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.

 

Bitcoin both is and is not a store of value

The weekend just gone has seen some extraordinary price moves and yet as I looked through most of the media early this morning there was no mention of it. For example I have just scanned the front page of the online Financial Times and there was not a peep. One mention on Bloomberg seems a little confused.

Bitcoin’s march toward respectability faces another hurdle as hedge-fund platforms reject the overtures of firms trading cryptocurrencies.

I didn’t realise it was marching towards respectability myself and if it was are hedge funds a benchmark? Apparently things are going badly.

It’s the latest blow for a digital currency that’s struggling to break into the financial mainstream.

The next bit I found particularly fascinating.

Joe Vittoria, CEO of the Mirabella platform, said he has doubts over bitcoin’s liquidity and where oversight might come from. There are also suggestions that the digital currency’s valuation should be below where it’s currently trading, he said.

You see that second sentence applies to so many markets right now for example many of the world’s bond markets have been pumped up by central bank buying. Others might be wondering is another example is the online food delivery company Just Eat in the UK which looks set to join the FTSE 100 as it has a larger market capitalisation than the supermarket chain Sainsburys.

For an article posted around 4 hours ago they seem rather behind the times.

While investors have embraced bitcoin, sending it soaring above $8,000.

Last night as I checked how financial markets were starting the week in the far east I noted this and put it on Twitter.

Bitcoin has been on another surge and is US$ 9396 now.

Of course it is soaring above $8000 technically but is behind events. Indeed this morning it has risen again as Reuters point out.

Bitcoin’s vertiginous ascent showed no signs of stopping on Monday, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone.

The digital currency has seen an eye-watering tenfold increase in its value since the start of the year, and has more than doubled in value since the beginning of October.

It BTC=BTSP surged 4.5 percent on the day on Monday to trade at $9,687 on the Luxembourg-based Bitstamp exchange.

There are different pricing platforms but on the one I look at it reached US $9771 earlier. Although as ever there is a fair bit of volatility as it is US $9606 as I type this sentence.

Jamie Dimon

The Chief Executive of JP Morgan hit the newswires back on the 12th of September.

If a JPMorgan trader began trading in bitcoin, he said, “I’d fire them in a second. For two reasons: It’s against our rules, and they’re stupid. And both are dangerous.” ( Bloomberg)

Considering the role of the banking sector in money laundering and financial crime this bit was somewhat breathtaking.

“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,” he said. “So there may be a market for that, but it’d be a limited market.”

This intervention can be seen two ways. The first is simply expressed by the fact that the price of Bitcoin has more than doubled since then. The second is ironically also that it has doubled as of course that is a building block in determining whether something is a bubble or not.

What has driven this surge?

Back on the 29th of December last year I pointed out the Chinese connection.

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 onto this morning Reuters have been on the case.

By some estimates, China’s overall debt is now as much as three times the size of its economy……..Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

This has the government worried.

China’s central bank governor, Zhou Xiaochuan, made global headlines with a warning last month of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

In such a position Bitcoin investment may seem a lot more sensible than otherwise. If nothing else those caught in the clampdown on the shadow banking sector may think that it is worth a go and the funds involved are so large it would only take a relatively small amount to have a large impact.

It was also be a particular irony if some of the money the Bank of China pumped into the system last week found its way into Bitcoin.

ECB and the war on cash

This is something which must provide some support to Bitcoin which is simply fears over what plans central banks have for cash. This particularly applies to those who have been willing to dip into the icy world of negative interest-rates such as the European Central Bank and I am reminded of this from the 22nd of this month.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount of
deposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

Currently those with most to fear seem to be those with money in Italian banks although just to be clear as we stand now the deposit protection scheme up to 100,000 Euros still operates.

If we look forwards to the next recession it would appear that some central banks will arrive at it with interest-rates still negative so if they apply the usual play-book we will  then see interest-rates negative enough to mean that cash will be very attractive. I have postulated before than somewhere around -1.5% to 2% is the threshold. Then they will have to do something about cash. Perhaps they are on the case.

 

Other fears may come from the way that central banks have expanded balance sheets and thus narrow measures of the money supply. The Bank of Japan explicitly set out to double the monetary base.

Comment

There is a mixture of fear and greed in the price of Bitcoin. The fear comes from those wishing to escape domestic worries in China in particular as well as worries about the next moves of central banks. The greed simply comes from the rise in the price which has been more than ten-fold since I looked at it on December 29th last year. So if you have some well done although of course the real well done comes when you realise the profit. I note others making this point.

Bitcoin’s market cap just passed 150 billion USD. For those who do not know, that is how much money NEW bitcoin “investors” will have to spend, in order for the current bitcoin holders to get the money that they THINK they have.  ( @JorgeStolfi )

That statement is true of pretty much every price although of course some have backing via assets or demand. So often we see a marginal price used to calculate a total based on an average price that is not known. Also with a price that has varied between US $8992 and 9771 today alone I would suggest that this below must have more than a few investors screaming for financial stretcher bearers. From @JosephSkinner74

Long/Short Bitcoin swings with up to 100x Leverage at Bitmex! 💰💰 Enjoy a 10% Fee Discount! 👌🏽

What could go wrong?

This leaves us with the issue of how Bitcoin functions as a store of money which depends on time. Today’s volatility shows that over a 24 hour period it clearly fails and yet if we extend the time period so far at least it has worked rather well as one.

A royal wedding

Firstly congratulations to the hopefully – our royal family has form in this area – happy couple. But fans of the magnificent Yes Prime Minister will already be wondering what it is designed to distract us from and whether Theresa May has turned out to be more effective in this regard than Jim Hacker?!