November 2017


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Let’s take a brisk tour of the most exciting, confounding, lucrative and, yes, dangerous financial realm in recent memory: Bitcoin and its fellow crytocurrencies.   Bitcoin, which fetched about $963 per unit on Jan. 1, changed hands at around $10,044 in mid-afternoon, good for a 944% return year-to-date.  Over a five year period, its price has advanced by approximately 85,000%.
As might be expected, the digital store of value’s meteoric rise is leading to no shortage of interesting behaviors and remarks from market participants.
Elon Musk, CEO of Tesla, Inc. and SpaceX, was moved yesterday to debunk a blog post theorizing that he is in fact the mysterious Satoshi Nakamoto, the pseudonym of the still-anonymous creator of bitcoin’s source code.  Meanwhile, cryto-ficionados looking to score some digital ducats have come up with an innovative solution:  Using Musk’s own Tesla charging stations to mine for them.  EcoMotoringNews explains:
Some creative Tesla owners came up with a way to make a few [thousand? – ed.] bucks from their parked EVs: Cryptocurrency mining.
One member of the Tesla Owners Worldwide [group] on Facebook suggested the idea, possibly in jest. Then another owner went ahead and did it, posting a photo of his setup.  Some members suggested that his setup could pull as much as 3 kilowatts of power and would probably require the vehicle’s air conditioning to be on for cooling.
Last week, when the price of bitcoin still hovered near $8,000, crypto bulls caught an unwelcome surprise from the operators of a smaller e-currency called Tether (for more see the Sept. 8 Grant’s, “Crypto 36,000” and its subsection, “Tethered to What?”). Tether, which claims a one-for-one backing with U.S. dollars, announced that some $31 million worth had been stolen by hackers, and that it would not redeem the coins.  A Nov. 21 piece in the New York Times noted that the operators of Tether and the largest bitcoin exchange known as Bitfinex are one and the same, and went on to mention some other curious details about the incident:
Tether and Bitfinex have insisted that the two operations are separate. But leaked documents known as the Paradise Papers, which were made public this month, show that Appleby, an offshore law firm, helped Mr. Potter and Mr. Devasini, the Bitfinex operators, set up Tether in the British Virgin Islands in late 2014.
One persistent online critic, going by the screen name Bitfinex’ed, has written several very detailed essays on Medium arguing that Bitfinex appears to be creating tether coins out of thin air and then using them to buy Bitcoin and push the price up.
Tether and Bitfinex have countered this criticism in statements on the companies’ websites and promised that every Tether is backed up by a dollar sitting in a bank account. In September, the companies provided an accounting document intended to prove that Tether is financed with real money.
Lewis Cohen, a lawyer at the law firm Hogan Lovells who advises many virtual currency projects, said the document, because of the careful way it was phrased, did not prove that the Tether coins are backed by dollars.
Among the cohort of crypto True Believers, perhaps none boasts the stature and track record of Murray Stahl, co-founder and chief investment officer of Horizon Kinetics. In a recent interview with Barron’s, Stahl was coaxed into providing his assessment of bitcoin’s potential value. To say the least, if he is on the beam, today’s levels will represent a screaming bargain.
Barron’s : How high can the price go?
Stahl: I’ve got a value, but it is so preposterous I wouldn’t tell anybody, because it is much higher than today’s price; it would be meaningless to anybody. I think it is worth much, much more than what today’s price is. I won’t tell you a number. I’ll tell you how I get to a number. So, basically the premise is that bitcoin or some cryptocurrency is accepted as a means of the exchange. Let’s say that premise proves to be valid. Well then, because it is a worldwide currency it is valued by a law of no arbitrage. It has to be equal to the nominal value of all the fiat currencies in the world. At least that, maybe even more because it is non-inflationary.
Barron’s : So is your price target the value of all fiat currency in the world?
Stahl: Yes, whatever that number is.
Barron’s went on to cite an estimate by The Money Project pegging the total value of the world’s fiat currency wealth at $7.6 trillion, which would make each bitcoin worth $361,000.
Needless to say, not everyone shares Stahl’s opinion. John C. Bogle, progenitor of the Vanguard Group, minced no words this afternoon at the Council for Foreign Relations, according to Bloomberg: “Avoid bitcoin like the plague. Did I make myself clear?”
Finally, a Nov. 20 Bloomberg dispatch titled “A Bitcoin Bubble? Here’s The Bet It’ll Survive the Apocalypse” details the increasing popularity of cryptocurrencies among so-called doomsday preppers.
Across the North American countryside, preppers . . . are storing more and more of their wealth in invisible wallets in cyberspace instead of stockpiling gold bars and coins in their bunkers and basement safes.
That one elicited an enthusiastic rebuttal from investor Bill Fleckenstein on the most recent Grant’s podcast:
When you can overcome the intellectual hurdle of the fact that the amount of bitcoin is supposed to be limited, but the amount of potential forks (i.e. a split of one cryptocurrency into two or more smaller ones) is unlimited and the amount of potential alternative cryptocurrencies is infinite. Oh by the way, the blockchain is what most people yap about, but yet, you don’t own it [when you buy a crypto], I submit that if you can overlook all those things . . . why can’t you overlook the fact that you need electricity in an apocalypse and you wouldn’t have any, that’s just a simple inconvenience.
Crypto is certainly one of the defining characteristics of this cycle. As for its prospects, place your bets accordingly. Or don’t.

 

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Bitcoin and the other cryptocurrencies are a classic bubble. So far only early adopters and the more adventurous hedge funds have become involved. A true bubble will suck in the public and go [even further] vertical before crashing to whatever value it will ultimately find.

However the volatility is tremendous, which makes for a potentially very profitable trading instrument.

The problem is that there are no ETFs, Futures [yet] to trade the cryptos. The only way to trade them currently is via ‘binary options’, which have issues. The key is to trade some sort of set-up signal in a specific timeframe and see how it goes. For the moment, buying the dips is a very profitable strategy.

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Wendy McElroy is ready for most doomsday scenarios: a one-year supply of nonperishable food is stacked in a cellar at her farm in rural Ontario. Her blueprint for survival also depends upon working internet: part of her money, assuming she needs some after civilization collapses, is in bitcoin.

Across the North American countryside, preppers like McElroy are storing more and more of their wealth in invisible wallets in cyberspace instead of stockpiling gold bars and coins in their bunkers and basement safes.

They won’t be able to access their virtual cash the moment a catastrophe knocks out the power grid or the web, but that hasn’t dissuaded them. Even staunch survivalists are convinced bitcoin will endure economic collapse, global pandemic, climate change catastrophes and nuclear war.

“I consider bitcoin to be a currency on the same level as gold,” McElroy, who lives on the farm with her husband, said by email. “It allows individuals to become self-bankers. When I fully understood the concepts and their significance, bitcoin became a fascination.”

QuicktakeBitcoin and Blockchain

At first glance, it seems counter-intuitive that some of bitcoin’s most ardent proponents are people motivated by the belief that public infrastructure will collapse in times of social and political distress. Bitcoin isn’t yet widely accepted as a method of payment and steep transaction costs make it inconvenient to use at vendors that do take it.

Preppers, as it happens, have a different perspective on what they see as the money of the future, which has surged 10-fold in the past 12 months as supporters lauded it as a digital alternative to rival the dollar, euro or yen.

Used to send and receive payments online, bitcoin is similar to payment networks like PayPal or Mastercard, the difference being that it runs on a decentralized network—blockchain—that’s beyond the control of central banks and regulators. It was born out of an anti-establishment vision of a government-free society, a key attraction for those seeking unhindered access to their capital in case a massive shock shuts down the banking system.

“Not too long ago, people in the prepper community were actively warning against crypto, and now they’re all investing in it,” said Tom Martin, a truck driver from Washington who runs a social-media website for people interested in learning skills to survive disaster. “As long as the grid stays up, people will keep using bitcoin.”

In addition to gold, silver and stocks, Martin invests in bitcoin and peers litecoin and steem because they’re easier to travel with, harder to steal and offer better protection in the event of the kind of societal breakdown that would unfold if a fiat currency like the dollar collapsed.

He’s among those confident that bitcoin can withstand even a complete blackout through the strength of the underlying blockchain, the anonymous public bookkeeping technology that records every single bitcoin transaction.

Discussions on the pros and cons of investing in crypto have popped up on survivalist forums like mysurvivalforum.com and survivalistboards.com this year as bitcoin rallied above $7,000. “Buy bitcoin” is now a more popular search phrase than “buy gold” on Google.

The buzz is starting to impinge on gold’s role as a store of value especially since, like the precious metal, there’s a finite supply of bitcoin, which proponents say gives it anti-inflationary qualities. Sales of gold coins from the U.S. Mint slid to a decade low in the first three quarters months of 2017.

“It’s definitely had some impact on the market,” Philip Newman, who does research on precious-metal coin sales and is one of the founders of research firm Metals Focus, said by phone from Washington. “People see bitcoin prices going to the moon. No one thinks gold is going to the moon.”

To attract investors who traditionally buy gold, several digital assets, like Royal Mint Gold and Anthem Gold, have been developed that are backed by physical gold stored in vaults.

Still, it’s hard to envision people walking around spending digital coins to buy Spam, canned beans or bottled water at a local supermarket when they don’t have electricity at home to charge their smart phones, let alone a working internet connection to access their digital wallets.

“I doubt bitcoin is a safe haven from an extreme-risk environment. In that sense, bitcoin isn’t gold,” said Charlie Morris, the London-based chief investment officer at Newscape Capital Advisors Ltd., which invests in cryptocurrencies and is building a price-discovery platform for them.

Bitcoin has also not reached the critical mass to be considered a viable currency to invest in, UBS Group AG’s Mark Haefele said in an interview. The total sum of all cryptocurrencies is “not even the size of some of the smaller currencies’’ that UBS would allocate to, he said.

Preppers, though, stock enough food and supplies to sustain them for months, if not years, and they expect whatever governing structure emerges post-calamity will prioritize getting the web back up and running.

“It may be difficult, if not impossible to access for a while, but once things start returning to some level of normality, then the blockchain will return as it was before the disaster,” said Rob Harvey, a bitcoin investor who prepares for natural and nuclear catastrophes by learning and teaching survival skills, like making a fire. “The blockchain does not need a specific place or a specific person to survive—that’s a strong survival tactic.”

Interest in cryptocurrencies has started permeating the mainstream. When Morris surveyed hundreds of executives attending the London Bullion Market Association’s annual conference last month, one in 10 said they’d rather own bitcoin than gold following a nuclear war.

Along the fringe, the 20,000 libertarians expected to converge on New Hampshire as part of the Free State Project are also switching from precious metals. They like bitcoin because it isn’t created by a government, unlike conventional currency.

“You can use bitcoin for economic transactions in a way that gold was never designed to do because it’s a physical thing—it’s heavy,” Matt Philips, the project’s president, said by phone. “A lot of people don’t know what the heck to do with gold if you give it to them in exchange for a cup of coffee.”

Whatever doom-and-gloom scenario unfolds, McElroy, from Canada, has faith in bitcoin. She’s writing a bookcalled Satoshi Revolution, inspired by the pseudonym of the person or people who created bitcoin in 2009 as an answer to the financial turmoil wrought by the global financial crisis.

She says the digital currency breaks society’s dependence on a state that uses its monopoly over the issuance of money to dominate the economy, making it a natural hedge against disaster.

“It is a people’s currency,” she writes in the book’s introduction. “Bitcoins move seamlessly through a world without states or borders, obeying only the command of individuals who choose to deal with each other. Immune to currency manipulation and inflation, they do not serve the powerful elites at the expense of average people.”

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As Mike Novogratz tries to bring some kind of institutional backing to the cryptoasset industry at one end of the market, at the other end, traders and speculators looking to make a quick buck continue to run riot.

The latest a high dubious offering comes from management company, SYMM, which has recently announced the launch of new a cryptocurrency investment fund, offering a uniquely new commission structure to investors.

Bitcoin dividends 

SYMM is launching the Symmetry Fund, which is the first crypto fund to offer buyback options for shareholders. According to the firm’s press release, the fund has been designed to “make it easy for individuals to invest in cryptocurrencies without all the effort, capital and risk involved with personal trading in the market.”

Here’s some more info on the offering:

“The SYMM fund invests in Bitcoin, Ethereum, Dash, Lite Coin and Ripple so offers a diversified portfolio for those looking for the safety of a traditional managed mutual fund, but still benefit from the gains being seen in the rising cryptocurrency markets, especially lucrative ICOs (Initial Coin Offerings).”

The fund will pay monthly dividends equivalent to 50% of trading profits in Ethereum with the remaining 50% reinvested and investors are able to pick up the buyback option at any time.

In order to mitigate volatility, the fund will keep 10% of its assets in flat currencies (US$/€). Management fees are “competitive” and charged on profits at 7.5% for investments over 100 ETH and 15% for under 100 ETH.

CME Contract 

So far, the bitcoin hedge fund world has been able to get away with almost no regulation but as bitcoin trading becomes more mainstream, it will attract regulators.

The CME Group is planning to launch a bitcoin futures contract, which will have to be approved by regulators. And when the contract is approved, there are many funds currently standing on the sidelines that would like to be involved.

Indeed, $100 billion hedge fund Man Group recently declared that it would be interested in trading bitcoin if or when the CME product hits the market. This would likely be the first of many entries into the market by mainstream hedge funds.

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PUT the word Bitcoin into Google and you get (in Britain, at least) four adverts at the top of the list: “Trade Bitcoin with no fees”, “Fastest Way to Buy Bitcoin”, “Where to Buy Bitcoins” and “Looking to Invest in Bitcoins”. Travelling to work on the tube this week, your blogger saw an ad offering readers the chance to “Trade Cryptos with Confidence”. A lunchtime BBC news report visited a conference where the excitement about Bitcoins (and blockchain) was palpable.

All this indicates that Bitcoin has reached a new phase. The stockmarket has been trading at high valuations, based on the long-term average of profits, for some time. But there is nothing like the same excitement about shares as there was in the dotcom bubble of 1999-2000. That excitement has shifted to the world of cryptocurrencies like Bitcoin and Ethereum. A recent column focused on the rise of initial coin offerings, a way for companies to raise cash without the need for a formal stockmarket listing—investors get tokens (electronic coins) in businesses that have not issued a full prospectus. These tokens do not normally give equity rights. Remarkably, as many as 600 ICOs are planned or have been launched.

This enthusiasm is both the result, and the cause, of the sharp rise in the Bitcoin chart in recent months. The latest spike was driven by the news that the Chicago Mercantile Exchange will trade futures in Bitcoin; a derivatives contract based on a notional currency. More people will trade in Bitcoin and that means more demand, and thus the price should go up. But what is the appeal of Bitcoin? There are really three strands; the limited nature of supply (new coins can only be created through complex calculations, and the total is limited to 21m); fears about the long-term value of fiat currencies in an era of quantitative easing; and the appeal of anonymity. The last factor makes Bitcoin appealing to criminals (although this is even more true of cash) creating this ingenious valuation method for the currency of around $570.

These three factors explain why there is some demand for Bitcoin but not the recent surge. The supply details have if anything deteriorated (rival cryptocurrencies are emerging); the criminal community hasn’t suddenly risen in size; and there is no sign of general inflation. A possible explanation is the belief that blockchain, the technology  that underlines Bitcoin, will be used across the finance industry. But you can create blockchains without having anything to do with Bitcoin; the success of the two aren’t inextricably linked.

A much more plausible reason for the demand for Bitcoin is that the price is going up rapidly (see chart). As Charles Kindleberger, a historian of bubbles, wrote

There is nothing so disturbing to one’s wellbeing and judgment as to see a friend get rich

People are not buying Bitcoin because they intend to use it in their daily lives. Currencies need to have a steady price if they are to be a medium of exchange. Buyers do not want to exchange a token that might jump sharply in price the next day; sellers do not want to receive a token that might plunge in price. As Bluford Putnam and Erik Norland of CME wrote

Wouldn’t you have regretted paying 20 Bitcoins for a $40,000 car in June 2017 only to see the same 20 Bitcoins valued at nearly $100,000 by October of the same year?

Indeed, the chart is on a log scale to show some of the huge falls, as well as increases, that have occurred in Bitcoin’s history. As the old saying goes “Up like a rocket, down like a stick.”

People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory. Someone responded to me on Twitter by implying the fools were those who were notbuying; everyone who did so had become a millionaire. But it is one thing to become a millionaire (the word was coined during the Mississippi bubble of the early 18th century) on paper, or in “bits”; it is another to be able to get into a bubble and out again with your wealth intact.

If everyone tried to realise their Bitcoin wealth for millions, the market would dry up and the price would crash; that is what happened with the Mississippi and the contemporaneous South Sea bubbles. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.