Bitcoin: Gold Rush in the Wild Wild Math Game

By EconMatters

 

Bitcoin has become a buzz word in the investing community, not as an alternate currency unit replacing the fiat money, but as an asset class with a spectacular 1,600%+ return this year, valuation almost doubled just in the December month alone. Bitcoin was heading towards $20,000 before pulling back to $15,000 level on 12/21/2017, and . The entire cryptocurrency market capitalization rose above $600 billion for the first time on Dec. 18, 2017.

 

Bitcoin Chart Dec. 21, 2017 

 

Despite what you might have heard people raving about the "money of the future," the fact is that bitcoin and other cryptocurrencies are very expensive and experimental as well.

 

Existed Since 2009

 

Bitcoin is a form of digital or virtual currency and is not as “new” as you might think. It has existed since 2009. In January 2009, a programmer implemented the bitcoin software as open source code and released it under the alias of Satoshi Nakamoto. There have been many rumors regarding the true identity of Nakamoto, but nothing conclusive so far.

A Mining Math Game for All

 

With many companies adopting it as form of payment and many others getting ready to, bitcoins are an extremely fast-spreading “currency”.

 

Unlike fiat currency controlled by world’s central bankers and partly backed by gold reserve, Bitcoin is based on mathematics and totally decentralized. That is, much like the precious metal, bitcoin can only be “mined”, not “printed”. All Bitcoin transactions, including Bitcoin creations, are recorded and verified on the blockchain, also originally developed by Satoshi Nakamoto. Today, around the world, people and companies are using software programs and computers following a mathematical formula to produce bitcoins around the world.

1,000+ Rival Crytocurrencies 

 

It was not until 2011 when other rival crypocurrencies emerged partly due to bitcoin’s increasing popularity. Currently there are over 1,000 cryptocurrencies in circulation with new ones frequently appearing.

 

How Many Bitcoins Are There to “Mine”?

 

It seems anyone, with proper equipment, can “mine” bitcoins. The logical question would be is there a limit to how many bitcoins can be mined? According to Bitcoin.org, the bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners.

Silk Road Anonymous

 

Because Bitcoin was purposely designed with anonymity and lack of control in mind, it is quite attractive for criminals. Heard of Silk Road, the darknet black market, best known as a platform for selling illegal drugs? Though the U.S. government shut down Silk Road in 2013, Bitcoin benefited from Silk Road’s headlines and front pages of the mainstream media.

Gone in 60 Seconds at Mt. Gox

 

The lack-of-control nature of Bitcoin also comes with some security issues. In January 2014, the world’s largest Bitcoin exchange Mt. Gox went offline, and its total of 850,000 Bitcoins disappeared. Investigations are still trying to figure out exactly what happened. At today’s prices, those missing coins would be worth about $12 billion. Nevertheless, the bottom line is that those owners never saw their Mt. Gox Bitcoins again.

Bitcoin Futures Launched

 

Despite debacles at Silk Road and Mt. Gox, Bitcoin futures debuted on CME Group late on Sunday, Dec. 17, 2017, and on CBOE a week earlier. Many hailed this recognition by major exchanges as the pivotal moment of bitcoin to legitimacy. However, as Reuters reports:

 

“…. an almost twentyfold increase [of Bitcoin] since the start of January has also led to increasing warnings about the dangers of investing in an immature, opaque and largely unregulated market.”

1,000+ Whales Control the Market

 

The Bitcoin market cap is about $215 billion, but 40% of that “immature, opaque and unregulated” market is held by about 1,000 users/whales. What is even more disturbing about this market structure as Bloomberg reports:

 

“….the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.”

 

Late Does Not Mean Never

 

In other words, whales can easily make or break the market by colluding and manipulating the Bitcoin prices. This is akin to the Hunt Brothers cornering the silver market back in the ‘70s. It was illegal what the Hunt Brothers did, do you think regulatory agencies around the world would just sit idly by and watch the same thing happen in the new Bitcoin market?

 

Regulations are notorious for lagging way behind technology. Nevertheless, it is inevitable that sweeping regulations will catch on in the near future. France’s finance minister already said his country would propose that the G20 group of major economies discuss regulation of bitcoin next year.

 

"Gold Rush in the Wild Wild West"

 

To sum up,

 

• Bitcoin is “created” or “mined” by a math program written by an unknown person.


• The program protocol caps the creation at 21 million bitcoins.


• 40% of the market is controlled by 1,000 whales who know and communicate with each other regarding buying and selling of Bitcoins.


• There are over 1,000 cryptocurrencies in circulation rival to Bitcoin with new ones frequently appearing.

 

The current Bitcoin Market lacks the proper structure that a healthy asset market should have, that is,

• Reasonable transparency,


• Long and short players (Bitcoin right now is a long only market),


• A diversified pool of producers (supply) and users (demand)


• Appropriate regulations/portocols to prevent collusion and market manipulation.

 

Bitcoin Investment

 

Right now, much of the hype is about getting rich by trading Bitcoin. One thing to remember is that just like any other exotic asset class, Bitcoin is even more vulnerable to the boom-and-bust cycle. Bitcoin’s first crash took place in 2013 when the price of one Bitcoin reached $1,000 for the first time, but then the price quickly plummeted to around $300. It took more than two years before Bitcoin reached $1,000 again.

 

Many traders are on the sideline right now waiting for a significant pullback to get in on Bitcoin. The key is to buy low and not develop a sentimental/emotional attachment thus missing the proper selling point. Before jumping in, it is also important to understand risks and opportunities in the bitcoin market. Expect much higher than normal volatility and sweeping regulations that could drastically change the market landscape.

 

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Comparing Bitcoin, Ether, & Other Cryptos

Unless you’ve been hiding under a rock, you’re probably aware that we’re in the middle of a cryptocurrency explosion. In one year, the value of all currencies increased a staggering 1,466% – and newer coins like Ethereum have even joined Bitcoin in gaining some mainstream acceptance.

And while people like Jamie Dimon of J.P. Morgan and famed value investor Howard Marks have been extremely critical of cryptocurrencies as of late, many other investors are continuing to ride the wave. As Visual Capitalist"s Jeff Desjardins has noted in the past, the possible effects of the blockchain cannot be understated, and it could even change the backbone of how financial markets work.

However, even with the excitement and action that comes with the space, a major problem still exists for the layman: it’s really challenging to decipher the differences between cryptocurrencies like Bitcoin, Ethereum, Ethereum Classic, Litecoin, Ripple, and Dash.

For this reason, we worked with social trading network eToro to come up with an infographic that breaks down the major differences between these coins all in one place.

(click image for massive legible version)

A DESCRIPTION OF MAJOR COINS

Here are descriptions of the major cryptocurrencies, which make up 84% of the coin universe.

BITCOIN

Bitcoin is the original cryptocurrency, and was released as open-source software in 2009. Using a new distributed ledger known as the blockchain, the Bitcoin protocol allows for users to make peer-to-peer transactions using digital currency while avoiding the “double spending” problem.

No central authority or server verifies transactions, and instead the legitimacy of a payment is determined by the decentralized network itself.

Bottom Line: Bitcoin is the original cryptocurrency with the most liquidity and significant network effects. It also has brand name recognition around the world, with an eight-year track record.

LITECOIN

Litecoin was launched in 2011 as an early alternative to Bitcoin. Around this time, increasingly specialized and expensive hardware was needed to mine bitcoins, making it hard for regular people to get in on the action. Litecoin’s algorithm was an attempt to even the playing field so that anyone with a regular computer could take part in the network.

Bottom Line: Other altcoins have taken away some of Litecoin’s market share, but it still has an early mover advantage and some strong network effects.

RIPPLE

Ripple is considerably different from Bitcoin. That’s because Ripple is essentially a global settlement network for other currencies such as USD, Bitcoin, EUR, GBP, or any other units of value (i.e. frequent flier miles, commodities).

To make any such a settlement, however, a tiny fee must be paid in XRP (Ripple’s native tokens) – and these are what trade on cryptocurrency markets.

Bottom Line: Ripple runs on many of the same principles of Bitcoin, but for a different purpose: to serve as the middleman for all global FX transactions. If it can successfully capture that market, the potential is high.

ETHEREUM:

Ethereum is an open software platform based on blockchain technology that enables developers to build and deploy decentralized applications.

In the Ethereum blockchain, instead of mining for bitcoin, miners work to earn ether, a type of crypto token that fuels the network. Beyond a tradeable cryptocurrency, ether is also used by application developers to pay for transaction fees and services on the Ethereum network.

Bottom Line: Ethereum serves a different purpose than other cryptocurrencies, but it has quickly grown to displace all but Bitcoin in value. Some experts are so bullish on Ethereum that they even see it becoming the world’s top cryptocurrency in just a short span of time – but only time will tell.

ETHEREUM CLASSIC:

In 2016, the Ethereum community faced a difficult decision: The DAO, a venture capital firm built on top of the Ethereum platform, had $50 million in ether stolen from it through a security vulnerability.

The majority of the Ethereum community decided to help The DAO by “hard forking” the currency, and then changing the blockchain to return the stolen proceeds back to The DAO. The minority thought this idea violated the key foundation of immutability that the blockchain was designed around, and kept the original Ethereum blockchain the way it was. Hence, the “Classic” label.

Bottom Line: As time goes on, Ethereum Classic has been carving out a separate identity from its bigger sibling. With similar capabilities and a different set of principles, Ethereum Classic could still have upside.

DASH:

Dash is an attempt to improve on Bitcoin in two main areas: speed of transactions, and anonymity. To do this, it has a two-tier architecture with miners and also “masternodes” that help the network perform advanced functions such as near-instant transactions and coin-mixing to provide additional privacy.

Bottom Line: The innovations behind Dash are interesting, and could help to make the coin more consumer-friendly than other alternatives.

BONUS: BITCOIN CASH

Although not included in the graphic, we also wanted to add a quick word on Bitcoin Cash. This new currency “hard forked” from Bitcoin about a month ago, as a result of miner disagreements about the future of Bitcoin. Here’s a detailed summary of the announcement.

Crypto Currencies Go Ballistic

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW: Crypto Currencies Go Ballistic

I"ve received at least 5 emails on this topic now.

What on earth is going on with the altcoins?

Here"s one message I share with you from a particular gent who, apart from being a thoughtful, intelligent, and successful guy, has more hair than me:

"Dear Chris,

Just curious, have you been following crypto-currencies – the altcoins in particular ?  There are two very interesting developments under way:

1. The total market value of all crypto-currencies has almost doubled from about $18 billion to about $34 billion … in just FOUR MONTHS !!


2. While BTC has increased in price about 40% from $956 to $1,335, its market share has dropped dramatically from about 90% to just over 60% … also in just FOUR MONTHS !!  Altcoins such as ETH, Ripple, Dash, and especially PIVX have increased in value 600% or more (FYI, the percentage increase for PIVX is not a misprint – it increased in value 173 times). .  See spreadsheet below

The growth in the overall value of the crypto-currency markets makes me wonder if we reached an inflection point where the ‘dam has broken’ so to speak and a flood of money is about to pour into this market (n.b., SEC has agreed to revisit the Winklevoss Bitcoin ETF application as well as an application for an ETF that would invest in ETH).

The reasons behind the performance of the altcoins is something of a mystery to me.  I get it that the likes of Microsoft and Chase-Morgan announced they would be backing ETH which would explain its increase in price, but I do not know why the other altcoins have done so well especially relative to BTC.  BTC is about the only crypto-currency the vast majority of the investing ever has heard of and yet major amounts of money are flowing into the altcoins yet I have no idea how more than a handful of people with substantial amounts of money even know about these altcoins let alone why they would have invested in them.

FYI - I have begun diversifying into ETH.  It’s now 13% of my crypto-currency position.  I also am planning to take small positions in many of the other altcoins listed below over the next few months.

Pretty unbelievable"

 

WTF is happening?

Take a look at the Bitcoin market cap:

And this - all the altcoins combined market cap:

And Bitcoin"s dominance wanes:

Ok... so this presents a host of questions.

Let"s Start With What We Do Know...

Bitcoin, which I"ve written about extensively, got one helluva boost in the last week, rising to over US$1,400. Now, this was pretty easy to figure out. All it requires is curiosity, a stubby finger, and Google.

With those three things we can see that about 50% of trading volume in the 24 hours leading up to this record breaking rally came from the Bitcoin-JPY exchange rate.

We also know that our sake drinking friends recently deemed the cryptocurrency a legal form of payment. It seems that, given the option of holding yen and BTC, Mrs. Watanabe did some math.

Then, over in the land of trigger warnings, safe spaces, and rioting-latte-drinkers we had the stern-faced suits at the SEC suggest they"d be reviewing their decision for Zuckerberg"s-old-buddies-proposed ETF, the Winklevii brothers (plural).

All obviously bullish for Bitcoin. No surprises there.

Altcoins

As my friend mentions in the article above, we"ve got the likes of Microsoft and the vampire squid"s half brother JP Morgan backing Ethereum so it"s easy to see why Ethereum got a shot of espresso.

What About the Others?

You tell me.

I suspect it"s a momentum driven "who"s next" game being played, though I profess I"m largely unencumbered by knowledge when it comes to the hundreds of altcoins out there.

Here I lean on a friend, entrepreneur, fellow investor, and super nice guy Rolf Versluis, who wrote an excellent piece on altcoins. Read it. You will be better of for it... and probably more attractive, too.

The Bigger Picture

Blockchain is here to stay.

Anyone that thinks bank issued fiat currency as we know it today is going to still be with us in the next 50 years or likely less simply isn"t paying attention.

Central banks absolutely will begin to use a blockchain to create their own currencies.

The simplest way for any central bank to do this right now would be for them to fork the Bitcoin protocol into a new protocol that is unchanged, except that the central bank would set and adjust the block mining reward as they see fit - not unlike modern day paper currency.

In this way the central bank’s crypto-currency would be decentralized in transactions and centralized in supply.

The Bank of England are already working on this, as discussed in this article.

Now, any blockchain could be used. It doesn"t have to be the Bitcoin protocol as India proved with Indiastack.

A hypothetical situation...

Central bank A creates its own crypto currency, forbids the use of any others. Not any different from the situation today, except that it"s fiat currency which individuals are forbidden from creating.

What"s stopping them?

They"re broke.

The monetary system is held together by termites and desperately needs a fix. QE and negative rates haven"t done the trick and instead have left us with unimaginable debt loads.

Like the chubby boy north of Seoul, they"re running out of options.

This is not to mention the unprecedented level of transparency a government would have with a crypto-currency. Every single transaction that takes place is irrefutable, tracked, and registered on the blockchain. Taxation could take place at source. A few lines of code would solve that problem.

Forget about banning cash, which can be transacted hand to hand as well as via the banking system.

With a crypto-currency everything would go through the chosen protocol meaning that when you buy that "pleasure toy" for your wife or shell out for drug rehab for your wayward cousin, it"s all recorded, registered, archived - ready to be mined by "algos" which will eventually preclude you from buying too much booze since your health insurance won"t permit it.

TOTAL control.

Bliss to sociopaths from Washington to Beijing and everywhere in-between. Not only can taxation take place at source but try speak out against the establishment and watch them seize your entire net worth with a click of a button.

At a policy level: think of the immediacy of data provided to policy makers, who - though they have proven completely inept at managing an economy - will see a treasure trove of granular data and think to themselves, "whoah Janet, this is exactly what we"ve needed all along".

Undeterred by a wall of evidence suggesting they"re buffoons incapable of walking your dog and with a new set of tools they"ll gleefully set to work.

The blockchain, when compared to their existing toolbox, will appear to be what a chainsaw is to scissors. Whoopeee!

Can you feel the onrushing Orwellianism?

Fools will say, “If you are not doing anything wrong, you have nothing to fear.” This is 100% true and completely plausible, if government were benevolent. It"s not.

Right now we don"t know whether governments will succeed or not.

We do know that the technology allowing for such a world exists. In a situation where things really come unglued it"s possible their legitimacy comes into question and - combined with their inevitable incompetence - paves the way for something entirely different.

Remember, these discussions we"re having here are based on technology which only a decade ago never even existed.

When gunpowder was created it would have been easy to extrapolate a view as dystopian as ever.

That never happened.

Maybe we get lucky and we find a world with more, not less freedom.

The jury"s still out.

Question for the Week

Cast your vote here and also see what others think will happen

- Chris

"The entire human populace is now taking charge of the means of production and changing the rules of the game. They’re making their own freaking currencies, for God’s sake." ? Paul Vigna, The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order

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