What is happening with Bitcoin?

The world of Bitcoin is ever-changing at least in price terms. As I type this then one Bitcoin would cost some US $6720 as opposed to the peak of US $19187 in October of last year. So quite a drop but we also need to note that if we go back to this time last year it was just below US $2000 albeit the rocket engines to take it higher were firing up. So in terms of it being a replacement for money the price moves over the past year make it almost impossible to think of it as a store of value although if we look further back it remains party-time for longer-term investors.

The background

This is that Bitcoin continues to come under verbal and written attack. From Financial News this morning.

Three of the world’s most respected economists have led a joint attack on bitcoin, claiming the digital currency will be “regulated into oblivion” as governments globally move to clamp down on money laundering.

So the heat is on in terms of threats.

Joseph Stiglitz, Nouriel Roubini and Kenneth Rogoff have renewed their assault on the  cryptocurrency believing it will be subject to further sharp and damaging falls as authorities crack down on criminals using Bitcoin to launder money and to avoid paying taxes.

These are familiar lines especially from Kenneth Rogoff who infamously does not like cash either. As to the title I think there are more than a few grounds to challenge this hype.

The three respected economists have renewed their assault on the cryptocurrency

Bank for International Settlements

Towards the end of June the General Manager of the BIS Augustin Carstens weighed in heavily on this issue. One particular section was breathtaking in its cheek and apparent avoidance of reality. The emphasis is mine.

Cryptocurrencies promise to replace trust in long-standing institutions, such as commercial and central banks, with trust in a new, fully decentralised system.

The trust issue is one that those in Denmark will be mulling right now. From the Financial Times last week.

The Kremlin critic investigating an alleged $230m Russian fraud is set to file a criminal complaint against Danske Bank in its home country of Denmark, accusing it of being a central player in a vast money laundering scheme.

As you can see we are shooting two birds with one stone as we note the “trust” in Danske and the fact that yet again it is a bank accused of money laundering on a grand scale or the exact opposite of the claims of Kenneth Rogoff.

Danske is under mounting pressure over the alleged money laundering. Mr Browder and local media claimed this week that the amount of transactions that flowed through the Estonian branch of Denmark’s biggest lender may have been as much as DKr53bn ($8.3bn), more than double previous estimates.

As the total market capitalisation of Bitcoin is US $141 billion it seems to lack the ability to match the banks in this area even if every Bitcoin is used for money laundering. After all Danske is only one bank and even if we just remain in the relatively small geographic area of the Baltics there seems to be a lot of money laundering going on. Here is the Baltic Times on the IMF visit to Latvia which ended at the weekend.

strong measures are necessary to restore the system’s reputation following the halt to ABLV Bank’s operations, the IMF points out. Effective implementation of anti money laundering and combating the financing of terrorism (AML/CFT) recommendations has to focus on reducing the proportion of questionable foreign deposits and the risks they pose to Latvia’s financial system.

For those wondering about ABLV I analysed its fall on the 19th of February. As to the ramifications this emerged at the end of last month according to Reuters.

Ilmars Rimsevics, a member of the European Central Bank’s policy-making governing council, was charged with soliciting and accepting a bribe, the Latvian Prosecutor General’s office said on Thursday.

This has posed two legal moral and ethical issues. Firstly there is the issue of financial crime in the Baltic based banks which presumably is why the head of ECB banking supervision Ms Nuoy has just visited Lithuania as according to domino theories it is the only one currently standing. Also it has raised the issue of how and if the law applies to central bank governors in the Euro area.

Oh and Mr.Carstens has thoughts in this area as well.

The goal should be to ensure that cryptocurrencies cannot undermine the role of central banks as trusted stewards of monetary and financial stability.

Technical Details

Hyun Song Shin has been the go to man for this sort of thing at the BIS for a while now although he does start by posing an issue for the BIS itself.

Much has already been said about how impractical cryptocurrencies are as a means of payment,
as well as the scope for fraud and other illicit activities they open up. The line from Agustín Carstens’
speech that they are a combination of a bubble, a Ponzi scheme and an environmental disaster has been
much discussed.

I thought that central banks liked bubbles! Is he really trying to tell us that they do not? The issue of the “precious” returns yet again as in spite of all the fraud issues people like this always highlight problems which are usually much smaller elsewhere.

Returning to his main points they are as follows.

One is the lack of scalability, which is about providing flexibility and capacity to function as a payment system regardless of the number of transactions.

The second problem is the lack of finality of payments. A payment being recorded in the ledger
does not guarantee that it is final and irrevocable. For cryptocurrencies, what counts as the truth is a matter
of agreement among the bookkeepers.

This bit also caught my eye.

At one point last December, the voluntary user fee
reached $57 dollars per transaction. So, if you insisted on buying a coffee for $2 with bitcoin, you would
have had to pay $57 to process the payment.

As someone who lives in central London I would like to know where you can get a coffee for US $2? More seriously Bitcoin needs to up its transactions game although if this was a bank no doubt the message would be that it is a result of its success.

Energy

This is a hotly debated topic as this from Crypto briefing highlights.

Published by the research team at CoinShares, a London-based cryptocurrency investment firm, the report argues that significant Bitcoin mining operations are principally powered by cheap renewable energy, and use roughly half the amount of energy that has been previously suggested.

According to the report, published today, the Bitcoin mining industry consumes approximately 35 TWh every year; 50% less than the 70TWh currently claimed by the Bitcoin Energy Consumption Index, which also argues that BTC mining has a carbon footprint that exceeds 32m tonnes annually. ( TWh =Terawatt Hours)

Best of luck with the idea that renewable energy is cheap! There are of course some examples but in general it is raising energy costs.

Comment

There is much to consider as we mull  whether these are just birthing pains or crippling ones? On the side of the former is the way that the establishment continues to spend so much time trying to rubbish Bitcoin. If it is so bad why bother as it will collapse of its own accord if they are right? We get nearer the truth as we note that the accusation of promoting financial crime is beyond laughable from people who promote the “precious” with their next breath. As to technology I am also reminded that the UK banks are often accused of having systems still based in the 1970s. That may or may not be true but it is true that the Bank of England did not lower Bank Rate beyond 0.5% because it was afraid of the impact on the banks. Even now according to Governor Carney it thinks they cannot take them below 0% a consequence which I think is much for the best albeit it does highlight quite a weakness in IT.

Looking ahead this is so reminiscent of the development of the railways if we look at the broader picture. They are of course still with us although there are more than a few commuters who wish that they were not if their social media output is any guide.

Money, get away
Get a good job with more pay and you’re O.K.
Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team ( Pink Floyd )

 

 

 

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10 thoughts on “What is happening with Bitcoin?

  1. Shaun, thanks for raising that subject again. I think crypto currencies backed by a trans-govt underwriter have a good chance of replacing Fiat. However there is no reason for a Fiat organised country and CB to want to give up their local “heroin franchise”.

    I looked at buying Crypto, just as I looked at buying gold but the speed of transaction/conversion is simply not there and there are costs. The crypto exchanges are forever getting raided too.

    I reckon the bigger problem for Fiat countries and economies are in their debt soaked economies there will be alot of folk who have “bet the bank” borrowed to fund Crypto, overleveraged and when they are all found to worthless there will be a deal of bankruptsy.

    I think that should be the focus for the CB’s, dealing with the fall out from Crypto. Nothing happens in the summer. October 2018 would be a good time for a Crypto Crisis.

    Paul

    • Hi Paul

      The central banks and the BIS have oodles of skin in this game such as seigniorage and QE as you imply. Oh and control of ( some) interest-rates. So their attack on the cryptocurrencies is entirely predictable. I see my alma mater the LSE has upset the Financial Times ( the central bankers newspaper?) by offering an online course on the subject.

      Yet on the other hand as you say there are plainly issues and dangers of a ponzi. However when I read this bit I thought just like the banks!

      “The crypto exchanges are forever getting raided too.”

      We may need to revisit the subject of safe havens and if they are to quote a reply below “just an illusion”

  2. Personally I always believed these type of currencies were scams, or not dissimilar to Ponzi or pyramid type of schemes.

    I disliked them from go and still dislike them just like Buffet and many other astute investors dislike them’

    All this being able to “mine” further “bitcoins” bizarre to say the least and I believe the amount of energy needed to do so phenomenal.

    As for regulation its come far too late in my view, but still needs to be done to protect people from losing money from investing in things they don’t understand.

    The public can lose money on a one armed bandit but they are protected on limits and odds and have a better of understanding on odds than they do the complexities of cryptocurrencies.

    My own view is they should have been made illegal yonks back.

    If you are given £ from a retailer and bank its guaranteed by the BOE, there is no guarantee on a cryptocurrency or not that know of.

    My own interpretation is they are a virtual currency which isn’t tangible, just like a puff of smoke. One minute its clear to see the next minute it can disappear.

    Or to put it into another context a mirage in the dessert on minute one sees the sea 100 yards in front of them the next minute its gone.

    My latter comments may be slightly over the top but reflects my dislike of the products.

    Tulip bulbs and Ostrich eggs comes to mind, the latter I believed was a scam as it was being sold when I first started my investments in shares, fortunately I avoided the scam having first seen it mentioned on a TV programme and in fact did obtain the literature at the time.

    • Hi Peter

      Whilst I agree with your sentiment about protecting the unwary it is a dangerous road to go on. I meant to reply to Paul that there was evidence of people borrowing to buy Bitcoin when it was above US $10k and that now looks at best expensive. So yes there are dangers but as to “It’s gone” well it was apparently okay to issue some £12 billion of RBS shares and then for it to collapse a few short months later.

      The inimitable South Park was on point.

  3. It is a fascinating subject – I would make a couple of comments:
    1. I think that the central banks are responsible for the emergence of Bitcoin. Although you correctly call out the poor record of bitcoin as a store of value, the CBs and governments have done and are doing their utmost to trash the dollar/pound/Euro through QE and borrowing. If you have governments clocking up astonishing levels of debt, existential threats to the Euro from, say, Italy and you add in QE, it is not surprising that people look for something outside the system;
    2. Some time ago, I stupidly gave my email/phone details to a bitcoin “investment firm”. The deluge of calls from all over the world and emails ever since trying to pressurise me into buying have convinced me that there is a problem with Bitcoin. The only other time I have been put under this pressure was at the end of the dot-com boom. Only a scam (like ostrich eggs or tulips, as noted above) induce people to sell in this way. The harder they try, the more I resist…

    • James,
      “Only a scam (like ostrich eggs or tulips, as noted above) induce people to sell in this way. The harder they try, the more I resist”

      Well said!

      The crypto has allowed money laundering and drug money to be invested and probably traded by drug barons and thieves to hide their money offshore.

      The comments are are why I think they should be shut down by governments.

  4. I note the Royal Mint have a project looking at a Gold Backed ‘crypto’….or is it about making gold more tracable using blockchain? The latter seems more like it.

    Having thrown in my natural scepticism, there does seem to be some merit in having a gold backed currency that is easy to transact with, which this seems to potentially meet. Just that it makes it awfully easy to confiscate or even ‘dilute’ when the time comes (as it inevitably does when the government in some form is involved). It could fulfil Haldane’s and King’s oft stated idea of allowing individuals to deposit their money at the BoE without taking on the risks of the commercial banks lending multiples of their deposits out. An idea that harks back to Irving Fisher’s “100% Money”.

    https://www.royalmint.com/invest/bullion/digital-gold/

    https://en.wikipedia.org/wiki/Full-reserve_banking

  5. Bitcoin peaked on Dec 17th 2017 and fell back to the value attained in October 2017.
    Bitcoin was £700 in Jan 2017 and is £5000 now. Maybe you like better investments that are safer and with a higher return, but bitcoin has shown excellent performance over it’s 9 year life.
    “I don’t understand it and so don’t like it” wouldn’t have seen you holding Amazon or Google stocks then? 😉
    Crypto is here to stay. Decentralised crypto currency is the only way forward to stop central government interference and manipulation by the money holders (the Banksters).
    Open ledger means the crooked Banksters will all get caught (see Mount Gox and other criminals now behind bars), so it’s hardly surprising that the Banksters are not fond of the idea of going to jail for their fraudulent and reckless behaviour.
    Ban it? Make it illegal? LoL! How? Oh! You mean setup a government controlled firewall to stop the citizens from accessing anything the government doesn’t want you to see, just like that bastion of Liberal tolerance China and to some extent Russia? Yeah, that sounds like a great idea to enhance our freedom and liberty! Or you could just move to China or Russia? Or maybe bury your head in the sand making the La La La sound because there is nothing wrong with the worlds financial systems that a bit more QE can’t fix? Dream on buddy!

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