Virtual Currencies

     

 

 

An Unenthusiastic Market

On Thursday, July 6, in the late afternoon (as reckoned in Arizona), the price of silver crashed. The move was very brief, but very intense. The price hit a low under $14.40 before recovering to around $15.80 which is about 20 cents lower than where it started.

 

1 kilogram cast silver bars from an Austrian refinery. These are available in 250 g, 500 g and 1 kg sizes and look really neat. We use the 250 g ones as paperweights, so this is an investment with use value.  [PT]

 

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The Crypto-Bubble – A Speculator’s Dream in Cyberspace

When writing an article about the recent move in bitcoin, one should probably not begin by preparing the chart images. Chances are one will have to do it all over again. It is a bit like ordering a cup of coffee in Weimar Germany in early November 1923. One had to pay for it right away, as a cup costing one wheelbarrow of Reichsmark may well end up costing two wheelbarrows of Reichsmark half an hour later. These days the question is how many wheelbarrows of US dollars one may need to pay for a bitcoin.

 

Is it real? (As our readers know, the nature of reality poses certain problems).  When we started writing this, bitcoin had just moved up by more than $600 in one week to its then level of $2,400 –  within a little more than a day it reached an interim peak of $2,760, then plunged to an interim low of around $1850 in just two trading days, only to rally to a new high of $2,930 over the next two weeks. Currently it trades at $2,750 (don’t hold it against us if these figures are no longer true by the time this post is published).

 

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Returns One Can Only Dream Of

When I heard about Bitcoin for the very first time in May of 2011, it traded at eight US dollars.

As I write this, almost exactly six years later on May 20 2017, it has broken through the USD 2,000 barrier for the first time [ed. note: since then it has streaked even higher].

 

Bitcoin, daily: just four trading days after breaking through the USD 2,000 level, Bitcoin reached a peak of USD 2,760 – click to enlarge.

 

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Bitcoin Mania

The price of gold has been rising, but perhaps not enough to suit the hot money. Meanwhile, the price of Bitcoin has shot up even faster. From $412, one year ago, to $1290 on Friday, it has gained over 200% (and, unlike gold, we can say that Bitcoin went up — it’s a speculative asset that goes up and down with no particular limit).

 

Bitcoins are a lot less tangible than this picture implies, but they are getting a lot of love recently [PT]

 

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RFID Technology fur Use in Currency Becomes More Sophisticated

The 500 euro banknote barely circulates in Europe – this is to say, it is rarely seen in everyday commerce. However, it does exist, and makes the handling of large amounts of cash easier. Not surprisingly, it is said to be highly popular with various criminal organizations, although as far as we are aware, there is no hard evidence of this. Rather, it seems to be an assumption, if a sensible one.

Hitherto, the ECB was mainly interested in the possibility of employing RFID tags in banknotes for security reasons (to make forging them more difficult), and as passive tracking devices, ostensibly in order to be able to track money used by organized crime so as to prevent money laundering.

 

10 after mw

10 euro bill after 10 secs of microwave treatment

Image via dvd-svcd-forum.de

 

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A Major Mining Operation

Since recovering from a brief plunge to $150 intraday in January, Bitcoin has moved in a trading range roughly between $210 and $270. Most recently the currency traded around $235. As we will explain further below, at what price Bitcoin changes hands may actually be relevant for the sustainability of its crucial infrastructure backbone. Here is an hourly chart of the action on the Bitstamp exchange over the past 10 trading days:

 

bit coin, hourly chartBitcoin hourly. Since the low at $150 in January, the crypto-currency has traded in a range between approx. $210 and $270, via bitcoincharts.com, click to enlarge.

 

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A Relentless Downturn

When Chinese investors discovered that Bitcoin might offer an avenue for circumventing China’s exchange controls, the digital currency soared to an incredible $1,250 per unit (on some, but not all Bitcoin exchanges – prices tend to vary a bit between the different exchanges). This was of course not only due to the perception that exchange controls could be evaded with Bitcoin; the Chinese are well known for their love of gambling after all. As real interest rates were in negative territory for long stretches of time in recent years, China’s citizens have sought out all sorts of investments to preserve the purchasing power of their savings – Bitcoin was just one more option, but China’s authorities ultimately cut this option off.

 

P1160701

Image credit: fmh

 

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Vaporization in Bitcoin-Land

It is still not quite clear what exactly happened at Mt. Gox in Tokyo, the formerly biggest bitcoin exchange in the world. According to the exchange, the so-called 'transaction malleability' problem allowed hackers to initiate countless bogus transactions, stealing some 744,000 bitcoins. Even at the recently somewhat lower price of $600 per bitcoin (at non-Mt. Gox exchanges), this sounds like a lot of money. In fact, it sounds as if the exchange has essentially been bankrupted/vaporized, and no amount of 'trying to fix the problem' can actually, well, fix it. Mind, this is just a hunch on our part based on the fact that about $450 m. are said to have disappeared.

In spite of no longer allowing withdrawals (whether of bitcoin or any other forms of currency) since February 7, trading actually continued at Mt. Gox until February 25. During that time, bitcoin prices crashed on the exchange, and a two-tier price system developed. There have always been slight price differences between the various bitcoin exchanges, but our impression was that arbitrage transactions kept prices at most exchanges for the most part quite closely aligned. However, after it became clear that withdrawals from Mt. Gox were no longer possible, the price of bitcoin traded there decoupled rather noticeably. While the currency weakened at other exchanges as well, it did so to a far smaller extent.

This week, trading at Mt. Gox finally stopped and the site became inaccessible shortly thereafter. Access has been restored in the meantime, but all the site does at present is display the terse message that can be seen on the chart below:

 

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Bitcoin, Gold, and the Quantity of Money

The popular view today is based on the linear Quantity Theory of Money. It seems to be common sense. If more units of a currency are issued, then the value of each unit should fall. Many people may not think of it in explicit terms, but the idea is that the value of one unit of a currency is 1/N, where N is the total money supply. If you double the money supply, then you halve the value of each currency unit.

Inflation, according to this view, is either the cause—the increase in the money supply itself. Or it’s the effect—rising prices. The Keynesians hold that inflation is good, and the Monetarists basically agree, though they quibble that the rate should be limited. The Austrians universally think inflation is bad.

The Quantity Theory is not based in reality. One should think of this theory like the Lamarckian theory of evolution.[1] Lamarck asserted that changes to an animal’s body—e.g. its tail is cut off—can be passed on to its offspring. At the time, this theory may have seemed only common sense, and it was very convenient, if not tempting. The same is true with the Quantity Theory of Money. It is convenient, seems like common sense, tempting—and wrong.

 

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Bitcoin 2.0

Where could gold go from here?

Aw, c’mon … you know. Up or down. Down or up. Or, of course, sideways.

The most deflationary analysts, such as Robert Prechter, are looking for a bottom for gold below $500 an ounce. The most bullish gold bugs, on the other hand, tell us that the sky is the limit.

We stopped buying gold many years ago, when it went over $1,000 an ounce. But we haven’t sold a single ounce since. Who knows? We might need it. Besides, at $1,200 an ounce, it seems fairly priced.

Neither too hot nor too cold; the yellow metal is at room temperature.

But do you remember our recent prophecy… Sure-Fire Guaranteed Prediction #2: Our Monetary System Will Collapse?

Exactly when or how… well, we don’t know. But we’ll take a wild guess: When the money system goes down, gold goes up. Ergo, sometime in the future we’ll be able to sell our gold for more than $1,221 an ounce.

 

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The Cryptocurrency Revolution

The Dow closed over 16,000 on Friday. Glory hallelujah! Onwards and upwards…from now and for all eternity. Oh, dear reader, tears came to our eyes as the bell rang and we reflected on the majestic delusion that drives stocks higher and higher, day after day, to some breathtaking pinnacle.

Thirteen years ago, the value of America’s capital stock – as measured by the Dow – was under 12,000. Now, it is fully a third higher. Wait. 13 years ago was the height of the dot.com bubble. Since then, there has been a real estate bubble. And a debt bubble. And now, another stock market bubble?

What else has happened? GDP is up $6 trillion. But total debt is up $30 trillion. Debt is rising 5 times faster than output! How could the capital stock of this economy be worth 33% more now than it was then?

Sell? Buy? Old timer Richard Russell thinks we are just at the beginning of the exciting third stage of a market bubble…the fireworks stage…where prices skyrocket, before blowing up.

Who knows? So let’s change the subject…to Bitcoin. Nobody knows anything about Bitcoin either, but everybody seems to have an opinion.

 

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How I Explained Bitcoin to My 94-Year-Old Mother

The Dow fell yesterday. Gold too.

But at least Tim Geithner has found a job. Now, he can give up the food stamps… and get off the unemployment rolls. The cronies are taking back one of their own. He’s back on Wall Street – at private equity firm Warburg Pincus.

When they approached me, they clearly wanted me to play a substantial role in running the company,” Geithner told the Wall Street Journal. What does Geithner know about private equity?

Nothing. But sometimes WHO you know is more important than WHAT you know.

It won’t hurt Warburg Pincus that its new managing director knows his way around Washington. And it didn’t hurt the suits on Wall Street, when the bad debt hit the fan in 2008, that they had their man Tim in the Department of the Treasury.

 

 

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