Bitcoin's 'Fork' In The Road

The moment there is a hard fork, we are going to allow brand confusion to step in. This is a HORRIBLE idea.

The security of the Bitcoin network comes from the computational hash power that the miners bring. This is driven by the price of Bitcoin?—?higher the price, more hashing power. High prices are in turn driven by market demand. Market demand is driven by PR & media and the long term narrative that Bitcoin is the first and only true cryptocurrency which is a long term store of value. If we mess with this, I believe we can expect negative consequences…

When the media declared Bitcoin was dead in 2014, it took us a long time to recover, price wise.

Bitcoin Unlimited will just become an altcoin if it doesn’t have majority support?—?why does it matter?

In the event that 35–50% of miners broke away and created an altcoin, in this case?—?Bitcoin Unlimited, we would essentially then have 2 coins. Bitcoin (BTC) & Bitcoin Unlimited (BTU). One could argue that BTU is not Bitcoin, but it may still be called Bitcoin by the man on the street. For instance, if he buys what he thinks is Bitcoin, to buy some gift cards at Gyft, only to discover that he bought the wrong Bitcoin?—?can you imagine the issues that merchants are going to have now in dealing with the customer support fallout. In all or many cases, they may even remove Bitcoin as a payment method, unless the business is Bitcoin only, in order to avoid customer confusion or the risk of the individual coins fluctuating in price between purchase and usage.

As much as the crypto world is smart enough to understand the differences, the average person barely understands Bitcoin today and forcing them to tell the difference between BTU & BTC is going to be a big challenge.

Let’s not forget some other important points: Roger Ver (the force behind Bitcoin Unlimited aka Bitcoin Jesus) also owns Bitcoin.com (and a number of other strong domain names) and he also owns a couple of hundred thousand Bitcoins (apparently around 300k BTC).

When Bitcoin forks, everyone who is holding BTC, would receive an equal amount of BTU?—?so Roger would have presumably 600k coins (300BTC +300 BTU) according to industry rumours.

The moment Bitcoin splits, he is able to legitimize Bitcoin Unlimited using Bitcoin.com?—?which for the uninitiated would actually be a legitimate source of information, and is highly ranked on search engines like Google. Bitcoin Unlimited would effectively become Bitcoin.com. My first company was in search engine marketing?—?I know this world all too well.

If there was a fork and Roger wanted to pump Bitcoin Unlimited, he could literally dump all his Bitcoin (BTC) holdings into the market. I don’t want to even guess what 300,000+ coins being moved in a short space of time would do to prices, especially after a contentious hard fork where new money investors would already be on the sidelines. This happened to Ether Classic after the Ether Fork?—?the Ether Foundation sold off 90% of their coins and depressed the price. Just the threat of this alone will cause the market to tank for BTC, just for starters. If Roger wants to kill Bitcoin’s price and legitimacy, there is no reason to not fear this and the market will start pricing in this risk.

Roger would not be the only person to sell down BTC. Other BTU loyalists who have two sets of coins would do the same, initially in order to drive down BTC. Conversely, all the long term BTC holders would now receive equal amounts of BTU. Even the most hard core BTC Hodlers would probably sell down BTU with all their BTU coins in order to try and crush it. Given the importance of BTC as a reserve asset in altcoins, many traders could use weakness in price to short BTC and drive their altcoin prices up.

Long story short?—?none of these scenarios (or any others I can think of) play out well for Bitcoin, either in the markets or the media and this fundamental divide means that you’re going to have increased volatility from both sides, as more coins will pour into the market?—?crushing any demand side driven rally.

The whole point about Bitcoin being a long term store of value is that there are only 21m coins, ever. Stability, security and scarcity are the differentiation properties of Bitcoin, a contentious Hard Fork attacks these properties and will be strongly reflected in the price. After a Hard Fork, we will be sitting with 33m “Bitcoins”, on track for 42m and we’ll be having arguments about which one is the legitimate Bitcoin for years to come. You can expect legal cases to arise around the use of the brand, as the Ethereum Classic Investment Trust has shown.

Imagine someone says: I want to buy Bitcoin. Next question is: Which one?! After that, the very next question will be :

“What if one of these coins fork again?—?then we will have 63m coins, and so on and so forth.”

But, aren’t two coins are better than one! The market will adjust!

Let’s say the price of Bitcoin today is $1,000?—?if doing a 75%/25% split would now mean that you have have 2 coins, this should mean they are worth $1,000 ($750+$250). So, I did a simplified calc based on Metcalfe’s law, and it estimated the new coins combined could be worth more than 33% less almost immediately after a Hard Fork due to reduced network effects, and that’s assuming everything went well... With the ensuing FUD and negative press/media?—?you can expect this to drop even further! Bitcoin’s enemies can’t wait for an opportunity like this.

Creating two networks destroys network effects (payment providers, merchants, etc) and the Bitcoin price is non-linear to size of network, so the two coins combined will not equal the same price. You can compare this to the Ether split, as Bitcoin is at scale ($20bn) and Ether wasn’t at the time and it definitely set them back.

Bitcoin has died many times, it can survive a Hard Fork! Even Ethereum did.

Let’s start over. Ethereum is a B2B facing platform?—?consumers & media don’t know or really care about it. Bitcoin is a $20bn asset class. And yes, after the media declared Bitcoin dead after the last “bubble”, it took us 2+ years to rebuild the price by generating demand organically. The media attention this time during the recovery and cross the price of gold does not even come close to last time when it was taking off like a rocket. If a split is portrayed badly in the media and creates confusion, we will possibly go into another 2 years of sideways and down. Do we have that much time again with other competitors on the heels? And let’s be frank, a Hard Fork is not Bitcoin dying. It’s Bitcoin duplicating. Now we have two Bitcoins, both won’t die, maybe one will. Which one is the real Bitcoin? Do not underestimate how many enemies Bitcoin has?—?a fork will just give them all the ammunition they need to confuse the market.

Who cares if 30% of the miners fork off?

Bitcoin’s price is a function of faith and network security, given the large amount of computing power that goes into it. Metcalfe’s law dictates that the value of the network is the square of the network. By splitting the network even 70/30, it’s inarguable that it’s less secure. Yes, it could rebuild but, depending on the price of each coin after the split, hash power may move from one coin to the other. These are highly specialized machines and one coin surges in price, you can expect hash power to follow suit.

Remember that one of the biggest mining companies, Bitmain, is now signaling support for Bitcoin Unlimited. It’s very clear that the current difficulty of Bitcoin makes it harder and harder to compete in this market, but after a Hard Fork, there would need to be a difficulty adjustment on both new forks, given the reduced hash power?—?this opens up the opportunity for Bitcoin mining companies to sell more hardware to miners on both sides of each coin.

The sales of mining equipment are a huge economic disincentive to maintain the status quo without a block size increase, unless the Bitcoin price surges which I don’t believe will happen unless Segwit is adopted and then this debate is over. I called 1300 as a key resistance level and it’s proving to be.

Bitcoin was largely built on the premise that economic forces and self interest would help govern the security of the network. We talk a lot about decentralization but the reality is that the hardware that powers Bitcoin is produced by a handful of companies who also control mining pools which can be used against the network.

Bitcoin has a product & people problem, not a technical problem. A fork will resolve it because both sides get what they want.

The real issue, I believe is two-fold. The community wants Bitcoin to be all things to all people?—?Roger wants cheap coffee transactions, Core wants to ensure its sufficiently decentralized and secure, Vinny wants a store of value, etc.

We have a governance problem in Bitcoin and we have no way to resolve conflict except to fight about it, publicly and given that it’s quasi-democratic, unless we all agree on something, nothing gets done. This has burned a lot of people and I can see why we have so many altcoins out there trying to replace Bitcoin.

Bitcoin cannot be all things to all people, at least, not a for a long time. Right now, it needs to be stable, secure and unchallenged. We can continue to argue amongst ourselves as a community, but for now I am against any contentious Hard Fork that would see us creating two separate code bases with two different brands of Bitcoin.

Companies like Coinbase, BitPay, Gyft, BitPesa, Bitgo and many others have invested years to build consumer adoption and understanding of Bitcoin and create outlets for people to use it. A fork now would undermine all these efforts, investments and limit adoption of Bitcoin in general. Unlike in the Ethereum Hard Fork, 100s of companies use Bitcoin and this would lead to a lot of counterproductivity. Companies should be focused on advancing adoption of their products, not in protocol fights. This debate has already been a strain on the community.

I understand and appreciate many of the different perspectives?—?some which I have not had the time to mention in this post, but given a balance of risks to the Bitcoin ecosystem, I believe that the adoption of Segwit right now is imperative in order for us to get to the next stage in the evolution of Bitcoin and remove the risks of a contentious Hard Fork. The Core Dev team has had a lot of criticism leveled at them and clearly they are not good at community relations, managing perceived conflicts of interests (like Blockstream’s involvement), which has resulted in emotions flaring up against them which is causing an uprising of sorts as we are now seeing. Technically, however, it’s inarguable that they are the best technical team in Bitcoin today.

If we all just breathe out, and put aside our differences and emotions (even just for a while), let’s accept that doing a Hard Fork right now is NOT in the best interest of Bitcoin and let’s please just adopt Segwit.

This post is not trying to be an endorsement or critique of either BU or Core. This post is asking the community to put aside their differences and come together to prevent an irreparable splinter.

I’ll keep posting more links below, but here are few for starters:

Bitcoin Q&A: The dangers of hard forks in protocol evolution https://t.co/BYW413YRg1 via @aantonop

— Vinny Lingham (@VinnyLingham) March 14, 2017

How Bitcoin Reached Parity With Gold

Would you rather have one bitcoin, or a single ounce of gold?

As Visual Capitalist"s Jeff Desjardins notes the answer used to be obvious. Even at the climax of the legendary 2013 rally, bitcoin was never able to reach unit-for-unit parity with gold.

However, since an off-year in 2014, the enigmatic cryptocurrency has steadily climbed in price to take the title of the best-performing currency in both 2015 and 2016. And today? After continuing its rally into 2017, the price of bitcoin has now passed this arbitrary, but psychologically important measure of parity with an ounce of gold.

How did we get here so fast?

Bitcoin: A Short History

Here are some of the most important events that have shaped the bitcoin market:

May 2010: The famous “Bitcoin Pizza” transaction takes place.
This is one of the first “real world” transactions, in which one man indirectly paid 10,000 BTC for two Papa John’s pizzas. That works out to a pretty steep price of over $6 million per pizza using today’s prices, but we are sure they were delicious. Today, May 22 is still celebrated as “Bitcoin Pizza Day” throughout the Bitcoin community.

February 2011: Bitcoin hits “dollar parity”.

October 2012: Bitpay says 1,000 merchants accept bitcoin payments.
Early adopters of the cryptocurrency included WordPress.com, Reddit, OKCupid, and The Pirate Bay.

Mar 2013: Cyprus bank bail-in.
Generally speaking, the European Debt Crisis was a major boon for bitcoin. However, this specific event really put the potential downsides of the banking system and centralized fiat currencies in the limelight.

Oct 2013: Silk Road Bust
As prices were soaring at the end of 2013, the FBI seized 26,000 BTC from Silk Road and its alleged owner, Ross Ulbricht.

Feb 2014: Mt. Gox files for bankruptcy protection
The world’s biggest exchange, which at one point controlled 70% of bitcoin transactions, was plagued with hacks and other problems. It finally went under in 2014.

Aug 2015: By this point, 160,000 merchants accept bitcoin payments

Dec 2016: Bitcoin is the world’s top performing currency for 2nd straight year
See our charts on this for 2015 and 2016.

Bitcoin’s Rise in Context

For enthusiasts and speculators that have followed the cryptocurrency since the beginning, the meteoric rise of bitcoin has been a wild ride.

However, despite the feat of reaching unit-for-unit parity with gold, it is important to take in some context.

Firstly, there are about 16.2 million BTC in circulation – and there are 5.6 billion oz of gold that have been mined throughout history. For that reason the value of the gold market is still more than 300x higher.

Next, while the value of the bitcoin market has soared exponentially since the early days, it is still only worth about $20 billion in total – this is about half of the value of the average company on the S&P 500 (~$40 billion). Compare the bitcoin market to an Apple or Google, and it seems even less extraordinary.

But for those people that follow the crypto markets closely, this above context actually represents the potential upside of the digital cryptocurrency. It means bitcoin still has lots of room to soar – and since bitcoin supply is limited and cannot be created out of thin air, there is nowhere for the price to go but up.

Will Japan's Declaration of Bitcoin as Legal Tender Accelerate Cryptocurrency Mainstream Adoption?

It’s being reported by Sputnik News and other sources that Japan has declared Bitcoin to be legal tender. Unfortunately, I have not been able to quickly confirm this through Japanese sources. The use of BTC as legal tender in one of the world’s leading economies is a big plus for Bitcoin, and likely to lead to a much more rapid pace of adoption. Volume is strong on increasing price.

Be aware that volume on exchanges doesn’t necessarily equate to gross transactions. There are OTC transactions and P2P transfers via the blockchain (see http://Veritaseum.com). There is one thing that is apparent, though. JPY is the new Bitcoin darling, replacing CNY in terms of BTC trade volume on exchanges.

In full disclosure, the blockchain doesn’t show this difference this morning, although it is very clear that CNY not only lost the 90% volume title, but is no more than 25% of US volume after the PBOC clamped down on KYC/AML and margin lending in Chinese bitcoin exchanges

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Bitcoin Extends China Golden Week Gains - Tops $1000, One-Month Highs

As the dollar continues to tumble (and amid China"s quite period during Golden Week), Bitcoin has gently begun to shake off China "probe" weakness and extend its gains once again. For the first time since January 5th, Bitcoin is trading above $1000...

Chinese Bitcoin Trading Volumes Crash 90% Overnight

As we reported yesterday, there was one reason why bitcoin quickly became the darling of HFT and various high speed algo traders operating out of China - which is home to about 10 significant bitcoin venues, with a majority of trades executed on the top three, and which recently accounted for as much as 98% of global bitcoin trading: domestic transactions were "frictionless", as there were no fees on buys or sells. However, that changed on Sunday night because as China"s three largest bitcoin exchanges, BTCC, Huobi and OkCoin, all said in separate statements on their websites, starting Tuesday they will charge traders a flat fee of 0.2% per transaction. The move was meant to "further curb market manipulation and extreme volatility."

As expected, the impact was immediate and on the day the new fees went into effect, trading volumes crashed by roughly 90% across most Chinese exchanges.

According to Bloomberg, the same high-speed traders who had dominated bitcoin trading in China for the past year, are pulling out of China’s bitcoin market after the three biggest venues started charging transaction fees on Tuesday. One-hour volume at OkCoin fell 89% to 1,026 bitcoins at 1 p.m. local time, from 10,062 during the same period on Monday, according to the venue’s website. Huobi and BTC China saw declines of 92% and 82% respectively.

According to data from Bitcoinity there were roughly 4,800 trades on OKCoin between the hours of 11pm and midnight EST. In the following hour, the exchange registered just over 1,000 trades, denominated in CNY: a comparable fall of more than 80%.

Data pulled from Bitcoinity for BTCChina also demonstrates the apparent effect the new trading fees have had on volume. After registering more than 37,000 trades between the hours of 7 and 8pm EST, that amount had fallen to less than 1,000 between the hours of midnight and 1am EST

As discussed previously, and as Bloomberg noted, the lack of fees was seen as the main reason why as much as 80 percent of bitcoin trading in China was automated, with professionals using strategies such as "cross-exchange arbitrage" also known as frontrunning of major order blocks. The platforms made money by charging clients to withdraw bitcoin, but Tuesday’s changes may have ended that system for good. The moves came after the Chinese central bank made on-site inspections of the exchanges and reportedly found a number of violations.

“The exchanges are cutting their arms off to stay alive,” said Zhou Shuoji, whose Fintech Blockchain Group runs a bitcoin hedge fund and venture capital fund. The venues are proactively weeding out speculative trading to appease regulators, said Zhou. The fees, introduced by all three venues at midday on Tuesday, made market-making unprofitable, he said.

And while HFT traders, frontrunners and other "liquidity providing market makers" are furious that their business model in China was just crushed, the good news is that much of the inherent volatility in bitcoin may now be gone.

The good news is that bitcoin prices today were little changed, at around 6,300 yuan per bitcoin. Ultimately, any stability in bitcoin prices as a result of the elimination of HFT-driven volatility may be just what the digital currency needs to rise above $1000 and stay there.

Bitcoin China Tumbles After PBOC Finds Platform "Violations"

Bitcoin prices in China had fallen last week after the PBOC began to investigate platforms and now, as Beijing News reports, margin trading and short selling violations were found at Bitcoin exchanges OkCoin and Huobi.com after preliminary inspections, according to PBOC officials.

Violations were also found at the BTCC online bitcoin exchange, including unauthorized businesses and illegal margin funding, Shanghai Securities News says on cnstock.com, citing officials at the PBOC Shanghai branch.

The reaction - for now - is muted, but all three major Chinese Bitcoin exchanges are seeing prices fall...

Perhaps indicating more controls to come, officials noted "these bitcoin trading platform financing irregularities are leading to abnormal market volatility. In addition, these platforms are not required to establish anti-money laundering internal control system."

China's Bitcoin Exchanges Suspend Margin Trading

China"s bitcoin traders who use the most popular bitcoin exchange not only in China, but also the entire world, BTCChina, were met with an unexpected warning on Friday:

Starting from January 12th, 2017, BTCChina has suspended margin loan service. If you have any questions, please contact Customer Service: support@btcc.com.

BTCChina, which commands over 37% of global bitcoin trading...

... wasn"t alone.

Following last week"s central bank crackdown on bitcoin, China"s major bitcoin exchanges have all halted, or otherwise updated, their lending-based bitcoin trading services, according to CoinDesk.

First reported by China-based bitcoin traders and market observers, BTCC, Huobi and OKCoin appear to have quietly adjusted their terms. Just around the time of the BTCChina notice, Huobi issued a similar announcement on its WeChat page, advising clients that "in order to maintain market stability, we may pause the new leverage services at any time according to market fluctuations and our risk control systems."

Huobi customer service comment at WeChat @huobicom pic.twitter.com/YqP7XM1aVO

— cnLedger (@cnLedger) January 13, 2017

Meanwhile, OKCoin"s international and China-facing websites OKCoin.com and OKCoin.cn were said to be offering limited or augmented versions of the services, though traders were reporting different experiences.

While some users told CoinDesk they were able to borrow 2x leverage at press time (even when executing CNY-denominated trades on OKCoin.cn), others indicated that their accounts were prohibiting this action.

One trader said he was able to see higher margin options, but only able to borrow lower amounts. (OKCoin representatives did not respond to requests for further clarity).

Bobby Lee, CEO of BTCC, told CoinDesk that changes to the exchange"s service were being made in response to interactions with the People"s Bank of China, the country’s central bank, though he stopped short of saying that the service had been terminated or disabled. Lee told CoinDesk: "There"s going to be some give and take. We"ll likely make adjustments as time goes on."

Lee indicated that the move came after the exchange received "informal guidance" from the PBoC, which as reproted last week, has been engaged with domestic bitcoin exchanges amid the run-up in bitcoin prices seen at the start of the year. The developments followed news that central bank officials had met with representatives from the exchanges and, warning them it would "rectify misbehavior" by exchnages.

Last week news spread quickly about the central bank intervention in bitcoin on Chinese social media, with seven local industry representatives acknowledging they were aware of the supposed changes (some noted that they had yet to actively test their perceptions via exchange accounts). Some local traders indicated that they were not surprised by the news that margin trading services had been updated, given the longstanding lack of legal clarity under which the exchanges had operated.

One former representative of a China-based exchange, who declined to be quoted on the record, indicated that he is unsure of whether the issue would have been with the service itself or the way it was marketed to consumers. "I don"t know if it"s [paused] while they implement a system that"s agreeable to the government, or if it"s gone for good," he said.

OTC trader Zhao Dong, likewise, hinted at how this development could come to shape the bitcoin markets, portraying it as a double-edged sword for the industry.

"The good side of margin trading is it provided additional liquidity to the market, the bad side is it is easy for investors to lose money," he said.

Ultimately, the crackdown on margin lending may end up being a long-term positive, as it will prevent the tremendous momentum shifts that have sent volatility in the digital currency soaring. While it would mean slower gains, it would also result in far more gradual selloffs, and a strong investor base.

Yet from some quarters of the Chinese bitcoin space, there was a broad feeling that further engagement with regulators will be forthcoming.  Cited by Coindesk, Ricardo Zhang, CEO for BTC123, a local bitcoin lending and news site that yesterday paused its services: "I think this time, there will be some corresponding laws and regulations promulgated, and a more standardized industry."

* * *

For some Chinese traders the crackdown on margin lending comes just a few days too late. On Friday night we observed the plight of of Ding Wen, who by the age of 34 had built up a personal fortune of more than two million yuan after years of hard work at an internet company in Nanjing, in east China’s Jiangsu province. But, Wen saw most of that wealth go up in smoke on January 5, when China’s bitcoin market crashed, sending the price of the virtual currency plunging 40 per cent in just a few hours after lunch. The reason? Trading on margin:

Ahead of the market crash, Ding had borrowed 995 million yuan from Huobi by pledging a principal consisting of the 409 bitcoins he already owned. He then bought a further 1,228 bitcoins with the loan. Most of his holdings were compulsorily sold out by Huobi during the price collapse while he was unable to access his account.

Meanwhile, Wu Xing, head of marketing at Huobi, said the log-in delay was caused by a torrent of visits and selling orders, which exceeded the capacity of the website. “[The loss] was due to irresistible factors and not included in the compensation scope. We are sorry and understand the feelings of the investors,” she said.

While China"s infatuation with the rapidly moving bitcoin will come and go, then come and go again, this incident merely reinforces a long-running observation of ours: for those traders seeking a way to get rich quick and retire, forget fundamentals, forget technical analysis, forget even reading between the lines of central bankers or frontrunning Donald Trump"s tweet:  all you have to do is figure out which asset China"s army of deranged bubble chasers will flock to next, buy it just ahead of time, wait a few days, then sell it all just before the bubble bursts.

For the really brave ones, rinse and repeat.

Is A Bitcoin "As Good As Gold"?

Submitted by Stefan Wieler via GoldMoney.com,

Introduction

 

The price of Bitcoin seems to have exceeded the price of gold briefly for the first time this week; however, this comparison is completely arbitrary.

Gold is measured in weight, while Bitcoin, much like currency, is an abstract form of money and can only be measured in units of itself. One Bitcoin is worth a lot more than 1 gram of gold, but a lot less than 1 tonne. Despite Bitcoin’s stellar performance in 2016, the size and depth of the cryptocurrency market is dwarfed by the $7 trillion gold market.

Gold remains the only true global money with a size and volatility comparable to that of fiat currency.

View the entire Research Piece as a PDF here...

Bitcoin – or cryptocurrency itself – is the most exciting monetary experiment in modern times.

Unlike fiat currency, it can’t just be printed, and it mimics the scarcity properties of gold in that it needs an enormous amount of energy to create one coin. The energy-proof of value is what links gold to the primary industries and allows it to maintain its purchasing power over incredibly long periods of time. Without it, any form of money will inevitably be corrupted over time and decay. Bitcoin has some of the same energy-proof of value that makes gold far superior to fiat currency, which can be created with the stroke of a key. Bitcoin, also like gold, is a global currency that may be universally accepted in the future. Even USD can’t make that claim.

Bitcoin has some qualities that are not shared by any other form of money, most notably the potential total anonymity in electronic transactions; however, some might feel that aspect that may prevent the universal adoption of Bitcoin as money. Today, the global stock of Bitcoin is just $20 billion (despite its price rally) and its transaction volume is tiny, even when compared to more exotic currencies. That said, as the adoption of Bitcoin increases, governments may no longer be happy with the fact that it can be used for anonymous transactions and may prevent legitimate businesses from accepting it as money if they see this as a threat. Only time will tell. In the meantime, Bitcoin remains the only alternative to gold (and other precious metals) for savers to escape the built-in decay function of fiat currency otherwise known as inflation.

Bitcoin is currently in the limelight because it has apparently exceeded the price of gold for the first time on some exchanges (although at the time of writing, Bloomberg still shows an average price of Bitcoin hasn’t crossed the gold price yet, but it seems just a question of time). We have no doubt that this will lead to a barrage of headlines in online media, and some mainstream outlets will jump on the bandwagon as well. After all, they already widely reported on a claim made by the Winklevoss brothers in mid-2016 that Bitcoin’s volatility had apparently fallen below the volatility of gold, and thus Bitcoin had become “better at being gold than gold”. We rebutted this claim and surely Bitcoin’s volatility shot back up to 100% shortly thereafter.

Bitcoin has rallied almost USD500 last year and USD100 in the first two days of 2017 alone. At the time of writing, 1 Bitcoin was trading at USD1,135, while 1 oz of gold was trading at USD1,164. To some, it may seem like Bitcoin is about to be more valuable than gold, and though this is of course conceptually incorrect, it probably won’t stop the media pundits from publishing the headline anyway.

Gold and elements can be measured by weight (oz, g, kg, t). Mass and weight are the measuring units endowed by nature. Fiat currencies, or any other abstract commodity or money (including Bitcoin), cannot be measured that way. An abstraction can only be measured in units of itself. Gold and silver are therefore the only form of money today that are traded in weight. Fiat currency on the other hand cannot be measured by anything other than other currency, at least since Nixon ended the convertibility to gold in 1971. In that respect, Bitcoin falls into the same category.

Thus, when comparing units of gold to units of Bitcoin, one must first define what unit it is measured against. Is it grams (currently USD37/g), kilograms (USD37,000/kg) or tonnes (USD 37 million/tonne)? Or are we measuring it in the rather obscure measure of troy ounce (USD1,157/ozt), which, apart from exchange traded metals, is not used for anything else?

Hence comparing the price of 1 Bitcoin vs 1 troy ounce of gold is a little bit like comparing the shares of Seaboard Corp. (USD4,179 per share) to those of Apple Inc. (USD116 per share) and concluding that Seaboard Corp. is worth 35 times as much. Clearly, measured accurately by market cap, Apple is the largest and most valuable company in the world and worth 126 times as much as Seaboard Corp.

The same basic principle applies to money. Combined above-ground gold stocks are currently worth around $7 trillion. As we noted last year, that is more than all banknotes in circulation of all currencies combined (see Eliminating cash will also eliminate the checks and balances on banking policy and practice, February 22, 2016), and it certainly dwarfs the market cap of Bitcoin at around $18 billion. In fact, all crypto-currencies combined (we count 710) have a market cap of just $21 billion (see Figure 2).

There is another obvious obstacle when comparing Bitcoin with gold: Volatility. High volatility is often pointed out against gold being used as medium of exchange and store of value. We will look the volatility of gold in more detail in an upcoming report, but in a nutshell, we find the volatility of gold (measured as standard deviation) is roughly comparable with currency, and gold has proven to be a much better store of value than any currency over the long run - even when interest is taken into account. Bitcoin’s volatility significantly exceeds that of both gold and currency. At times, Bitcoin’s volatility declines for a short period and can even approach the volatilities of gold and currency, but tends to shoot up violently shortly thereafter.

However, standard deviation should not be confused with a measure of risk. The standard deviation quantifies the dispersion of returns; what it does not do is distinguish whether that dispersion comes from upward or downward moves.

For example, an asset that has a 1% return every second day and 0% return every other day would exhibit an annualized standard deviation of 8%. An asset that has a -1% performance every second day and 0% every other day exhibits the same standard deviation. In an asset management context, the two assets may have the same risk. In fact, the negatively performing asset might reduce risk in a portfolio if it is negatively correlated to the other assets. But for a saver, the first asset is clearly less risky.

Hence, instead of measuring volatility as standard deviation, we can measure just the downside deviation. This provides a better idea of the risks of money. How does this look for Bitcoin? Bitcoin’s downside deviation is still several orders of magnitude higher than that of gold or currency. Over the past two years, Bitcoin experienced a downside deviation of >45%. Since the beginning of data in 2010, it was >100%.

The volatility – or to be precise, the downside risk – makes it difficult for Bitcoin to be more widely adopted as money. What speaks for Bitcoin is that it has shown stellar performance over its short lifespan, but this stellar performance comes with considerable downside risk. A merchant accepting Bitcoin as payment is exposed to this downside risk unless he instantly exchanges Bitcoins back to currency following the transaction. Even though a cycle takes about 6 minutes in theory, exchanging Bitcoin to currency actually takes about one hour to confirm the transaction and another hour to confirm the price, during which at the very least the merchant is exposed to the downside volatility. Holding Bitcoins permanently might hold huge upside, but that also comes with intolerable downside risk for a merchant. After all, merchants should spend their time and energy with what they are best at (selling goods) rather than trading currencies and Bitcoin.

Another claim we don’t agree with is that Bitcoin is as free of counter-party risk as gold. What we have seen with Ethereum, another nascent cryptocurrency, is that these virtual currencies ultimately have a master key. With Ethereum, that key is controlled by a council that decides its future inflation rate; with Bitcoin, that key is controlled by Gavin Andresen, an engineer based in Massachusetts. There’s no guarantee that they won’t change the source code for the Bitcoin blockchain in the future, and when you “own” a Bitcoin you simply refer to the blockchain - a distributed ledger that tells you what and how much you own. In this regard, we don’t agree that Bitcoin does not have custodial or counter-party risk; the blockchain itself is the fat tail.

This means that for now, gold remains the only global currency in which individuals and corporations can transact with no time delay, with price volatility comparable to that of major currencies yet without counter-party risk, and one that has been proven as a store of value for thousands of years.

China Launches Bitcoin Crackdown: PBOC Will Probe Abnormal Investor Behavior "And Rectify Misbheavior"

Having long been advocates of Bitcoin (ever since Sept. 2015 when it traded at $230) for the simple reason that we were confident the digital currency would eventually become China"s favorite means of circumventing capital controls - precisely as has transpired - two months ago we warned that the unprecedented surge which made bitcoin the best performing asset in the past year with a 5x return, may be ending as "China Prepares To Impose Curbs, "Capital Controls" On Bitcoin."

Since then, and especially over the past week, China has launched a series of incremental steps designed to do just that, which culminated on Friday when China"s central bank issued a statement calling the changes in the virtual currency "abnormal", and said authorities have required the trading platform to operate in compliance. They urged the platform to "probe investors" behavior and to "rectify misbehavior."

The statement hit shortly after China FX regulators, SAFE, said it would begin scrutinizing fund outflows via Bitcoin, as China sought to close this final gaping capital outflow pathway.

Furthermore, according to China Daily, China"s financial services authorities required major executives of the Shanghai-based bitcoin trading platform BTCC on Friday to "rectify misbehavior in the trading of the virtual currency", without clarifying precisely what this means, and to raise awareness of risks as the value of bitcoins experienced wild fluctuations.

China"s mass speculators flocked to the bitcoin market in recent days in a bid to gain from its fast appreciation, which rose 200% in 2016. However, after rising in near-exponential fashion over the past few weeks without any corrections, Bitcoin"s value fluctuated by more than 30 percent within the past two weeks as concerns of Chinese interference first emerged and were then confirmed. .The statement said authorities would like to reaffirm that the bitcoin as a virtual currency which cannot and shall not be regarded as currency in circulation.

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It is unclear if the PBOC has successfully burst China"s latest bubble: According to data from the Shanghai-based bitcoin trading exchange, BTCC, more than 100 new investors started trading the virtual currency in the past three days, a fast growth compared to some 20 new investors before October in 2016.

"This trend shows that the bitcoin market"s appeal has been rising to a new level," said a market review by BTCC dated Jan 4.

Feng Xin"an, 43-year-old sales manager with Shanghai-based Maoxin Trade Ltd, said he invested some 135,000 yuan ($19,515) in the bitcoin market as he regards bitcoin as a "haven asset".

"The young generation, like my son and his friends, love to pay with digital currencies. Their demand for bitcoin can grow further, as I observe," he said.

Meanwhile analysts continue to warn that bitcoin is not a tool that "guarantees" yield, and warn new investors who have limited knowledge, that entering the market blindly could be risky.

"Investors should always remember that bitcoin lost more than 75% of its value in 2013. We do not recommend it as a long-term investment tool, particularly because of compliance concerns," said Zhang Yufang, investment adviser with Shanghai Shangding Investment Consultancy.

Then again, we are talking about Chinese bubble blowers: a legendary class of momentum chasers who will take any trend far beyond the level of max pain before allowing it to burst in a spectacular supernova of selling, in which the slowest sellers end up suicidal, either literally and metaphorically, before moving on to the next pre-bubble asset.

Following the PBOC statement, Bitcoin tumbled as low at 5,555 Yuan, or just above $800, before rebounding modestly as a new batch of BTFDers emerged.

Bitcoin Nears Parity With Gold

Bitcoin just topped $1100 for the first time since Dec 2013, bringing it closest to gold ever...

The last time bitcoin approached parity with gold, it marked the top in the virtual currency...

But the current price of gold in bitcoin is now at a record low...

Brings a whole new meaning to the phrase "as good as gold."

Bitcoin: The Best Performing Currency For A Second Year In A Row

Bitcoin is no stranger to extreme fluctuations. As Visual Capitalist"s Jeff Desjardins notes, for each of the last four years, the cryptocurrency has either been the best or the worst performing currency – with nothing to be found in between.

Luckily, for those that follow the digital currency closely, those fluctuations were mostly pointed in an upwards direction for 2016. The currency finished the year at $968.23, which is more than double its value from the beginning of the year.

Were any other global currencies able to compete with bitcoin’s strong performance throughout the year?

The following chart compares major currencies (paired with the USD) over 2016:

Brazil’s real rallied 21.9% on the year, the most in seven years. Traders are hoping that center-right President Michel Temer can ease public spending following the departure of Dilma Rousseff.

Russia’s ruble also finished the year with double-digit gains, up 17.8% against the U.S. dollar. This was largely due to the recovery in Brent oil prices, which gained $10/bbl over the course of 2016.

However, a rosier picture for oil was not enough to buoy all producers. Africa’s biggest economy, Nigeria, fell into its first recession in 25 years during the opening half of 2016. Ripple effects from low oil prices caused the Nigerian naira to lose more than one-third of its value throughout the year, making it the worst performing currency (at least officially).

Unofficially, Venezuela’s struggling economy has been pushed to the brink by its ongoing currency crisis. The massive hyperinflation is not reflected in official numbers, since the bolívar is technically “pegged” arbitrarily by the government. Based on black market activity, however, experts estimate that the currency ended the year with inflation of roughly 500%.

Bitcoin in 2017?

Bitcoin is now the best performing currency for two years in a row (2015, 2016):

And in the opening days of 2017, the cryptocurrency has already gained a head start on other global currencies. It passed the vital $1,000 mark in the first days of New Year trading, and could be poised to three-peat for the title of best-performing currency of the year.

To do it again, bitcoin prices would likely need to rise at least 30% on the year, closing in on the $1,300 mark.

Will it be another extreme for 2017 – or will the bitcoin price finally settle for middle ground among other global currencies?

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The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

Bitcoin Surges Above $1,000 As China Unveils New Capital Controls

As noted yesterday, for the first time in three years, and only the second time in history, bitcoin rose above $1,000 in Yuan-denominated Chinese trading, however it was limited to the lower side of this "round number" psychological barrier in US trading, as BTC flirted with $999.99 for most of the day on the popular Coinbase exchange, without crossing it.

Overnight, however, Chinese demand proved too great and US markets had no choice but to arb the difference. So with Bitcoin trading in China at an implied price of over $1,050 at this moment, bitcoin finally soared above $1,000 in the US as well, trading just around $1,024 on Coinbase as of this moment.

Various catalysts for the recent surge have been cited, chief among which is the ongoing crackdown against cash in India providing a new source of demand for bitcoin. However, the most immediate driver of the recent burst in Chinese demand originates, not unexpectedly, from China where Beijing over the weekend implemented even more of what we have said since September 2015 will keep pushing bitcoin relentlessly higher: capital controls.

Recall that as we noted over the weekend, in order to further curb capital outflows, Chinese banks will be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People"s Bank of China (PBOC), down from the current level of 200,000 yuan, according to a PBOC document released on Friday. Cross-border transfers more than 200,000 yuan by individuals will also be subject to the report process. In terms of foreign currencies, the report threshold remains at the equivalent of 10,000 US dollars for both cash transactions and overseas transfers.

How do we know that this latest PBOC intervention in capital markets was merely the latest form of capital controls? Because the PBOC immediately said it wasn"t.

As Xinhua reported overnight, "the policy stoked worries that the government is trying to impose capital control in a disguised form."

"It is not capital control at all," central bank economist Ma Jun said.

Actually, imposing limits on capital movement, i.e. controls, is by definition just that.

Logic, however, did not prevent Ma from continuing on a tangent, and he "explained" that the responsibility of report will be assumed by financial institutions, and there will be neither extra documentation nor official approval procedures for businesses and individuals. "They will not feel any change," Ma added. He also noted that each person"s current annual foreign exchange purchase quota of 50,000 US dollars is unchanged, and normal activities, ranging from business investment and operation abroad to individuals" overseas trips and study, will not be affected, Ma said.

The PBOC has said the move aims to improve monitoring of money laundering, financing for terrorists, graft and tax fraud, instead of targeting common business activities. Appealing to the Chinese savers not to withdraw their money out of fears of even more capital controls, Ma said that the world"s major countries also have similar rules, citing that transactions worth 10,000 US dollars or more are subject to reporting in the United States, Canada and Australia.  Regulators in those countries can even adopt stricter rules if necessary after obtaining legal authorization, Ma said.

Judging by the move in Bitcoin since the announcement, nobody believes Mr. Jun.

And yet, what is surprising is that if China indeed wishes to limit capital flight by bitcoin it could easily do so with the flip of a switch, sending the price plunging. As we noted recently, according to Bloomberg sources, Chinese officials have been considering policies including restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad. Further indicating that Chinese regulators were "just a little behind the curve", they allegedly noticed only recently that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, the report further reveals.

A quick look at the uncanny correlation between the decline in the Yuan and the rise in the bitcoin, confirms that the digital currency has indeed been largely used to evade capital controls. 

Based on this chart alone, the recent surge in Bitcoin would imply that a substantial devaluation of the yuan is looming. That, or even more aggressive capital controls.

As for those buying into bitcoin here on the momentum, most of which originates in China, we urge readers to be cautious as by now the PBOC has certainly noticed that the digital currency remains one of the final, and most successful, means of bypassing capital controls in China. Should Beijing mandate that bitcoin no longer be a means to illegally transfer capital offshore, there is risk of a dramatic, and sharp, drop in its price.

Bitcoin Soars Above $1000 In China

2017 is off to a good start if you are holding Bitcoin as volumes continue to surge through Chinese Bitcoin exchanges amid fears of increased crackdowns on foreign exchange transfers in the new year. In the last 24 hours, BTC China has seen prices spike above 7,100 yuan (well over $1000 at the onshore rate exchange) as Bitstamp reports prices over $990.

Bitcoin in China topped 7,100 this morning - and with USDCNY at 6.945, that is over $1000...

Though it is not quite there in dollars...

So we now know, Bitcoin $1000 arrived before Dow 20,000.

Bitcoin in China approaches record highs...

As we noted recently, according to Bloomberg sources, Chinese officials are considering policies including restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad. Further indicating that Chinese regulators were "just a little behind the curve", they allegedly noticed only recently that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, the report further reveals.

A quick look at the uncanny correlation between the decline in the Yuan and the rise in the bitcoin, confirms that the digital currency has indeed been largely used to evade capital controls.

And it appears Bitcoin implies a notable devaluation of the yuan is looming.

As a reminder, back in 2013, the government classified bitcoin as a commodity and not currency, placing it outside the purview of the foreign-exchange regulator, the people said.  That does not mean, however, that China is powerless at limiting bitcoin"s upside.

Several Chinese government bodies including the People’s Bank of China and the financial regulators said in a joint notice that year that bitcoin functioned like a digital commodity without the legal status of a currency. The central bank said in January it is studying the prospects of issuing its own digital currency and aims to roll out a product as soon as possible.

While China dominates bitcoin mining and trading, the government has shown caution over its spread in the nation. In 2013, the PBOC barred financial institutions from handling bitcoin transactions.