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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Of Bitcoin banks and electricity consumption

This morning opens with yet more Bitcoin headlines and news. I guess it is in keeping with the times that what was so recently a raging bull market should apparently so quickly become a bear one. From Reuters.

 

Bitcoin traded at $10,968, down 3.7 percent in Asia, after a fall of 16.3 percent on Tuesday, its biggest daily decline in four months.

Just over 24 hours ago it was above US $13,000 and of course in mid-December we saw a peak of over US $19,000.  It is also important to provide some perspective as if we look back a year we see that it was below US $900. Or to put it another way over a year we have quite a bull market and over a month a bear one.

Another way of putting it is shown below.

I think the mean needs to be higher but otherwise we get an attempt to explain human investing psychology with both its flaws and glory. One facet of this which I found particularly troubling came from CNBC just over a month ago.

Bitcoin is in the “mania” phase, with some people even borrowing money to get in on the action, securities regulator Joseph Borg told CNBC on Monday.

“We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,” said Borg, president of the North American Securities Administrators Association, a voluntary organization devoted to investor protection. Borg is also director of the Alabama Securities Commission.

If only Borg had said “resistance is futile”! But he was on the ball in two big respects in that he was warning of a problem should people borrow into a surge and also later he pointed out that “innovation always out runs regulation”. It is hard not to note that the peak we have seen so far came quite quickly.

The banks and Bitcoin

However the apparently Bitcoin friendly behaviour of the banks did not last. From the Financial Times on Saturday.

Bitcoin investors trying to channel their new fortunes into UK property are being turned away by mortgage lenders and brokers who fear breaching anti money-laundering regulations.

There was a more specific example.

One public sector worker built up a deposit of £40,000 after investing in bitcoin, said Mark Stallard, a broker and principal at House and Holiday Home Mortgages. But he said he had been unable to arrange a loan because it was hard to prove where the funds had arrived from and to link them to his client.

 

“The first mortgage lender I rang asked me what a cryptocurrency was,” Mr Stallard said.

 

“I rang two other lenders and they said they would not touch it. “When I mentioned where the money had come from there was massive reluctance to help or understand the problem. I do not believe the mortgage providers in general are ready for this issue and research tells me that a lot more people will be knocking on our doors with funds made or raised in this fashion.”

There are various issues here as for example the client could say he has made the money by gambling/investing. Of course the latter issue of investing raises the issue of whether capital gains tax is due? So perhaps that is why there is a claimed issue with where the funds arrived from. Mind you the Building Societies Association have a cheek to say the least to say this.

“There is currently no regulation of these electronic currencies, which puts them into the highest risk category in relation to money laundering. In addition, it is well known that such currencies are popular with criminals, who use them to launder the proceeds of crime.”

Apparently you can however pay off your mortgage with Bitcoin profits.

Existing borrowers who want to use their bitcoin profits to pay down mortgage debts are free to do so. Daniel Hegarty, founder of online mortgage broker Habito, said a customer recently cancelled his remortgage application before it was completed, deciding instead to pay off his whole mortgage with his money from bitcoin investments.

So there is quite an inconsistency there as I again have a wry smile at the banking sector accusing others of facilitating money laundering and being popular with criminals!

Anonymity

This is an odd one with the cryptocurrencies.I am sure many of you know more about this than me but there is a clear contradiction in what we are told. Firstly we are regularly told that the trading is anonymous and that is one of the points of the system. Fair enough. But we are also beginning to be told that financial crimes can be spotted so we simultaneously do not know what is happening but we also do?!

Electricity and power

We are getting ever more stories about the energy consumption of Bitcoin as this tweet from John Quiggin suggests.

If mining ended tomorrow, China could reduce its coal consumption by an amount comparable to its entire import of Australian thermal coal (supporting calcs to follow)

Sadly he has not yet provided the mathematics behind this but there have been plenty of other suggestions in the same vein. For example from Bloomberg last week.

Miners of bitcoin and other cryptocurrencies could require up to 140 terawatt-hours of electricity in 2018, about 0.6 percent of the global total, Morgan Stanley analysts led by Nicholas Ashworth wrote in a note Wednesday. That’s more than expected power demand from electric vehicles in 2025.

There are plenty of arguments about the numbers but suddenly hydro-electric power seems to be en vogue as this from Bloomberg yesterday suggests.

A Canadian utility has already voiced enthusiasm. Hydro-Quebec has said it’s in “very advanced” talks with miners about relocating to the province and that it envisions the miners soaking up about five terawatt-hours of power annually — equivalent to about 300,000 Quebec homes — from the surplus created by the region’s hydroelectric dams.

If we move onto future power demands of which Bitcoin and the other cryptocurrencies may turn out to be significant I have a question. Are we not going to run out of electricity? My own country has been something of a shambles in providing new power generation as the ultra expensive plans for  a new nuclear point at Hinkley Point demonstrate and yet we are told this. From the BBC today.

Three-fifths of new cars must be electric by 2030 to meet greenhouse gas targets, ministers have been warned.

There have been some movements on infrastructure as for example there are now nine charging points around Battersea Power albeit they seem to be rarely actually used. But in a future where they are used a lot and that is not so inconceivable where is the electricity going to come from? It is not that there has been complete failure as for example I have just checked and wind power is currently providing over 10 GW but of course it relies on the wind blowing. It is helping in this cold snap but what if people wanted to charge their vehicles on a cold windless night? Perhaps that is when Smart Meters will really come into their own and not in a good way.

Comment

There is a lot to consider here as we mull two concepts that would have been regarded as separate only a short time ago which are Bitcoin and electricity. Here is another way of looking at it from Chris Skinner.

Part of the problem is, that all those Bitcoin miners are racing to solve the same problem, but only the miner who solves the problem first gets to actually claim the block. All the other miners lose out, and their energy goes to waste. Even with that probability, with 1 Bitcoin at roughly US$20,000, there’s plenty of incentive to try.

There is still a fair bit at US $11000. But unfortunately trying it at home will not work.

Even so, a fairly typical computer with an average type of SHA isn’t going to cut it — a recent estimate was that to mine a single Bitcoin using an average computer would take you around 1,367 years

So you would need something like Carl Sagan’s SETI project. However one way of looking at the message from Alex Hern below would be to think is Hinkley Point a way of nobbling Bitcoin?

The power consumption of bitcoin mining is purely artificial, and its equilibrium is essentially at the level where the cost of all the electricity used is equal in the long run to the value of the bitcoin granted in mining rewards.

The energy problem is simply that renewable sources of electricity are sometimes outside our control whereas things we are shutting down such as coal generation we can control. Yet the potential demands for electricity are rising with no clear plan to provide for them unless of course cold fusion finally works or we find a way of being able to store power efficiently.

 

Will the “madness and delusions” of 2017 carry on next year?

Let me open by wishing you all a very Merry Christmas. This morning has brought back an old friend in a way as the UK stock market used to regularly celebrate December with a Santa Rally and yesterday brought a move to an all time high of above 7600 for the FTSE 100 equity index.  We will see if another push higher on the last (half) trading day before Christmas happens. But in many ways equity markets have been eclipsed in 2017 in spite of their sequence of higher highs and now we have seen the icing on the cake I think.

There was a time when the Long Island Ice Tea company at least to me meant a bar in Covent Garden which was fashionable and popular. Well that is just such old era thinking now as I present this. From Bloomberg.

Long Island Iced Tea Corp. shares rose as much as 289 percent after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain Corp. It’s the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin’s 1,500 percent rally this year.

If we look back we see that the share price had fallen from a high of US $6.68 in June to US $1.70 on the 12th of this month. Presumably the fall was caused by the losses which according to CNBC give it a share price to earnings ratio of -4.21 and a Return on Equity of 554%. Anyway from the 12th there was a minor rally which presumably came from some sort of leak of the proposed plan if plan is the right word and then boom.

Let me take you to their website.

Long Island Iced Tea Corp. (NasdaqCM: LTEA) (the “Company”), today announced that the parent company is shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology. …… The Company believes that emerging blockchain technologies are creating a fundamental paradigm shift across the global marketplace, with far reaching applications

I don’t know about you but the concept of ultra vires seems applicable to me here but then we get to something that rally takes me back in time to this.

a company for carrying out an undertaking of great advantage, but nobody to know what it is.

That as the Extraordinary Popular Delusions and the Madness of Crowds is from Charles Mackay describing one part of the South Sea Bubble of the early 1720s. Let us now return to today.

The Company is already in the preliminary stages of evaluating specific opportunities involving blockchain technology. The discussions are only in the preliminary stages but indicate the areas of focus for the Company.

We then get some examples but then are told this.

However, the Company does not have an agreement with any of these entities for a transaction and there is no assurance that a definitive agreement with these, or any other entity, will be entered into or ultimately consummated.

But and there is always a but.

Philip Thomas, Chief Executive Officer of the Company, commented, “We view advances in blockchain technology as a once-in-a-generation opportunity, and have made the decision to pivot our business strategy in order to pursue opportunities in this evolving industry

We can at least agree that going from tea to blockchain is indeed a pivot. As to the share price well those who paid over US $9 may already be experiencing the sort of hangover the Long Island Iced Tea Bar used to give me. The actual financial position will not ease it. From Bloomberg.

Long Island Iced Tea had a net loss of $3.9 million on sales of $1.6 million in the three months ended Sept. 30. The company has lost $11.6 million on sales of $3.9 million in the first nine months of the year.

As to assets well there is this.

The company has reserved the web domain name www.longblockchain.com

Until this happened I was only vaguely aware of other developments.

Future FinTech Group Inc. — until May known as SkyPeople Juice International Holding –soared more than 215 percent after a CNBC anchor called attention to its business. The stock was up 9 percent at the time of the tweet, only to take off in what has become the norm in stocks that merely mention “fintech” or “crypto” in their names. ( Bloomberg )

This gets very potentially murky as the fear is that this sort of thing ( “media leak”) can be part of a planned process. Anyway the share price high of 8.2 has after only a couple of days been replaced by 3.25.

Bitcoin

The last few days have seen quite a decline for Bitcoin. It was only on Sunday it nearly reached US $20k at least according to Bitfinex whereas this morning it has dropped as low as US $12110. Quite where this leaves the posse of amateur investors who have piled in I am not sure but I do worry about this development.

“We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,” said Borg, president of the North American Securities Administrators Association, a voluntary organization devoted to investor protection. Borg is also director of the Alabama Securities Commission.

Sadly Borg did not say that resistance is futile or that we will all be assimilated however he did come up with an excellent line which is that.

innovation and technology will always outrun regulation

As usual the Bitcoin price is proving to be very volatile and is now back over US $14,000 as I type this. But blockchains don’t seem quite what they were although of course it is all a question of perspective as on a monthly quarterly or annual basis Bitcoin has soared.

Comment

As we look back it has been an extraordinary year. Just as we were wondering about bubbles in house prices as well as bond and equity markets we saw Bitcoin surge past them all in this regard. As ever Lewis Carroll was way ahead of time

“you see, so many out-of-the-way things had happened lately, that Alice had begun to think that very few things indeed were really impossible.”

Meanwhile there was some seasonal cheer for the UK economy as annual economic ( GDP) growth was revised upwards from 1.5% to 1.7%. However this was not quite so seasonal.

global growth negative in October & flat in September according to CPB: . The & half-year prediction of 3% growth in 2017 as usual now looks wild! ( @RebeccaAHarding )

I will be back in the New Year so let me wish you all a Happy New Year as well. By then I will be able to report on my rebranding on Twitter as Notayesmansecon Blockchain 🙂

 

 

Bitcoin futures trading indicates plenty of problems ahead

Last night saw a change in the Bitcoin world. This is because a Bitcoin futures contract started trading on the Chicago Board Options Exchange or CBOE. It would appear that plenty were watching as this took all of 30 minutes.

Due to heavy traffic on our website, visitors to may find that it is performing slower than usual and may at times be temporarily unavailable. All trading systems are operating normally.

The system trouble was accompanied by yet another surge in the price. From Bloomberg.

Bitcoin futures expiring in January were priced at $17,780 as of 12:57 p.m. Hong Kong time, up from an opening level of $15,000. About 2,300 contracts changed hands.

So not an enormous amount of contracts but the interest and price swings did have an impact.

Futures on the world’s most popular cryptocurrency surged as much as 25 percent during their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts meant to cool volatility. Dealers said initial volumes exceeded expectations, while traffic on Cboe’s website was so strong that it caused delays and outages. The exchange said all its trading systems were normal.

Who could possibly have forecast that lots of people would be watching? Anyway as I type this the price for the January 2018 contract is US $17640 ( up 14%)  with the volume being 2695 and the high having been US $18850.

What is the point of a futures contract?

The purpose of a futures contract is to bring trading on a particular instrument into one place. Why? Well even what are considered to be active markets may have bursts of activity followed by quiet periods which are awkward to say the least if you wish to trade in them. The impact can be boosted by the contract covering a concept rather than a particular asset as for example in bond futures where a generic is traded rather than an individual bond. So the ultimate end product of a successful futures contract is liquidity or the ability to trade consistently which benefits investors and traders as well as the exchange itself which charges fees on the trades.

It also brings into play the ability to “short” an instrument as you can sell as your opening trade whereas with ordinary trading you have to buy something before you sell it. This is much simpler than what you have to do in equity markets which is borrowing the stock so you can sell it which you have to plan and work at rather than just contacting an exchange and selling.

Obviously the exchange is at risk as prices move so you have to put up cash or margin to cover your position. When people refer to gearing on a futures contract this is one way of measuring it as if you have to put up 10% margin then if you wished you could buy  ten times as much of the instrument concerned for the same outlay. Some care is needed though as there is also variable daily margin to cover losses ( as well as lower margin if profits arise)

Success or failure comes essentially from volume and liquidity and from that flows the other factors.

How does it work?

The basis is that you have a point in time when everything has to be settled hence the concept of a January contract in the case of Bitcoin ( there are also February and March).  At that point anything outstanding is delivered for example I had a colleague some years back who had 2 potato futures contracts delivered on him and was in danger of getting more spuds than he could handle even with his barn.

Also there is a clearing house who organises and guarantees settlement. In the UK the main clearing banks back the London clearing house which back in my main trading times was seen as a big strength. Well we all make mistakes don’t we? Also the exchange is regulated.

The point for Bitcoin

In a way futures trading is a sort of coming in from the cold for Bitcoin. It gives the potential for there being one price rather than the multitude of them we currently see. That would be a clear gain and if we add in the regulated and clearing issue another potential gain is that institutional investors join the party. This would have positive impacts on volume and liquidity which would be likely to settle the price down and make it more stable.

Problems

Something has troubled me from the beginning and it is this. From the CBOE.

XBT futures are cash-settled contracts based on the Gemini’s auction price for bitcoin, denominated in U.S. dollars.

This needs to turn out to be both stable and reliable as for example the market would be damaged if there were even suspicions that there were ways of manipulating the settlement price. I do not know Gemini but their price will have to be 100% reliable and what if the overall Bitcoin price is squeezed?

Next is that one of the benefits of futures trading may not actually apply and h/t to @chigrl for raising the issue. Remember I said that allowing short selling was one of the key points of a futures contract? Well here are the rules of Interactive Brokers and the emphasis is mine.

Due to the extreme volatility of cryptocurrencies, clients will be unable to assume a short position including as part of a spread. The only time a short order will be allowed will be in the case of a roll trade that results in a long position. In addition, market orders will not be accepted.

If this is in any way widespread the whole concept of a futures contract on Bitcoin may be holed below the waterline. As I pointed out earlier the ability to sell short is if not the modus operandi a big point of having a futures market. Added to that is that there are of course plenty of risks in being long Bitcoin at current levels. Are market prices supposed to bring a balance between the risk of buying and selling?

Comment

Actually although the media seems to have mostly overlooked it there was a clear signal of the inability for at least some to short Bitcoin futures.

No wonder sellers want a premium if it is difficult or even not possible to sell unless you have already bought.  On such a road then the price may well keep singing along with Jackie Wilson.

Higher (lifting me)
Higher and higher (higher)

As someone who has spent plenty of years in such markets the apparent inability to do spreads ( trading January versus March for example) is another issue. Say there is a large buyer for January futures and a seller in March, what used to be called locals would arbitrage that out adding to liquidity. You see these markets need someone to trade with otherwise they curl up and die. Another sign of trouble can be higher fees like this from the FT earlier.

The Singapore Exchange is to increase fees as much as 10-fold for derivative trading members next year, following a recent large technology upgrade. As of January, annual fees for proprietary trading members such as big global banks with direct market access will jump from S$2,000 to as much as S$25,000 in some cases, SGX said on Monday.

Also there is the underlying issue of what is a Bitcoin and if it is suitable for a futures contract in the first place?

Some of the issues I have raised today could be fixed if not at a stroke quite easily. But they need to be done as you see once a contract gets a reputation for being illiquid then it tends to die a death. So far 2768 is not all that brilliant especially if we allow for this.

CFE is waiving all of its transaction fees for XBT futures in December 2017.>

All that is before the Merc ( CME) starts trading them too.

Oh and some are suggesting option contracts ( my old stomping ground). How would that work unless you had the ability to hedge via selling futures?

The rocky upwards ride of Bitcoin continues

One of the features of 2017 has been the extraordinary price volatility exhibited by Bitcoin. This has of course come at a time when many have been mulling exactly the reverse in equity markets although of course the current rhetoric over and from North Korea may well change that. For some perspective let us look back to the 29th of December.

“When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.”

Back then I pointed out two things. Firstly the chart pattern was of a “bowl” formation so that the price would need to keep rushing higher or it would end up like one of those cartoon characters who run over the edge of a cliff and briefly levitate before the inevitable happens. The next was that it was approaching the price of gold in individual units although later we looked at the fact that as an aggregate it was a long way away as there is much more gold.

What was driving things?

There were various influences. One generic was fear of what plans central banks have for fiat countries in an era of low and indeed negative interest-rates. Partly linked with this was the specific issue of demonetisation in India where some bank notes were withdrawn. Added to this was the continuing demand from wealthy Chinese to move some of their money abroad and the efforts of the authorities to block this so at times Bitcoin gets used.

The surge

Here is Fortune to bring us up to date.

Bitcoin was worth less than $590 a year ago. Then early Tuesday, the cryptocurrency surged to yet another all-time high above $3,500, as investors likely pulled their funds from the new Bitcoin spinoff, Bitcoin Cash or “Bcash,” to invest it in Bitcoin.

Bitcoin pulled back slightly by mid-day, trading at $3,430.

CNBC returned to the comparison with the price of gold although to be fair they did offer some perspective.

That’s nearly three times the price of gold, which settled at $1,262.60 an ounce, up nearly 10 percent for 2017…….That said, the gold market is worth trillions while bitcoin’s market capitalization is only about $57 billion…..Lee pointed out that the overall size of the gold market at about $7.5 trillion dwarfs that of bitcoin.

It didn’t take long from approaching the price of gold to nearly triple it did it? Bloomberg has decided to give us a comparison which will upset central bankers everywhere.

It has increased more than threefold this year, compared with a doubling in the value of Vertex Pharmaceuticals, the best performer in the S&P 500 Index.

At least they didn’t point out that it has gone up (much) more than house prices as there is only so much a central banker can take in one go! Still they were not finished with comparisons.

Here’s some other stuff you could buy for the price of one bitcoin, including but not limited to 100 22-pound boxes of Hass avocados.

 Actually that don’t impress me much to coin a phrase as a PC user who is not especially keen on living solely on avocados and facing the consequences of setting up a stall to sell them all. But we get the idea.

Splitting the atom

The cryptocurrencies have a problem around growth and change and here is the FT Alphaville view on the fork at the opening of this month.

In the next 24 hours, the trust in the bitcoin system is going to be even more severely tested than usual. The community of miners, nodes and developers is initiating a so-called hard fork which hopes to expand the network’s processing capacity, allowing it to scale more effectively. In the process bitcoin will be split in half, and two new systems will emerge.

The hope is that faith will be channelled into the newly evolved, expanded and improved chain, while the old chain will be abandoned. But anyone and everyone who has a bitcoin will via the process suddenly be endowed with two assets instead of one, with a free option to support one and render the other useless. If the effective split makes people feel twice as enriched, it’s worth asking, why they shouldn’t feel inclined to keep hold of both of them? And that too will be an option.

It would appear that investors have sold the new Bitcoin cash to buy more of the existing Bitcoin. It would be amusing if they are rejecting change wouldn’t it? On a more serious note is this how money will be created in the future? We only have a very short time frame to consider but as we stand there has been both money and wealth creation here. Perhaps the central banks are in charge after all……

The only way is up baby

Business Insider seems rather keen.

Arthur Hayes, CEO of BitMEX, a bitcoin derivative exchange, thinks SegWit marks an important milestone for bitcoin’s future.

“At long last, the solution touted to solve bitcoin’s scaling problems, Segwit, is activated,” Hayes said.

“With Segwit implemented, I believe $5,000 Bitcoin is within striking distance,” he concluded.

Comment

Let us look at the functions of money and start with a unit of account. Many people will know of Bitcoin but how many will account in it? Not much I would suggest. The price surge will mean that so far it has performed really rather well as a store of value and indeed quite an accumulator of it but we also need to note that along the way there have been sharp drops. There has been progress in it being a medium of exchange as more places accept it but it is still a very long way away from anything like universal acceptance.

However in continues to survive and in more than a few ways thrive. Fears of central banks blocking bank accounts continue to feed its growth. Frankly the rumours that Euro area bank deposits could be frozen in a banking collapse would have been cunning if started by a Bitcoin fan. There are loads of risks just like there are in any new venture but also care is needed as this from Gadfly of Bloomberg indicates.

There are also fears that big traders are having an undue influence on the price of Bitcoin, with one blogger flagging the actions of “Spoofy” — a nickname for traders who apparently place million-dollar orders without actually executing them. Bitcoin is essentially unregulated, so risks are abundant.

I love the idea that regulation has pretty much fixed risk, what could go wrong? But even more importantly many ordinary or dare I say it regulated markets are being spoofed these days and if the reports that reach me are any guide the regulators seem to have both a tin ear and a blind eye. Along that road we may well find a reality where for some Bitcoin looks rather like a safe haven although these days we need to add the caveat whatever that is?

Also finance regularly provides us with curiousities. Today’s comes from the land of the rising sun as we note that it is clearly in the firing line from North Korea and yet the Yen has strengthened through 110 versus the US Dollar.

The rise and rise of Bitcoin and the crypto currencies

On Friday the news in the UK was grabbed by the ransom wear attack called Wanna Cry. At first the media concentrated on the impact on the National Health Service but soon news that attacks were happening around the world filtered in as well. It was hard not to think of the large amount of funds that have been poured into NHS IT infrastructure which seemed somewhat at odds with the fact that it was still running Windows XP! Mind you as a person who was sold the Vista system by Microsoft I am someone who still thinks fondly of XP and think it was a better system.

However an intriguing part of the attack was the request to be paid in Bitcoin. Also I have to confess I was curious as to why the individual claims were small. From Wall Street Wires.

For instance, the ransomware is asking for $300 in Bitcoin.

Not much is it? Perhaps they hoped that it would be small enough that people would pay it discreetly and they would avoid publicity. Also if everyone paid up not doubt it would amount to a tidy sum indeed. It did bring Bitcoin back into mainstream news albeit in rather a seedy way. Although for our would be criminals there was something of a draw back which is that it turned out the world could watch them being paid. Indeed @actual_ransom is on the case.

Note: This bot is watching the 3 wallets hard-coded into ransomware. It tweets new payments as they occur, totals every two hours.

In some detail as this from a few minutes ago indicates.

Someone just paid 0.0045 BTC ($7.61 USD) to a bitcoin wallet tied to ransomware.

As of the time I am typing this the total paid is apparently as shown below.

The three bitcoin wallets tied to ransomware have received 151 payments totaling 24.75899797 BTC ($42,640.91 USD).

Of course the real boom will be in online security consultants who seem so far to be selected from a group who wear sunglasses indoors if the output of BBC News is any guide.

An Asset Bubble?

The Financial Times has been on the Bitcoin case.

Sky-high valuations for bitcoin have helped the value of crypto currencies burst through $50bn, raising fears of an asset bubble in the unregulated market.

A sky high valuation?

A sharp spike in the price of bitcoin, which has risen 55 per cent this month and is worth more than gold, pushed it past $1,900 on the Bitfinex exchange on Friday.

So the price has been very strong although I have to say that the idea that it “is worth more than gold” has a few issues with it. What is the unit of comparison for a start? After all gold is a physical commodity whereas Bitcoin is a virtual one. If we move to the aggregate level then if Only Gold is correct then all the gold so far mined is worth some US $7.4 trillion which rather dwarfs the US $50 billion value of the crypt currencies. Presumably they are comparing a singe Bitcoin with a troy ounce of gold. Also it is unusual for the FT to fear an asset bubble is it not?

A lot has been going on in this space including the fact that whilst Bitcoin is the most famous of the crypto currencies it is far from alone.

A growing number of alternative digital currencies — or “alt-coins” — is feeding the speculative frenzy with values in some rocketing as much as 500 per cent in the past week………Aside from bitcoin, there are more than 830 alt-coins ranging from Litecoin, a challenger to bitcoin, to MiketheMug, a coin that promises to make weekly payouts to holders.

There have been quite a few developments along the way.

An increase in initial coin offerings (ICOs) — unregulated issuances of crypto coins where investors can raise money in bitcoin or other crypto currencies — is fuelling the market and drawing attention from lawyers and financial professionals. Many fear ICOs, which are trying to market themselves as an alternative to venture capitalists as a way of raising cash for businesses, breach existing securities law.

Of course quite a lot of ordinary conventional offerings fail which poses quite a few questions for how you regulate such markets. Some seem to be the preserve of city professionals.

Observers say many individuals are trading alt-coins from corporate IT departments, concentrated in the financial sector and falling under the radar of senior executives. Many are sitting on virtual fortunes, but are unable to liquidate their cash as banks clamp down on measures to avoid money laundering.

There is an obvious problem with the phrase “virtual fortune” is there not? If they are legitimate it seems very odd that they are caught up in money laundering regulations so I suspect that there is more to this than meets to eye. After all the financial sector is ridden with financial crime of many sorts. Also I have seen plenty of supposedly bona fide markets where investors have been unable to realise the money they thought they had made. The case a couple of decades ago when investors put money into Italian shares is something of which I am reminded of by this. It was oh so easy to put money but, ahem, considerably more difficult to ever take it out.

Comment

If we step back for a moment we can compare Bitcoin with fiat money. On such a road we can see that the ground for Bitcoin has been fertilised by the way that central banks have been so keen on asset price rises. Compared to these assets which in concrete terms people face with the cost of housing but otherwise in bond and equity markets cash has depreciated in value. On that subject the UK FTSE 100 index has risen to an all time high of 7454 today again depreciating the value of cash money compared to it. Of course consumer inflation numbers look the other way from this.

There are obvious problems with the Bitcoin and crypto currency world. Firstly its role as a medium of exchange is limited as many places will still not accept it as a means of payment. That is why the recent news from Japan was welcomed by price rises. Also in an irony the recent price surge poses a question for its use as a store of value. It is not just the concept of “what goes up must come down” sung about by Blood Sweat & Tears in the song Spinning Wheel but also the issue that the price volatility means that the value is swinging wildly as Bloomberg point out.

Even during the huge run up this year, it has moved more than five percent on 21 different days, with nine of those being moves lower.

In the end it comes to the fact that Bitcoin fans have more faith in blockchain mathematics than central bankers. Of course some prefer the anonymity it provides and some just like the technological aspect. The main danger from authority must be from the likes of Kenneth Rogoff who must be very disappointed that the latest outbreak of financial crime is not being driven by high denomination bank notes. Of course there are other dangers which include it falling out of fashion and being replaced by other alternatives. Whilst there are obvious differences between this and the growth if the railroads back in the day there are similariites and how many succeeded again? Oh and as we stand it poses an increasing challenge to measures of money supply especially in areas where it is widely used.

The impact of Bitcoin and negative bond yields

As we approach the end of 2016 the natural tendency is to look ahead to 2017. We will soon find ourselves afflicted by a litany of forecasts for the year ahead. I say afflicted because this has been an “annus horribilis” for establishment forecasters but those that I am in touch with seem to have learned little if anything at all. Accordingly the theme “same as it ever was” seems set to turn into a “road to nowhere” for them. However we will take a different tack as the holiday break has thrown up a couple of disturbing signals in the world monetary system.

Bitcoin surges

When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.

Actually for some I note that threshold city has already arrived. From BTC Manager.

Bitcoin has surpassed its all-time high in two major currencies, the Euro and the British Pound……With the largest weekly volume in almost 12 months, bitcoin looks to continue to soar against the Euro. With a break of the all-time high at €872.90, there are no previous fractal levels to gauge where the market will take us next. However, the best bet is through the use of simple psychology. Buyers will look to cash out once the price has hit a psychological resistance, a big, round number where profits will be locked in and buying interest starts to fade.

So it is interesting to note first that standard analysis ” it might go up or it might go down” applies as much to newer markets as it does to older ones! As ever the possibility it might stay the same is ignored though. But those of you who use the Euro as a currency have seen a considerable devaluation against Bitcoin in recent times which means those of us who use the UK Pound £ have had a particularly poor 2016 against it.

On the Coinfloor exchange, BTC-GBP was at £479.00 week ending June 26, 2016, following our open letter to Britons. Fast forward to the close of 2016, BTC-GBP is looking to break above the £800 mark and is taking aim at the psychological £1000 level. With a break above the all-time high, there is no precedent and £1000 could be a conservative estimate for the long-term, but we will see some exhaustion from bulls at this level.

Looking at the chart a past colleague of mine would be very upset if I did not point out that it looks very much like what he called a “bowl” formation. This means that it needs to continue to accelerate or otherwise it will then be like one of those cartoon characters which run over a cliff edge by mistake. Or to bring things up to date like the Toshiba share price this week as it has now eroded nearly all the gains of 2016.

There is another perspective we can find and StockTwits helps us out with this.

 Some care is needed with the word never as Botcoin was invented on the 31st of October 2008 and is thus a child of the credit crunch era. But the current situation does give us food for thought as the immediate knee-jerk response that it is replacing gold in some fashion does have issues. Let me point out the one which occurs to me which is that discoveries on other planets and moons apart the supply of gold is fixed whereas Bitcoin and especially cryptocurrencies in general is not. ( Just to add that the latter remains true but @BambouClub has pointed out that Bitcoin is limited to 21 million units).

Also those of you who like me watched the BBC 4 documentary on Fleetwood Mac last night which of course featured the “Gold Dust Woman” Stevie Nicks will wonder about any impact on music and this is before the backing vocals she did for John Stewart?

There’s people out there turning music into gold

Somehow I don’t see “Bitcoin Dust Woman” quite cutting it do you?

Why is this happening?

If you follow the advice of go west young (wo)man then you have a long journey as the real pressure is to be found in the East. Let us first take a stop over in India where the Demonetisation debacle continues.  From LiveMint.

Mumbai: Demonetisation has boosted the digital platforms for payment, which has helped the National Payments Corporation’s (NPC) RuPay card usage at merchant terminals soar seven times since 8 November, taking the daily volumes to over 2.1 million.

As we look at the ongoing issue it is not hard to see the motivation for people wanting to escape the Indian monetary system entirely and thus moving towards currencies like Bitcoin. As I pointed out on November 11th.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Although of course many were left out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Here is a link to the details of Demonetisation.

https://notayesmanseconomics.wordpress.com/2016/11/11/the-war-on-cash-continues/

China

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops! If we move to this morning there are other signals to be found. From the Wall Street Journal.

The yuan dropped 7% against the dollar this year…….

Unlike other emerging markets that have mostly free-floating currencies such as Russia and Brazil, China hasn’t had a chance to find its bottom. Chinese investors, therefore, act as if more depreciation is coming, sending money overseas.

The People’s Bank of China is increasingly replacing deposits and indeed finance in the banking system in a move that has not gone so well for us western capitalist imperialists. But the fundamental point here is that with such a large flow of funds ongoing we see two clear effects. The first is the rise in the Bitcoin price as it would take only a minor proportion of the move to put it in a boom and the second is that the world financial system looks unstable one more time.

Negative Interest-Rates in the UK

One of the forecasts for 2017 will no doubt be for higher bond yields. After all it has to be right one year! But more seriously if we just look at the UK something else is in play and it covers a few areas. It started with this before Christmas. From Bloomberg on December 16th.

The U.K. Treasury sold one-month bills at an average negative yield for the first time ever on Friday, with investors bidding for more than seven times the amount on offer,

That got worse just before Christmas and today a former respondent on here Shireblogger who now contacts me on Twitter pointed out this.

UK gilts just hit a record low 2 year yield at 3.3 bps. ( @bondvigilantes )

What we find ourselves observing is a safe haven problem of sorts as @NelderMead points out.

a year end desperation for collateral. QE creates the priv deposits & takes away the collateral to back ’em

Another “side effect” of the “Sledgehammer” of Andy Haldane and Mark Carney. Are they available for comment and I do not mean a diversion onto green issues?

Comment

So there you have it. After all the central planning and “reform” what we see are yet more signs of stress in the financial system. So much for certainty about 2017 as we expect inflation yet again in the use of the words “unexpected” and “surprise”.

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I will be on after the 1 o’clock news today with quite a bit to discuss I think.