Virtual Currencies

     

 

 

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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Gold 2.0

Exciting things are happening!

Virtual currency bitcoin traded to over $700 on Monday. The Dow shot to over 16,000. And China decided to go even further down the capitalist road.

Don’t know about bitcoin?

The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce,” a Justice Department official told the Senate. Bitcoin may “hold long-term promise,” said Ben Bernanke. “If properly regulated,” added an unnamed official.

Publicly, the feds are playing it cool with bitcoin. Privately, they must be sweating. As we told a small group of Bonner & Partners Family Office members last week at our private meeting in Nicaragua, bitcoin has the potential to be “gold 2.0.” The new virtual money has the potential to destroy the dollar… the Fed… the banks… and the world’s fiat money system.

It could also make gold obsolete. This new money is easier to use and costs nothing to store. But regulate it? That may be impossible. Bitcoin is arguably the most disruptive monetary technology yet invented. It could be the biggest financial story since gold. Nothing like it has happened in 6,000 years – an entirely new… and better … kind of money.

In fact, it could help bring in a whole new phase of economic development… Watch this space for more details …

 

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Global Money Supply Growth

 

Michael Pollaro has recently updated his money TMS data. As of October, US monetary inflation shows signs of re-acceleration. Earlier in the year a slowdown could be observed in spite of 'QE-to-infinity'. This was probably attributable to a combination of commercial bank credit inflation slowing down and dollars that moved into the US banking system during the height of the euro area debt crisis slowly leaking back out (only money that is on deposit in the US banking system is counted in the US money supply data).

As of October, broad US money TMS-2 is increasing at 8.4% year-on-year, at a 10.2% quarterly annualized rate and a 17.6% monthly annualized rate. Narrow  money TMS-1, which is the more volatile measure, exhibits slower year-on-year  growth (6.5%) as well as slower quarterly annualized growth (5.9%), but its monthly annualized growth rate has risen to 25.4%, so it is catching up.

 

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Bitcoin Retests Old Highs

It is interesting that bitcoin has not at all succumbed following the bust of the 'dark web' drug marketplace Silk Road. We already pointed out that the crypto-currency proved quite resilient on the day the news of the bust hit (see: “Bitcoin and the Silk Road Bust”), defying those who thought the currency could not maintain its exchange value once the Dread Pirate's web site was no longer operational.

However, we have been quite surprised by what has actually happened since then. From the intraday lows made on the day of the bust, bitcoin has risen by about 100%, in the process retesting its previous 'blow-off' peak that was reached in the weeks following the Cyprus depositor haircut:

 


 

bitcoin

After the Silk Road bust, bitcoin soared to retest its previous highs – click to enlarge.

 


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The Dread Pirate's Cash Stash is Still Safe

As a quick addendum to our recent post on the Silk Road bust and what it means for bitcoin (surprisingly little), here is something that strikes us as truly funny. Apparently the FBI finds itself unable to confiscate the Dread Pirate's stash of bitcoins:

 

“Closing down the Silk Road and arresting its alleged operator has left the FBI in uncharted territory. After shuttering the hidden site, law enforcement went to work confiscating the money and materials belonging to supposed drug kingpin Ross Ulbricht, but this usually routine procedure is proving especially troublesome in this case. The cache of more than 600,000 bitcoins in Ulbricht’s personal fortune are still inaccessible to the FBI. The only way to move Bitcoins out of a private wallet is to have the corresponding private key to authorize the transaction. The FBI has been unable to get through the encryption protecting Ulbricht’s wallet, leaving all those Bitcoins — amounting to roughly $80 million at current rates — out of reach. Based on publicly available data, this is about 5% of all Bitcoins in existence right now.

Funds held by users of the site, however, were not so well-protected. Before completing transactions on the Silk Road, users would load Bitcoins into an escrow account on the site. The agreed upon coins would only be transferred to the seller’s private wallet once the buyer had verified delivery of the goods. When the feds took over the Silk Road, there were over 26,000 Bitcoins in user accounts that were relatively easy to snatch up.

The FBI has transferred all 26,000-plus seized Bitcoins to its own personal wallet, but because Bitcoin transactions are tracked publicly, it didn’t take the internet long to find the FBI’s wallet address. Users have taken to transferring tiny fractions of a Bitcoin to the FBI with public comments attached decrying the war on drugs and the arrest of Ulbricht. Users have even helpfully tagged the wallet address as “Silkroad Seized Coins.” You can check out the comments as they come in by watching the blockchain for the FBI’s wallet.”

 

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'Dread Pirate Roberts', Drug Prohibition and the Dark Web

By now it is well known that the proprietor of the 'Silk Road' internet marketplace for drugs and other illicit products has been busted by the FBI. Of course, the idea that the State should prohibit drug use by adults is highly questionable. If one studies the history of legislation in this regard, it soon becomes clear that while these prohibitions have been variously dressed up in Puritan morality or appeals to the need to preserve the 'Volksgesundheit' (the peoples' health), these laws really were largely protectionist measures.

For instance, it is no coincidence that marihuana use became illegal around the time chemical concerns such as Du Pont de Nemours introduced artificial fibers. Making the plant that produces marihuana illegal at the same time removed the biggest competition to artificial fibers – hemp.

Similarly, drug prohibition leaves the field of supplying the population with various uppers and downers in the hands of the pharmaceutical industry, which is producing dangerous psychoactive medication by the wagon loads these days. What the long term consequences of feeding the population with various benzodiazepines and other types of psychoactive drugs that influence the serotonin, norepinephrine or dopamine balance in the brain (such as the infamous and widely prescribed antidepressant Prozac) are is not really known, but we do know that a great many mass murderers that have gone 'postal' in modern times have been taking such psychotropic drugs.

 

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