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.