of distributed ledgers is here. There is no longer a question that distributed ledgers will replace our current method of securing transactions. The firewall system no longer has a constituency after the Swift debacle.
What are the implications for investors? First, there is nothing yet you can invest in directly. It is possible to purchase a thing called a crypto-currency. The most prominent of these is called Bitcoin. However, unless you spend the necessary months of research to grasp the underlying determinants of the value of Bitcoin, I have an emphatic one-word recommendation. Don’t. This investment is incredibly risky, and those who provide confident forecasts of its future value are deluded or worse.
The future of transactions reminds me a little of the invasion of Europe by Genghis Khan. In the distributed ledger business, Genghis Khan is Bitcoin. There is no corporate presence sponsoring Bitcoin. It is open source. The key significance of Bitcoin/blockchain is that this particular distributed ledger is, at the moment, prohibitively expensive to hack. Its disadvantages include a lack of governance. Advocates will rightly argue that a lack of governance has its benefits – obvious to anyone who considers the problems with having a government – but there are also disputes in the Bitcoin community and no clear way to resolve them.
Genghis Kahn’s competition, the Pope and Kings of distributed ledgers, are the usual suspects – primarily the big banks. But also the big accounting firms and the major IT firms are involved. I wonder if the Pope and the Kings were afraid to speak the name of Genghis Kahn. One thing is for sure, the Big Business side of the distributed ledger debate is afraid to speak the name Bitcoin. Honest.
Almost universally, if the equity capital of a distributed ledger advocate exceeds one billion market value, the advocate will never use the word Bitcoin in a discussion of distributed ledgers. Blockchain is the magic term they use. I find this annoying since the developers of Bitcoin coined the term blockchain and would have copyrighted it if they had not been open-source kind of guys who don’t do that sort of thing.
It is much, much, too early to tell how this combat is going to sort itself out. There is a shortage of practical uses of the technology from any source. The number of practical uses at the moment is zero. But the word “inevitable” is no longer too strong.
Investment recommendations? I’ve got a few. My very long term bet is that the big banks (Bank of America (NYSE:BAC), Bank of New York Mellon (NYSE:BK), Bank of America , Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and JP Morgan Chase (NYSE:JPM), among others) will be the big losers. Likewise, the big accounting firms. All have invested billions. For them, pocket change, but pocket change invested pointlessly.
An exception: I find of particular interest Goldman’s entry into retail banking with a strong aversion to brick and mortar branches. These both are wise decisions. I have a buy on Goldman — and its awareness of, and willingness to place bets upon, the outcome of fintech is one reason I think Goldman’s long term strength is assured. In the distributed ledger future, branches disappear.
The distributed ledger contest will ultimately boil down to a contest between the major IT firms (IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL)) (read: Pope and Kings) on one hand, and the loose governance of Bitcoin (The Great Kahn) on the other hand.
Do not, however, look here for a standard analysis of funds invested and rates of return. This is a game that will have one winner, and the game is winner-take-all. A thinking IT firm like IBM realizes that this is a contest it must enter. This is positive for the future of IBM’s stock, but I am a long way from knowing where IBM is going to jump, or whether I approve of their plan — which is, at the moment, very diffuse.
This is also not a time to look at the fintech component of IBM’s blockchain-oriented financials. It is far too early and the financials, nearly irrelevant. In this mega-contest for the future of distributed ledgers, it is not so much about dollars invested as intellectual resources expended and risks taken.
It is perhaps prudent at the moment for Big Blue to have a finger in every pie. But when a fully informed decision can be made, the winner of this contest will be the player with the most information and best instincts. And the earliest to make the right commitment. Then we can ask old fashioned questions like: What are the implications for IBM’s financials?
On the big firm side, IBM in particular has two things working for them. They are tight with the big banks and accounting firms on the one hand, yet comfortable in the world of open source on the other. I see them with a development role in devising the apps the banks and accountants will be ultimately reduced to offering in the transactions world. Those will be some monster apps, but Apps is Apps. They’re not where the big bucks are. The big distributed ledger itself is the real prize. IBM, or another big IT firm, will need to ramp up quickly to seize it.
IBM and its ilk will also be potentially better able to make decisions than the loosely structured management of Bitcoin/blockchain. But IBM should learn to say the word “Bitcoin.” The term was totally missing from their initial press release. It’s a clear sign of fear or hubris. And I don’t think IBM has a reason to fear, as its banking customers and the accounting firms do.
What of the Bitcoin community? For all of their pretensions of computer power/economics-based decision-making ala the internet, the Bitcoin community is not the free-wheeling fun-loving band it makes itself out to be. Bitcoin-land has a management problem of its own. There is indeed a hierarchy of Bitcoin/blockchain management, albeit informal. And this management has disputes. A very important current dispute is whether and how the blockchain will grow. This is no small matter. Because if Bitcoin will matter a year from now, it needs to grow like Topsy, and now.
Who will win the battle for the One Big Global Distributed Ledger? Too soon to call, but the stakes are enormous.