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.

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The economy of South Africa must be in turmoil

This week has seen South Africa reach the headlines but it has not been about cricket or rugby. Instead the removal of its finance minister has led to a currency crisis being reported. However as we look deeper we see that the South Africa Rand has been “fallin”  in Alicia Keys terms for quite some time and is in fact a serial offender on this front. If we look back we see that five years ago just under 7 Rand purchased one US Dollar and this morning it takes some 15.5 of them. Over the past year the move has been accelerating as back then it took 11.6 Rand to buy a buck. In essence it has been singing along to Paul Simon for quite a while.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

This sort of situation is self-fulfilling as if you have funds available the sensible course is to park it abroad which only makes the currency fall further and encourages others to do the same in a repeating loop.

How well do financial markets work?

This is another view of the equilibriums of economic theory which invariably turn out to be something between a mirage and a chimera. Let us look at this from the point of view of an average house buyer in the UK who has according to official data some £286,000 to spend. Each of those UK Pounds will buy around 23 Rand at these levels. According to Knight Frank (h/t James Mackintosh) you could buy this in Cape Town.

This beautifully appointed well-loved family home offers great open plan living. With 3 reception areas consisting of formal lounge; open plan dining room leading to gourmet kitchen and family room; separate scullery;4 bedrooms (2 en-suite bathrooms);family bathroom; guest toilet and covered outside patio for easy entertaining, this house ticks all the boxes. – See more at: http://search.knightfrank.co.za/za5986#sthash.6W60O6JK.dpuf

That description misses out the swimming pool! For half the price you could pay this.

Valley View Lodge is a 120 Ha lifestyle lodge situated in the Swartberg Private Wildlife Estate, at the foot of the Swartberg Mountains in the Klein Karoo. The main house is a comfortable 4 bedroom, 3 bathroom family home with open plan living areas and beautiful views over the surrounding Swartberg Mountains. Two of the bedrooms lead to a patio with views over the terraced garden with pool. There is a separate one-bedroom cottage with a full en-suite bathroom and a fireplace in the lounge. – See more at: http://search.knightfrank.co.za/za5698#sthash.Q5yNf3bI.dpuf

The catch in Cape Town is the mention of a local security lodge as in the serious problem with crime there, but if we just stick to a bit of number crunching well it is hard to not mull this from Henry Pryor earlier.

Buying an average home in Victoria Road after next April as a 2nd home will cost £1,113,750 in Stamp Duty.

So one street in the Royal Borough of Kensington and Chelsea – admittedly the most expensive one – would give you enough money to buy both properties and maybe fill the swimming pool with notes with just the Stamp Duty. Even Einstein would have struggled with such a version of relativity as we consider the phrase, Go Figure!

The Reserve Bank of South Africa

It has applied conventional central banking methodology and done this in response to the currency decline. From its December Quarterly Bulletin.

Having raised the repurchase (repo) rate by 25 basis points to 6,0 per cent in July 2015, the Monetary Policy Committee  (MPC)  agreed on an unchanged rate in September, but at its meeting in November 2015 decided to raise the repo rate further to 6,25 per cent per annum.

Sobering in what we call a zero interest-rate world with negative tinges. Plainly a brake is being applied to the South African economy at what I will explain below is a bad time for it. But if we stick with interest-rates there are other problems as the ten-year bond yield has pushed above 10% meaning that any longer term borrowing is very expensive right now. In terms of its target this is what the Reserve Bank is aiming at.

the inflation target range of 3 to 6 per cent

Commodity Wars

The fall in commodity prices which is so welcome in many places is not welcome everywhere and South Africa is one of the latter.

In addition, mining production shrank for the second consecutive quarter, affected primarily by lower production of platinum and iron ore in the third quarter. Platinum production declined due to scheduled maintenance work at certain platinum furnaces as well as safety stoppages, while iron ore production was reduced in reaction to a global oversupply.

Something of a double whammy is at play here.

In general, mining production continued to be affected by declining international commodity prices and rising production costs.

Also we get a reminder of which commodities are in play.

the mining sector declined at an annualised rate of 9,8 per cent in the third quarter, largely brought about by decreases in the production of platinum, diamonds, iron ore and manganese ore. Production volumes of coal and gold mines, however, remained broadly unchanged over the period.

Precious metal prices have been in a bear market too and if Jon Stewart was right it is not a good time to be a musician right now.

People out there turnin’ music into gold
People out there turnin’ music into gold

Also agricultural output has been hit by a drought in an example of Shakespeares woes come in battalions and not single spies.

Inflation?

Yes but not as much as you might think.

Annual consumer price inflation was 4,8% in November 2015, up from 4,7% in October 2015

However there is goods price inflation of 3.8% which is quite an anti-achievement if you note all the commodity price falls leading to goods disinflation in so many other countries. Also the currency decline will mean that the heat is on in this area as we look into early 2016.

If we look for some perspective then the underlying index is at 116.5 where 2012=100.

Economic Growth

Actually a rebound in manufacturing means that South Africa has just had some.

. Following a contraction of 1,3 per cent in the second quarter of 2015, growth in real gross domestic product accelerated to an annualised rate of 0,7 per cent in the third quarter……. the level of real gross domestic production in the first three quarters of 2015 was still 1,0 per cent higher than in the corresponding period in 2014.

Apparently if you exclude the sectors which are shrinking then the outlook is brighter.

Excluding the contribution of the usually more volatile primary sector, growth in GDP would have bounced back from negative growth of 0,4 per cent in the second quarter of 2015 to positive growth of 2,2 per cent in the third quarter.

Comment

There is much to consider here as we see how a crisis in the financial sector impacts on the real one. Economic growth has slowed and remember this is the Africa which was supposed to be “boom,boom,boom” according to the mainstream media. If we look at this in terms of what you can buy from abroad then (h/t Renaissance Capital) GDP per capita has dropped from over US $8000 in 2011 to more like US $5700 now or back to 2009 levels.

There are of course other issues such as the endemic corruption and the presumably related energy crisis which is so bad there are regular black-outs. It even makes UK energy policy look a little better that is how bad it is! The political crisis and further falls in commodity prices have seen the Rand fall further whilst I have been typing this article and it has reached 16 to the US Dollar. Peak currency crisis? Maybe, but I am reminded of the relative house prices displayed today compared to my home country of the UK.

There should be a flow of money in to buy such things waiting and hoping for better days. In an individual sense this is good as it will support the Rand and maybe reestablish some sort of equilibrium. But also it comes with dangers as the fastest movers are likely to be vulture style hedge funds as we fear an outbreak of asset stripping. Time perhaps for some Freddie Mercury.

Are you ready, hey, are you ready for this?
Are you hanging on the edge of your seat?
Out of the doorway the bullets rip
To the sound of the beat

Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust

But let us end on a more hopeful note with Florence and the Machine.

It’s always darkest before the dawn