The #BitcoinBreakdown: Before You Buy, More Caveats

First Appearing on HedgeAccordingly.com

Fifth in a series.  Part 1, Part 2, Part 3, Part 4, Part 5

By @sellputs

Let us regard the wonders of technology & innovation: Suddenly, we now have multiple easy ways to lose money betting on bitcoin. Giddyup!

With incredible speed, from your laptop or even your smartphone and without even thinking about it, you can open up a new account, inject real U.S. dollars into it, use that to buy a teensy piece of your favorite cryptocurrency, and begin surfing the bitcoin wave. Or begin getting crushed by that wave, depending on your timing, smarts and luck.

This occurs to me on a recent Thursday night, as I visit an old friend in Brooklyn and bring along Big Guy, a college pal who stands 6-feet-4 (“and a half,” he feels it necessary to point out).  The Big Guy and I had been hanging out at the famed Waverly Inn in the West Village in Manhattan, where I had the vodka martini, marked down on special: just $28, down from $30 list.

This next point has nothing to do with bitcoin, okay? I gotta say: Anybody who regularly spends 30 bucks on a martini is a P.T. Barnum-scale sucker.  What a waste of money.  Waste it, instead, on something really irresponsible. . . . like bitcoin.

Anyway, we’re standing around a table in my friend’s apartment in Brooklyn, and Big Guy is taking swigs from a bottle of Blue Point Winter Ale and staring into the screen of his smartphone, as if mesmerized by some new videogame. Instead, he is tracking his own cryptocurrency trades.

“Uh oh, Ethereum is flash-crashing,” he says. He had gotten got into Ethereum (ETH), a newer “altcoin” alternative to bitcoin, a few days earlier at $620, watching it rise to $740 in a day or two and holding on, only to see it crash instantly down to $650 just this moment.  Should he sell?

Guy resists the urge and doubles up on his bet, adding to his ETH holdings (as well as Litecoin, LTC) “to lower my cost basis and scalp the bounce-back from the flash crash,” as he describes it later.  By 3 a.m. that same night, Ethereum had re-inflated to rise back up even higher, to $850. Whew.

Big Guy had put $10,000 into a new account he opened at Coinbase, a digital exchange akin to the New York Stock Exchange (except it is unregulated and carries no particular guarantees, far as I can see).  He had bet his stake all on bitcoin, pulling out after a 53% gain in a week, after commissions.

Guy opened up a second account, this one on GDAX, a 24/7, online platform in the rather unregulated, Wild West of crypto (it is owned by Coinbase). GDAX offers FDIC guarantees up to $250,000 (what happens to your money as a result of your trades is on you). On GDAX, he bet his bitcoin profits on the two lesser lights, ETH and LTC.  He says he can take profits out of Litecoin in only minutes, while transferring money out of bitcoin would take several hours. (LTC is lighter-traded than the binge-fueled bitcoin.)

GDAX charges him 25 basis points (0.25% of the total value of the trade) for “taking markets,” that is, buying coin shares on offer, and no fee at all for “making markets,” or selling on the platform.  Coinbase’s buying fee, at 1.5%, is fives times as much that of GDAX. A few days after he sat out the mini-flash-crash, Guy transfers some LTC from his GDAX account to another coin platform, Binance, where he wants to sell LTC and spread the proceeds among various coins trading below $5 apiece.

And a day or two after that, Big Guy is beaten down: He was up 75% and lost most of it all when he panicked and fled ETH and LTC at the bottom of a later plunge. Too fidgety. Easy come, easy go. He’s back in Ripple, though, and it has been “outperforming.”

Yes, the Big Guy admits, he does worry that in a flash crash or especially high trading volume, he may not be able to minimize his losses and take out cash.  In cryptocurrency trading, the bigger question than whether to sell may be: Can you sell? 

Coinbase limits how much money you can pull out of your account after you sell your crypto and convert the proceeds back to U.S dollars or whichever “real” currency you desire. So, in the event of a crash or some sudden, sharp de-valuation in bitcoins, your ability to act fast and sell your coins might be hampered, and selling your coins could be all but impossible.

Think of it as a football packed with cheering buyers, most of them unaware that there’s only one exit—and it is the size of a doggy door.  Buyer beware.  Puppies, too.

Next up: The high fees for buying bitcoin.

This Cryptocurrency Mining Rig Can Also Heat Your Home

The intensifying energy consumption of the bitcoin network is becoming a concern for environmentalists who have begun to question whether digital currencies should be considered a socially responsible investment. As we pointed out last month, Digiconomist’s Bitcoin Energy Consumption Index stood at 29.05TWh.

That’s the equivalent of 0.13% of total global electricity consumption. While that may not sound like a lot, it means Bitcoin mining is now using more electricity than 159 individual countries, including Ireland and Nigeria.

As the share of the world’s electricity consumed by miners of bitcoin and other cryptocurrencies rises, miners will likely face pressure – both economic and social – to find efficiencies wherever they can.

In anticipation of this trend, a crypto startup called Comino is marketing a mining rig that also functions as a heater.

Back in October, the Next Web published a report about the company and their new product, the Comino N1. In launching the product – priced at an affordable $5,000 per rig – the company is hoping t make it easier for novices and those who have only a glancing familiarity with crypto technology to start mining coin.

A reporter from The Next Web tested out the miner – and found that it both the heating and mining functions worked well. He even used it to heat his room during the winter.

After running the crypto-heater for a little over a month now, we are finally ready to share our experience with the device...

 

Once we installed the mining rig in our office, which practically included connecting the crypto-heater to the internet via the web-based dashboard system developed by Comino, it automatically created a wallet and began mining Ethereum. As easy as this.

 

Of course, if you already have a wallet, you still have the option to connect it to the dashboard. You can also connect any other mining rig to the Comino dashboard, in case you want to follow all of your mining efforts in one place.

 

Among other things, the online dashboard shows a number of statistics the Comino developers had programmed to monitor, including the current and average hashrate at which the miner is solving cryptographic puzzles, the current and average temperature at which it operates, as well as the unpaid balance of Ethereum you’ve accumulated. It also shows stats for the temperature of each separate GPU.

...

Throughout this one-month trial, the only issue I experienced with the miner was that – for some reason – its ambient temperature sensor inaccurately picked up the temperature of the GPUs inside (which had just taken a break from mining); this prevented the device from booting up again, until it cooled down a little.

...

And in case you were wondering about how reliable the Comino was as a heater : it certainly kept the temperature high enough to save some energy on heating bills, but not enough to make you turn on the air conditioner. Which is exactly what you want from a a machine that was built to bank on crypto.

The Comino N1 maintains an average hashrate of about 200 MH/s, and an average temperature of approximately 60 Celcius – about 140 degrees Farenheight.

Since installing the miner on Nov. 16, TNW reported that it has so far transferred a total of 1.2 ether to the company’s designated wallet. Since Ethereum is currently trading around $700 a coin, the miner would pay for itself in eight months, assuming the value of Ethereum doesn’t crash, or that an influx of new mining capacity decreases the miner’s efficiency.

Riding The Blockchain Train: These Companies Changed Their Name, And Their Stock Price Soared

Many others had done it, but nobody quite as blatantly as beverage maker Long Island Iced Tea Corp, which on Thursday became the latest to jump on the cryptocurrency bandwagon, bizarrely but profitably changing its name to Long Blockchain Corp, which sent its shares soaring by 500%.

In an ironic twist, we previewed LTEA"s hilarious "pivot" just one day earlier when - discussing a similar surge in microcap stock Net Element - we said:

Now that it is abundantly clear that for a stock to explode higher, all that is necessary - and sufficient - is a press release mentioning the company"s name and throwing in the word "blockchain" in the same sentence (see Riot Blockchain and LongFin Corp), other public microcaps have decided that if that"s all it takes, then by all means they will gladly take investors" money.

Indeed, as the value of Bitcoin has skyrocketed in recent months, companies previously focused on making fitness apparel, bras, cigars and beverages (and many other unrelated things) have rebranded themselves as virtual currency or blockchain companies of one sort or another. In this light, what Long Island Ice Tea Blockchain did was the culmination of what to many is clear mania beahvior, as many obscure companies have pivoted operations or simply changed their names to cash-in on the cryptocurrency wave, a trend reminiscent of the dotcom boom. As profiled previously, a barrage of companies have seen their shares sky-rocket, largely on words such as “crypto” or “blockchain” in their names.

And investors have cheered them on, pushing their stock prices up, forcing countless microcaps to ride the "Blockchain train"

Artist"s impression of The blockchain train

Courtesy of the NYT, below is a list of companies that have moved into crypto or blockchain businesses, or changed their names. The list also captures the surge in market value since the close on Oct. 11, a day before bitcoin crossed the $5,000 mark.

* * *

BEFORE: Long Island Iced Tea Corp.
AFTER: Long Blockchain Corp.

Long Island Iced Tea made iced teas in flavors including peach and lemon, as well as lemonades. On Thursday, the company, based in Farmingdale, N.Y., said it was shifting its corporate focus to the blockchain.

In the company"s own words:“We view advances in blockchain technology as a once-in-a-generation opportunity, and have made the decision to pivot our business strategy in order to pursue opportunities in this evolving industry.” (December 21)   

* * *

BEFORE: Vapetek Inc.
AFTER: Nodechain Inc.

Vapetek made batteries and liquid for electronic cigarettes. In September, it rolled out a candy flavored e-liquid called Rock Kandi. This month, the Nevada-based company renamed itself and said it would shift to mining virtual currencies.

In the company’s words: “We are confident that cryptocurrency mining and blockchain technology has a large market opportunity in the coming years and we look forward to growing the company and creating shareholder value, while helping to innovate the future of global currency.”  (December 20)       

* * *

BEFORE: Bioptix Inc.
AFTER: Riot Blockchain Inc. 

Bioptix was a pharmaceutical company until this year. In October, the Colorado company said it was changing its name, making an investment in a Canadian virtual currency exchange and creating operations to mine Bitcoin and other virtual currencies. 

The company said that alongside its virtual currency business, it will continue to pursue “products for cattle, equine and swine for the assistance and facilitation of reproduction.” (October 4)   

* * *

BEFORE: On-line PLC
AFTER: On-line Blockchain PLC

On-Line was a small British company that previously incubated internet businesses. This fall, the company said it was renaming itself and shifting to focus on virtual currency technology.

The company said: “Blockchain technology and cryptocurrencies are a new and exciting area we have been working on for some time to provide systems to support the roll out of these technologies across a range of applications.” (October 26)

* * *

BEFORE: Croe Inc.
AFTER: The Crypto Company

To become a public company, The Crypto Company acquired a small existing public company, Croe, which previously developed women’s fitness clothing.

The company said this summer that its “core services include consulting and advising companies regarding investment and trading in the digital asset market and investing in a manner that diversifies exposure to the growing class of digital assets.” (June 9)

After the change, the Securities and Exchange Commission, concerned by the company’s actions, suspended trading of its stock. More such companies are sure to follow.

* * *

BEFORE: Rich Cigars Inc.
AFTER: Intercontinental Technology Inc. 

Rich Cigars previously produced cigars. But the Florida company said this month that it was changing its name, getting out of the cigar business, moving to Colorado and creating  subsidiaries to mine for virtual currencies.

The company said it will be pursuing “the development of a unique cryptocurrency mining business for Bitcoin and other cryptocurrencies which will operate on a 24/7 basis.” (December 14)

* * *

BEFORE: SkyPeople Fruit Juice Inc
AFTER: Future FinTech Group Inc

Formerly SkyPeople Fruit Juice was "engaged in developing agricultural plantations and produces and markets fruit juice concentrates, fruit beverages, and other fruit related products in China and overseas markets.

The company changed its name “to reflect commitment to e-commerce and agricultural commodities trading”.

* * *

BEFORE: 360 Capital Financial
AFTER: 360 Blockchain Inc.

360 Capital Financial provided financial services to companies. In October, the Canadian company announced it would change its name and ticker symbol and begin investing exclusively in blockchain-based companies.

The company said: “We are taking an all-round view to the 360 Blockchain Inc. business plan; with a mission to empower blockchain technologies with capital and experience to create exponential value.” (October 4)

* * *

BEFORE: Leeta Gold Corp.
AFTER: Hive Blockchain Technologies

Leeta Gold was focused on mineral exploration in Canada, though with little apparent success. This summer, the company said it was acquiring a Bitcoin mining company, Genesis, with facilities in Iceland and renaming itself.

According to the company: “This transaction positions HIVE as a leading cryptocurrency miner in an attractive jurisdiction, Iceland, with low energy costs.” (June 14)

* * *

Other companies have been less blatant about their "pivot", and instead changing their name, they acquired or announced expansion plans involving various "blockchain"-linked buzz words.

Digital Power Corp

The power system solutions provider has launched cryptocurrency mining operation.

• Market cap as of Oct. 11: $10.98 mln


• Market cap as of Dec. 21: $97.2 mln

* * *

Marathon Patent Group

Shares in the intellectual property licensing and management company have zoomed after announcing a deal to buy cryptocurrencies miner Global Bit Ventures Inc.

• Market cap as of Oct. 11: $17.8 mln


• Market cap as of Dec. 21: $54.5 mln

* * *

Social Reality

The internet advertising firm in October said it planned an Initial Coin Offering of Blockchain Identification Graph tokens (BIGtokens). Most recently, the firm said it would offer a cryptocurrency dividend.

• Market cap as of Oct. 11: $28.4 mln


• Market cap as of Dec. 21: $52.2 mln

* * *

Nova LifeStyle Inc

The furniture maker launched a blockchain-enabled unit, called “I Design Blockchain Technology Inc” on Wednesday and said it planned to accept bitcoin and other cryptocurrencies on the platform.

• Market cap as of Dec. 19: $60.8 mln


• Market cap as of Dec. 21: $78.6 mln

Source: Reuters, NYT

Will Ethereum Be The Next Facebook?

Authored by Kenneth Tan via Hackernoon.com,

2017 has been an amazing year for Ethereum.

Prices has hit an all time high of $800, and it is now the processing nearly double the number of transactions of bitcoin at a million a day.

As we enter 2018, I think Ethereum will be the next Facebook due to the massive amount of use cases that i am finding in major industries that benefit greatly from decentralization & transparency.

Ethereum is basically the app store for blockchain.

It allows creators to build and run apps without having to worry about the underlying “operating” system just like Apple.

Here are some of the areas to look out for:

Fundraising and ICOs

ICOs are the largest real world use case for ethereum. Traditionally, to fund your idea, you would have to borrow money from a bank, give up a lot of equity to a VC, or get an expensive loan from people lending sites. Basically, ICOs is a kickstarter on steroids.

As the founder of fundyourselfnow.com, I have worked with entrepreneurs all over the world on their product to get it ready for their ICOs. Many come from developing nations such as Indonesia (EagleCoin) and India (WandX) where it would have been extremely hard to raise significant funding for their idea due to lack of local investors.

ICOs are democratizing funding and spawning the next wave of innovation from young hungry entrepreneurs all over the world who will eventually contribute back to their local communities for a better future.

Payments & Lending

Currently, the crypto-currencies are quite hard to spend. Crypto credit card companies such as TenX, Monaco, Tokencard are stepping in to fill in the gap. All of them are built on the ethereum network. I personally hold a TenX Card and have used it to spend on daily goods and services using bitcoin.

Monaco in particular, has gotten official approval from VISA to issue cards to Singapore residents. Expect to see a huge increase in actual cryptocurrency spending & adoption 2018 as many of these crypto-card companies get official approval from VISA or MasterCard.

There has also been a rise of ethereum based lending solutions, such as SALT lending and ETHLend. The interest rates are expected to be fairer than getting from a bank, and people globally can gain access to financing even without a bank account.

I expect that 2018 will be the year where we will help lot of the unbanked get included in this new digital world.

Gambling

The gambling industry is ripe for disruption. 2017 started off with a very simple dice game, etheroll. You send ether to a smart contract and winnings are sent to you in a matter of minutes. Etheroll has over 260,000 ethers wagered so far (Around 2000m USD), which is incredible considering how simple and basic the game is.

Keep an eye out on Edgeless and Funfair in 2018 as one of them could potentially grow to become the largest online global casino. They have significant advantages over traditional real world casinos:

1. There is no capital controls


2. Anonymous, money doesn’t flow through the banking system


3. Trustless smart contract to process payouts and ensure fairness of game.

Gaming

The virtual nature of gaming lends itself incredibly well for the blockchain. Many successful gaming companies have started to include tokens in their games/product to fund their gaming ecosystem.

Here are some of the interesting ways tokens are used (not exhaustive):

Decentraland?—?Buy Land in their virtual world. Virtual worlds has been around since 2003 with Second Life and Ethereum might be the fuel that makes it finally takes off

Engin Coin?—?Used to create virtual goods that people that can on their marketplace. Instead of using “gold” in most games, expect games in 2018 to require you to use their own Ethereum game token to make & trade items.

CryptoKitties?—?Tokens represents a digital cat in the blockchain. Over 17m worth of cats were transacted since they launched early Dec , with the most expensive cat sold for more than 100k USD.

What more interesting is that with the use of Ethereum tokens for games, this could potentially mean that you could eventually trade items across games. For example, you can trade an Enjin Coin Item for land in decentraland through decentralized exchanges using the ENJ/MANA trade pair. Virtual worlds economies which are currently “silo-ed” could potentially change with the ability to “trade” across worlds.

Final Words

I see the money flowing into Ethereum and the overall cryptocurrency market as a positive. The technology underpinning Ethereum has a lot of real world usage that has yet to be unlocked and money is being funneled into innovative ethereum projects via ICOs at an incredible rate.

Mark Zuckerburg started facebook at the young age of 20 about 13 years ago, and it has completed changed the way we interact with our friends and family.

Vitalik, founder of Ethereum, started Ethereum also at the young age of 20 too about 3 years ago. I strongly believe that within the next 10 years, Ethereum will radically change the we interact with our world.

Hedge Fund Behind Mystery "Bitcoin To $50,000" Bet Revealed

The crypto space was thrown into chaos today as the price of bitcoin and its peers plunged overnight, cementing the pioneering digital currency"s worst week since December 2013, only to rebound dramatically into the close, wiping out virtually all losses. Also today, just as the rout was nearing its trough, we shared a story from the Wall Street Journal about a mystery trader who placed a $1 million bet that bitcoin will climb above $50,000 by December 28, 2018.

That trade was a call option purchased on the LedgerX platform, which received permission from the CFTC over the summer to launch the first swap execution facility for the clearing of bitcoin-linked derivatives, and began trading in the fall, before CME and CBOE launched their own bitcoin futures. As the WSJ detailed previously, if bitcoin is below $50,000 on Dec. 28, 2018, the options will expire worthless, and the $1 million will be lost. But if bitcoin rises above that level, the options give the owner the right to buy 275 bitcoins for $50,000 apiece—a transaction that would cost $13.8 million.

Some more details on the trade mechanics from Privateer"s Aaron Brown:

... one or more people delivered 275 bitcoin (valued at $4.5 million at the time) to the LedgerX clearinghouse, and wrote one-year calls at a strike of $50,000 ($13.75 million in total) against them for a premium of $3,600 per coin ($990,000 total); that is, the buyer paid the seller $990,000 today, and has the right but not the obligation to buy 275 bitcoin for $13.75 million any time before December 28, 2018. These 275 bitcoin are held by the LedgerX clearinghouse and will be released on Dec. 28, 2018 to either the buyer (if the buyer exercises the option by paying $13.75 million) or the seller (if the buyer does not exercise).

 

These are real bitcoin, and there is no need for any sort of settlement auction, the call option buyer can exercise and receive the physical bitcoin.

Naturally, it was unclear who the buyer of the call was, just as it was unclear if the call was a standalone trade or part of a broader, multi-leg option strategy. And perhaps more importantly, the identity of the seller was also a secret.

On Friday afternoon, one part of the the mystery was solved, when the buyer of the $50,000 call was revealed as Blocktower Capital, a prominent crypto hedge fund, Business Insider reported.

BlockTower Capital is among the best known crypto hedge funds in a booming space that now includes over 175 such firms, according to fintech analytics firm Autonomous NEXT. BlockTower was founded by Ari Paul, formerly of trading firm Susquehanna, and Matthew Goetz, a former VP at Goldman Sachs.

Paul tweeted about the WSJ story on Thursday:

I wonder who bought these? ???? https://t.co/gIXFW0d0hm

— Ari Paul (@AriDavidPaul) December 21, 2017

Paul followed up that tweet by saying: "One thing to understand with options: a deep out of the money call is not a bet that something *will* happen, it"s a bet that something *might* happen. Risk a little to win a lot."

Still, just days after the trade was executed, Blocktower is nursing a not insiginificant amount of bruises, because as a result of today"s sharp repricing lower in cryptos and the acute impact of gamma and vega on what is already the world"s most volatilte instrument (excluding electricity) the MTM value of the call option declined substantially (although in all fairness should today"s sharp rebound continue for a few more days, all the losses will be offset by the renewed upward momentum). Indeed, some like Dan Novaes, CEO of blockchain company Current Media said, "The holidays are a notorious time for crypto prices to drop — that has been the case over the past several years. After the holidays, I expect the prices to rebound."

Perhaps Novaes is right: many have suggested that today"s drop was nothing more than some tax loss selling which quickly snowballed on Thursday night into a major momentum-reversal drop in the illiquid pre-Christmas market. And perhaps bitcoin will indeed trade well above $50,000 before December 28, 2018, resulting in a substantial payday for Blocktower Capital.

And while we know who the buyer was, what is more interesting here is the identity of the seller, as that may have been one of the original bitcoin "whale" billionaires, who - as Aaron Brown speculated yesterday - has found a way to cash out partially of their massive positions without moving the market. 

Keep in mind that the only cash that exchanged hands when the trade was done was $1 million, or rather $990,000, between the buyer of the call, and the seller. Here is Brown"s explanation why this particular option trade could be far more important not for directional bet on the underlying, but to allow the mega holders of bitcoin to cash out.

I spoke to some large bitcoin holders, most of whom have held for years and never sold, and all expressed at least some interest in doing similar trades. It is a natural one, the "bitcoin billionaires" -- the approximately 1,000 people who hold an estimated 40 percent of all bitcoin, or an average of around $350 million each -- reducing their exposure in return for some cash today. In turn, financial investors get a secure, levered exposure to bitcoin that is not hostage to an unproven price-setting and without the expense of setting up a system to hold physical bitcoin. Bitcoin miners need cash for equipment and electricity bills (China this year cut off lending on bitcoin collateral) and early bitcoin adopters could stand to diversify their portfolios.

In addition to allowing whales to cash out in dribs and drabs, such selling of calls (or puts) could also have a dramatically stabilizing effect on the market:

One trade doesn"t make a market, but if, say, 1 percent of all bitcoin were taken off the market and held as option collateral, and financial investors put up cash in one-year derivatives, that could do a lot to stabilize the market. That means both reducing price volatility and giving confidence that market prices represent true trading prices for institutional quantities of bitcoin. This, in turn, could make Cboe and CME cash-settled futures more attractive, and thereby represent a solid base for bitcoin ETFs.

Finally, this increased visibility in the bitcoin pipeline and clearance would boost institutional confidence and lead to increased holdings:

And once that happens, institutions are likely to accept custodianed ownership of physical bitcoin, broadening and deepening the ownership base. There are few entities with institutional access to bitcoin derivatives trading and expertise with trading and holding physical bitcoin. That has to change for bitcoin to join the global financial system.

The last point is spot on because the inverse is also true: if bitcoin billionaires stay out of the market, institutional investment in bitcoin will remain problematic. Individuals will be able to trade small amounts in a fragmented market of loosely regulated exchanges, but futures and ETFs will not be securely backed by physical bitcoin -- their prices will be pushed around by betting sentiment of people who own no bitcoin.

Then again, as Brown concedes "that"s not necessarily a bad thing. After all, bitcoin was invented as an alternative to financial markets, and it functioned quite nicely for years with no connection to Wall Street. That"s one possible path for cryptocurrencies, a parallel financial system. But many people have set their hearts on linking the two systems, and we may have just seen the first trade to validate their dreams."

Needless to say, for Blocktower Capital"s bullish bet to be successful, a linkage which enables institutional investors to offload some of the "whale" holdings while stabilizing the market, would be the far better, not to mention profitable outcome, one which could indeed result in Bitcoin rising to $50,000, and above, in 12 months time.

Incidentally, Ari Paul is not worried by today"s selloff. In fact, as he tweeted earlier, "a major sell-off with prolonged consolidation at a lower level would be the healthiest thing for crypto.  <50 million people own any at all today.  I"d love to see broader ownership."

Trump"s Tax Bill May Be Reason for Crypto Rout

Content originally published at iBankCoin.com

Let"s be clear. The American market for Bitcoin is an aspirational one; but the true volume is done in Asia. Instead of going through the trouble of setting up shell corporations to launder their money, the Chinese have been using crypto currencies, which was beautifully marketed as some sort of rebellious form of capitalism -- creating millions of bedroom billionaires.

All of that might be ending soon, thanks in part of President Trump.

He"s gonna sick the IRS hard on your asses -- tossing evil tax evaders into ass-raping prisons.

Bloomberg:

New limits in the bill would bar cryptocurrency owners from deferring capital gains taxes when trading one type of virtual currency for another -- effectively closing a gray area in the tax code, experts say.

 

Those gains can be considerable. Bitcoin, which had an initial price of less than 1 cent when it first traded in 2010, was around $1,000 as 2017 began and surpassed $19,000 this week, at least briefly, before paring some of the gains. Many enthusiasts jump between bitcoin and a long list of similarly volatile competitors, such as ether.

 
For investors who hold the virtual currencies, “the bill is bad news,” said Kelsey Lemaster, a tax attorney with Goodwin Procter LLP. “Every time you trade one digital currency for another, one token for another, it’s going to be a taxable event.”

 

The change might not deter traders, who have been leaping into cryptocurrencies without researching what they are -- let alone their tax implications, said Brian Kristiansen, a partner in the digital currency services practice at Friedman LLP.

 

Under current law, Bitcoiners have been protected under the "like-kind exchanges", swapping one investment for another, notably Ethereum. That shit ain"t gonna fly in 2018. You"re gonna get taxed out.

The change goes into effect January 1st.

Bitcoin is off by 7,000 points from recent record highs, trading at $12,500.

Bitcoin Gets the Gold Treatment- Futures Roll Over FOMO Crowd

We Told You First- Bitcoin is Going to Be made To Heel per its Banking - Government Overlords. 

Written by Soren K., Bon Scott, and Fay Dress for the Soren K.Group  

There is no Bretton Woods agreement to repeal here. Therefore, just control the upstart before if gains traction is all that needs to be done. And it is being done right now. Bitcoin as a potential alternative  to sovereign fiat is being strangled in the crib right now via futures listing in the US and banning in the Asian markets. We were warned. Yes it will continue to go up and down i nmassive vilatile moves, but now longs getting in using futures will lose money because of the volatility adn  the leverage they cannot afford. This is a tax on the ignorant common man feeling the anxiety of missing out unfolding in real time.

From a Previous Post on How Bitcoin will be made to "Heel"

 Technology that removes the banks" clearing risk while keeping the client captive in their system. Technology is disruptive, yes. But market structure, regulatory agencies , and marketers that lobby and shill for the Banks and Government will win. Technology has no protective moat by nature. It is that quality which will allow Bitcoin to be owned by the powers that be. 

As the cash in India is being replaced by Visa cards, so shall the Bitcoins be replaced by bank or nation state branded versions of themselves. [EDIT- Futures Do Nicely as well- Soren k .] Are you ready to exchange more  freedom for convenience?

Bloomberg today saw no possible correlation between trading desks opening up to arb bitcoin futures  and its drop off a cliff.  

Bitcoin plunged as much as 21 percent, briefly dropping below $13,000 in overnight trading. There seems to have been no particular catalyst for the selloff, with extreme volatility remaining a hallmark of the digital token. By 5:40 a.m. Eastern Time bitcoin had recovered some of losses to trade at $14,539.60. In a sign that cryptocurrencies are becoming more mainstream, yesterday we learned that Goldman Sachs Group Inc. is setting up a trading desk to make markets in digital currencies.

In other words, buy the dip because it is becoming mainstream. Pay no attention to the prop arbitrage desk that will destroy futures longs even  while the bank clients are hedging their BTC longs through them. You know, like when miners hedge production through bullion banks? Mainstream is code to a flow trader (i.e. one who has no original idea in his head and front runs client flow and hammer smaller participants) as for "there  is enough stupid money in it for us to arb the shit out of it. After we do that, we will destroy the public longs 

We find this fascinating as headlines like:

• “Gold Rallies $50.00: ‘It is overbought’ says analyst” In unrelated news: Russia declares war on US 

or

• “Gold plummets $3.00 as people realize its a worthless pet rock, may cause cancer” 

pervade the financial MSM whose sponsors have nothing to do with gold by and large. Enter BTC which has not yet cemented its potential in the public mind as a replacement for fiat, and must be strangled in the crib. 

Incensed? You Bet We Are

We were compelled (incensed) to bang this post out despite being on vacation. Written from the road hastily but accurately. Seriously. How many times can you be warned?

Here are some links to previous posts on the concepts of market structure as tool of control, an interview with Vince Lanci actually saying “Sell Bitcoin futures and buy Gold on a dollar for dollar basis” last week in an interview with Daniela Cambone when asked about the relationship between the two.

Some articles on bitcoin"s market structure and as a futures product .

• Why Bitcoin Can"t Replace Gold - Economic Freedom - Marketslant

Futures as a form of regulation in Bitcoin

 Bitcoin will be co-opted by Banks

We have said this several times in the past. Bitcoin is not your savior from Banking Oligarchs. It is electronic. It is not physical and therefore can be co-opted by the banks themselves. Banks are not going to give up their franchises. If they cannot beat Bitcoin, they will create their own. The CME has embraced Blockchain technology. Banks are starting their own crypto currencies. Believe us when we say, either the government, or the Banking industry will shut it down. If they cannot, then they will buy or control it.  

This is a war between Mice and Cats. Every time the Mice (people) find a new way to avoid the Cats (Banks) monopolistic ways, the cats do something to throttle the Mice. Sometimes it is by developing their own Tech. Sometimes it is by using the government regulatory agencies to help them. Sometimes it is via a fear campaign. 

Usually, it is all three. Banks are developing their own proprietary Blockchain products. Governments are restricting ways to use Bitcoin. And finally it is done under the cover of "stop the crime"

•  Interview: If You Don’t Own Bitcoin and Hold Gold, Read This


• Recco Read: Doug Casey Measures Bitcoin’s Moneyness on the Gold Scale


• A Real Gold Guy"s View Of Crypto, Bitcoin, and Blockchain

and other Soren K. Posts on Bitcoin HERE

As stated in several posts by the Soren K. Group, and Vince, who is a bonafide rockstar in areas governing market structure, subjective probability, and commodity investment and trading in general. [Edit-And the only one of us crazy enough to put his real name on these articles.-Fay Dress]

Bitcoin lies at the intersection of all 3 areas. In the aggregate we said the following:

• Bitcoin futures will be sold to you as your only safe  reliable regulated way to get bitcoin. 

This means if you buy bitcoin futures, you are buying a cardboard cutout of the product. You are buying a tracking stock that settles in cash and MUST, when all is said and done trade at a lower  less than “physical” bitcoin.

You traded freedom for convenience again. Good Fido!  Here"s a lesson from people who understand this as it happened to Gold. 

• Ways to demoralize, control, or co-opt a grass roots movement into a product that threatens sovereign “debt- money”and restore some economic freedom. 

If you can’t control it outside your nation’s borders bit there is pent up demand in your nation, you can make it illegal and/ or implement draconian measures to impede its use on your country. This is the China way.

News flash! China is a newbie when it comes to manipulating its people. And frankly it doesn’t have to be subtle as their people are under no pretense of being in a democracy.

But in “democratic” countries one must protect its citizens from evil doers, give them “free markets” and get the public to swap freedom for convenience. Manipulation , Manufactured consent, and controlled opposition are the tools. 

So guys like Jamie Dimon, talking sock puppets who in an attempt to protect government fiat vilify Bitcoin one day; and who apparently didn’t get the note that the tactic of demonizing bitcoin had been replaced by “co-opting” it flips his script in a week. JPMORGAN  promptly after  being reminded there will be a futures market and money to be made; they actually imply it is a store of value, a new gold.

Are you serious? When bitcoin does become a store of value, it will be as a result of its potential for price appreciation  being killed. Price appreciation , by the way, that was a reflection of what would happen to gold if they took their foot off its throat. Bitcoin needed to be controlled; for it showed the vulnerability to government issues fiat as trustworthy. Is it not obvious? Where corporate and government interests can intersect, they do- and the public gets killed at the crossroads. 

1- increase accessibility  and stoke public grass roots movement  retail demand 

2- eventually trade at a discount to Bitcoin itself because it is settled in cash- a bank arbitrageurs dream! 

3- This de-facto regulation of bitcoin combined with tail-wagging dog price transparency will make the product “come to Daddy”.. daddy being the government which has no interest in Btc succeeding in its original form, it’s other daddy being the banks who will make a sitload of money raving “physical” bitcoin to cash settled futures, and destroy its status as money without borders.. at least in the USA. 

We circled back to Vince for a comment:

If you bought bitcoin futures as an investment, you are going to get fleeced. Or better said, your profits, if they come, will have a “little off the top” when you cash in. This is the expense of swapping convenience , “safety” and taxation, for OTC “exchange” counter party risk. 

He continues that it’s not bad if you know what you are getting into:

This is not a negative on the product. It does give you transparent access to a market with “wild west” issues. You may very well make money on a 5 year hold, but not as much as if there were no futures, not as much as owning BTC itself.

On investing vs trading:

Bitcoin is now a trading vehicle. It will be relentlessly arbed by bank prop traders, which is all fair to me. But it is the selling of it to a public that is woefully under capitalized, undereducated, and in search of a financial messiah to solve their fear of missing out anxiety. 

So what price should futures trade at compared to spot?

I don’t know. (Laughs) And to just say that in this age is itself a “no-no”. But anyone who knows and is in the markets will not tell you unless they are talking their position. What I can offer is the differential will become a product of cost of production, cost of storage, opportunity cost of money, and taxation. plus anything I haven"t thought of yet

He goes on seeming to work out the potential arb in his head as we chat.

I have to wonder: if bitcoin is a medium of exchange and in spot form may be difficult to tax properly, but profits on BTC futures are taxed at capital gains.. couldn’t that imply a discount in some instances as high as 20%? I don’t know, but those using BTC to dodge taxes in expatriating money criminally would certainly have that as a possible differential. But how that arb works, I haven’t figured yet. 

Look, at its basic level, the futures settle cash, they are not fungible with BTC, they cannot be. There is no above ground fungible unified supply in exchange vaults yet. Therefore it must trade at a discount to the real thing. The other factors that need to be considered are cost of mining and storage in energy terms. Maybe there is an arb between BYC, Futures and electricity.. it certainly is going to be a huge profit center for smart proposals desks like Goldman. Don’t short Goldman in the year after they get their arb up and running. It will be free money to them.

Come to think of it, if you are not in a position to sell BTC futures and buy Gold as a risk arb like i recently said in a Kitco intrview, just buy GS stock. They will certainty profit being long, short and sideways in Bitcoin futures. Don"t dig for gold, but the company that sells the shovels here.

We told you it would happen. Bitcoin in futures  form is now getting a taste of what it is to be a pariah wrapped in a pretty bow to the public while being demonized by the govt implicitly. 

This is market structure sponsored by a corporatised government that will do any thing to protect its most precious franchise its debt as money schematic that has hi jacked the fiscal lifeblood of our financial system with a heroin addicted contaminant. 

Will botcoin (not a typo- the algos are coming)rally again? Of course it will. But now we can all watch in real time as over the nextb5 Years Bitcoin “physical” will succumb to bitcoin futures due to its higher volume and more liquid markets. It will undermine the pseudo crypto exchanges which do actually need regulation. 

But make no mistake about : every broker and bank will be pitching cryptos now to you the public. And it is a tax on you. Bigger forces are now being put in place to make bitcoin less volatile, lower in price, and a sleepier asset. Hence it will become in their pitch “a store of value”. This is a joke. 

Remember all the gold nuts complaining that paper gold isn’t physical gold? Well he’d we go again. 

 

 

Forward Guidance

 

Government shutdown avoided, Spanish regional vote solves nothing, and bitcoin tumbles.

Staying open

Congress passed a bill to keep the U.S. government funded until Jan. 19. The bare minimum needed to avoid a shutdown, the legislation means lawmakers can head home for the holiday break, but makes for a difficult start to 2018 as a wide range of divisive fiscal and social issues have to be faced. Measures contained in the bill will allow President Donald Trump to sign the tax plan as early as today.

Catalan headache

The election in Catalonia saw separatist parties win a small majority of seats in the Barcelona assembly. The result keeps intact the uneasy status quo that’s endured since October, rather than take the Spanish region closer to independence. With ousted Regional President Carles Puigdemont still facing arrest if he returns from his self-imposed exile in Brussels, and Spanish Prime Minister Mariano Rajoy’s People Party losing almost all of its seats in the assembly, an easy way forward seems elusive. This uncertainty is being reflected in markets this morning, with Spain’s IBEX 35 Index dropping as much as 1.6 percent after the open. 

Markets ready for a holiday

Overnight, the MSCI Asia Pacific Index rose 0.3 percent, while Japan’s Topix index closed 0.2 percent higher as the avoidance of a U.S. shutdown helped lift sentiment. In Europe, the Stoxx 600 Index edged 0.1 percent lower at 5:40 a.m., with the results of the Catalan election making Spanish stocks by far the worst performer in the region. S&P 500 futures added 0.1 percent, the 10-year Treasury yield was at 2.485 percent and gold was slightly higher.

Data due

The core PCE deflator for November, the inflation gauge favored by the Federal Reserve, is due at 8:30 a.m., with consensus seeing a pickup to 1.5 percent. At the same time, personal income and spending numbers will be published, with durable goods orders for November also at 8:30. At 10:00 a.m. we get the latest reading from the University of Michigan sentiment gauge and new homes sales data. At 1:00 p.m. the Baker Hughes rig count will be the last piece of significant data in what has been a good week for oil.

Bitcoin (BTCUSD) Breaking Daily Chart Upchannel Support

Bitcoin (BTCUSD) Weekly/Daily

Bitcoin (BTCUSD) is down more than 15% (at the time of writing) from yesterday, and more than 30% off the peak last weekend just shy of the psychologically key 20k whole figure level (on Bitstamp). Significantly, BTCUSD has just broken upchannel support (on the weekly and daily chart), with this week"s weekly candle reversing all of last week"s gains and then some. The daily MACD is negatively crossing, which combined with the strongly downsloping daily RSI and Stochastics suggest more downward pressure today. Although bears are increasingly in control having broken the 6 week upchannel support line, with the weekly MACD blue line still sloping slightly up, BTCUSD could very well shrug off the upchannel support break this weekend, clawing back into the upchannel briefly and forming a lower high next week. If the weekly MACD blue line flattens and turns down this weekend, longer term bears will have plenty to feast on in early January. 

 

 

 

 

Click here for today"s technical analysis on Ethereum (ETHUSD), Litecoin (LTCUSD)

If Bitcoin Is A Bubble...

Authored by Erik Norland via CMEGroup.com,

Our earlier articles on bitcoin discuss the crypto asset as a currency and a commodity. Both papers focused on the consequences of bitcoin’s defining feature: the asymptotic supply limit of 21 million coins. This gives it an unusual juxtaposition of demand uncertainty and supply certainty (as well as inelasticity). As a currency, it gives rise to a tension between its use as a store of value and as medium of exchange. Like commodities, it has a mining cost of production that both influences and is influenced by price. Finally, we explored bitcoin’s demand dynamics and the problems posed by rising transaction costs and their potential to trigger price crashes. This paper explores bitcoin as an equity, and more specifically as the first equity ever launched by a non-hierarchical “teal” organization, a self-driving entity with an independent force and purpose, its role in promoting blockchain and the potential consequences of bitcoin and blockchain for the economy.

While bitcoin is most commonly described as a currency, one can argue that it also has equity-like characteristics. These arguments can be both narrow and legal in nature as well as deeper and more philosophical. From a legal perspective, many governments are moving to regulate initial coin offerings (ICOs) of cryptocurrencies as they do initial public offerings (IPOs) of equity and other securities. Bitcoin’s ICO occurred in 2009 and at the time was largely overlooked by regulators. No longer. With over 1,000 additional cryptocurrencies being launched during the past two years, regulators worldwide are playing catch up, considering their response to this occurrence. 

On an economic and financial level, bitcoin also exhibits equity-like characteristics. The rewards that miners and those validating transactions on the bitcoin blockchain receive are analogous to stock grants made to employees by corporations. The stock of a company can be seen as an internal currency used to compensate and motivate employees, aligning their interests with those of the organization. To that end, the number of bitcoins in existence is comparable to the “float” of a corporation – the number of shares issued to the public. 

When bitcoin forks into a new currency, such as bitcoin cash, the move is comparable to a corporate action such as a spin out.  In a spin out, a corporation can give each of its shareholders new shares in a division of the firm that is being released to the public as separate and independent entity. In September 1996, for example, shareholders of the communications giant AT&T found themselves owning two stocks: that of AT&T services business, and that of Lucent Technologies, a phone equipment maker, of which AT&T (wisely) divested itself. Likewise, when bitcoin most recently forked, the owner of each bitcoin received one bitcoin cash, a new and separate cryptocurrency. 

While bitcoin is not by any means a traditional corporate entity with earning statements and a board of directors, it could be seen as an equity in its own ecosystem whose value derives from the size and health of that community. What is clear is that if bitcoin is equity, it represents a radically different corporate form than has ever created before.

It appears to be one of the first examples of what sociologist and organizational development specialist Frederic Laloux describes as a “teal organization”: an organization with fluid hierarchy that is adaptive and rules-based where authority is decentralized and distributed among members. That such an organizational form would arise around a distributed ledger is perhaps not surprising but it does, nevertheless, represent a radical new experiment in human organization. In his book, Reinventing Organizations, Laloux describes five organizational types: red, amber, orange, green and teal (Figure 1).  Red organizations are primitive tribal groups led by a single person. Street gangs and the mafia are modern examples. By their nature they are unstable: when the leader dies or becomes impaired, there is a fight for control and the organization can disappear or split if a new leader does not emerge. See Francis Ford Coppola’s “The Godfather” series for details. 

Figure 1: Organizational Theorist Frederic Laloux’s Five Kinds of Human Organizations

Amber organizations, the world’s first and oldest bureaucratic form, represent a radical innovation: an immutable organizational command-and-control hierarchy that survives and outlasts any member.  Organized religion, government bureaucracies and militaries are examples of amber organizations.

Most corporations are either orange or green organizations. Compared to amber organizations, orange ones feature additional agility. While they maintain strict hierarchies, they form more ad hoc project groups, have greater differentiation in expertise, and change the size, scope and form of their hierarchies in conjunction with needs. They can also merge and split apart peaceably. Green organizations take this approach further, often decentralizing decision-making to frontline employees. They tend to be somewhat flatter and management is meant to enable the success of frontline employees in a partial reversal of (or at least a more two-way version of) the usual top-down reporting lines.

Until the creation of bitcoin, teal organizations were mostly theoretical, although Wikipedia could be considered an example. What Wikipedia and bitcoin have in common is that both are essentially non-hierarchical organizations in which users make voluntary contributions to the development of the entity.  For Wikipedia, this comes in the form of writing and editing articles on millions of subjects in dozens of languages in accordance with the rules of the organization.  For bitcoin, the voluntary contributions come in the form of mining bitcoin and validating transactions. What differentiates bitcoin from Wikipedia is that the latter is a not-for-profit organization that requires periodic, voluntary monetary contributions from supporters. Bitcoin, by contrast, rewards contributors economically in a manner somewhat analogous to orange or green corporations but with much stricter, and less political, rules for who gets paid what and why. Little wonder that bitcoin and its crypto peers are described as “the internet of money.”

Bitcoin’s limit on supply to 21 million coins is also open to a useful equity analogy. This limit on the number of coins is one of the reasons why we think that bitcoin is useless as a medium of exchange and is being treated, rightly or wrongly, as a highly volatile store of value, sort of like gold on steroids. Bitcoin could become a more useful medium of exchange if it increased the cap on the total number of coins. So, why doesn’t it? Corporations have the option of issuing more shares. For example, in the early days of the Great Recession, many banks issued more shares to recapitalize themselves. The problem with issuing more shares is that it dilutes the value of the existing equity holders and usually lowers the price of a stock. As such, aside from compensating themselves and some of the employees with share options and share grants, corporate managements avoid issuing more shares like the plague. And normally, equity holders want such share grants to be limited so as not to be excessively dilutive. 

We don’t know if the bitcoin user community will one day allow for the creation of more than 21 million bitcoins.  If they do, it would improve the value of bitcoin as a medium of exchange but it would likely come at the expense of bitcoin holders’ value. As such, we are not sure why existing bitcoin holders would agree to such a change. Nor is it clear why the miners and transaction validators would agree to such a change, which would likely lower their profit margins.

Bitcoin’s Equity Bubble and The Macroeconomy

As of this writing, bitcoin has a market cap of around $280 billion.  While that’s substantial, it’s relatively small compared to the biggest corporations, which are valued north of $500 billion each. It also pales in comparison to the $75-trillion global economy. If bitcoin’s price collapsed to zero tomorrow, economic impact would be negligible.  But what would happen if bitcoin rises another 1,000%, as it has thus far in 2017? If it achieves a $3 trillion market cap and then suffers a price collapse of, say, 80-90%, as it has twice thus far in its short history, what impact will it have on the economy then? Still probably fairly minimal. U.S. equities alone are valued at $25 trillion. If U.S. equities fall 10% and wipe out $3 trillion in value, that alone would not likely cause a recession.

Let’s pursue a truly extreme and hypothetical case to illustrate our point. What if the currency rises to $1,000,000 per bitcoin? It may sound farfetched but it wouldn’t be too surprising given what has already happened to bitcoin prices (Figure 2). That would give it a market cap of around $20 trillion, depending upon how many bitcoins exist by then. If it then collapsed, it could have a negative impact upon the finances of more recent buyers, many of whom might not be financially well off and many of whom would have purchased near the top. If one assumes a -5% wealth effect for drops in asset prices – a dubious but common assumption—then if bitcoin one day lost $20 trillion in market cap, it could shave $1 trillion of consumer spending globally. That would be enough to slow the global growth rate by over 1%.  Moreover, a crypto meltdown could also one day hit investment in computer hardware like during the collapse of technology stocks between 2000 and 2002 which led to a sharp decline in business investment and tripped the U.S. economy into a recession in 2001. A combined wealth and investment effect might drive the global economy into a recession and trigger a backlash against cryptocurrencies if they rally enough in the meantime to have such an impact. Obviously, this is an extreme hypothetical. For the moment, however, we’re not the point where this is a serious concern. And, as Aristotle once commented, ‘probable impossibilities are to be preferred to improbable possibilities.’

Figure 2: Proof That Anything is Possible.

Investors who are buying bitcoin are presumably hoping to find someone else to sell the currency to at a higher price. That said, there is more to bitcoin economically than just the theory of the greater fool. As more people bid up the price, the difficulty of solving bitcoin’s cryptographic algorithms increases. This in turn is driving up investment in more powerful and faster computing technology of both a traditional integrated circuit and non-traditional variety. Indeed, solving cryptographic problems may be one of the first tests facing quantum computers.

The problem is that investors in bitcoin and its peers are mainly out to make profits and not to finance or subsidize the development of distributed ledgers nor more powerful computers. As such, if the price of crypto assets collapsed, investors may be sorely disappointed just as many were when the first generation of internet stocks collapsed between 2000 and 2002, driving the Nasdaq 100 index down over 80%. 

One possible result of the current run up in cryptocurrencies and their possible collapse is that central banks may one day decide to issue their own distributed ledger currencies. Former Fed Chairman Alan Greenspan once compared making monetary policy to driving a car guided only by a cracked rearview mirror. Even now, important policy decisions must be based upon imperfectly estimated economic numbers that are weeks or months old by the time they become available. In 2017, economic policy making is still a vestige of the 20th century. 

Blockchain technology has the potential to one day allow policy makers to issue their own cryptocurrencies that will give them real time information on inflation, nominal and real GDP. It won’t allow them to peer through the front windshield into the future but at least they can look into the rearview mirror with much greater clarity and see out the side windows of the monetary policy vehicle. This could allow them to create the amount of money and credit necessary to keep the economy growing at a smooth pace more easily than they do today. Switching off of the gold standard vastly reduced economic volatility and improved per capita economic growth (Figures 3 and 4).  Moving to blockchain-enhanced fiat currencies could further reduce economic volatility and, ironically, enable further leveraging of the already highly indebted global economy as people find ways to use capital more efficiently. More broadly, crypto-inspired investments could bring about new technologies that we cannot yet imagine.

Whether bitcoin “equity” investors are rewarded for bringing about such “improvements” is another matter. A few investors in the early days of the internet during the 1990s came away enormously wealthy. Many others lost money. The current cryptocurrency boom could end in a similar fashion. 

If Bitcoin Is a Bubble

The truth is that most of the assets that trade on exchanges have been in ‘bubbles’ at one time or another for reasons that have nothing to do with the existence of futures contracts. ‘Bubbles’ by the way are only visible in rear-view mirrors.

Silver experienced a bubble in 1980 when the Hunt brothers cornered the physical spot market. The price soared from $4 per ounce to around $50 and then collapsed. The futures market performed just fine during this period and fulfilled its function of allowing silver users to hedge risk from the price volatility. 

The same can be said of subsequent bubbles, including those in the equity market in 1987 and the Nasdaq in 2000. As the housing bubble popped, beginning in 2007, the banking system suffered severe stress but futures markets functioned with neither interruptions nor bailouts. Daily margining helped to prevent the kinds of overleverage that plagued the banking sector.

Many commodity prices also experienced bubbles during the past decade and saw their prices collapse.  Crude oil fell from $147 per barrel in the summer of 2008 to as low as $36 per barrel by early 2009.  Natural gas prices dropped from $13 per MMBtu in 2007 to as low as $2 per MMBtu by early 2015 while exhibiting bitcoin-like volatility. Metals prices also collapsed between 2011 and 2016 after huge run-ups during the previous decade. In every case, futures markets functioned well.

Figure 3: GDP Growth Per Capita Improved Under the Fiat Currency Standard.

 

Figure 4: Economic Volatility Fell with Fiat Currencies.

 

Does Bitcoin Have Inherent Value?

There are those who argue that bitcoin has no inherent value and is merely a speculative vehicle. With respect to inherent value, we largely agree. Bitcoin has no inherent value. Neither do the U.S., Australian, Canadian or New Zealand dollars, the euro, the yen, the pound, the Swiss Franc or any other government-issued currency. Yet large user networks trade in these currencies in great quantity every day and agree that they do have value in the present moment. Moreover, futures contracts have existed on these fiat currencies for four decades. If fiat currencies have no inherent worth then neither do government bonds. Both are forms of debt whose value derives from taxing authorities and whose value can be eroded by inflation. 

Gold also has little inherent worth. It barely figures into industrial processes. Most gold is hidden away in vaults and that which is not is largely worn as jewelry – pretty but not economically functional, unless conspicuous consumption really does create value. A small amount of gold winds up in people’s teeth.  The fact that gold is prized is a function of both its scarcity and a large user network that accepts that it has value. Bitcoin is no different, only more recent. And, while it can’t be worn as bling-bling, it can be exchanged for hard currency, which is accepted in jewelry stores worldwide.

Only industrial metals, agricultural goods and energy products can be said to really have any inherent worth. Yet despite the critical importance of these goods, prices are not sky-high because supplies are, for the moment, abundant. 

Lots of Pots, Lots of Kettles

While there is much truth to saying that bitcoin has no inherent worth, there are lots of glass houses in this financial neighborhood, so one should be careful about throwing stones. Cryptocurrencies, including bitcoin, are unique. That said, one can understand them better by drawing analogies to a variety of more familiar asset classes, including fiat currencies, commodities and equities.  However unique, bitcoin carries characteristics of all of these assets to which we are more accustomed. 

Bottom line:

• In addition to currency and commodity-like characteristics, bitcoin also resembles equity.


• Bitcoin can create spin offs (hard forks).


• Bitcoin miners and transaction validators are compensated with bitcoin in a manner analogous to companies granting stock to employees.


• Like Wikipedia, cryptocurrencies represent non-hierarchical “teal” organizations in which people make voluntary contributions. 


• Bitcoin is a bit like an equity on an ecosystem that surrounds the crypto asset rather than a traditional hierarchical corporate entity.


• If there is indeed a crypto bubble, it may be financing and incentivizing the creation of a new generation of powerful computers which could have widespread and unpredictable future applications.


• Investors in cryptocurrencies may or may not benefit from popularizing the blockchain and distributed ledgers.


• At the moment, bitcoin is too small to pose any threat to the stability and continued growth of the global economy but this could change if the currency rises to a much higher value and then collapses. 

 

Finra Issues Warning On Crypto-Related Stock Scams

Yesterday morning we explained the latest and greatest get rich quick scheme in the stock market as follows:

Now that it is abundantly clear that for a stock to explode higher, all that is necessary - and sufficient - is a press release mentioning the company"s name and throwing in the word "blockchain" in the same sentence (see Riot Blockchain, LongFin Corp, Net Element, and Nova Lifestyle) other public microcaps have decided that if that"s all it takes, then by all means they will gladly take investors" money."

This morning, the microcap formerly known as Long Island Ice Tea did just that when it changed its name to Long Blockchan Corp, sending its stock 500% higher.

Needless to say, idiocy like this will end in tears, and when the various sequential bubbles burst, they will sweep away with them any value-adding and non-fraudulent products and services that have emerged out of the cryptocurrency and blockchain technology. Which is why it"s about time for the regulators to step in and start halting such examples of manic investory stupidity before more people get hurt, or worse, suicided.

This morning, the market"s self-regulator FINRA, did just that, when finally it issued a warning titled "Don’t Fall for Cryptocurrency-Related Stock Scams" which, literally, boils down to one simple warning: "Do your research before purchasing shares of any company offering investment opportunities in cryptocurrency", a warning that is applicable to every single investment, yet when people see 500% gains in seconds after an illiquid microcap company adds "blockchain" to its name, nobody actually bothers with.

Here is Finra"s full warning which of course, will be ignored until the whole sector crashes.

Don’t Fall for Cryptocurrency-Related Stock Scams

 

Cryptocurrencies (such as Bitcoin) are in the news daily. FINRA is issuing this Alert to warn investors to be cautious when considering the purchase of shares of companies that tout the potential of high returns associated with cryptocurrency-related activities without the business fundamentals and transparent financial reporting to back up such claims.

 

Do your research before purchasing shares of any company offering investment opportunities in cryptocurrency. And don’t be fooled by unrealistic predictions of returns and claims made through press releases, spam email, telemarketing calls or posted online or in social media threads. These actions may be signs of a classic "pump and dump" fraud.

 

The SEC suspended trading in a number of securities due to questions regarding the accuracy of cryptocurrency-related activities. For example, trading was suspended when the SEC questioned the accuracy of claims regarding:

 

• the liquidity and value of a company’s assets in DIBCOINS, a cryptocurrency;


• assertions by several companies that each planned to conduct an Initial Coin Offering (ICO); and


• a company’s claimed transition from a vape products business to one involved in  cryptocurrency and adoption of blockchain technology.

 

Tips to Avoid a Cryptocurrency-Related Stock Scam

 

Especially in today’s “hot” cryptocurrency environment, it’s easy for companies or their promoters to make glorified claims about new products, services and other cryptocurrency-related connections. And, even when legitimate companies flock to a hot, new sector, fraudsters almost always follow suit, exploiting the news to launch their latest frauds du jour. Follow these tips to avoid costly mistakes.

 

• Do not say "yes" to cryptocurrency stock purchases from an aggressive cold caller, even if the claims sound plausible, particularly if the recommended stocks are very low-priced. Don"t feel guilty about hanging up. Not answering at all, or putting down the phone, are generally the best and safest responses to a cold caller or anyone aggressively pitching low-priced stocks or other investment opportunities.


• Be suspect of anyone who makes guarantees that an investment will perform a certain way, or makes pushy sales pitches that encourage you to “act now.”


• Use FINRA BrokerCheck® to the check registration status of, and additional information about, the people and firms who tout these opportunities.


• Check the SEC"s EDGAR database to find out whether the company files with the SEC. If so, read the reports and verify any information you have heard about the company. But remember, the fact that a company that has registered its securities or filed reports with the SEC doesn"t mean that the company will be a good investment.


• Be wary of stocks with huge spikes in price: this could signal potential manipulation or fraud


• Know where the stock trades and pay attention to any cautions associated with the stock. Most stock pump-and-dump schemes tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Markets, which provides icons to warn investors of concerns associated with a given company. These include a stop sign to indicate the company cannot or will not provide important information to regulators, exchanges or the OTC Markets—and also a skull and crossbones to warn that the security, company or a person who controls the company might be involved in a spam campaign, questionable marketing, regulatory action or more.

If you"re suspicious about an offer or if you think the claims might be exaggerated or misleading, please contact us.