On or about February 23rd, 2014, Mt. Gox (on of the larger bitcoin exchanges) collapsed. The MSM (mainstream media) had a field day...

kapre

LA times on btc

yhoo on btc

I warned everybody that the fall of Mt. Gox was simply a poorly managed small business getting its just dues. To correlate the fortunes of Mt. Gox with the fortunes of the Bitcoin ecosystem is akin correlating the fortune of the World Wide Web with that of Pets.com or Alta Vista in the 1990s. Sounds silly doesn't it? Well, fast forward 3 weeks from the Gox'd experience and this is what we find... BTC volatilityThe week after the media frenzy regarding Mt. Gox started to fade, the price of BTC (bitcoins) started a dramatic phase of price stabilization. This apparent price stabilization was verified by the very dramatic drop in standard deviation.

If we drill down to the weeks in question, we find... BTC volatility1

This price stabilization has occurred even before the wide scale adoption of UltraCoin. 

As always, I'm looking for:

  1. financial capital
  2. intellectual capital
  3. developers, management and sales/marketing expertise.

If you have any of this in abundance, hit me at This email address is being protected from spambots. You need JavaScript enabled to view it..

Published in BoomBustBlog

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Let's quote some of the last lines of my last article on Bitcoin: "Witness the drivel that comes out of the the analyst's reports (and yes, I thoroughly ridiculed each one):

  1. Theres' Something Fishy In The House Of Morgan, Pt. 2: Bitcoin Fear, Envy & Loathing
  2. Does the Mainstream Media Assist Wall Street In Hypocritical Hypothesis For Fear Of The Next Paradigm Shift?"

You see, first JP Morgan threw baseless fear tactics, then Citibank jumped into the fray. Well, guess whose next? Goldman Sachs, of course. Everybody's favorite fair game player. As excerpted from Business Insider today:

"Dominic Wilson and Jose Ursua of the firm's markets research division are first up. They argue that Bitcoin fails to meet both basic criteria of a viable currency: while there remains an outside chance for widespread acceptance as a medium of exchange, as a stable source of value, it has so far failed. That undermines the premise that Bitcoin could serve as a way of short-circuiting exchange rates in inflation-prone countries."

 And Reggie, Chief of Bullshit Patrol & Related Crimes Division chimes in with a Google search on promintent "failed" currency processors:

Bitpay user growth google searchcoinbase user growth google search

But wait a minute! Goldman's business business is growing at a fraction of this pace, and actually negative in some areas. So, if Bitcoin as a currency and payment system is a failure, what the hell is Goldmam? Of course, Business Insider goes on to report...

For most users what matters is not the comparison with other currencies, but a comparison with the volatility of the currency that they hold (dollars in the US for instance) in terms of the things that they need to buy. The volatility of consumer prices (in dollars) has been even lower than FX rates, even if measured over a period including the 1970s. Put simply, if you hold cash today in most developed countries, you know within a few percentage points what you will be able to buy with it a day, a week or a year from now.  

This is Bullshit! Say it to the more mathematically challenged, my bonus hungry friends. Let's run the math using theusinflationcalculator.com:

Dollar as a store of value

As you can see, if you measure things from the '70s as the esteemed, erstwhile Wall Street aficiaondo from Goldman recommended, then you would have less than 17% of your buying power left. Yes, bitcoin is volatile, but its volatility stems from the price going up and down, while the USD has primarily just went down. You know that saying about the frog in the slowly heated boiling pot of water, right?

In addition, both of the largest Bitcoin payment processors absorb the exchange rate volatility for their customers, or did the best of breed Goldman analysts somehow overlook this pertinent fact?

 

Eliminate the bitcoin volatility risk with BitPay's guaranteed exchange rates. ... Import your BitPay sales into QuickBooks, to report and reconcile your bitcoin  ...

 

In addition, there are cutting edge products being introduced by tall, handsome, charsimatic and highly intelligent entrepeneurs who have a long track record of out gunning Goldman et. al. that allow anyone to hedge Bitcoin volatlity against any prominent fiat currency.

Back to those Goldman guys...

Wilson and Ursua include this graph showing volatility of Bitcoin versus the Argentine peso, the yen, the euro, the pound, and U.S. inflation. It's not even close. 

bitcoin volaitlity

But wait a minute! If the largest payment processors absorb the volatility and market risk of their customers, then Goldman must assuredly be referring to the currencies above from an investment perspective, no?

Yes! Bitcoin is truly volatile, indeed, but the guy at Goldman are cheating, hoping that the rest of us don't know our finance and/or basic common sense. You see, they are looking at just one side of the equation - the side that favors fiat currencies and disfavors bitcoin. You see, risk is the price of reward. For every reward you seek, you pay a price in risk. The goal, as a smart investor, is to pay little risk for much reward. Goldman is trying to make it appear as if you are paying nothing but risk for bitcoin and getting little reward in return. Let's see how that pans out when someone who knows what they're doing chimes in. From the BoomBustBlogresearch report File Icon Digital Currencies' Risks, Rewards & Returns - An Into Into Bitcoin Investing For Longer Term Horizons:

Bitcoin risk adjusted returns

You see, with high volatility (aka, risk), it's hard to earn your cost of capital, not to menton surpass it. Isn't that right, employess of Goldman Sachs? Let me jog your collective memories, as excerpted from the BoomBustBlog post on When the Patina Fades… The Rise and Fall of Goldman Sachs???

GS return on equity has declined substantially due to deleverage and is only marginally higher than its current cost of capital. With ROE down to c12% from c20% during pre-crisis levels, there is no way a stock with high beta as GS could justify adequate returns to cover the inherent risk. For GS to trade back at 200 it has to increase its leverage back to pre-crisis levels to assume ROE of 20%. And for that GS has to either increase its leverage back to 25x. With curbs on banks leverage this seems highly unlikely. Without any increase in leverage and ROE, the stock would only marginally cover returns to shareholders given that ROE is c12%. Even based on consensus estimates the stock should trade at about where it is trading right now, leaving no upside potential. Using BoomBustBlog estimates, the valuation drops considerably since we take into consideration a decrease in trading revenue or an increase in the cost of funding in combination with a limitation of leverage due to the impending global regulation coming down the pike.

gs_roe.jpg

 

 Now that we see how hard it is to truly produce Alpha, I query thee... What do you think would happen if a financial maverick, an out of the box thinker who's different from all of those other guys, got a seed round of funding for the most disruptive product to hit the finance world since the printing press? What if that seed round was for $8 million dollars, with a preferred A series coming right behind it? What would such a cash flush company do, being one of the most cash flush Bitcoin companies in the world? Hmmmnnn!!!

Speakin' of Goldman Sachs...

I anticipate being in the market very soon for (I'm not thier yet, but hopefully very soon):

CTO - Chief Technology Officer

COO - Chief Opertating Officer

General Counsel

CMO - Chief Marketing Officer 

CFO - Chief Financial Officer

As well as skilled Java and Blockchain developers.

Hit me via reggie at ultra-coin.com if you have an interest in coming on board.

Published in BoomBustBlog

Citibank

About two weeks ago I answered what was at the time one of the most amateurish reports coming out of the bit money center banks in some time in Theres' Something Fishy In The House Of Morgan, Pt. 2: Bitcoin Fear, Envy & Loathing. Well, it appears that there's a contest for the hypocritical hypothesis and Citibank intends to go for the gold, likely toppling JP Morgan's lead. In a nutshell, we have a gaggle of US based banks that have exhibited horrendous risk management, business judgement and trading/investment acumen nearly topple the global financial system, demand (as in ransom money) trillions of dollars of welfare (which they recieved and are still recieving) from the US taxpayer, and still pay out billions of dollars in bonuses and salaried compensation - all the while the US dollar is still safe and sound as the worlds deepest, most liquid currency market not to mention still being the world's reserve currency.

Now, a much, much, much smaller Bitcoin exchange fails after flashing obvious warning signs for months and does not require bailing out by the tax payer or the Federal Reserve (how can I emphasize how big a plus this is for Bitcoin), and bitcoin dips in price for a single evening - rebounding nigh immediately! Citibank and JP Morgan's incompetence through the entire world into a near depression - and that's with globally collaborative ZIRP, trillion's of dollars of bailouts and the clandestive changing of accounting rules and the morphing if simple  math to make it look like the insolvent were really not so.

Re: Mt. Gox failure -  Would Mt. Gox still be in business today, like JPM and Citi if the Federal Reserve dropped rates to a negative level, FASB authorized the changing of accounting standards to minimize Gox's liabilities and no one at the exchange was held liable for what appeared to be outright fraud, as claimed by the SEC? would there be analysts in Mt. Gox writing silly papers overflowing with hypocritical hypothesis about how XYZ the dollar was dead because a US bank went bust? Probably!

Remember, I turned JP Morgan's alleged research upside down in Theres' Something Fishy In The House Of Morgan, Pt. 2: Bitcoin Fear, Envy & Loathing, to wit:

I've worked hard to establish a strong reputation - not only in terms of competence but in terms of integrity. For those who don't know of me, you canview my media apearances and calls as well as my Wikipedia page. You see, my mommy and daddy raised me to appreciate both aspects of success - not only one. With that in mind I'd like to address the recent report from JP Morgan slamming Bitcoin. Just so most know my viewpoint, the typical Bitcoin enthusiast and entrepeneur is primarily technologist leaning, thus may or may not see all of the aspects of the financial side of this new... "thing". In addition, and because of that, the financial guys often get away with some outrageous bullshit that they'd never even try under different circumstances. Let's apply this perspective to JPM's latest FX strategic outlook report, "The Audacity of Bitcoin". I will refute this report, point by point, and in the process make the managing director whose name is on the report look downright ignorant and uneducated. This is not a personal attack or an attempt at sleight (hey, he may be a downright stand-up guy), I am simply calling it as I see it.

Before we get to the report though, I want to address the foolishness of following these "reports" from the big name brand money center banks.

Mainstream media entities such as the Wall Street Journal and Business Insider take the conflicted interest ridden drivel from these investment banks as actual legitimate analysis and actually base their reporting on it. That really gives me pause! Now on to addressing what Citibank claims as espoused through Business Insider, and I quote:

In a new note, Citi currency strategist — and the bank's defacto Bitcoin analyst — Steven Englander basically asks: What's the point of Bitcoin now?

Many of his comments echo our take in the week leading up to Gox's shutdown about how huge a setback this was not only for mainstream Bitcoin adoption, but also for the central tenets that got Bitcoin off the ground in the first place.

But for Englander, the technical glitch that hit not only Gox but other exchanges "seems to have been known for years without the Bitcoin developers instituting a complete fix,"... "So one question is whether the decentralized structure, which is the attraction to many, makes it too cumbersome to enact essential fixes."

"Bitcoin transactions [were] thought to be impregnable and turned out not to be," said Englander. "Earlier security questions had centered around everything except the possibility that there might be a fraudulent transactions record. The imperviousness to fraud was one the big attractions of Bitcoin and the surprise exploitation of a known defect is a setback. Now it looks like just another payments system that has to worry about fraud."

Where am I to start with this? Long story short, this is plain old simple ignorance! Bitcoin is open source software. That is why you get it for free! It's not as if the core Bitcoin development team ran a company and Mt. Gox bought a commercial software package from them with a warranty and represenations. Mt. Gox relied on an open sourced code base and refused to both contribute back to the community and even keep abreast of what was going on in the community. The end result? A problem that was recognized and solved 3 years ago went unseen by Mt. Gox until they were bled of hundreds of million of dollars worth of bitcoin.  JPM acts as if it is the open source communty's responsibility to instruct Mt. Gox on how to write and maintain software when in actuality it was Mt. Gox's responsibility to give back to and monitor the open source community!!! Notice how entities that were paying attention and playing by the open source communities rules were unscathed by this so-called "defect". If I say there is a hole in the ground and I send out a report that there is a hole in the ground, but you don't read that report and continue to walk until you fall into the hole - all the while knowing you gained access to the ground for free, are you going to blame the ground for being imperfect or yourself for ignoring the community that gave you free access when the warned you about the hole and even gave you instructions on how to avoid the hole?

"Bitcoin's market cap on paper by far exceeds that of the competition and that are many Bitcoin holders heavily invested in Bitcoin, so it has a first mover advantage. However as a store of value, its only value is reputational, and recent developments have shaken that reputation."

Go to 1:25 in this video for an answer to the statement above...

 

Business insider goes on to warn of the following risk: "That big banks themselves co-opt the still-relevant technological developments embedded in Bitcoin and junk all the bad parts". Actually, the banks will implement bad parts and junk all the good parts. You see, this is all relative. In general, what's good for you and me is generally bad for the banks, and vice versa. Why do Citibank and JP Morgan harp on the pitfalls of decentralization? It's because the banks are the guys with the centralized servers!!! If you eliminate the need for centralized servers you eliminate the need for banks! 

Why harp on the dangers of peer to peer? Because bank branches will disappear in a heartbeat, as will centralized exchanges and the ability to pack in massive fees and charges unbenknownst to the client, the same fees and charges that fund those oh so many decimillionaire annual bonuses. It means a paycut for Wall Street and Wall Street is known to be vociferous in its attempts to avoid paycuts.

Reference UltraCoin: The Future of Money!!! for a long list of reasons why the banks fear and loathe Bitcoin, and by extension, UltraCoin!

Published in BoomBustBlog

Citibank

About two weeks ago I answered what was at the time one of the most amateurish reports coming out of the bit money center banks in some time in Theres' Something Fishy In The House Of Morgan, Pt. 2: Bitcoin Fear, Envy & Loathing. Well, it appears that there's a contest for the hypocritical hypothesis and Citibank intends to go for the gold, likely toppling JP Morgan's lead. In a nutshell, we have a gaggle of US based banks that have exhibited horrendous risk management, business judgement and trading/investment acumen nearly topple the global financial system, demand (as in ransom money) trillions of dollars of welfare (which they recieved and are still recieving) from the US taxpayer, and still pay out billions of dollars in bonuses and salaried compensation - all the while the US dollar is still safe and sound as the worlds deepest, most liquid currency market not to mention still being the world's reserve currency.

Now, a much, much, much smaller Bitcoin exchange fails after flashing obvious warning signs for months and does not require bailing out by the tax payer or the Federal Reserve (how can I emphasize how big a plus this is for Bitcoin), and bitcoin dips in price for a single evening - rebounding nigh immediately! Citibank and JP Morgan's incompetence through the entire world into a near depression - and that's with globally collaborative ZIRP, trillion's of dollars of bailouts and the clandestive changing of accounting rules and the morphing if simple  math to make it look like the insolvent were really not so.

Re: Mt. Gox failure -  Would Mt. Gox still be in business today, like JPM and Citi if the Federal Reserve dropped rates to a negative level, FASB authorized the changing of accounting standards to minimize Gox's liabilities and no one at the exchange was held liable for what appeared to be outright fraud, as claimed by the SEC? would there be analysts in Mt. Gox writing silly papers overflowing with hypocritical hypothesis about how XYZ the dollar was dead because a US bank went bust? Probably!

Remember, I turned JP Morgan's alleged research upside down in Theres' Something Fishy In The House Of Morgan, Pt. 2: Bitcoin Fear, Envy & Loathing, to wit:

I've worked hard to establish a strong reputation - not only in terms of competence but in terms of integrity. For those who don't know of me, you canview my media apearances and calls as well as my Wikipedia page. You see, my mommy and daddy raised me to appreciate both aspects of success - not only one. With that in mind I'd like to address the recent report from JP Morgan slamming Bitcoin. Just so most know my viewpoint, the typical Bitcoin enthusiast and entrepeneur is primarily technologist leaning, thus may or may not see all of the aspects of the financial side of this new... "thing". In addition, and because of that, the financial guys often get away with some outrageous bullshit that they'd never even try under different circumstances. Let's apply this perspective to JPM's latest FX strategic outlook report, "The Audacity of Bitcoin". I will refute this report, point by point, and in the process make the managing director whose name is on the report look downright ignorant and uneducated. This is not a personal attack or an attempt at sleight (hey, he may be a downright stand-up guy), I am simply calling it as I see it.

Before we get to the report though, I want to address the foolishness of following these "reports" from the big name brand money center banks.

Mainstream media entities such as the Wall Street Journal and Business Insider take the conflicted interest ridden drivel from these investment banks as actual legitimate analysis and actually base their reporting on it. That really gives me pause! Now on to addressing what Citibank claims as espoused through Business Insider, and I quote:

In a new note, Citi currency strategist — and the bank's defacto Bitcoin analyst — Steven Englander basically asks: What's the point of Bitcoin now?

Many of his comments echo our take in the week leading up to Gox's shutdown about how huge a setback this was not only for mainstream Bitcoin adoption, but also for the central tenets that got Bitcoin off the ground in the first place.

But for Englander, the technical glitch that hit not only Gox but other exchanges "seems to have been known for years without the Bitcoin developers instituting a complete fix,"... "So one question is whether the decentralized structure, which is the attraction to many, makes it too cumbersome to enact essential fixes."

"Bitcoin transactions [were] thought to be impregnable and turned out not to be," said Englander. "Earlier security questions had centered around everything except the possibility that there might be a fraudulent transactions record. The imperviousness to fraud was one the big attractions of Bitcoin and the surprise exploitation of a known defect is a setback. Now it looks like just another payments system that has to worry about fraud."

Where am I to start with this? Long story short, this is plain old simple ignorance! Bitcoin is open source software. That is why you get it for free! It's not as if the core Bitcoin development team ran a company and Mt. Gox bought a commercial software package from them with a warranty and represenations. Mt. Gox relied on an open sourced code base and refused to both contribute back to the community and even keep abreast of what was going on in the community. The end result? A problem that was recognized and solved 3 years ago went unseen by Mt. Gox until they were bled of hundreds of million of dollars worth of bitcoin.  JPM acts as if it is the open source communty's responsibility to instruct Mt. Gox on how to write and maintain software when in actuality it was Mt. Gox's responsibility to give back to and monitor the open source community!!! Notice how entities that were paying attention and playing by the open source communities rules were unscathed by this so-called "defect". If I say there is a hole in the ground and I send out a report that there is a hole in the ground, but you don't read that report and continue to walk until you fall into the hole - all the while knowing you gained access to the ground for free, are you going to blame the ground for being imperfect or yourself for ignoring the community that gave you free access when the warned you about the hole and even gave you instructions on how to avoid the hole?

"Bitcoin's market cap on paper by far exceeds that of the competition and that are many Bitcoin holders heavily invested in Bitcoin, so it has a first mover advantage. However as a store of value, its only value is reputational, and recent developments have shaken that reputation."

Go to 1:25 in this video for an answer to the statement above...

 

Business insider goes on to warn of the following risk: "That big banks themselves co-opt the still-relevant technological developments embedded in Bitcoin and junk all the bad parts". Actually, the banks will implement bad parts and junk all the good parts. You see, this is all relative. In general, what's good for you and me is generally bad for the banks, and vice versa. Why do Citibank and JP Morgan harp on the pitfalls of decentralization? It's because the banks are the guys with the centralized servers!!! If you eliminate the need for centralized servers you eliminate the need for banks! 

Why harp on the dangers of peer to peer? Because bank branches will disappear in a heartbeat, as will centralized exchanges and the ability to pack in massive fees and charges unbenknownst to the client, the same fees and charges that fund those oh so many decimillionaire annual bonuses. It means a paycut for Wall Street and Wall Street is known to be vociferous in its attempts to avoid paycuts.

Reference UltraCoin: The Future of Money!!! for a long list of reasons why the banks fear and loathe Bitcoin, and by extension, UltraCoin!

Published in BoomBustBlog

Cryptocurrencies have been on a tear over the last 2 years, both in terms of mindshare and returns. This is particularly true of the last year, in which Bitcoin (the de facto proxy for cryptocurrencies) has heaved from $13 to $950, making a pit stop at $1200 along the way. This 7,308% return looks to be outrageously delectable to many a speculator and has even caught the eye of an institutional fund or two. The problem is, and what many novice investors have a problem conceptualizing, that astute institutional “investment” funds actually have a problem dipping their toes in the wilding appreciative yet hyper-volatile world that is cryptocurrencies.

The reason is because “investment funds” as opposed to beta chasing “trading” or “hedge" funds seek a measured return on investment. The raw returns that you see spouted for Bitcoin and the various alt.coins are actually not what the smart institutional money is looking for.

Put another way, you tend to get what you pay for. Risk is the price of reward, with risk being defined as deviation from expected return. You nearly never get a reward without bearing some risk to attain said reward. On the flip side, you should always demand a commensurate reward for the risk that you take. Measuring reward without taking into consideration the risk paid to attain such reward is akin to jumping out of the top floor of a 50 story building to revel in the exhilaration of the drop without taking into consideration what happens when you reach ground level. All in all, it tends to end ugly.

My clients are told that if you assumed $1 of risk to reap $1 of reward, then you effectively made nothing from an economic, risk adjusted reward perspective. This is difficult for the layperson to understand since those who reaped said dollar are left holding one dollar of nominal returns which looks, smells and spends like a dollar. They don't seem to get it until that third or fourth go around when they get 30 cents back for the dollar they invested (versus an amount over a dollar, hence a negative return). You see, probabilistically, you can reap more than you sow over the short term simply out of dumb luck. Realistically, the law of averages will catch up to you and eventually (and most likely close to immediately) you will reap what you sow, or... you get what you pay for!

Similarly, if bitcoin investors/traders believed they are doing well when bitcoin jumps from $13 to $950, they may be mistaken. The reason? Bitcoin has a modified beta of roughly 673! That means that it is volatile. Very volatile! More volatile than practically any basket of currencies or stocks you can think of. This volatility means that in a short period of time it's just as easy to be on the losing side of the trade of this asset as it is to be on the winning side. So, you're lucky if you bought at $500 and rode it to $950, but you could have just as easily bought at $1,200 and rode it down to $500.

With these concepts in mind, you should always adjust for risk before attempting to measure reward. By doing that you will find that you can compare disparate assets, ventures and opportunities that have different reward propositions and even different horizons by measuring the risk (or the economic cost) of the investments and then adjusting the actual or expected reward desired to compensate for said risk commensurately.

Notice how, if one were to take this approach, one can see the different risk adjusted returns between the top two cryptocurrencies by market value. Bitcoin is the most popular, but Litecoin is the most profitable - even when fully adjusted for risk.

ridk reward

The UltraCoin team has run these calculations, among many other currencies, on every cryptocurrency with a market value over $1 million. In addition, these currencies have been aggregated to form what we have coined as the "UltraCoin Cryptocurrency Composite Index" - a basket of cryptocurrencies upon which our custom UltraCoin derivatives can trade, hedge, invest and speculate.

These indices and calculations (not to mention a bevy of other calculations to assist in trading) are part and parcel of the UltraCoin client.

CryptoCurrencyComposite Index

The graph below depicts the outrageous raw returns had by holders of bitcoin. It also denotes the extreme volatility experienced therein, particularly from late 2013 onward.CryptoCurrencyComposite Index graphIf one were to place a hurdle rate of required return to compensate for said volatility, the return curve will look somewhat different.CryptoCurrencyComposite Index graph - adjusted

As you can see, all that glitters is not necessarily gold! I will be pushing for the beta release of the UltraCoin client quite soon, quite possibly at the Berlin Bicoin conference. In the meantime, for those of you who have not had a chance to play with the software, here are a few screen shots.

currency transalation errortest 

Published in BoomBustBlog

Here is the next segment in the presentations given at the North American Bitcoin Conference in Miami Beach.

Published in BoomBustBlog

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My Twitter followers know that I attended the North American Bitcoin Conference in S. Beach Miami last weekend. Here are some keepsakes from the visit as well as a video answer to the new media pop financial pundit, Peter Schiff's assetion that Bitcoin has no intrinsic value.

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The proprietors of a Bitcoin ATM, due to appear in the states next month.

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Published in BoomBustBlog

Bitcoin is highly volatile. It also experienced astonomical returns. That we all know. What I wanted to know was the true source of those returns. Some say it's speculation, some say is fundamentally derived. Most say things they have no business saying. I believe it's fair to say that bitcoin adoption will increase, and increase rapidly. It makes sense to believe said adoption will increase bitcoin's price. It's interesting in that history doesn't necessarily support that assumption though, as trading volume and daily returns have a low (or sometimes even negative) correlation.

Bitcoin trading Volume vs return correlation copy copy

I believe I have amassed one of the biggest libraries of bitcoin investment and financial data available in a very short period of time. I will start distributing this data via forensic reports to all paying subscribers as of tomorrow. Professional and Institutional subscribers will recieve some very, very advanced trading strategies that I have discovered that appear to still be making some pretty big short term returns as well. They are not simple, they proffer more than a little risk, but they are capable of some very material returns.

On a different front, it is also widely known that bitocoin's high volatility hampers its use by many would be vendors and institutions. I have created a solution, which I have illustrated in the following video - a brief demo of the early code of our Zero Trust Currency Contracts and an explanation of what they do.

Those who are interested in getting in on our closed beta, please email me at reggie at boombustblog dot com. Paid subscribers to my blog (click here to subscribe) get first crack, then those who are influential in the business, corporate finance guys, etc. and/or the high net worth crowd. I'm trying hard to get the beta rolled out today, but you know how this software development stuff goes. As of now, we're right on schedule for a beta release last week. :-)

Although this is a mere introduction, paying subscribers can catch a preview with File Icon Digital Currencies' Risks, Rewards & Returns - An Into Into Bitcoin Investing For Longer Term Horizons

Published in BoomBustBlog

BoomBustBTC contract

Note: New subscriber content available below.

I have created derivatives for Bitcoin that work exclusively on the Bitcoin network. They are capable of literally replacing the role of the large money center and investment banks. YES! This is a big thing. I will hopefully have a limited use beta example of the first product for the viewers of the show to experiment with. These products have been designed as zero trust contracts (meaning it was designed to eliminate the human judgment factor, thereby nearly completely automating the entire transaction). Currently, trust issues that the conventional OTC banking system products incur severely hamper free flowing capital markets. Greed begets inefficiencies. Digital zero trust contracts (as opposed to physical legal contracts) “theoretically” eliminate litigation and court involvement and expensive dispute resolution through means of the legal system. My BoomBust contracts allows anonymous parties to swap exposure in and out of Bitcoin from many widely traded currencies. (USD, EUR, YEN, CNY, etc.).

The state of the capitalist union today is ripe for Bitcoin activity to explode if knowledge of the platform spreads. Just to list a few catalysts:

  1. The lack of trust in the world’s reserve currency, the USD.
  2. The financial controls in the world’s most populous nations, India and China.
  3. The Pan-European sovereign debt crisis
  4. The confiscation of bank deposits in Cyprus (EU Bank Depositors: Your Mattress Is Starting To Look Awfully Attractive - Bank Risk, Reward & Compensation) and Ireland (As Forewarned, Irish Savers Have Just Been "Cyprus'd", And There's MUCH MORE "Cyprusing" To Come) and eventually anywhere banks are overleveraged and/or undercapitalized.
  5. The billions of the great “unbanked” of the world, in both 3rd world nations and even in the most developed nations on earth, ex. right here in the US.
  6. The paltry returns on loans and bank deposits as well as the unsubstantiated bubble returns on risk assets – all stemming from the Fed’s unprecedented 6 year global ZIRP real time experiment. I commented on this back in 2008 (A real life, real time example of the Great Global Macro Experiment)and it’s still running strong.

Possible uses for the BoomBust contracts:

Simple investment/speculation

Those who want to gain exposure to a foreign or digital currency can easily enter into a swap to gain said exposure without actually having to purchase said currency (other than BTC, of course).

Hedging

The swap can be used as a simple hedge for any party that has large exposure to BTC, USD, EUR, etc., such as a retailer with low margins and high volume, ex. Chinese widget manufacturer or smartphone OEM, that accepts bitcoin but wants to hedge out the volatility and market risk. The BoomBust contracts can be layered, levered and/or compounded to make more complex hedges as well.

Capital flight/mobility & Banking System Bail-in protection

Parties who are domiciled in free flowing capital hostile states that have tight capital controls, ex. China, India, and now France with its 75% effective wealth confiscation scheme, etc. that have banned or limited BTC trading by banks and/or individuals can take advantage of the BoomBust contracts to gain multi-currency exposure without explicitly violating the law. Take note that the systems with the tightest capital controls have been the one’s exhibiting the most aggressive stance to bitcoin. Unfortunately, they don’t seem to understand what Bitcoin is and what it can do. I stand to educate the masses. See below…

Cyprus banks closed on a Friday and announced confiscation of assets over the weekend. These BoomBust contracts could have been used to move monetary value outside of the Cyprus banking system assuming the participants had a store of Bitcoin (it is rumored that this is how some of the Russian money was removed over the weekend). Let’s assume a small businessman would like to purchase $1M euro worth of bitcoin, yet is concerned that the BTC volatility may cause more of a loss than the Cypriot capital controls. He buys the BTC then hedges his large BTC position into EUR. He proceeds to do that with a quarter of his monthly cashflows, building up a sizeable, fully hedged position in cyberspace (thus, effectively offshore) and outside of the fragile Cyprus banking system. The Cyprus banks pull the trigger to confiscate funds and the Russian bank depositor has significant funds mobile and ready to deliver anywhere in the internet connected world within minutes, even on a Sunday afternoon.

Another example of dealing with a company with tight capital controls would be India. India has extremely tight capital controls that have (IMHO) hampered its economic progress relative to China, despite having similar populations and the advantage of a large indigenous English speaking population stemming from British occupation (easier to do business with the larger capitalist nations when more of your constituents speaks the native tongue).

India has effectively outlawed trading in bitcoin, but Indians can still participate in the evolution of money by taking advantage of the liberalised remittances scheme of the Central Bank of India, a person can remit up to 75,000 USD offshore annually. These monies can end up in a Bitcoin friendly jurisdiction (amazingly enough, like the US), and be used to purchase BTC hedged, via BoomBust contracts, back into rupees or the currency of choice.

indian BTC program

This can also work the other way around, which would actually be quite advantageous to the Indian government and potentially make them rethink the real world practicality of capital controls. Even in a country that has capital controls and fears Bitcoin may threaten its banks, a decentralized near friction free currency exchange would be beneficial solely do to international remittances from expats in foreign workers. A real world example are Indians that I know who lose significant money because of PayPal and Western Union fees (not to mention bank wire fees). Indians can send BoomBust digital contract rupee locked BTC home on a deferred basis. The registered exchange or ATM in India however could only be one-way so that it only accepts BTC from the Indian general public in exchange for rupees and not the other way around.

Spread Arbitrage

On Dec 13th, the EUR/USD exchange rate was roughly .78x, thus if one were to have sold 1 BTC into EUR than purchased USD, a $10.66 spread could have been realized over buying the USD with EUR directly.

arbitrage opp 

Notice the differences in prices throughout the SAME MARKETS, contingent upon exchange.

BTC markets 

I am happy to discuss this with institutional and professional subscribers whenever possible.

All paying subscribers (click here to subscribe) can download this introduction to our institutional level report on investing in cryptocurrencies: File Icon Digital Currencies' Risks, Rewards & Returns - An Into Into Bitcoin Investing For Longer Term Horizon. There will be much more to follow in the upcoming days. Below is the brief summary as how we have computed the following ratios:

Excess Risk Adjusted Return

Excess Risk Adjusted Return is defined as returns over and above the required return on asset based on its risk characteristics. BITCOIN being a very volatile asset, the required return of the currency has been computed using the CAPM (Capital Asset Pricing Model) approach. CAPM equation requires a variable known as Return on Market Portfolio (a portfolio comprising of all risky assets, conventional as well as alternative assets like antiques, currencies, private equity investments, etc.). For equity investments, general Market Index shall suffice but in our case the investment is altogether different (Digital Currency) and the conventional market index will be a bad proxy. Best Proxy in our case shall be a diversified Currency Portfolio – comprising all global as well as digital currencies. As such there exists no known proxy/Index consisting all Currencies, We have approximated it by using MSCI – EM Currency Index. The Index comprises a basket of 25 emerging market currencies. 

Excess Risk Adjusted Return = (Return on Asset) – (Required Return on asset based on its risk characteristics)

Return on Asset (Ra) = Return on B ITCOIN for different periods like 3M, 6M 12M, etc.

Required Return on Asset = RFR + β * (Rm – Ra)

RFR = Current US I year Treasury Yield

Beta = Covariance of (Returns on Asset & Returns on comparable Index) divided by Variance of (Index Returns)

Rm = Long term return on comparable Index, (in our case which is the Currency Index return comprising 25 Emerging Market currencies)

What's so eery is that now even Ben Bernanke and I actually agree upon something... 

“Digital currencies may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system. 

US Federal Reserve Chairman Ben Bernanke

Published in BoomBustBlog

So, what is money? According to Wikipedia

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.

When currency is stable, money can serve all four of the functions above. Things get trickier when currencies are not stable. If we were all to be honest with ourselves, we'd have to query, "What fiat currency is truly stable over time?".

When unstable currencies or engineered forms of financial capital are brought into play the fourth aspect of defined money (and the least addressed) gains significantly in importance. Here we must differentiate and distinguish between true capital (economic capital) which comprises physical goods that explicitly and directly assist in the production of other goods and services, e.g. hammers for carpenters, paintbrushes for painters, wrenches for plumbers, tooling for factories, etc., and financial capital. Financial capital is funds provided by lenders and/or investors to businesses and entrepeneurs to purchase economic capital (ie.equipment) for producing real goods and services.

To explain why the 4th aspect of money's definition is important, yet often and in my opinion purposely ignored, let's examine the three concepts of capital maintenance in terms of International Financial Reporting Standards (IFRS): (1) Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital maintenance in units of constant purchasing power.

  1. Physical (economic) capital - We have covered already.
  2. Financial capital in monetary units is best described as basic accounting. It's how most financial reporting is done in the states (and in Europe). It fails to take into consideration the constant destruction of value of the fiat currencies, an aspect of the definition of money that is a foundation of money itself!
  3. Financial capital measured in constant purchasing power - something that effectively never happens. It is the "Real" value of money, adjusted for destructive aspects, ex. inflation, particularly purposeful inflation brought upon by a banking system that attempts to adjust and control the prices of goods and services for its own end (as opposed to the end that will benefit the masses) through the artificial manipulation of the value of the means of exchange, the currency.

Financial capital is provided by lenders for a price, commonly known as interest. This  price to attain financial capital is not the only cost though, for the price of the financial capital provided by lenders through things such as debt does not take into account the cost of currency maintenance destruction, or the purposeful manipulation of the currency value by the lender or lending system to which the lender belongs to to further its own means. This is why the prudent may wish to identify a single standard of deferred payment to avoid purposeful manipulation (otherwise known as cheating) by transacting in a denominator of debt that the participant believes to be dropping in value, ie. fiat currency!

Relation to debt-based society

A debt in any form is essentially a deferred payment. The fourth definintion of money, standard of deferred payment,  is usually what the debts are denominated in. The value of any and all money – including the most liquid and deep, ex. dollars or euros, or the oldest and revered, ex. gold and silver, or the newest and least understood, Bitcoin and cryptocurrencies – may fluctuate over time via inflation and deflation and often through direct manipulation and unforeseen results that stem from the same. The value of deferred payments (the real level of debt) likewise fluctuates.

Money, as Leading Economists Such As Paul Krugman Appear To Know It, Is Obsolete - There's a New Sheriff In Town

The definitions of money mentioned above are predicated upon the assumption that money must be dumb! What I mean by this is that money was defined in a time when the store of value was an inanimante object designed to represent a simple binary concept of buy or sell, that had no abilities other than to look or appear as if it had the value believingly bestowed upon it by society - or at least two of the participants in a particular transaction. What if money in this digital day and age was smart? What if money was able to do things besides just sit there and be called money?

Here's an example...

Historically, and up until now, deferred payment was/is based on enforceability of debts and rule of law. The rule of law, particularly engagement within the legal system is destructively expensive, time consuming and essentially the antithesis of friction free commerce, ex. capitalism. The rule of law is generally not relied upon when debts are unlikely to be collectable. For illegal transactions, or for low or zero trust transactions, gold or diamonds may be preferred as the medium of exchange and in those circumstaces there is no recourse in case of counterfeit currency (bogus, bank peddeled Mortgage Backed Securities, fake US dollars, etc.) is being used. — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars - which brings us back to where we started.

What if currency was smart enough to act upon a predetermined set of parameters, even after being released to the payee? What if trust never had to be a factor in negotiation fo payment, even in a negative trust environment? What if the highly ineffecient legal system could be wholly avoided in the risk/reward calculation of a monetary transaction? Would the existence of this possibility, in essence, demand a 5th definition for money - intelligence and/or malleability? You see, the cryptographic digital currencies are smart as compared to the dumb dollar or euro, or yen or yuan! It is this intelligent ability to control money during a transaction and even post transaction, the abilty to instruct money to disburse iteslf only open mutual agreement by all parties present, that appears to elude the prominent MSM economists of today. 

Furthermore, dumb money as purely fiat is truly without physical value or utility value as a physical or digital commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for all debts, public and private - including taxes, where in the US, it is the only currency accepted. Laws in place such as these essentially imbue fiat money with the value of any of the goods and services that it may be traded for within the nation that issues it. The fact remains though, the value of fiat money is held in belief and belief only, enforced by the whims of government. With this being the case, there is no true utility argument to be made for fiat currencies, including the USD.

Digital cryptocurrencies such as Bitcoin, however, have an implicit edge on the fiat currencies in that its utility (or use value) is dramatically leveraged as compared to fiat because it comes part and parcel with its own, virtually unassailable transmission system. In essence, this means that if Bitcoin, the USD and the EUR were cars, BTC would be the only one that comes with its own international roads open 24/7 that were able to bypass all of the toll roads and bridges, everywhere there was an Internet connection - not to mention power itself with a virtual fuel that was limitless and had no costs. Now, if one were to think of it, such an aspect is so valuable and useful (as in utilitarian) that not only does it qualify for significant use value, but in the very near future one could wonder how the world ever got along without it. Does this mean that a sixth aspect of the definition of money needs to be added - autonomous transferability!

This is why I say there's a new sheriff in town and the old schoolers whose eyes are not yet open should recognize that the future of money is here!

According to famed economist and NY Times pundit Paul Krugman, "To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value."

I counter these widely believed assumptions with the fact that the USD, the world's reserve currency, has not been a stable store of value. As a matter of fact, from its underpinnings (as described in the BoomBustBlog link below) and throughout its history, the dollar has consistently lost its value over time to inflation. Thus, as per Krugman, the USD is not successful!

As per Wikipedia:

To be widely acceptable, a medium of exchange should have stable purchasing power (Value) and therefore it should possess the following characteristics:

  1. Value common assets
  2. Constant utility [I have explained the constant utility of Bitcoin above, a utility which trumps the relatively dumb dollar]
  3. Low cost of preservation [the cost of preservation is a fraction of that of the dollar, with constant reprinting of physical dollars and coins and the power, machinery and labor required to do so; as well as the recircutlation of those new bills, not to mention the destrcution of the old bills]
  4. Transportability [This is moderately difficult with large amounts of physical bills, but much easier with the digital manifestation of those physical bills that most institutions deal with. The mere existence of the banks as necessary intermediaries and middlemen add signficant, and in this day and age of P2P technology, unnecessary costs and frictions and rules. This hampers portability significantly - no transfers on weekends and bank holidays, no low margin business models due to artificially high transaction costs, big up Visa, Mastercard and Paypal!)
  5. Divisibility
  6. High market value in relation to volume and weight [Bitcoin can't be beat in this regard]
  7. Recognisability
  8. Resistance to counterfeiting [A currency based on cryptography, need I say more?!]

As quoted from the Wikpedia link above:

"fiat money is the root cause of the continuum of economic crises, since it leads to the dominance of fraud, corruption, and manipulation precisely because it does not satisfy the criteria for a medium of exchange cited above. Specifically, prevailing fiat money is free float and depending upon its supply market finds or sets a value to it that continues to change as the supply of money is changed with respect to the economy's demand. Increasing free floating money supply with respect to needs of the economy reduces the quantity of the basket of the goods and services to which it is linked by the market and that provides it purchasing power. Thus it is not a unit or standard measure of wealth and its manipulation impedes the market mechanism by that it sets/determine just prices. That leads us to a situation where no value-related economic data is just or reliable.[3][4]" 

I will continue this missive in part 2 of the series wherein I will announce my efforts in bringing the beneftis of smart money to light. I'm sure these concepts and products will blow your socks off, even if you are an old school economist! For those who don't follow me, this is who I am. - Who is Reggie Middleton? I believe track record speaks louder than Op-Ed columns, degrees or TV show appearances. Let me know if you agree...

Published in BoomBustBlog
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