The professional and institutional versions of this report contain over 30 pages of data and analysis. These trades are for big boys (and girls), or at least those who can think like big boys (and girls). It is my intent to have traders, investors, companies and speculators use our Zero Trust Digital Contracts often, and knowledge of opportunities such as these do a lot to foster such use. Click here to subscribe.
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. :-)
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:
The lack of trust in the world’s reserve currency, the USD.
The financial controls in the world’s most populous nations, India and China.
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).
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.
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.
Notice the differences in prices throughout the SAME MARKETS, contingent upon exchange.
I am happy to discuss this with institutional and professional subscribers whenever possible.
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...
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.
Physical (economic) capital - We have covered already.
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!
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!
To be widely acceptable, a medium of exchange should have stable purchasing power (Value) and therefore it should possess the following characteristics:
Value common assets
Constant utility [I have explained the constant utility of Bitcoin above, a utility which trumps the relatively dumb dollar]
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]
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!)
High market value in relation to volume and weight [Bitcoin can't be beat in this regard]
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."
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...
This article showases my 3rd installment of Bitcoin analysis, explanation and investment opportunities. As a quick recap of the 12 minute video, I reviewed:
Bitcoin's dramatic and near unprecendented run and generation of 6 digit gross returns...
The definition of Alpha and its Bitcoin's historical generation of Alpha over the last 3 years.
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Risk, risk vs. reward and the application of said idealogies to true risk adjusted investment returns as compared to fiat currencies...
Book2 version 2 31778 image001
Arbitrage opportunities available through Bitcoin and Litecoin trading....
Book2 version 2 31778 image004
A comparison of daily returns between Bitcoin and high beta emerging market currencies...
Book2 version 2 31778 image005
And last but not least, the innovative, unique and unprecendented finanical products we're looking to launch in the beginning of the new year, starting with digital currency to fiat swaps, avaible from any smartphone, PC or even Google Glass...
Screen Shot 2013-12-27 at 06.38.54
chocomalk +Stephen Pettyjohn What you are saying is that the cost/price of any real world currency should not matter either? ".After all it is infinitely divisible" Isn't that one of the arguments of bitcoin? That it fixes the problem of over printing by limiting the issuance to a finite amount? So we see now the people did not understand monetary theory since issuance is only one factor in the inflation/deflation cycle of circulating currency. Because of price fluctuation and its divisible nature, there is in effect an infinite amount of bitcoin in circulation. There is a plus side to this but that is not the point. As I stated there are flaws in the system. And I understand why the energy cost is high but I also understand that any competing currency will outdo Bitcoin by not only matching or exceeding its security but doing so more EFFICIENTLY. Some smart developer will write a more efficient code or better way of managing the overall system and that will pop bitcoin. Anyway my argument was not to disparage cryptos but to point out the flaws and the flawed logic presented here. If anything bitcoin has shown the worth of the underlying structure that caused the other internet bubble and that is the internet itself. The most valuable and one of the greatest inventions ever. The internet is the road. Show less Reply •
Stephen Pettyjohn8 hours ago Sorry, I suppose I should clarify my first statement. The value of the currency (call it a relative CPI) impacts those who own it, but the actual utility of the currency and its demand is controlled by market cap (which is why the market cap for the dollar is so high, when we print money the price per dollar drops proportionally or close to it).
The raw cost of the network is the barrier to obtaining a large share. For instance, the switch from GPUs to ASICs (Im throwing out FPGAs here because that was a very short phase) reduced the cost per GH from about $270 to $5 with a subsequent reduction in power cost of about 25X. This only made it easier for mining pools like cxe.io to take over larger market shares because they were able to gain an efficiency edge. Increases in efficiency do not yield increases in security. The only thing that blocks people from obtaining a larger mining share is the cost of obtaining that share. The only thing that could "pop" bitcoin at this point is a new form of the dirty pool attack, which is arguably not effective or a method of breaking the 256k1 eliptic coding, which is not used outside of bitcoin (or rather is used infrequently) and thus very little work has been done on this front. Show less Reply •
chocomalk8 hours ago +Stephen Pettyjohn As I stated, printing(issuance) and deflation(withdrawing from circulation) is only one way this cycle can happen. Imagine if the dollar went from 1 - 1000 in a year and then tell me why it was a good thing outside of the investment potential. I didn't say efficiency leads to security but it can, the efficncy will lead to less power consumption. Sorry but a united front of world governments could halt bitcoins advance. Even the US alone could provide the pressure needed. That would relegate bitcoin to the black market and if they ever decide to stop the war on drugs lol Show less Reply •
chocomalk8 hours ago +Stephen Pettyjohn As a side note to my last comment, there used to be smaller increments of the dollar than the penny. It is as divisible as bitcoin, it all relies on the system itself. Reply •
Stephen Pettyjohn8 hours ago +chocomalk India is openly arresting individuals operating exchanges (http://www.dnaindia.com/india/report-first-time-in-the-country-ed-raids-a-bitcoin-seller-in-ahmedabad-1941187) and it's citizens still take part in the currency. In addition, one or two EU countries treat it as a good and tax a massive VAT on it's exchange. All that happens is the population is less likely to transact with it. Considering less than 10% of BTC exchange happens in the US (and even that number is suspect given that a large portion of that exchange is done via brokers to exchanges in Slovenia and Russia) I doubt the US could control the currency significantly. As long as some governments are willing to open their doors (Cyprus, Sweden, Spain, Singapore) then I am relatively certain regulation will not kill the currency. Now, current value is obviously in jeopardy (China's recent regulatory stance) but in terms of long term prospects I think we are relatively safe.
Also, it is worth noting that the estimated cost of electricity for the current mining network is 1/30th the estimated hardware cost. As long as hardware is price competitive and will yield a return at current or short term predicted value people will buy it. Arguably Scrypt produces less waste by not leaving giant ASIC doorstops around, but I'm sure in a world where Litecoin or a Scrypt derivative is the prominent currency FPGAs or ASICs will be built and well be back to the same point.
But why are they investing? Because they are using it to transact or because of the profit potential? Hard to answer.
Bottom line here is the argument that it bypasses the system fails if the system it is bypassing decides to get involved. India might not be able to stop people from buying or using it in outside transactions but they can regulate he business end in India itself as can other countries, they just haven't yet.
Sure some may not make it illegal but they will want a cut of the action and if they can't get a cut they will make all effort to stamp it out I assure you.
So in the end will it be better than a central currency? Imagine if right now the entire world just adopted it and odd man out, if you didn't have the sense to get in early you are effectively screwed and poor as punch.
"current value is obviously in jeopardy"
This is really the basis of my entire argument, bitcoin is a great invention outside some flaws I listed and others outside my keen. Miners should receive compensation but the current system makes monopoly and overt profits way to easy.
False correlation. Bitcoin is not the internet, it's not a road either and we had an internet bubble anyway lol. You assume it's present unregulated state will continue. And obviously you have not looked into the "fuel cost" of Bitcoin, it is actually quite high. Your analogy of a road can be used with the present regulated transfer system. There is nothing Bitcoin can do that another more efficient(cheaper) CURRENCY can do and that is the point, at these price levels, bitcoin is an investment vehicle not a currency. Is it a ponzi? I don't know but it could be. It's a great idea with horrible implementation. Show less Reply •
+chocomalk India is openly arresting individuals operating exchanges (http://www.dnaindia.com/india/report-first-time-in-the-country-ed-raids-a-bitcoin-seller-in-ahmedabad-1941187) and it's citizens still take part in the currency. In addition, one or two EU countries treat it as a good and tax a massive VAT on it's exchange. All that happens is the population is less likely to transact with it. Considering less than 10% of BTC exchange happens in the US (and even that number is suspect given that a large portion of that exchange is done via brokers to exchanges in Slovenia and Russia) I doubt the US could control the currency significantly. As long as some governments are willing to open their doors (Cyprus, Sweden, Spain, Singapore) then I am relatively certain regulation will not kill the currency. Now, current value is obviously in jeopardy (China's recent regulatory stance) but in terms of long term prospects I think we are relatively safe.
Also, it is worth noting that the estimated cost of electricity for the current mining network is 1/30th the estimated hardware cost. As long as hardware is price competitive and will yield a return at current or short term predicted value people will buy it. Arguably Scrypt produces less waste by not leaving giant ASIC doorstops around, but I'm sure in a world where Litecoin or a Scrypt derivative is the prominent currency FPGAs or ASICs will be built and well be back to the same point.
Show less Reply •
chocomalk16 hours ago +Stephen Pettyjohn But why are they investing? Because they are using it to transact or because of the profit potential? Hard to answer. Bottom line here is the argument that it bypasses the system fails if the system it is bypassing decides to get involved. India might not be able to stop people from buying or using it in outside transactions but they can regulate he business end in India itself as can other countries, they just haven't yet. Sure some may not make it illegal but they will want a cut of the action and if they can't get a cut they will make all effort to stamp it out I assure you. So in the end will it be better than a central currency? Imagine if right now the entire world just adopted it and odd man out, if you didn't have the sense to get in early you are effectively screwed and poor as punch. "current value is obviously in jeopardy" This is really the basis of my entire argument, bitcoin is a great invention outside some flaws I listed and others outside my keen. Miners should receive compensation but the current system makes monopoly and overt profits way to easy.
+Gary Tooze "Hi Reggie - I know you fancy yourself as a realist, but in all the videos and articles I have followed from you - you have never mentioned 'Gold'. Why do you suppose the Central Banks hold Gold? REALISTICALLY they OWN the government - which could crush BTC in a flash. The CBs know exactly what is going on and won't be the losers in these shifting sands....
Reggie Middleton +Gary Tooze No, you have not got it right in referece to your gold comparisons. BTC does have Intrinsic value, more so than gold in my opinion. BTC is programmable, gold is not. BTC can easily be stored, transfered and tracked - gold can not. BTC can circumvent banks, as can gold - but by your estimation the banks hold most of the gold already :-) The programmability of BTC (especially in a digital age) should end the argument of intrinsic value before it gets started. Programmability is more valuable than fringe industrial uses in the age of the Internet and an interconnected world.
A few observations Mr. Middleton. First, the problem with your automobile analogy. Who builds and maintains the exclusive road that only your car may use? The roads that the rest of us use can be built with the monetary unit of account (fiat) for public purpose. Could the same ever be said of a bitcoin alternative? I don't see this as a remote possibility.
This leads to what I consider the primary weakness of the bitcoin alternative model. It's essentially a return to the gold standard by electronic means and would severely limit policy space for a democratic republic in a massively monetized economy. Can bitcoin as presently constructed fuel a federal job guarantee to provide a true living wage floor for those willing to work? How would a true single-payer universal health service be provided with bitcoin? What about publicly provisioned education through graduate school at no charge for citizens? I think you can see what I'm driving at here. All of these policies require the services of a true central bank (under democratic control) utilizing fiat over which it maintains absolute sovereignty.
Actually, the hundreds of millions of denizens of the World Wide Web builds "builds and maintains the exclusive road that only your car may use?" The Web, and its denizens are not, in large part, governmental agencies, nor are they direct agents of the government either.
"The roads that the rest of us use can be built with the monetary unit of account (fiat) for public purpose. Could the same ever be said of a bitcoin alternative? I don't see this as a remote possibility."
Of course, those digital roads can be built. There are some ISPs and hosting services that you can go to know to pay in bitcoin to set up a site infrastructure and be part of the roads of the Web.
"Can bitcoin as presently constructed fuel a federal job guarantee to provide a true living wage floor for those willing to work? How would a true single-payer universal health service be provided with bitcoin? What about publicly provisioned education through graduate school at no charge for citizens? I think you can see what I'm driving at here. All of these policies require the services of a true central bank (under democratic control) utilizing fiat over which it maintains absolute sovereignty."
You've lost me here. It's not as if the USD can "fuel a federal job guarantee to provide a true living wage floor for those willing to work" so I don't see how you would ask the same of Bitcoin. It is the value percieved behind the dollar that fuels these items you refer to, not the dollar itself. It is this very same discussion that outlines the utility of bitcoin as a currency (as opposed to Bitcoin, the transmission network). The Fed can, and has, and currently is, mulitplying the amount of dollars in the system to fund these activities without a commensurate increase in the value backing these dollars nor a commensurate increase in the economic value in the system at all. This can't be done very easily with bitcoin, which is one of the popularly stated benefits of the currency. It is essentially printer-proof!
What your country's central bank is doing is debasing the value of the monetary units to make more of them to nominally purchase goods and services in the present, but not paying for them in the present. Economically, this is simply a loan that needs to be repaid by true value creation in a future time period (likely that of your children). You see, those debased dollars are essentially IOUs, while you are referring to them as actual units of value and not promises to deliver said value.
False correlation.Bitcoin is not the internet, it's not a road either and we had an internet bubble anyway lol. You assume it's present unregulated state will continue. And obviously you have not looked into the "fuel cost" of Bitcoin, it is actually quite high. Your analogy of a road can be used with the present regulated transfer system. There is nothing Bitcoin can do that another more efficient(cheaper) CURRENCY can do and that is the point, at these price levels, bitcoin is an investment vehicle not a currency. Is it a ponzi? I don't know but it could be. It's a great idea with horrible implementation.
Reggie Middleton "Bitcoin is not the internet, it's not a road either and we had an internet bubble anyway lol." No, we did not have an Internet bubble. We had a stock market bubble wherein underwriters preyed on the naive and greedy in convincing them to buy Internet stocks.
" You assume it's present unregulated state will continue." How do you regulate a P2P network?
"And obviously you have not looked into the "fuel cost" of Bitcoin, it is actually quite high." The "fuel cost" of Bitcoin? You mean like the paper, ink, printing presses and metallurgical coin stamps made to produce fiat which has to cyclically be replaced every few years with the same expensive process save some additional R&D to attempt to outrun counterfeiters who always seem to win in the end anyway?
" Your analogy of a road can be used with the present regulated transfer system." So the present regulated transfer system can circumvent the Fed, ECB and all money center banks? Please....
"There is nothing Bitcoin can do that another more efficient(cheaper) CURRENCY can do and that is the point, at these price levels, bitcoin is an investment vehicle not a currency." Nothing as in being programmable to act towards the wishes of the sender and/or reciever after being sent or recieved? Nothing as in being able to totally circumvent banks - all of them? Nothing as being able to settle a 9 digit international monetary transfer from Sri Lanka in 30 minutes on a Sunday afternoon in NYC? That's a whole lot of nothing, my friend.
chocomalk +Reggie Middleton Yes it was an investment bubble, call it what you want the similarity is investment and inflated value. The net itself is not analogous to bitcoin nor were the businesses that sprung up around it outside the servers/IP providers themselves. You regulate with the law. You might be able to get away with underground transactions but they can limit a lot of commerce. They can also regulate the pay window, meaning you could not buy or sell into other currencies legally. Or accept payment as a business legally. I am not saying present currency doesn't have a cost, just that the energy requirements for Bitcoin are quite large. Circumvent is what Bitcoin is doing at present, I already stated that it could end or be regulated the same way meaning there would be no effective difference. And I should have stated "crypto currency" that was my mistake. A cheaper, more secure crypto currency can and will be produced meaning any value that bitcoin has above its "manufacture" is based on investor and market opinion. Like I said, It's a great idea with bad implementation and it is overpriced.
The Internet is a interlocking network (hence the name, "internet") of standalone servers that serve data to and from each other in such fashion as to make a seamless network of information available to all who access it. Bitcoin is a peer to peer network of computers who collectively transmit, recieve and maintain the bitcoin system as a whole. Think of bees working in a hive without a central queen bee, but a queen bee that exists a little at a time in each and every worker, drone, soldier and scout bee. In order to destroy the hive or to coopt it, you will have take down the entire hive or the vast majority (as in >95%) of the bees to do so. If you live in the hive as well, like the government and the rest of the world living on the WWW, then option one is out of the question. So, yes, Bitcoin is analagous to the Internet and WWW.
Stephen Pettyjohn +chocomalk Crypto currencies cost is irrelevant. At the end of the day it's the amount of goods that can be bought. Since that measure is relatively the same and tracks with the dollar, the only thing that makes bitcoin feel expensive is the whole unit bias. After all it is infinitely divisible (in theory, currently a satoshi is only a ten-millionth) As for cheaper crytocurrencies, certain currencies have design advantages, but price is never one of them. A cheaper currency means that the network supporting it's proof of work system is smaller. The 51% scale attack cost against bitcoin is close to 1.5 billion right now (and thats assuming that you can magically convert bitcoin into specialized ASICs) whereas, a single large bitcoin miner could easily perform a 51% attack on any of the SHA256 alt currencies. Bitcoin's massive electricity and hardware costs are what give the currency it's security against network attacks. In addition, the higher price and corresponding market cap encourages development in the area which makes bitcoin more fluid and props up companies like CoinBase, ItBit, Bitpay, and Circle.
2014 is set to be a banner year for BoomBustBlog. As you may have noticed, positings have slowed down to almost nothing. This due to another battle with hackers on the server. As we bounce back, we will take the global macro world by storm. This includes the digital currencies and how they will affect the world as we know it.
I have recorded a brief simple video to explain my perspective on digital currencies. Let it be known to all who don't normally follow me: I'm not a gold bug, I'm not crypto-currency bug, I'm a risk-adjusted return bug! I attempt to see things as they truly are and will call it as I see it. Those of you who instanteously dismiss Bitoin as a bubble or Ponzi scheme are likely doing so without taking the time to fully understand it (it is quite different, I must admit), or read the disruptive change that it's capable of bringing into play - a disruptive change at the level of the Internet and World Wide Web during the the early to late 90's. For an example of this broad based, yet widely followed misunderstanding, reference The "Anti-Economist" Calls Bitcoin the A…
Now, there's no doubt that Bitcoin has been on a tear as of late, after all...
The vast majority of that 6 digit (that's right, "Six" digit) return has occurred within the last year.
The most likely reason stems from media exposure. Please note that I don't think it's due to media exposure, it stems from it. You see, as explained in the short video below, Bitcoin's primary value stems from its inherent ability to truly and absolutely circumvent the gate keepers of monetary value today - the Central and Money Center Banks of the world.
Basically, the gatekeepers of money can now have the locks on their gates picked. The tertiary value is that this new money is "programmable," but more on that later. The more people who realize the value of this new, finite, cryptographic money, the higher the demand pushes the value of the money.
Do I have a point? Well, look at it from obscurity in 2010 to media darling in 2013 - Yes! All 391,288% worth of appreciation!
Stay tuned for more on my take on smart money in the very near future.
Paul Krugman wrote an anti-cryptocurrency Op-Ed piece in the NY Times titled the "Anti-social Network". Now, I know the Times needs to sell ad space and subscriptions, hence technical accuracy may not be exactly what they are going for, but Mr. Krugman (the classical Keynesian economist type - I don't particularly subscribe to such schools of thought, I guess I'm not educated enough) has spewed so many inaccurate statements, false facts and just plain old indications of his total misunderstanding of the subject matter one would think it would behoove the Times to either have him issue corrections (or, since it is Op-Ed after all) have someone such as my self (you know, maybe a little less academically involved) come after him and clean up a little.
Now, where shall I start? To quote Mr. Krugman:
So how is bitcoin different? Unlike credit card transactions, which leave a digital trail, bitcoin transactions are designed to be anonymous and untraceable. When you transfer bitcoins to someone else, it’s as if you handed over a paper bag filled with $100 bills in a dark alley.
I don't think that's true Mr.Krugman. Let's refer to Wikipedia's write-up on the Cryptocurrency...
Once validated, every individual transaction is permanently recorded in a public ledger known as the blockchain.
I believe Mr. Krugman made this error due to the accuracy of a statement made earlier in the Wikipedia description of Bitcoin, to wit:
You see, the old school way of applied economics may very well have a big problem wrapping their collective heads around the concept of the absence of a "central authority" (read central bank) to act as the Grand Pubah, or ultimate financial intermediary. I'm just saying..
And to go on with the oh so witty comments from Mr. Krugman...
And sure enough, as best as anyone can tell the main use of bitcoin so far, other than as a target for speculation, has been for online versions of those dark-alley exchanges, with bitcoins traded for narcotics and other illegal items.
Bitcoin is a currency that's no older than 4 or 5 years. Has any other currency experienced a genesis any different than Bitcoin? The US dollar, when freshly minted was used for the spurious trade of human lives, the lives of my very own relatives several generations back, actually. It was the tool for rampant speculation as well, prone to extreme volatility and purposeful devaluations. Was it really so different from Bitcoin before it went mainstream (that is except for the purposeful devaluations part since there is no Grand Pubah to unilaterally call the market shots)? Methinks this economist may be picking and choosing his facts. For instance, look at how he started the Op-Ed missive in the first place...
Bitcoin’s wild ride may not have been the biggest business story of the past few weeks, but it was surely the most entertaining. Over the course of less than two weeks the price of the “digital currency” more than tripled. Then it fell more than 50 percent in a few hours. Suddenly, it felt as if we were back in the dot-com era.
The economic significance of this roller coaster was basically nil. But the furor over bitcoin was a useful lesson in the ways people misunderstand money — and in particular how they are misled by the desire to divorce the value of money from the society it serves.
Volatility is the name of the game with new currencies that have limited penetration and distribution, no? Why pick on bitcoin? Let's recall how the US dollar got started via the continental note, as per Wikipedia:
By the end of 1778, Continental Currency retained between only 1/5 to 1/7 of their original face value. By 1780, Continental bills - or Continentals - were worth just 1/40th of their face value. Despite efforts by Congress to reform the currency by removing the old bills from circulation and issuing new ones, the attempt met with little or no success. By May 1781, Continentals had become so worthless they ceased to circulate as money. Benjamin Franklin noted that the depreciation of the currency had, in effect, acted as a tax to pay for the war. In the 1790s, after the ratification of the United States Constitution, Continentals could be exchanged for treasury bonds at 1% of face value...
Paul then goes on to compare Bitcoin enthusiasts to Goldbugs - which was inevitable. I'm far from a Goldbug, and those that follow me can attest. Apparently Mr. Krugman isn't either, but he appears to make a specious argument, to wit:
The similarity to goldbug rhetoric isn’t a coincidence, since goldbugs and bitcoin enthusiasts — bitbugs? — tend to share both libertarian politics and the belief that governments are vastly abusing their power to print money. At the same time, it’s very peculiar, since bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air. Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment.
I really need somebody from the academic ivory towers to explain to me the difference between paper currencies being backed by the power of the state and Bitcoins alleged self fulfilling fulfilling prophecy of the belief that other people will accept them as payment. Both of these concepts share one common theme that seems to have escaped Mr. Krugman - Belief!!! Being backed by the full faith and power of the government means nothing unless you believe that government backing has a real value. That real value, if you do believe in it, is solely a function of your level of belief in the government and the governments willingness to back the currency and to what extent. After all, Greek bonds written under Greek law are backed by their government as well, as are Somalian bonds. So, pray tell, what's the difference between the value of those bonds and US treasuries? Belief, that's the difference! Again, a refresher from Wikipedia:
Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note. Consequently, some proponents of theintrinsic theory of value believe that the near-zero marginal cost of production of the current fiat dollar detracts from its attractiveness as a medium of exchange and store of value because a fiat currency without a marginal cost of production is easier to debase via overproduction and the subsequent inflation of the money supply.
The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales. The demand for housing overall is slowing down, with sales in the last few months of 2013 falling on y-on-y basis. In most major Canadian markets there is an increase in listings and decrease in sales (even though prices are still somehow rising, which should in and of itself be indicative of a problem).
Robert MacFarlane, a long-time crane operator, surveys his empire from the top of one of Toronto’s flashy new apartment buildings. “I can see more than 50 tower cranes,” said Mr MacFarlane, whose bird's-eye photography from the country’s tallest crane has gained him online notoriety as interest in Toronto’s property sector escalates.
These cranes – which can offer clues to bubble-like conditions – emerged in response to lofty demand for condominiums from investors and homebuyers taking advantage of Canada’s ultra-low interest rates.
This is a fact. I've observed this in the bubble markets that I've personally experienced: Miama, NYC, DC - cranes and construction galore. In retrospect it appears virtually impossible for anyone NOT to realize we were in a bubble.
But as home prices rally and construction projects proliferate – particularly in Toronto, Montreal and Vancouver – industry analysts say the country’s property sector is perched precariously at its peak.
David Madani, economist at Capital Economics, believes the nation is on the verge “of what will prove to be a prolonged correction”.
“Canada’s housing market exhibits many of the symptoms that preceded disruptive housing downturns in other developed economies, namely overbuilding, overvaluation and excessive household debt,” he adds.
Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.
And why in the world would borrowing costs rise with all of the world's most powerful central banks pushing #ZIRP4EVA???
In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”
The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce.
But isn't that a circular argument???
...the flipside of a low interest rate policy designed to buttress the economy has meant that household debt levels have hit record highs as homebuyers stretched themselves to jump into the housing market. That in turn propelled demand and prices.
... Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.
On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says.
... Year-to-date new home sales in the Greater Toronto Area – an area accounting for a fifth of Canada’s home building activity – are down by half from two years ago, according to the Building Industry and Land Development Association.
... Mr Madani forecasts a market correction in home prices over the next few years, predicting a 25 per cent drop.
But those that are bullish on the market point to resilient regional data. October sales of existing homes rose 38 per cent in Vancouver and 19 per cent in Toronto.
“It’s a mistake to think that what happened in the US will happen in Canada,” said Gregory Klump, CREA’s chief economist said.
Yes, because this time it's different!!!
... Mr MacFarlane too has yet to be convinced of an imminent slowdown. “In the past when things have slowed down, there has been a distinct ‘feeling’ from the boots on the ground perspective. I don’t really sense that right now.”
Nothing like that good 'ole empirical forensic analysis to make an investor feel all warm and cozy, right?!
In a recession, not many people and businesses borrow, hence lending tends to be a poor business.
In order to make money off of lending assets you need a reasonable return.
When ZIRP (Zero Interest Rate Policy) is applied, said reasonable return does not exist unless banks dramatically mark up the cost of the loan which brings up back to point one.
In the states I made this point when most analysts insisted that ZIRP was good for the banks, to wit...
Now remember, I've been very bearish on the EU and thier banks and sovereign debt in particular, since Q! 2010 - way before most - reference Pan-European sovereign debt crisis. Yesterday morning if you were to Google the term EU recovery, you would see something like this in return...
The European Central Bank cut its benchmark interest rate to a record low after a drop in inflation to the slowest pace in four years threatened its mission to keep prices stable.
Policy makers meeting in Frankfurt today reduced the main refinancing rate by a quarter point to 0.25 percent. The decision was predicted by three of 70 economists in a Bloomberg News survey. The ECB kept its deposit rate at zero and trimmed the marginal lending rate to 0.75 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m.
The ECB now has just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s target and unemployment is at the highest level since the currency bloc was formed in 1999.
“There comes a point where inflation is so weak, and coming in weaker than anticipated, that the case for loosening policy becomes too hard to resist,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London, who predicted the cut. “Bad unemployment numbers only make the case stronger.”
Does it seem like I've predicted the future hear once again as that Financial Nostradamus Dude???
A Fed-style quantitative easing program has repeatedly been ruled out by ECB policy makers. The central bank is barred by European Union treaties from financing state debt, making large-scale purchases of government bonds open to a legal challenge.
While Draghi has floated the prospect of a negative deposit rate, the rate for commercial lenders who park excess cash at the central bank, policy makers have said that its effects can’t be adequately predicted. A negative deposit rate could hurt banks’ profitability by lowering money-market rates, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to other financial institutions.
“If inflation stays low, as seems likely, and the threat of inflation expectations becoming unanchored to the downside increases significantly, then all the tools in the box can come into play,” said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “But knowing the way the ECB operates and how long it has taken to try and get support for a refi rate cut, doing the big stuff could take some time.”
Well, I believe QE has already been implemented by the ECB accepting trash sovereign debt as marketable collateral, but that's a discussion for another day. Just listen to the Financial Nostradamus dude when he warns what happens when a larger, admitted QE program is instituted. For one, you'd probably eliminate that inflation problem... replacing it with...