Friday, December 22, 2017

Bitcoin as a monetary policy tool

If you look from a systemic perspective, Bitcoin has been nothing more than another electronic asset bubble, while not a QE tool explicitly used by the Fed - it has accomplished the same thing, but much faster.  What took decades and years for QE to do in other markets, Bitcoin did inside of a few months.  While it's true that Bitcoin only goes up because US Dollars (USD) and other fiat currencies buys, the net effect is a near infinite velocity of money.  One subtle problem the Fed has dealt with perhaps more than inflation and others is Velocity of money, which is in steady decline since the credit crisis:
Basically, Velocity of money is how quickly money is 'spent' and moved around the economy.  Trillions of QE money on banks balance sheets is not helpful for the economy.  The Fed knows this, but is limited in its creativity.  Interestingly, if you look at the above chart when Velocity of money was in peak decline, it is about the time Bitcoin was introduced.  We have exposed how we believe anonymous forces inside the US Government are if not completely, somewhat responsible for the creation of Bitcoin, and in the very least participated in the design.  This isn't a conspiracy theory, it is macro analysis.  Who was the most capable group who had the world's best cryptographers, mathematicians, and huge budget? (NSA).  Who had an economic need for Bitcoin to solve the problem of Velocity of money (The Fed).  
Cash has the distinct advantage of being anonymous. You can put cash under your mattress or in a vault, and no one knows about it except you. A national cryptocurrency would make it far more difficult for criminals to hoard money because all transactions would be recorded in the government ledger. If a transaction was deemed illegal, the parties to the transaction could be identified. This is also true with bitcoin, whose ledger is viewable to anyone. Despite the negative press about bitcoin being used for illegal transactions, bitcoin is not anonymous, and criminals who use it often do not understand that their transactions are being recorded.
There is another reason for governments to like the idea of a national cryptocurrency: strengthening the power of monetary policy to help manage the economy.
We published this insight in multiple articles months ago and in our book Splitting Bits: Understanding Bitcoin and the Blockchain.
The WAPO story is clearly setting the stage for something, as WAPO has become the goto CIA mouthpiece for PsyOps and other agencies in "Big Intel." 
That's it, now go spend your Bitcoin!
For a detailed breakdown how the financial system really works, checkout Splitting Pennies.

Splitting Pennies and Splitting Bits

In 2015 we wrote Splitting Pennies to show the world what the FX market really is.  Splitting Pennies is a metaphor, for what the global FX money markets have become.  It is a holistic, systemic overview of the global financial system, with practical examples and pitfalls to avoid.  Since then, Bitcoin has become so popular we conceived Splitting Bits, the logical sequel in the Splitting Finance series.  Now you can get both on Kindle or Paperback from Amazon - See www.splittingpennies.com for more info or go here and buy it.

Saturday, December 16, 2017

What's really driving Bitcoin through the roof

Although Bitcoin is electronic and moves quickly, the real world doesn't.  Since Bitcoin (which is colloquially BTC/USD) has been in the news, millions have decided to put their own money into the Crypto world and press their luck.  So here's what's driving the price.  Let's say you want to buy Golem, it's not offered on Coinbase, you need to first get an account at Bittrex or Cryptopia which are only fundable in Crypto.  That means if you are not a hacker or computer expert, you need to first connect your Coinbase account to your bank account at Wells or BOFA and then buy BTC paying the egregious 7% fee (which ironically is similar to an FX transaction).  Then, and only then, you can fund your Bittrex with BTC and buy XRP or whatever.  So this is driving the price of BTC higher, as there is precious little supply of BTC.  We call this in FX 'real money flows' - as DB noted recently, Japanese men have become 'crypto day traders' - but the real upward pressure is by using BTC as a base/funding currency, which is only beginning.  Crypto exchanges are experiencing huge bottlenecks, which means this squeeze has only started.  This week the price of BTC/USD can run up 100% or more due to this demand.  

That means, millions of people investing thousands of dollars, is driving the price of BTC up, and will likely continue to do so, until there are viable alternatives, which there will be.  Currently BTC is really the only choice for many - although it is slow, inefficient, and feature poor.

Sunday, December 10, 2017

EES: The TRUTH about the new Bitcoin Futures CME contract

Elite E Services 12/10/2017 - As a Forex CTA for 12 years, we were happy to learn the CME will offer a Bitcoin futures contract, and called the CME to learn more.  Unlike most of these Bitcoin outfits, the CME has an office, a phone, which is answered, and we were routed to the correct person.  We don't want to name names as we still wait a response from legal about the publication of information (which will likely not happen before the contract goes live) so we will speak only generally about this contract and comment on what some of the market is saying:

 The problem, of course, boils down to Bitcoin’s volatility, something we flagged after the CME announced circuit breakers early last month.
Having taken a gamble on bitcoin futures, which are set to begin trading by the end of the year, the CME is now seeking to avoid the consequences of what has emerged as both the cryptocurrency's best and worst selling point: its unprecedented volatility…While the CME already uses daily vol limits on most other markets, including crude, gold and market futures, to temporarily halt trading when price swings get out of control, the CME has never before dealt with something like bitcoin
In June, Bloomberg showed how Bitcoin’s 30-day volatility had risen to 100%, which was comparable (at the time) with one of the most volatile financial instruments they (and we) could probably think of - a three-times levered ETF in junior gold miners.

The price of Bitcoin (notably, BTC/USD) has been exploding all week basically with the market expecting that with regulated futures contracts, it will bring institutional money into the Crypto market.  While that may be true, this futures contract is not exactly a conduit, as it is 'cash settled' which means effectively 'not settled' or 'self-cleared'.  CME will match buyers and sellers and not have any connection to any Bitcoin exchange or other clearing facility.  At the end of the day, each contract will have a profit or loss, against each other.  Crypto Market Makers could at their own risk, provide liquidity on-exchange and lay off risk independently, through the exchanges.  But practically, why would they?  Just to soak up 'newbie' liquidity from the moms and pops now able to trade the futures contract through their IRA?  Something certainly doesn't add up here, and given the chaos and volatility we saw all week, we are expecting at best, a total market meltdown; at worst, they may cease trading the contract.  There is certainly a lot of money waiting in the pipeline for the moment the contract goes live.  And it's not the only one, CBOE has a contract too, which is the first one which will go live.

Traders wait in anticipation this week to see how the market will react to the first regulated Crypto contracts.

To get in on the action checkout some Bitcoin resources we've added to our website by clicking here.  If you want to learn more about Bitcoin from the perspective of digital currency, which we've been doing for 15 years, checkout Splitting Bits - Understanding Bitcoin and the Blockchain.


Friday, December 8, 2017

Bitcoin Has A "Whale" Problem: 1,000 Investors Control Nearly Half The Market

If Jay Gould were alive today, he would've traded bitcoin.
Perhaps the most blatant hypocrisy perpetrated by bitcoin evangelists is their insistence that bitcoin and other digital currencies represent a return to a truly democratic financial system beyond the control of banks and other special interests, where players small and large can earn enormous profits simply by HODLing.
Of course, this idealistic take couldn’t be further from the truth. As Bloomberg points out, the markets for bitcoin and most of its cryptocurrency clones more closely resemble the US equity market of the Gilded Age, where a handful of powerful traders and brokers colluded to move prices in their favor. And because securities laws at the time were virtually nonexistent, the big players minted suckers with impunity.
According to Bloomberg, about 1,000 so-called “whales” control 40% of the bitcoin in circulation, giving them unrivaled leverage over the broader market. And because there are no laws explicitly banning collusion in digital currency markets, only the most blatant pump-and-dump operations risk being prosecuted as fraud.
And with the price skyrocketing like it has in recent days, the incentive for these traders to begin taking profits has never been more pressing.
About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.

“I think there are a few hundred guys,” says Kyle Samani, managing partner at Multicoin Capital. “They all probably can call each other, and they probably have.” One reason to think so: At least some kinds of information sharing are legal, says Gary Ross, a securities lawyer at Ross & Shulga. Because bitcoin is a digital currency and not a security, he says, there’s no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes.
As Bloomberg explained, the manipulation in bitcoin is extreme because many of the big players know each other from having been involved in the digital currency space since its infancy. Add to this the fact that the risks are incredibly asymmetrical – there’s tremendous upside in terms of profits if they can successfully pull it off. And the chances of them drawing the scrutiny of law enforcement are relatively low.
“As in any asset class, large individual holders and large institutional holders can and do collude to manipulate price,” Ari Paul, co-founder of BlockTower Capital and a former portfolio manager of the University of Chicago endowment, wrote in an electronic message. “In cryptocurrency, such manipulation is extreme because of the youth of these markets and the speculative nature of the assets.”

The recent rise in its price is difficult to explain because bitcoin has no intrinsic value. Launched in 2009 with a white paper written under a pseudonym, it’s a form of digital payment maintained by an independent network of computers on the internet‚ using cryptography to verify transactions. Its most fervent believers say it could displace banks and even traditional money, but it’s only worth what someone will trade for it, making it prey to big shifts in sentiment.
Case in point: Some of these so-called whales admitted in an interview with Bloomberg that they regularly incorporate what would in the equity market be considered material nonpublic information into their trading strategies.
Like most hedge fund managers specializing in cryptocurrencies, Samani constantly tracks trading activity of addresses known to belong to the biggest investors in the coins he holds. (Although bitcoin transactions are designed to be anonymous, each one is associated with a coded address that can be seen by anyone.) When he sees activity, Samani immediately calls the likely sellers and can often get information on motivations behind their sales and their trading plans, he says. Some funds end up buying one another’s holdings directly, without going into the open market, to avoid affecting the currency’s price. “Investors are generally more forthcoming with other investors,” Samani says. “We all kind of know who one another are, and we all help each other out and share notes. We all just want to make money.” Ross says gathering intelligence is legal.
And investors who buy into smaller tokens are at an even greater disadvantage.
Ordinary investors are at an even greater disadvantage in smaller digital currencies and tokens. Among the coins people invest in, bitcoin has the least concentrated ownership, says Spencer Bogart, managing director and head of research at Blockchain Capital. The top 100 bitcoin addresses control 17.3 percent of all the issued currency, according to Alex Sunnarborg, co-founder of crypto hedge fund Tetras Capital. With ether, a rival to bitcoin, the top 100 addresses control 40 percent of the supply, and with coins such as Gnosis, Qtum, and Storj, top holders control more than 90 percent. Many large owners are part of the teams running these projects.
Unsurprisingly, Bloomberg managed to find someone to defend the status quo: Whales won’t dump their holdings, this person argued, because they “have faith in the long-term potential of the coins.” This strikes us as a na├»ve assumption.
Some argue this is no different than what happens in more established markets. “A good comparison is to early stage equity,” BlockTower’s Paul wrote. “Similar to those equity deals, often the founders and a handful of investors will own the majority of the asset.” Other investors say the whales won’t dump their holdings, because they have faith in the long-term potential of the coins. “I believe that it’s common sense that these whales that own so much bitcoin and bitcoin cash, they don’t want to destroy either one,” says Sebastian Kinsman, who lives in Prague and trades coins. But as prices go through the roof, that calculation might change.
While the concentrated holdings of the modern bitcoin market should give potential investors pause, in some ways, it's not all that different from the modern equity market. As we pointed out back in September, the Bank of Japan owns a staggering 75% of the domestic ETF market. Increasingly, equity ownership in the US and around the world is becoming increasingly concentrated in the hands of central banks, sovereign wealth funds and the largest asset managers like BlackRock, Fidelity and Vanguard.
While the whales can exercise unrivaled influence over the price of bitcoin, they aren't the only players in the bitcoin market with a natural inclination toward self-dealing. As Bill Blaine pointed out, nearly every bank knows bitcoin's extraordinary gains are a crowd delusion fuelled by the extraordinary promise of free wealth.
Yet, many will be willing to trade and settle them for their clients – largely retail. So, while the bitcoin bubble has (for now) blessed hundreds of thousands of mom and pop investors with spectacular returns, these gains will only continue as long as the cartel allows them too.