Crypto – Currencies

     

 

 

How We Got Used to Fiat Money

Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market valued silver a bit lower than that.

 

The gold-silver ratio from 1800 to 1915. In the 1870s, numerous nations around the world dropped bimetallism in favor of a gold standard (France was a noteworthy exception). Thereafter it quickly became obvious that silver had been vastly overvalued at the official exchange ratio. It was essentially a subsidy for silver miners. Once a pure gold standard was adopted, mild consumer price deflation became the norm, as economic productivity grew faster than the supply of gold. Contrary to what virtually all central bankers nowadays assert, this had no negative effects on the economy whatsoever. On the contrary, the four decades following the adoption of the gold standard produced the biggest and most equitable real per capita growth the US has ever seen – such growth rates were never again recaptured. Of course, at the time government spending represented between 3% to 4% of total economic output, i.e., government was but a footnote in most people’s lives. The reason why governments subsequently sabotaged the gold standard was precisely that they wanted to grow without limit. [PT]

 

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Bitcoin and Credit Transactions

Last week, we said:

 

It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt.

Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by Satoshi’s design.

 

The mad-cap rally in bitcoin has continued – as we recently pointed out, the chart pattern is highly reminiscent of the pattern in gold in the 1970s. The current phase is mimicking the 1979 blow-off move. [PT] – click to enlarge.

 

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A Fork in the Cryptographic Road

So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.

 

Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we write this. So far the chart of BTC in USD terms since 2010 happens to be a spitting image of the chart of gold in USD terms from 1973-1979 (the pattern similarity is eerie). A brief explanation of the “hard fork”. [PT] – click to enlarge.

 

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Precious Metals Supply and Demand Report

That’s it. It’s the final straw. One of the alternative investing newsletters had a headline that screamed, “Bitcoin Is About to Soar, But You Must Act by August 1 to Get In”. It was missing only the call to action “call 1-800-BIT-COIN now! That number again is 800 B.I.T..C.O.I.N.”

 

Bitcoin, daily. In terms of the gains recorded between the lows of 2009 and the recent highs (from less eight hundredths of a US cent per bitcoin, or $1 = 1,309.2 BTC, the first officially recorded value of BTC, to $3,000 per bitcoin, or $1 = 0.000333333 BTC), the bubble in bitcoin by now exceeds every historical precedent by several orders of magnitude, including the infamous Tulipomania and Kuwait’s Souk-al-Manakh bubble. In percentage terms BTC has increased by about 392,760,000% in dollar terms (more than 392 million percent) since its launch eight years ago. Comparable price increases have otherwise only occurred in hyperinflation scenarios in which the underlying currency was repudiated as a viable medium of exchange. Our view regarding its prior non-monetary use value and hence its potential to become money differs slightly from that presented by Keith below. We will post more details on this soon, for now we only want to point out that we believe there is room for further debate on this point. [PT] – click to enlarge.

 

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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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