Here is Jim Cramer’s track-record on his stock picks this year… 🤡
Jim Cramer also has some medical advise for you too…
Here is Jim Cramer’s track-record on his stock picks this year… 🤡
Jim Cramer also has some medical advise for you too…
(Franz Walker) The Internal Revenue Service (IRS) wants access to tools that can crack crypto wallets of erstwhile digital tax evaders.
The IRS’s Criminal Division Forensics Unit released a request for information (RFI) looking for “reliable” tools and processes to crack the crypto wallets used by many to store their cryptocurrency fortunes.
Former Assistant Secretary of Housing And Urban Development, HUD and investment advisor Catherine Austin Fitts says you have to be careful and fully understand Bitcoin. Fitts explains, ‘We do know they want to go to an all-digital system with central bank cryptos. The easiest way to build the prison is to get freedom lovers everywhere to build our prison for them. To me, Bitcoin has always been the prototype on the way to building an all-digital, omnipresent crypto control system that they would love to put into place.’
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with Catherine Austin Fitts, publisher of The Solari Report.
All science is merely a means to an end. The means is knowledge. The end is control. Beyond this remains only one issue: Who will be the beneficiary?
(Birch Gold Group) Thanks to the Federal Reserve, the idea that you can go into a store and anonymously purchase something with cash might soon be obsolete.
Why? Because they’re developing something called Fedcoin, which would be based on blockchain technology.
The digital and decentralized ledger that records all transactions. Every time someone buys digital coins on a decentralized exchange, sells coins, transfers coins, or buys a good or service with virtual coins, a ledger records that transaction, often in an encrypted fashion, to protect it from cybercriminals. These transactions are also recorded and processed without a third-party provider, which is usually a bank.
Right now, Bitcoin is a popular form of cryptocurrency that operates using blockchain technology. Like the description above, Bitcoin is decentralized, its transactions are anonymous, and no central bank is involved.
But the irony is, the blockchain tech behind the Fed’s idea isn’t likely to be used the way Bitcoin uses it. Not even close.
Originally, the “Fedcoin” idea appeared to be a security enhancement to a century-old system used for clearing checks and cash transactions called Fedwire. According to NASDAQ in 2017:
This technology will bring Fedwire into the 21st Century. Tentatively called Fedcoin, this Federal Reserve cryptocurrency could replace the dollar as we know it.
The idea didn’t seem to move very much three years ago, but now the idea of a central bank-controlled “Fedcoin” seems like it could be moving closer to reality, according to a Reuters report from February 5.
According to the report, “Dozens of central banks globally are also doing such work,” including China.
Of course, there is risk, according to Federal Reserve Governor Lael Brainard. For example, there is the potential for a country-wide run on banks if panic ensued while the Fed “flipped a switch” and made Fedcoin the primary currency for the United States.
But blogger Robert Wenzel warns the risks of the Federal Reserve issuing its own cyber currency may run even deeper than that.
Lawmakers try to package and sell whatever ideas they come up with, no matter how intrusive or ineffective they might be.
According to Brainard, Fedcoin has the potential to provide “greater value at a lower cost” for monetary transactions. Sounds reasonable, if taken at face value.
But no matter how the Fed may try to “sell” the idea of utilizing Fedcoin in the future, Wenzel’s warning is pretty clear:
A Federal Reserve created digital coin could be one of the most dangerous steps ever taken by a government agency. It would put in the hands of the government the potential to create a digital currency with the ability to track all transactions in an economy—and prohibit transactions for any reason. In terms of future individual freedom, this would be a nightmare.
If you use cash at a grocery store, no one will know who you are or what you bought unless it was caught on video or you use a reward card. In the rare instance a store accepts Bitcoin, the same would be true.
But if you were to use a centrally-controlled digital currency like Fedcoin, who knows what the Fed will decide to track now or in the future? Or what meddling they could come up with to deny your transaction?
If the Federal Reserve wanted to outlaw cash, and your only choice was to use Fedcoin to make purchases, then your financial life would be tracked under their watchful eye.
“Not good” indeed.
Who knows if the Federal Reserve will move closer to making cash a thing of the past? Perhaps Fedcoin will add to the number of ways the Fed can meddle with your retirement?
Until that gets sorted out, you can consider other options to protect your retirement with a tangible asset that can’t be converted into digital form.
Precious metals like gold and silver continue to hold value, and have for thousands of years. And because they are physical assets, you can’t be tracked as you could if Fedcoin moves from being a bad idea to reality.
A complaint filed by lawyer Dr. Jonathan Levy on behalf of cryptocurrency crime victims, whose claims totaling over €27 million, takes aim not only at the European Commission but singles out the United Kingdom and several other EU member states as safe havens for crypto criminals.
The EU is accused of “maladministration” in regard to cryptocurrency. Maladministration is the technical term for various types of governmental injustice including delay and failure to investigate, take action or follow the law.
Dr. Jonathan Levy represents the Victims and the National Liberal Party, a UK political party with a platform that includes sound crypto currency policy. The EU stands accused of knowingly permitting the transfer of billions of Euros from victims to organized crime including the notorious €5 billion One World–One Coin Ponzi scheme which was operated by EU citizens utilizing EU banks for over almost 5 years. Only on the day of the filing of this complaint did the EU act to remove One World–One Coin from its own Top Level Domain .EU where it had been operating with impunity.
Dr. Levy has long criticized the United Kingdom’s handling of cryptocurrency related claims. According to Dr. Levy, “The United Kingdom and European Union have rolled out a welcome sign for crypto criminals and provided them unhindered access to Top Level Domains like .EU and .IO, their banking system, companies registration, and have turned a blind eye to the largest transfer of wealth to international criminal organizations since World War Two.”
Levy and his clients seek intervention by the EU Ombudsman to prompt the EU Commission to hold crypto currencies, social media networks, domains, exchanges, and domain privacy providers accountable for funding a Cryptocurrency Security Fund to pay out compensation to victims of crypto currency criminals.
Copies of the pleadings are available at: http://www.jlevy.co/cryptocurrency-litigation/
A senior official at China’s central bank announced at the China Finance 40 Group meeting today that the country will soon roll out its central bank digital currency (CBDC.)
Mu Changchun, Deputy Chief in the Payment and Settlement Division of the People’s Bank of China (PBOC,) stated that the CBDC prototype exists and the PBOC’s Digital Money Research Group has already fully adopted the blockchain architecture for the currency. China’s CBDC will not rely entirely on a pure blockchain architecture, as this would not allow the currency to achieve the throughput required for retail usage.
According to Changchun, the currency has been in the research and development phase since 2014. At the meeting on Saturday, he said, “People’s Bank digital currency can now be said to be ready.”
The CBDC will employ a two-tier operational structure, per Changchun:
The People’s Bank of China is the upper level and the commercial banks are the second level. This dual delivery system is suitable for our national conditions. It can use existing resources to mobilize the enthusiasm of commercial banks and smoothly improve the acceptance of digital currency.
A two-tier system is preferable due to China’s complex economy, vast territory and large population. “From the perspective of improving accessibility and increasing public willingness to use, a two-tier operational framework should be adopted to deal with this difficulty,” Changchun said. He also welcomed the resources, talent and innovation capabilities of commercial businesses who will partner with the PBOC to roll out the currency. Finally, this system will help avoid concentration of risk and financial disintermediation.
At the same meeting, China UnionPay Chairman Shaofu Jun said that the goals of China’s CBDC would be difficult to achieve. While a CBDC could solve issues related to cross-border transactions, long lag times and legacy inefficiencies, the lack of clear operational processes and a detailed regulatory framework across countries will be challenging to overcome.
The U.S. Internal Revenue Service (IRS) announced Friday that it has begun sending letters to taxpayers who own cryptocurrency, advising them to pay any back taxes they may owe or to file amended tax returns regarding their holdings.
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 United States’ Internal Revenue Service (IRS) is allegedly considering requiring tech giants to report on crypto activity by users, according to a presentation reportedly from an IRS presentation and provided by a Twitter user on July 9.
According to the documents shared, the IRS hopes to use Grand Jury subpoenas on firms such as Apple, Google and Microsoft to check taxpayers’ download history for crypto-related applications.
Known as Crypto Tax Girl, Laura Walter, certified public accountant and crypto tax specialist, tweeted the presentation, which was allegedly for agents in the IRS’s Criminal Investigation division.
Citing the document, Walter concluded that the tax authority is conducting exhaustive research into detection of criminal tax evasion cases involving crypto. As such, the IRS is considering carrying out interviews, open-source and social media searches, as well as electronic surveillance, the expert noted.
Specifically, the 181-page document reads:
“Grand Jury Subpoena should be considered for Apple, Google, and Microsoft for the Subject’s complete application download history. Each application’s function should be explored to determine whether or not the application can transmit, or otherwise allow, transactions in bitcoin.”
As Walter emphasized, the presentation envisions that IRS agents ensure that taxpayers are not notified about the obtained information regarding their use of cryptocurrencies to prevent detrimental to the investigation.
Cointelegraph notes that the IRS has not confirmed the authenticity of the presentation’s origin.
According to the documents provided, the IRS is hoping to serve subpoenas to check data from accounts in banks and Paypal for connection with crypto transactions. Additionally, the tax authority is considering reviewing social media giants such as Facebook and Twitter to find and record publicly available cryptocurrency addresses.
Concluding the thread, Crypto Tax Girl wrote:
“There is a ton of other information in there about crypto in general, tracing transactions via the blockchain, limitations of the blockchain, etc. but what you need to know is that the IRS is working HARD to identify criminal tax cases involving cryptocurrency.”
As previously reported, the IRS currently considers cryptocurrencies property. In late 2018, an advisory committee of the IRS expressed its intent to provide additional guidelines for the taxation of crypto transactions.
Recently, Cointelegraph reported on Singapore’s plan to exempt cryptocurrencies that are intended to function as a medium of exchange from Goods and Services Tax (GST).
Modern Portfolio Theory doesn’t work with cryptocurrencies.
In a cryptocurrency portfolio, it’s all about managing risk.
As the cryptocurrency space matures, more high-level allocation models will become relevant.
This idea was first discussed with members of my private investing community, Crypto Blue Chips. To get an exclusive ‘first look’ at my best ideas, start your free trial today >>
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.
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.
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:
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.
Two projects I would be investing in if they were actively maintained are Dogecoin (DOGE-USD) and Litecoin (LTC-USD). See the development activity below.
With no active development team, these projects simply can’t survive.
Does the team behind this project inspire confidence, and can they be identified?
In order to reduce the odds that the cryptocurrency project that you’re thinking about investing 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.
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.
What is the next step when you have a speculative asset whose value ( may go to zero or $250,000 ) in the near future? Why start writing insurance policies on it, of course! That’s the line of logic employed in the world of cryptocurrencies, as the newly formed crypto insurance business is booming.
To be sure, there is ample demand and soaring interest in crypto insurance, according to Bloomberg. After all, with fat premiums and no insurer on record to date of ever paying out a claim, why wouldn’t there be?
Furthermore, one can rarely go a few weeks without a headline about a major crypto exchange getting hacked, sometimes with hundreds of millions of dollars being lost in the process. Such was the case with the hacks of Bitfinex and Mt. Gox. Remember this stud?
Mark Karpeles, Mt. Gox CEO
As a result of this “accident prone” asset class, major players in the insurance and finance industry believe that the future for crypto insurance is bright. As Bloomberg notes, a representative from Allianz said it “could be a big opportunity.” Which is why Allianz is offering the product:
“Insurance for cryptocurrency storage will be a big opportunity,” said Christian Weishuber, a spokesman for Allianz, which began offering individual coverage for digital-coin theft in the past year and is one of the few insurers that agreed to talk about the issue. “Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.”
In addition, two other major crypto-insurance shops – Marsh & McLennan and Aon – said business has been booming over the last year.
While the cost is still beyond reach for many fledgling companies, Marsh & McLennan and Aon, the two leading insurance brokers that help companies shop for crypto policies, say business has been brisk this year. For the first time, Marsh formed a team of 10 dedicated to servicing blockchain startups.
Aon, which claims to have over 50 percent of the market for crypto insurance, recently streamlined its standard policy form to speed up the underwriting process. It has also seen some insurers tweak general company policies to include crypto-specific protections.
Whil Marsh and Aon declined to identify their partners, people familiar with the matter say over a dozen underwriters, including Chubb and XL, currently provide coverage to crypto-related businesses. And here is a blast from the past: none other than AIG has also been adding crypto coverage into standard policy forms, and said it’s met with cryptocurrency custodians and trading platforms about coverage, however, the firm “declined to say how much in crypto-related premiums it’s taken in.”
There may be a simple explanation for the enthusiasm to sell insurance: Marsh and Aon said that, so far, they are not aware of any insurance companies that have had to actually pay out on any claims, even as 2018 is supposed to be the “busiest year for hacks on record”. It’s probably safe to say that it won’t be long before claims are paid out. Big ones.
With 2018 on track to be the busiest year for hacks on record, the potential for a reputational black eye is perhaps one reason many insurers have declined to speak publicly about crypto. Lloyd’s of London, the world’s oldest insurance market, published a bulletin this month with guidance on crypto coverage and asked its agents to “proceed with a level of caution that recognizes the risks.”
Meanwhile, demand for insurance will only grow as it gives start-ups an air of credibility when try to raise capital, providing some modest cover for a business that has generally been speculative and regarded as somewhat dangerous.
It’s no small irony that the crypto industry, which originally sprung out of a techno-utopian desire to liberate its users from the traditional financial system, is embracing insurance as a way to go mainstream.
“I see it is a required step,” said Lucas Nuzzi, director of technology research at Digital Asset Research. Coverage can reduce investor concerns and make it easier to work with banks. “It definitely helps legitimize the industry.”
For example, Trustology, a London-based startup focused on crypto custody services, is in talks to obtain coverage that would insure its customer accounts up to 85,000 pounds — the same standard as a U.K. bank account — to help attract more clients. It’s also looking at self-insuring client funds.
And while even major crypto exchanges like Coinbase are starting to buy this type of insurance, in the case of the most popular US crypto exchange, it is only on a “fraction” of their holdings.
Coinbase, one of the most widely used crypto exchanges, buys insurance for a fraction of the digital coins it holds. Funds stored in so-called hot wallets, which may contain up to 2 percent of client assets and are used in active trading, are covered. Coinbase’s disclosures don’t provide details on how much coverage is provided for its remaining coin deposits, which are stored offline as a security measure.
Finally, selling crypto insurance for now remains a goldmine, with insurance companies able to charge a significant premiums, as underwriters can charge a crypto-related company upwards of five times or more than your average business for coverage against loss or theft, according to Bloomberg.
That said, like with any other other financial security boom, where derivatives of derivatives wind up in bloom during the first stage, many are skeptical about how long of a runway the field of crypto insurance will have, especially given the fact that the underlying asset value would will likely be for the determined by regulators in the future – and the decision will likely prove to be extremely volatile, leading to a painful bust for the insurance industry.
More than a thousand of crypto projects are “already dead” as of June 30, 2018, according to a recent TechCrunch report. The news outlet has based its claim on data from two websites: Coinopsy and DeadCoins.
Coinopsy provides daily reviews of various cryptocurrencies, including ones that are already “dead.” It defines a “dead” token as exhibiting at least one of the following:
“abandoned, scammed, website dead, no nodes, wallet issues, no social updates, low volume or developers have walked away from the project.”
According to Coinopsy’s list, there are 247 “dead” coins as of press time. These include the notorious Bitconnect that was shut down in January 2018 and is described by the website as “the most successful ponzi-scheme in crypto so far.”
DeadCoins similarly has a 830-item long list of “dead” cryptocurrencies. Among them is the recent Titanium Blockchain Infrastructure Services initial coin offering (ICO) that was shut dow by the U.S. Securities and Exchange Commission (SEC) for fraudulent practices.
According to the SEC’s press release, Titanium has raised $21 million from investors from the U.S. and other countries. In its statement, the SEC warned investors about ICOs as an extremely risky type of investment:
“Having filed multiple cases involving allegedly fraudulent ICOs, we again encourage investors to be especially cautious when considering these as investments.”
As Cointelegraph reported Friday, the volume of ICOs has reached $13.7 billion in 2018 so far, which is already twice as much as the market amounted to in the entire 2017. According to TechCrunch, scam and dead ICOs raised $1 billion in 2017.
On June 21, Nasdaq CEO Adena Friedman warned that ICOs pose “serious risks” for retail investors, claiming that projects that raise money this way have “almost no oversight.”
Earlier in June, crypto evangelist John McAfee said that he will stop promoting ICOs due to alleged threats from the SEC.
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:
PBoC Digital Currency Research Lab by CoinDesk on Scribd
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?
(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:
There will be no real non controlled currency in the world. There’s no government that’s going to put up with it for long.
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:
To me, it’s just dementia. It’s like somebody else is trading turds and you decide you can’t be left out.
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.
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?
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
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.
Source: Hans Hauge | Seeking Alpha
Look how fast things happen!!
Just about a month or so ago, many agents where laughing about Bitcoin, blockchain, and other cryptocurrencies, talking about how people won’t use it to buy real estate. Hmmm…
Where did this transaction happen?
In Burlington, Vermont.
The first property to be sold this way in the United States.
It was sold entirely through the blockchain. Completely.
Ethereum was the token used. This puts Vermont on the map.
Propy is a company in San Francisco. Propy handled the entire transaction including recording of the documents and contracts instead of using the city system.
Vermont is the first state to allow this kind of transaction and soon coming up are Colorado and Arizona.
The encryption technology in blockchain is the best available at this time.
This transaction used cryptocurrency for the purchase and it was then turned into the fiat money on the other end.
The first Bitcoin to Bitcoin transaction in the United States was when Michael Komaransky sold his Miami mansion for 455 Bitcoin which was the most expensive Bitcoin real estate transaction to date.
While most people will still not do a cryptocurrency real estate transaction, it is here, and it will be here to stay.
The different tokens will fail and others will rise. Ethereum is very stable. Blockchain is here to stay and evolve.
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.
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…
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…
* * *
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?
* * *
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.
* * *
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.
Authored by Dr. D via Raul Ilargi Meijer’s The Automatic Earth blog,
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
Frank Holmes, CEO of US Global Investors, reported back from the LBMA/LPPM Precious Metals conference that took place in Barcelona last week. Holmes gave the key note address on Day 2 “Quant Investing: From Gold to Cryptocurrencies.”
According to a thrilled Holmes, his presentation was voted the best – no doubt helped by the topical subject matter – and he was the recipient of an ounce of gold. He went on to relate the views of the conference attendees regarding the relative performance of gold and cryptos should there be (heaven forbid but sadly topical) a conflict involving nuclear weapons.
“Speaking of gold and cryptocurrencies, the LBMA conducted several interesting polls on which of the two assets would benefit the most in certain scenarios. In one such poll, attendees overwhelmingly said the gold price would skyrocket in the event of a conflict involving nuclear weapons. Bitcoin, meanwhile, would plummet, according to participants—which makes some sense. As I pointed out before, trading bitcoin and other cryptos is dependent on electricity and WiFi, both of which could easily be knocked out by a nuclear strike. Gold, however, would still be available to convert into cash.”
Unsurprisngly, the conference attendees gold voted gold as the superior store of value – a view which echoed the recent Goldman Sachs primer on precious metals. Goldman asked whether cryptos are the new gold and concluded “We think not, gold wins out over cryptocurrencies in a majority of the key characteristics of money…(precious metals) are still the best long-term store of value out of the known elements.”
However, there is obviously a difference between a superior store of value and shorter-term upside…and Holmes is far from bearish on bitcoin and other virtual currencies.
One of his observations is, alas, only too relevant for many gold investors that “Because they’re decentralized and therefore less prone to manipulation by governments and banks – unlike paper money and even gold – I think they could also have a place in portfolios. He goes on to aim a couple of blows on Bitcoin’s biggest recent detractors “Even those who criticize cryptocurrencies the loudest seem to agree. JPMorgan Chase CEO Jaime Dimon, if you remember, called bitcoin ‘stupid’ and a ‘fraud,’ and yet his firm is a member of the pro-blockchain Enterprise Ethereum Alliance (EEA). Russian president Vladimir Putin publicly said cryptocurrencies had ‘serious risks,’ and yet he just called for the development of a new digital currency, the ‘cryptoruble,’ which will be used as legal tender throughout the federation.”
It was Holmes observation on Bitcoin and Metcalfe’s Law that we particularly enjoyed …
This was Holmes’ take:
“Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes.
Robert Metcalfe, distinguished electrical engineer, was speaking specifically about Ethernet, but it also applies to cryptos. Bitcoin might look like a bubble on a simple price chart, but when we place it on a logarithmic scale, we see that a peak has not been reached yet.
Holmes is not the first to link Bitcoin with Metcalfe’s Law. For example, the Journal of Electronic Commerce Research published a study earlier this year. As TrustNodes reported
“The study measured the value of the network based on the price of relevant digital currencies and compared it to the number of unique addresses that engage in transactions on the network each day, according to the abstract. The results show that ‘the networks were fairly well modeled by Metcalfe’s Law, which identifies the value of a network as proportional to the square of the number of its nodes, or end users,’ the study says…The application of Metcalfe’s law towards transaction numbers specifically has long been suggested, with a fairly strong correlation between the price of digital currencies and their transaction numbers observed over many years. Ethereum, for example, was barely handling 20,000 transactions at the beginning of the year. Now it manages nearly 300,000 a day. Likewise, price has risen some 10x during the same time period. The reason for this relationship is fairly intuitive. As more projects build on ethereum, more users find it useful as there are more things they can do with it, which in turn makes ethereum more useful for new projects as it allows them to tap into more users. The same can be said about merchants. As more of them accept eth for payments, more think Ethereum can be useful for everyday things, which means more merchants want to accept it to tap into the increased number of users, so forming a virtuous cycle. Metcalfe’s law of network effects can be applied to developers too, or investors, including speculators. The more that use it, the more useful it becomes, with the reverse applying too. The fewer individuals that use it or the more that stop using it, the less useful it becomes.”
If that was his killer chart, however, this was perhaps his killer comment.
“Bitcoin adoption could multiply the more people become aware of how much of their wealth is controlled by governments and the big banks.“
This was among the hallway chatter I overheard at the Precious Metals Conference, with one person commenting that what’s said in private during International Monetary Fund (IMF) meetings is far more important than what’s said officially. We have a similar view of the G20, whose mission was once to keep global trade strong. Since at least 2008, though, the G20 has been all about synchronized taxation to grow not the economy but the role government plays in our lives. Trading virtual currencies is one significant way to get around that.
Everyone’s ADD, including me. I get attracted by shiny objects. I first noticed Bitcoin as a shiny object in mid-2013. I went down the rabbit hole far enough for The Wall Street Journal to call me “Wall Street’s Bitcoin expert” while they live 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…
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).
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.
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).
This post by CB Insights highlights 30 industries that blockchain could transform, and the companies leading the disruption.
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:
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.
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.
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.
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.
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.
The central depository for the Moscow Exchange, National Settlement Depository (NSD), announced that it is developing a platform to provide accounting services for digital assets like cryptocurrencies.
The platform looks to be build a unit of account, very important in the volatile crypto-space, for people to value their assets in and have access to through a wallet platform.
In short, the Moscow Exchange is taking a page out of Dan Larimer’s BitShares and its OpenLedger exchange to provide trading and accounting and banking services all validated and accessible through the blockchain.
In essence, by the end of 2018, cryptos will be trading on the Moscow Exchange and integrated into the banking system to stand beside stocks, bonds and other derivative assets.
CEO Eddie Astanin:
“Our goal is to create a secure and user-friendly accounting infrastructure for digital assets. We consider the platform would not only provide technological and legal protection of all parties involved, but also extend variety of post-trade services for investors, custodians and new institutions emerging in this sector of economy.”
Building Blockchains off the Putin/Buterin Meeting
This is yet another example of Russia’s rapid response to the changing environment of cryptos. Vladimir Putin’s meeting with Ethereum designer, Vitalik Buterin, in May at the St. Petersburg International Economic Forum must have been truly eye-opening for Putin.
Since then I can almost not keep up with the news flow coming out of Russia relative to the widespread adoption of the blockchain to rapidly modernize those areas of its economy that need it in order to compete over the next generation or two.
Putin, ever the long-game strategist, must have had a ‘eureka’ moment talking with Buterin about Ethereum for people close to the Kremlin to be reacting this quickly.
And the news this morning that Buterin is working on the fix for Ethereum’s scaling issues is welcome news on this front as well.
Blockchains as Sanctions Defense
But this goes deeper than just banking modernization, which is a priority for the Russian government. These moves into crypto are direct responses to the new sanctions placed on Russia by the U.S.
These are moves to make Russia a diversified destination for capital fleeing the chaos of the Western political breakdown that we are watching unfold before our eyes in real time.
There has been a lot of smoke about Russia (and China) backing their national currencies with Gold. And, while as a gold bug, I appreciate this sentiment I also understand that Russia couldn’t do that in this environment without creating insane capital flow issues in the current environment.
The better plan is to loosen central bank policy, issue some ruble-denominated debt (or yuan) while building up the crypto infrastructure to absorb those capital flows without creating dislocations within the ruble market.
This creates a more natural and organic flow of capital into the country without it causing social upheaval. Like the announcement of Russian Miner Coin, his move by the NSD is just another building block in the foundation of a more resilient Russian financial system to better coordinate the flow of capital and smooth the development of the chain of production.
This, in turn, limits the effects of U.S. sanctions. Once the market comes to the conclusion that Russia treats capital better than the U.S. does, the current trickle will become a torrent. And Russia has to be ready to handle this.
Diversifying into the blockchain is one of those important avenues.
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.
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.
Demelza Hays via The Mises Institute | Clipped From ZeroHedge
I was wrong about Ethereum because it’s such a good store of value…
no wait, let me try again.
I was wrong about Ethereum because it’s such a decentra…
I was wrong about Ethereum because everyone is using it as a supercomputer…
I do admit I didn’t see this Ethereum bubble coming, but then again I wrongly assumed that no startup would need or even dare to ask $50 million in funding and I also wrongly assumed that people would use common sense and that leading developers would speak out against this sort of practice. Quite the opposite it seems.
Ethereum’s sole use case at the moment is ICOs and token creation.
Greed from speculators, investors and developers.
Can you blame them?
Speculators and investors: No.
So let’s think for a minute and think what determines the price? Supply + demand. Pretty straightforward.
Supply: the tokens that are available on the market, right? But with every ICO there are more tokens that are being “locked up”. Obviously the projects will liquidate some, to get fiat to pay for development of their project, but they also see the rising price of Ethereum. So at that point greed takes over and they think, totally understandable, “We should probably just cash out what we really need and keep the rest in ETH, that’s only going up anyway it seems.”
And obviously there are new coins being mined, but if you look at the amount of ETH these ICOs raise, at this point, it’s just a drop in a bucket.
Demand: You have the normal investors (who are already very late to the game at this point… as usual), but the buy pressure that these ICOs are creating is crazy and scary. Take TenX for example, it’s an upcoming ICO at the end of the month. The cap is 200,000 ETH (at current ETH price of $370) that’s $74,000,000 for a startup. Here’s the best part: it’s only 51% of the tokens. Effectively giving it an instant $150 million valuation (if it sells out, which it probably will).
Another example is Bancor, a friend of mine runs a trading group, he collected 1,100+ BTC to put into Bancor. This needs to be converted into ETH before the sale starts. These are decent size players, but not even the big whales who participate in these ICOs.
It can go quite a bit higher, there are so many coins being taken off the market by these ICOs, that it can still continue for a while and everyone is seeing this and thinking: “Why aren’t I doing an ICO”. There are lots more coming.
At one point it will crash, hard. What the trigger will be? Bug(s) in smart contracts, major hack, big ICO startup that fails/fucks up, network split, even something as silly as not having a decent ICO for a couple of weeks which creates sell pressure from miners and ICO projects can cause a big crash. It’s not a question of “if”, it’s a question of “when”. That being said: Markets can remain irrational for quite a long time.
Usually when a bubble like this pops we could easily see 70–80% loss of value (for reference: Bitcoin went from $1,200 to $170 after 2013–2014 bubble). This is however quite the unusual situation and I’m not sure to what kind of bubble I can really compare it.
I’m sure most of you have seen “Wolf of Wall Street”. Just re-watch this clip and see if you find any similarities with the current situation. (bonus clip)
What I really find interesting is what the ICO startups will do, Bitcoin had hodlers and investors mainly, individuals who most of the time had a fulltime job and didn’t need to sell. With Ethereum there is this huge amount being held by companies who need to pay bills. Will they panic dump to secure a “healthy” amount of fiat funding, will they try to hold through a bear cycle?
Everyone loves making money, you can’t blame traders or investors from taking advantage of this hype. That would be silly. People will buy literally anything if they can make a quick buck out of it.
The responsibility here is with the developers, Consensys and the Ethereum Foundation but they don’t take responsibility since they’re getting more money. This will end with the regulators stepping in.
The reason why I say that it’s with developers, Consensys and the Ethereum Foundation is simple:
Let me illustrate this with an example. Have you heard of primalbase? It’s an ICO with a token for shared work spaces. Why would a shared work space need its own token? It doesn’t, it really really really doesn’t. Let’s take a look at the advisors:
First thing that an advisor should’ve said in this case was: “Don’t do it, it’s stupid, it makes no sense.” But well there we have Mr Ethereum himself.
We all know that Vitalik has a cult-like following with the Ethereum investors so it will be very easy for primal base to launch their ICO and use Vitalik’s face and name to get itself funded.
This is just one example, if you go through all of these ICOs you find a lot of familiar names and faces. Nothing wrong with being an advisor, but when you’re just sending people to the slaughterhouse…
The sad part is that a lot of people will lose a lot of money on this, some of them obviously more than they can afford to lose, that’s how it always goes. The regulators will step in after this bubble pops and what scares me is the fact that it will damage all of crypto, including Bitcoin, not just Ethereum and its ICO’s.
I’ve heard all the accusations:
Ethereum is not a store of value. It isn’t capped. Yes, I know they’re planning to switch to PoS (which it already kind of is). Do you think they managed to create the first software implementation ever without any bugs? Doing such a major change on a (currently) $30 billion market is completely irresponsible, borderline insanity. Even if we assume that there are no bugs, what about the miners? The miners who bought their equipment to mine Ethereum, the miners that supported the network for years. “But they knew we were switching to PoS.” Of course they knew, and do you think they’ll just give up on such a profitable coin? Some might switch immediately to Zcash and Ethereum Classic but there will be another fork and we’ll have ETHPoS and ETHPoW, with of course all the Ethereum tokens being on both chains. Even Ethereum developers think that his is a very likely scenario.
Ethereum’s fees are lower. They are, sometimes, by a bit. If you’re trying to send something when no token sale is active obviously, else you have people spending $100’s to get in on the token sale and clog up the network. Also doesn’t apply when you send something from exchanges since for example with Poloniex it’s about $1.9 vs $0.28 for Bitcoin. Oh and another exception is when you actually use it for smart contracts, which require more gas to process than a normal transactions from account A to account B. You know.. the actual reason why Ethereum was created.
Ethereum is not decentralized. Bitcoin isn’t as decentralized as it should be, we all know that, but compared to most other coins, Bitcoin is very decentralized. Vitalik has called himself a benevolent dictator in the past. He is the single point of failure in this project and if he gets compromised in any way that’s the end. There is no way of knowing if this happens and since people blindly follow everything he says, he has the power to do anything. Satoshi was smart enough to remove himself from the Bitcoin project.
Ethereum is not immutable. Don’t have to spend much time on this: see DAO and split that lead to Ethereum and Ethereum Classic.
Ethereum has the Enterprise Ethereum Alliance. But but but.. all those big banks use Ethereum. No, they don’t. They use “an” Ethereum, which is a (private) fork of Ethereum. By that definition 99% of all altcoins are using Bitcoin. Still a separate chain. The fact that we’re talking about a private blockchain here actually makes altcoins more like Bitcoin than “an Ethereum” that EEA uses like Ethereum. You can compare it to 2013–2014 when some companies started to get interested in blockchain vs Bitcoin, only difference here is that for Ethereum it’s part of their marketing campaign to lure in potential investors.
If you think I’m just full of crap, which is fair, I am just some random popular guy on Twitter who has been around from before Ethereum. Have a look at what Vlad has to say about the current state of Ethereum here and here. Vlad Zamfir is probably the smartest guy on the Ethereum team, and I say this while I don’t agree with him on many of his opinions, I do respect him.
If you’re an actual developer, be realistic and honest with your investors. Do you really ever need more than $5 mill? Finish a MVP first and then do a tokensale, if you really really need to do an ICO. Plenty of rich crypto investors and traders now that would love to be part of your project and who would be happy to just invest for equity. Yes, it will probably be less than what you can get in an ICO, but at least you didn’t sell out and it shows you actually really care about your product/service/…
If you’re a trader or investor, be realistic about the bubble. I know you hear this a 100 times when you’re trading but: don’t invest what you can’t afford to lose.
I have some Ethereum, not as a long term investment, but because the price is going up and I need it to invest in tokens which I can quickly flip as soon as they come on the market. That’s just the type of market we’re in. Everyone is making a lot of money, awesome right? What could potentially go wrong.
(The International Reporter, Editor’s Note): Let me remind Bundesbank and all the other banks, that after the 2008 crisis and the ‘too big to fail”criminality that since then has stolen tax payers money globally, that nobody is interested in the banking industry anymore. Along with their compounding interest rates they are seen as liars, cheats, thieves and outright criminals cashing in on the misfortune of others. Digital currencies are far safer…so far… and are the only outlet since these same criminals have been rigging the precious metals prices, currencies exchange rates and the markets in general to their own benefit and to the detriment of everyone else.
* * *
(ZeroHedge) When global financial markets crash, it won’t be just “Trump’s fault” (and perhaps the quants and HFTs who switch from BTFD to STFR ) to keep the heat away from the Fed and central banks for blowing the biggest asset bubble in history: according to the head of the German central bank, Jens Weidmann, another “pre-crash” culprit emerged after he warned that digital currencies such as bitcoin would worsen the next financial crisis.
As 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.
* * *
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.
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.
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.