Crypto Carnage Continues As The Fed Warns Digital Currencies Could "Pose Serious Financial Stability Issues"

Update: Bitcoin and Ethereum are holding at the lows of the day, but following ECB comments earlier (see below), The Fed"s vice chariman of supervision, Randy Quarles, warns that digital currencies like bitcoin pose "serious financial stability issues" as they grow...

Today, the vast majority of our payments by volume and value are processed by regulated financial institutions. In the U.S. payment system, digital currencies are a niche product that sometimes garners large headlines.

 

While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage.

Perhaps most ironic is Quarles" description of the "drawbacks" of cryptocurrencies...

But from the standpoint of analysis, the "currency" or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all. Indeed, how to treat and define this new asset is complicated.

So because it"s not backed by "other secure assets" - analysing its value is complicated... like the dollar.

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It"s a bloodbath in cryptocurrency markets this morning...

 

Having bounced overnight to over $10,600, Bitcoin prices are tumbling once again as we approach the US equity market open...

 

Ethereum is down over 20%...

While there is no immediate catalyst, CoinDesk notes that ECB Vice President Vitor Constancio  - ever eager to talk citizens away from decentralized "anything" - warned about the risks of investing in bitcoin at current valuations.

Speaking to CNBC, Vitor Constancio said developments in bitcoin"s price make it "a speculative asset by definition," continuing: "Investors are taking that risk of buying at such high prices."

Even so, Constancio told CNBC that the ECB is not in a position to regulate the cryptocurrency, saying, "We don"t have responsibility or even instruments that point to particular prices of particular assets, that is certainly not the role of central banks."

His comments echo those of ECB president Mario Draghi, who in September indicated that the central bank does not have the authority to regulate cryptocurrencies.

"It would actually not be in our powers to prohibit and regulate" bitcoin and other digital currencies, he said at the time.

However, on the more optimistic side, CoinTelegraph reports that Ronnie Moas has upped his End 2017 target for Bitcoin to $20,000.

Moas looks at Bitcoin as a whole, incorporating all the chain splits in his split-adjusted price is and considering the price of the forked Bitcoin chains alongside the original was $12,740 when Moas made his new prediction, $14,000 looked undervalued again.

$20,000 is a month away

Moas now puts the line in the sand at $20,000 for the split-adjusted price when the new year hits. Looking at how things have gone so far for Moas, a month is a long time, and perhaps $20,000 will be broken before that time.

Many pickers, investors and money movers have thrown their hats into the ring trying to hit the sweet spot of this volatile asset when it comes to prediction.

Tom Lee, rather conservatively, set a Bitcoin growth of 40 percent to happen by the middle of 2018. His prediction put him at $11,500. That prediction was made a week ago, and in that time Bitcoin topped at around $11,300.

Max Keiser has a much more bullish view, but over a longer time frame as the host of Russia Today’s Keiser Report believes that $100,000 Bitcoin is an eventuality.

Why split-adjusted?

Moas, as one of the most well-regarded stock pickers, is clearly in the Bitcoin game for its investment potential rather than the technology side which has seen different factions at war with each other. Some people are vehemently Bitcoin Cash supporters, and others true fans of the original chain.

Moas, however, with his investor’s hat on, sees that by buying Bitcoin he not only received free Bitcoin Cash, but also free Bitcoin Gold, and thus counts them together in his portfolio, urging others to d the same as a diversification strategy.

Bitcoin Diamond and the real gold

“I am raising my 2018 fork- and split-adjusted price target on Bitcoin from $14,000 to $20,000,” Moas explained. “The current price is $10,720 and the split-adjusted price is now $12,740 when factoring in Bitcoin Cash, Bitcoin Gold and Bitcoin Diamond.”

Bitcoin Diamond is another fork of the Bitcoin chain that went largely unnoticed. Its aim is to switch from proof-of-work to proof-of-stake after mining is completed - after just 10,000 blocks.

“Bitcoin is now up split-adjusted by 394 percent since my July 3 recommendation,” Moas went on.

 

“There is no way to justify Gold $7 tln at 40X Bitcoin ($180 bln). An argument can be made that Bitcoin will be equal to Gold within 10-15 years. I do not know how much Gold there is in the ground … I do not know how much Bitcoin there is.”

With Bitcoin"s Adolescence Comes Real Competition

Authored by Tom Luongo,

With the calling off of the New York Agreement to force the implementation of Segwit2x Bitcoin is now at a fascinating fork in the road (all puns intended).  Bitcoin prices are falling as people leave the network and Bitcoin Cash prices are spiking.

I advised my subscribers to hedge 15-25% of their Bitcoin position with Bitcoin Cash at $400 on October 28th.  That trade has a current return of over 300% with Bitcoin Cash now trading solidly above $1200.

Even with what now looks like a blow-off, near-term top in Bitcoin prices, Bitcoin investors are still up around $600 per Bitcoin (around 12%) since that day.  So, no one should be crying in their beer just yet.

Where Winning Looks Like Losing

But, as Rhett Creighton points out in a very good article at Cointelegraph,com, Bitcoin’s newfound weakness may be structural for more than just a few days worth of healthy, technical correction.

In short, the Bitcoin Core Developer team which won the battle over Segwit2x may have lost the war.  Bitcoin needs a transaction-scaling solution.  And it needs one quick.

Bitcoin Cash is a real competitor to Bitcoin because it combines big 8MB block and quick settlement times without any of the off-chain or side-chain complications associated with segregated witness (Segwit).  

But it does have the drawback of a single core developer. But, I’m a hard-core free-market guy.  Competition is what keeps everyone honest.

This is not to say that I’m not a fan of Segwit.  I am.  But, am I a fan of Segwit on Bitcoin?  I don’t know. 

In the world of cryptocurrencies I want a reserve asset that sits at the bottom of Exter’s Monetary Pyramid that can be 1) incorruptible and 2) a standard against which all other monetary-like assets, including utility tokens like Ethereum, can be measured.

The Current Monetary System – Exter’s Pyramid with Gold as the Foundational Asset

It’s the function that gold still functions within the global monetary system, despite protestations to the contrary by everyone from central bankers like Ben Bernanke (“I don’t know?  Tradition?”) to students of history like Martin Armstrong (a hedge against government incompetence).

Bitcoin has to continue to be that asset for the cryptocurrency and crypto-token community or the community will go adrift, unmoored from the anchor of sequentially-verified transactions from previous blocks.

The Real Battle for Bitcoin

And that’s where I have a bone to pick with Rhett over the following:

I fully expect the market cap of all crypto tokens to increase exponentially over the next few years, but this is not a winner-take-all scenario. Today, mainstream media financial advisors are touting Bitcoin as “the new gold,” but it can’t ever be that. To get a sense of how it’s different, imagine a universe where anyone could create a new kind of metal with essentially the same properties of gold.

 

Expecting Bitcoin to have the majority market share of Blockchains in the future is about as ridiculous as expecting the East India Company to be more valuable than all other corporations combined today.

Nonsense. The cryptocurrency market languished for four years because there was no compelling reason to back any other coin than Bitcoin in any substantive way.  The past is littered with technologically superior coins to Bitcoin and yet Bitcoin is $6000+ and many of them are $0.001.

The market craves those unit of account and store of wealth attributes that real monies have.  Just because something has the potential to be that doesn’t mean the market has to pay it any attention.  Otherwise Feathercoin or Litecoin would have out-competed Bitcoin three years ago.

Litecoin would have never had to incorporate the Lightning Network to differentiate itself from Bitcoin.

Rhett’s own project, Zcash, wouldn’t have been looking for its niche in the privacy space.  But, the use of these coins doesn’t mean that Bitcoin can’t act like digital gold.  In fact, with the collapse of Segwit2x and maintaining its high fees and low transaction density Bitcoin has more in common with physical gold than it has ever had previously now that the cryptocurrency market is maturing into one that settles actual trade.

Crypto-Gold Mine

It’s become a bad medium of exchange, just like gold.

If you want to move money around the net Litecoin is far superior as are dozens of other coins.  But, if you want the security of the oldest blockchain with the most trust built up over time, then Bitcoin is absolutely where you store your wealth.

Just like Gold.

Bitcoin’s Flaws Become Strengths when viewed as a Foundational Monetary Asset

Do you see the similarities here?  Gold is hard to do real business in.  Who wants to weigh out 0.1 grams of gold to buy a hamburger (around $4.50)?  There’s a real cost to doing transactions using gold as a medium of exchange.  It’s a time cost.

Bitcoin now looks exactly like Gold.  It’s expensive to own and or move Gold when compared against the dollar just like it is expensive and slow to move Bitcoins when compared with Litecoin or something else.

That makes its flaws strengths as a means by which to interface the ‘real’ world with the ‘crypto’ world.  Bitcoin doesn’t need to maintain transaction market share to maintain its relevance.  In fact, it losing market share is an expression that it is becoming that foundational asset we need it to be.

What we need is the volatility of the cryptocurrency exchange rates to stabilize.  For Litecoin to trade consistently within a 10% band relative to Bitcoin.  If we begin to see that volatility of the LTC/BTC pair die down over the next 18 months or so, then remember then you’ll know what is happening.

It will prove the whole cryptocurrency thesis that lack of central control over the issuance of monetary assets will be driven by end-users not central planners.

The dollar price of these coins will continue to rise, but they will do so in concert, in relation to the foundational asset, most likely Bitcoin.  Over time, we should see one currency emerge as the standard by which all others are measured.

Bitcoin’s Competition

But, Rhett is right that Bitcoin Cash has the real potential to be the real winner here.  Why? Because it is a soft fork of that original Bitcoin blockchain with the added advantages of a it being, for now, an excellent medium of exchange — low fees, short settlement times, no side-chains.

What this means is that Bitcoin Cash can, if its backers and developers stay on mission and are honest, compete with Bitcoin for the role of foundational asset.  Litecoin can’t.  It made it’s choice by going with side-chain payment processing.

The dark horse in this race is Bitcoin Gold. But, it too has the potential to become the new crypto-gold.

What Does this Look Like?

What we don’t know at this point is what the market wants in terms of cost structure for its reserve asset.

Do we want a very liquid one or a relatively-speaking illiquid one like Gold?  It’s a good question that I don’t have an answer to today.  My guess is an illiquid one that can reflect the value of the crypto-markets versus the value of the fiat-markets better by resisting hot money flows because of the high barrier to exchange.

Either Bitcoin or Bitcoin Gold.

But what I do know is that the entire cryptocurrency market just grew up a little and real world growing pains are on the horizon.

I would be hedged accordingly amongst all of the top market-cap coins that the market is right now separating off as serving real market needs.  I believe in the division of labor.  Each will serve different niches and work to keep the foundational coin developers honest.

There is no one blockchain can rule them all.

We tried that in the ‘real world,’ it was called the petrodollar and it gave rise to a level of wealth inequality and systemic corruption orders of magnitude larger than the world has ever seen.

Why would we want to recreate that in the crypto-world?  That’s what, ideologically, the Bitcoin Core developers were fighting for against Segwit2x.

If we want to make the crypto-dollar then we’ve learned absolutely nothing.

And we’re the ones that need to grow up, not Bitcoin.

Crypto Chaos Explained - Bitcoin Crashes As "Cash" Tops Ether For First Time

Bitcoin collapsed overnight, trading as low as $5555 - down 30% from its highs - before bouncing back above $6000, as Bitcoin Cash soared to as high as $2450 (4 times its price on Friday), overtaking Ethereum briefly as the second largest market cap cryptocurrency.

image courtesy of CoinTelegraph

Bitcoin has lost around $30 billion in market cap, but found buying interest as it ripped below $6000 and has stabilized this morning

Bitcoin Cash exploded in thje last two days - quadrupling in price at one point to over $2400 as Bitcoin crashed.

 

As Coin Telegraph reports, the sharp rise in Bitcoin Cash"s price has come at the expense of Bitcoin. Bitcoin’s price has been on a steady downtrend ever since the Segwit2X fork was cancelled. A lot of people had bought Bitcoins in the expectation that they would get free Segwit2x coins after the fork. While market observers had expected some of this hot money to flow into altcoins once the Segwit2X fork happened/got cancelled, Bitcoin Cash seems to have been the main, but not only, beneficiary. The combined price of Bitcoin and Bitcoin Cash is over $8,000, which is not very different from the price on Friday.

That surge in Bitcoin Cash pushed its market cap above Ethereum for a brief time...

 

All of this chaos has left many wondering what is going on. Arjun Balaji provides some much-needed context for what is occurring in the crypto space...

1/August, Bitcoin forks, spawning off a fork that"s supported by a minority of miners. It"s self sustaining though the rate at which Bitcoin blocks are mined is variable and the price tanks. It was initially trading on the futures market prior to the fork between 0.05 and 0.07BTC. The motivations for the initial minority fork are complicated and nuanced, but they were largely driven by the incentives of trading on the futures market prior to the fork between 0.05 and 0.07BTC. The motivations for the initial minority fork are complicated and nuanced, but they were largely driven by the incentives of Chinese mining and Bitcoin businesses whose operation depended on the low transaction fees in the network (given Bitcoin txn fees were approaching $10).

 

2/ When Bitcoin Cash (BCH) tokens were finally accessible, there was a rush to go liquidate the tokens on an exchange. With really thin orderbooks, price shot up to 0.26 on the BTC:BCH pair, but had a slow decline over the next 2 months, bottoming out around 0.05ish. This is all the while Bitcoin continued it"s meteoric rise to $8k+.

 

3/ However, "Segwit2X" (B2X), another long schemed fork was still planned. This fork had even less popularity, reflected on the futures market, but had a lot of support from many mainstream Bitcoin businesses. It had ideological overlap with Bitcoin Cash: increase the block size to lower transaction costs on the Bitcoin network. Many users of Bitcoin who were worried about the merits of the technical block size increase were vocal about avoiding these forks and still maintain conviction that lowering transaction costs through the Bitcoin network is possible through some recent upgrades.

 

4/ As the date for B2X fork grew closer, Bitcoin Cash eventually bottomed out. The market"s assumption here was that there is no need for 2 forks with ideological overlap to exist.

 

4a/ However, in a sudden move, there was a cancellation of the fork on November 8th, with much of the support of the 2X crowd going into Bitcoin Cash. This started a fantastic price spike--in USD, from $400-500 up to $2800 (as of last night) and in Bitcoin, even higher, with orders executing between 0.4-0.5BTC. As of now, it seems to be stable at low volume —0.3BTC.

 

5/ Many long-time holders and significant Bitcoin "whales" noted online how they are planning on selling BTC and buying BCH. Most notably, Roger Ver moved long-time cold storage Bitcoin holdings totaling over $250M to Bitfinex. Not sure if this has been executed upon or not, but the presumption is that he is either buying BCH or selling BTC for USD. The goal of this (IMO) is to generate momentum and the reflexivity needed to create a "flip" between BTC and BCH.

 

6a/ It seems like 1) miners incentives are aligned with BCH for now but it"s unclear if it"s just because of the volatile difficulty or if it is permanent;

 

 

6b/ 2) money is dumping out of BTC into BCH. When/if BCH becomes more profitable, miners will follow -- at that point, do businesses like Coinbase recognize Bitcoin Cash as the canonical Bitcoin? No idea, but it"ll be interesting to see play out.

 

7/ Bitcoin Cash has a planned hard fork on Nov 13th to adjust the volatile difficulty of mining. It remains to be seen whether (at a stable price), post-fork, miner incentives will remain as strong as before. If they are anticipating a large increase in price or have spent the last couple of months accumulating BCH at a low price like many have hypothesized, that could play a role as well.

Arjun concludes, net-net, this is a mess for most mainstream users (e.g. my dad), who have no idea what"s happening and potentially don"t own Bitcoin Cash.

The end of Bitcoin (BTC) and rise of Bitcoin Cash could hurt these users, who potentially bought Bitcoin on Coinbase in August and don"t know about these risks. This puts the emerging futures and ETFs in an interesting picture.

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The various factions within the crypto space are increasing their rhetoric... (as CoinDesk reports)

When asked about the move Jiang Zhuoer, founder of bitcoin mining pool BTC.Top, said simply that "2x fans" are moving both funds and mining hardware to bitcoin cash.

 

"BTC is going to die," Zhuoer said. Hapio Yang, CEO of mining pool operator ViaBTC, responded similarly, indicating he believes that businesses and investors are now migrating funds to bitcoin cash.

 

"I think more and more bitcoin holders are starting to understand what is the real bitcoin," he said via WeChat.

 

"I think a positive feedback loop has been created. This is waking people up to the shaky foundations BTC is built on," he said.

However, as CoinDesk notes, there remains a great deal of skepticism over cash...

Jack Liao, the CEO of Hong Kong-based mining firm LightningASIC, for instance, sought to frame the idea that the bitcoin cash price increase represented any real uptick in interest in the project as "total bullshit."

 

For those following the scaling debate, Bitmain"s conduct has been one of the larger contentious narrative points, and Liao (like others) believes the explosion seen in the bitcoin cash market value is nothing more than an orchestrated bid by the firm (and its supporters) to prop up the market.

 

"Many, many investors just see the change in hash rate," he said. "But they cannot support such a big bitcoin cash price."

 

Beijing-based over-the-counter Zhao Dong reported a similar sentiment in some circles, crediting the price to manipulation by miners and investors who have supported Segwit2x and bitcoin cash in the past. Bitmain and Ver were both signatories of the agreement that sparked the 2x software.

 

"They have money, they have hash power, they have everything need to pump the bitcoin cash price," he said.

Finally, to clarify, Willy Woo, recently named one of CoinDesk"s Top 5 Token Analysts of 2017, sees the price move as perhaps one to watch. In contrast to other alternative cryptocurrencies that he said may lack value propositions, he went so far as to color bitcoin cash as a more nuanced option.

"It"s backed by a lot of money from China controlling its price and supporting its network. If you buy bitcoin cash, you are betting that China wants it to dominate. That"s a strategic and geopolitical bet," he told CoinDesk.

"Bitcoin Jesus" Says Another Network Split Is Coming In November

Since its current world-beating bull run began in late 2015, bitcoin has surmounted a series of pitfalls that were supposed to kill the market.  The list is remarkably long. The DAO hack. The PBOC crackdown. The ICO craze. The SEC’s rejection in March of two proposed bitcoin ETFs. And, most recently, the network split that spawned bitcoin cash. All were supposed to burst the roaring valuation bubble, yet in almost every example, a temporary pullback was followed by another leg higher.

Considering that it was the culmination of three years of acrimonious infighting among bitcoin core devs and the miners, the August split – particularly the market reaction – was surprisingly cavalier. Now, the faith of bitcoin investors is being tested once again as key players in the market are warning that another network split could create a third version of bitcoin as soon as November.

According to Bloomberg, bitcoin evangelist Roger Ver, better known as “Bitcoin Jesus,” said that some of the miners who supported the controversial software upgrade that triggered the split in August have withdrawn their support just as bitcoin core developers are preparing to implement the second step of the update. This could create a rift between what Ver calls “legacy bitcoin” and “the SegWit2x version of bitcoin.”

“There’s probably going to be another split between bitcoin legacy and SegWit2X version of bitcoin but that just gives me more coins that I can sell for the Bitcoin Cash version,” Ver said in an interview on Bloomberg Television at a conference organized by Bitkan in Hong Kong.

Ver was an early adopter of bitcoin. Since the split, he’s been a vocal supporter of bitcoin cash. Ver, who was born in the US but renounced his citizenship and is currently a citizen of Saint Kitts and Nevis, has also been denied visas to travel back to the states in the past. Of course, Ver has been badly wrong before. Back in the summer of 2013, he traveled to Tokyo to visit Mt. Gox shortly after customers started having issues withdrawing their funds, which the exchange attributed to unspecified "liquidity problems." Ver attested that Mt Gox CEO Mark Karpeles had shown him bank statements proving that the exchange"s troubles were a result of being temporarily shut out of the traditional banking system, and that customers" assets were safe. Of course, this excuse was merely a ruse for a massive hack that resulted in the theft of tens of thousands of customer bitcoins.

To be sure, Ver isn’t alone in warning about another potential split. Samson Mow, chief strategy officer at blockchain startup Blockstream, also says a rift is likely as more miners and developers reject the pending upgrade to SegWit2X.

“Many developers, users, miners, and businesses have already stated they do not agree with the pointless 2x fork, so we’ll likely end up with three chains,” said Samson Mow, chief strategy officer at Blockstream, which has close associations with Core developers. “Long-term, only the main bitcoin chain which has the support of users and developers can survive.”

Bloomberg summarizes the circumstances that could lead to another split below:

“If another tear occurs in November, it would create a third version of the cryptocurrency and potentially further scatter capital and resources as three offshoots of bitcoin emerge.

SegWit2x refers to a compromise proposal developed to deal with the surge in transactions. In August, miners agreed to implement the first phase of the proposal, or SegWit. They were expected to increase the blocksize to two megabytes around November in a second phase.

Avoiding such a splinter requires miners to reach at least 92-percent consensus on supporting the second phase of SegWit2x, but that’s becoming increasingly unlikely, according to Wang Chun, co-owner and chief administrator of F2Pool, one of the world’s largest mining pools.

Even though SegWit2x garnered more than 93 percent support in July, miners and developers seem to be backing away from the proposal, a compromise that harbors characteristics disliked by extremists on both sides. Wang said he thinks the split will “happen, 100 percent.”

Many Core developers agree. Several have said they’d prefer to focus on writing code in the future for only the SegWit chain: currently the largest version of bitcoin at about $64 billion in market value.”

So, would the creation of a third iteration of bitcoin (and, we presume, the spontaneous generation of billions of dollars’ in “value”) be enough to trigger the great crash that naysayers like J.P. Morgan Chase & CO CEO Jamie Dimon and Bridgewater Associates founder Ray Dalio have warned is coming?

What say you?
 

Salt, Wampum, Benjamins - Is Bitcoin Next?

Authored by Michael Lebowitz via 720Global.com,

Currency was first developed about 4000 years ago. Its genius was in the ability to supplant barter thus greatly improving trade and providing a better means for storing value. As illustrated in our title, currency has taken on many different physical forms through the years. Given the recent advances in technology, is it any surprise the latest form of currency resides in the ether-sphere? In this article we explore the basics of cryptocurrencies and the important innovation they support, blockchain. We also offer an idea about whether or not Bitcoin, or another cryptocurrency, can become a true currency worthy of investment.

A Primer on Cryptocurrency and Blockchain

Cryptocurrency is an independent, digital currency that uses cryptology to maintain privacy of transactions and control the creation of the respective currency. While not recognized as legal tender, cryptocurrencies are becoming more popular for legal and illegal transactions alike. Bitcoin (BTC), developed in 2009, is the most popular of the cryptocurrencies. It accounts for over half the value of the more than 750 cryptocurrencies outstanding. In this article we refer to cryptocurrencies generally as BTC, but keep in mind there are differences among the many offerings. Also consider that, while BTC may appear to be the currency of choice, Netscape and AOL shareholders can tell you that early market leadership does not always translate into future market dominance.

Before explaining how BTC is created, acquired, stored, used and valued, it is vital to understand blockchain technology, the innovation that spawned BTC. As we researched this topic, we read a lot of convoluted descriptions of what blockchain is and the puzzling algorithms that support it. In the following paragraphs, we provide a basic description of blockchain. If you are interested in learning more, we recommend the following two links as they are relatively easy to understand.

The Ultimate 3500-word guide in plain English to understand Blockchain – Mohit Mamoria

A blockchain explanation your parents could understand – Jamie Skella

Blockchain is an open database or book of records that can store any kind of data. A blockchain database, unlike all other databases, is stored real time and is accessible for anyone to view its complete history of data.

The term block refers to a grouping of transactions, while chain refers to the linkages of the blocks. When a BTC transaction is completed BTC “miners” work to solve the cryptology algorithm that will enable them to link it to the chain of historical transactions. As a reward for being the first to solve the calculation, the miner receives “newly minted” BTC. As the chain grows, the effort needed to solve and verify the algorithms increase in complexity and demand greater computing power. As an aside consider the following statement by Bitcoin Watch (courtesy Goldman Sachs): “BTC worldwide computational output is currently over 350 exaflops – 350,000 petaflops – or more than 1400 times the combined capacity of the top 500 supercomputers in the world.” Needless to say, a tremendous amount of computing resources and energy are being used by BTC miners, and it is still in its infancy. Could these resources be better employed in other industries, and if so, how much productivity growth is BTC leeching from the economy?

The takeaway is that blockchain is an open, real-time database that provides anonymity to its users. It is not controlled or regulated (yet) by any government. BTC miners, driven by the incentive to earn BTC, and fees at times, verify and authenticate the database. Blockchain technology is incredibly powerful and will likely revolutionize data management regardless of whether cryptocurrencies thrive or disappear.

BTC

Bitcoin Mining (Creation): New Bitcoins are created as payment to BTC miners that solve the aforementioned calculations that verify transaction data and link it to the blockchain. This ingenious reward system incentivizes miners to compete to perform these calculations, enabling the blockchain to exist. Currently there are approximately 16 million bitcoins outstanding out of a proposed limit of 21 million. As the blockchain grows, the calculations required to mine BTC and add to the chain become more complex, making each bitcoin harder and more costly to earn than the prior one.

Obtaining and Storing Bitcoin: Other than mining Bitcoin, the only other way to obtain them is via transactions and exchanges. One can earn bitcoin by selling a product or service to someone willing to pay in BTC, or one can purchase them with traditional currency through a BTC exchange. BTC can be exchanged for cash or goods and services in a similar fashion. There are reportedly over 100 BTC exchanges, and BTC ATMs are gaining in popularity. BTC’s are stored in a so-called “wallet”. Wallets may reside on a mobile phone or a desktop computer. The decision to use one versus the other largely comes down to a trade-off between security and ease of use.

Transacting with Bitcoin: Each wallet has a unique key which serves as a personal identifier. When one wishes to transact, the buyer and seller swap their personal keys and the transaction information is posted for miners to verify and post to the blockchain. The identity of the buyer and seller is never revealed. This is one reason that black market, money laundering and tax avoidance transactions are popular on BTC exchanges. While not 100% accurate, you can think of a BTC transaction process as similar to a debit card transaction, but instead of banks verifying, approving and transferring cash to fund the transaction, miners fill that role.

Valuing Bitcoin: Valuing BTC is just like valuing any other currency. One can compare BTC to U.S. dollars or to any other currency. One can also compare the value of BTC to its purchasing power or what one may buy given a set amount of BTC. Currently, BTC is rising rapidly versus all major currencies thus its purchasing power is following suit. As marginal interest in BTC versus sovereign nation currencies increases, the rise in value could continue.

In trying to provide a succinct summary of BTC, we left out many details which you may find pertinent and/or interesting. As blockchain technology represents an important innovation and will certainly find many other uses besides cryptocurrencies, we would encourage you to apply further rigor and read beyond the scope of this article.

BTC – Currency or Investment Fad?

Since BTC started trading in July of 2010, it has risen over 51,000 percent! This meteoric rise in the price of a bitcoin, as graphed below, has certainly attracted many traders and speculators to the cryptocurrency space. While price gains are certainly drawing short term players, others are buying it for its promise as an alternative currency. It is this aspect of BTC that we believe is most relevant.

Data Courtesy: Bloomberg

BTC is a pure fiat currency, meaning it is backed by nothing tangible other than the value users ascribe. Currencies, whether fiat or hard money (backed by something tangible of value) derive value from their utility and scarcity. As the Weimar Republic and many other nations throughout history have learned, economic disasters occur when governments ignore the value proposition and recklessly print money.

The U.S. dollar, also a fiat currency, is backed by the full faith and credit of the United States as well as a small amount of gold. While some may not ascribe too much value to “faith and credit”, almost 250 years of economic progress, military might, and the most powerful tax base in the world strongly argue otherwise. The dollar is globally accepted for almost any kind of transaction, and, despite recent actions of the Federal Reserve, dollars remain relatively scarce. Put another way, even billionaire Bill Gates would stop to pick up a dollar bill laying on the ground. Visit a third world nation and notice how many vendors not only accept U.S. dollars but encourage their use over the domestic currency.

The question investors, not short term speculators, are tasked with answering is, “Will enough people value BTC to make it a respected and often used currency?” In our opinion, the most crucial information needed to answer that question is understanding how governments will respond to the rise of BTC. Gaining a sense for what is at stake for existing currencies and the economies that employ those currencies offers keen insight into the future of BTC and its ability to become more than an afterthought in global trade.

The preamble to the U.S. Constitution states the purpose of the Federal government is to: “form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.” In other words the government’s role is to protect the freedoms and liberties of its citizens. If the government has no ability to fund itself and is unable to provide defense and law enforcement it cannot uphold the Constitution. More precisely - the sovereignty of any nation, regardless of its form of government, rests upon the strength and integrity of its currency.

All transactions, and their participants, that occur with BTC are anonymous. Accordingly taxes cannot be efficiently assessed, black market transactions are made easier, and fraud can easily escape the eye of law enforcement.

If BTC continues to gain in popularity there is little doubt in our opinion the government will seek control or at a minimum the personal data from the transactions. In fact the SEC has recently opined on the matter claiming that “tokens” such as BTC can be deemed securities and may need to be formally registered. This is just a first step but given the potential threat, we envision government will impose a way to remove the secrecy BTC offers, allowing taxation and legal supervision to occur.

We strongly believe the government will not allow BTC to become a full-fledged currency, at least in its current form, but we think they are enamored with the technology. It is possible that a deeply regulated and controlled version of BTC or a new government cryptocurrency could at some point usurp the dollar as we know it today.

Before summarizing this article we leave you with a few pros and cons of BTC:

Pros

• BTC is unregulated, allowing users to avoid taxes or any other kind of governmental, banking, and law enforcement scrutiny.


• BTC is in limited supply which should help it to retain its value over time. We caveat that with the fact that there are many competitors, each with their own rules about creation.


• BTC creation is not subject to the whims of central bankers that appear constantly looking to devalue their respective currencies via inflation.


• Transacting in BTC is easy. As more sellers of goods and services accept BTC its flexibility improves.


• Typically storing BTC is less expensive than most other national currencies as well as precious metals. Additionally, transaction fees and other banking costs are largely avoided.

Cons

• Bitcoin is unregulated. Regulations to enforce market structure and prevent fraud are not available.


• There are over 750 cryptocurrencies and the number is growing rapidly. Which one will emerge as the dominant currency beyond the first mover stage? Conversely, which ones will fail and leave holders with nothing?


• BTC security is not fool proof. Wallets have been hacked on both desktop computers and mobile phones. Due to the anonymous nature of the exchanges, remediation of such actions is difficult.


• Price volatility makes accepting BTC a risky proposition. Accordingly transaction fees are becoming popular by many merchants.


• The energy costs and computing power associated with mining BTC is massive and will increase as the complexity of the blockchain and the number of users grow. Seemingly these resources could be put to better use.

Summary

The U.S., E.U., Japan, China and Great Brittan have devalued their currencies significantly over the past ten years. The recent success of cryptocurrencies is a meaningful sign that central banker actions have not gone unnoticed by the users of traditional currencies. While we applaud the concept of a currency that is scarce and avoids the whims of bureaucrats, we do not own, nor do we have plans to own cryptocurrencies in the future. The current market is one of significant volatility and heavy speculation. Additionally, the bigger concern is that global governments have the means to make or break cryptocurrencies. Until these powers more fully reveal their intentions on BTC, the risks are too speculative to warrant involvement.

Bitcoin Explodes Above $3000 To Record Highs

Despite the ongoing demise of Bitcoin Cash (down another 13% today) since the fork 4 days ago, cryptocurrencies are surging higher this morning with Bitcoin up 12% to a new record high at $3230.

CoinTelegraph reports that various experts and developers including Paxos principal architect Jimmy Song have noted earlier this week, Bitcoin price is likely rising due to the imminence of SegWit activation.

Since the mining community has already agreed to activate SegWit via Bitcoin Improvement Proposal BIP 91 and 141, the original SegWit proposal, SegWit is likely to be activated on the Bitcoin network by Aug. 14.

As the abovementioned date approaches, Bitcoin is expected to continuously increase in value, establishing new all-time highs.

And indeed it is...

Why is SegWit pushing Bitcoin price up? The debate between the mining community and Bitcoin developers regarding the activation of SegWit has delayed scaling in Bitcoin for years. The first attempt to scale the network which was presented at the Hong Kong roundtable consensus event failed and it took over a full year since then for the Bitcoin industry, mining community and developers to come to a consensus to activate SegWit. More importantly, the activation of SegWit marks the first major milestone in Bitcoin in terms of scaling, as Bitcoin has continuously operated within the 1 MB block size limit established by Bitcoin creator Satoshi Nakamoto upon its launch in 2009. SegWit will also establish the infrastructure necessary for two-layer solutions such as Lightning Network to operate. The implementation of Lightning Network and other solutions including TumbleBit will further scale the Bitcoin network by enabling micropayments and applications that were not possible before.

Notably the "value" of Bitcoin Cash has collapsed relative to Bitcoin since its "birth"... (Bitcoin Cash is now trading near record lows)

Another driving factor of Bitcoin price is rising demand from institutional investors. This week, CBOE, the largest options exchange in the US announced that it will integrate Bitcoin futures contracts and options on its trading platform by partnering with regulated Bitcoin exchange Gemini.

Executive of the largest options exchange in U.S. tells CNBC, #bitcoin is here to stay.

Positive outlook on bitcoin and cryptocurrencies! pic.twitter.com/czYNuEljVZ

— Joseph Young (@iamjosephyoung) August 4, 2017

Additionally, CoinTelegraph notes that the public"s interest in virtual currencies has sparked a boom for hedge funds with crypto exposure...

“Hedge funds with crypto exposure "exploding," tweets economist and investor Tuur Demeester.

According to his quoting a related article, over 70 such funds are now being in the pipeline.

The linked article includes a comment by Arthur Bell manager Corey McLaughlin who says: 

“I’ve been in the hedge fund space since 1998, and I’ve never seen anything like it in volume of launches in a particular area. It’s just crazy.”

The market will likely continue to call for increasing numbers as the funds continue to outperform other market spaces.

With the massive rise in values, hedge fund managers are seeing the need for new funds that link to cryptocurrencies and the public is calling for such funds. A recent revealed the number of such new funds, totaling nearly 70.