Are you going to be a victim of Bitcoin mania?

TAP – The South Sea Bubble, The Tulip boom, Poseidon, The Dotcom Boom and countless other examples throughout history show that the financial world knows how to create bubbles which draw in the weak-minded who fear missing out on the easy money.  Once all are sucked in, the price crashes at the end, and all or nearly all lose their shirts.  Only the insiders know when the crash is coming, the very people who organised the bubble in the first place.  The rest buy too late and hang on too long.

This Time Is Different – Part I: What Bitcoin Isn’t

[Bitcoin] won’t end well, it’s a fraud…worse than tulip bulbs…[but] if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars,”

— Jamie Dimon: CEO, JP Morgan

 

Headline: JPMorgan Guilty of Money Laundering, Tried To Hide Swiss Regulator Judgement

— via Cointelegraph

Given the current, latest successive series of spikes to all time highs for Bitcoin, the detractors are working overtime to make the case that the crypto-currency is a Ponzi, a scam, a phantasm or at the very least, a bubble.

Oddly, many of these same detractors spend a lot of time cheerleading “the other bubble”, that everything-bubble, stocks, bonds, real estate, even ETFs of ETFs, you name it.

It’s easy to make superficial apples-to-screwdrivers comparisons about why Bitcoin is doomed to fail. Until you really take some time to look into it. When first was exposed to the idea back in 2013 and researched it, I realized that “this really is different”, and the reason why was because of something John Kenneth Galbraith had once written which (until then) had invariably held up as true. In “A Short History of Financial Euphoria” Galbraith said:

“The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.”

(emphasis added)

When one looks at the history this accurately maps every financial bubble from Tulipmania (which we will debunk as a suitable metaphor for Bitcoin shortly) right up to 2008 and beyond.

However one place where it isn’t applicable, is to the phenomenon of Bitcoin. Crypto-currencies, at least at present, have no leverage and are near impossible to purchase on credit. In other words, if asset bubbles get that way largely through leverage, and there is comparatively no leverage in Bitcoin, then something else has to be driving it.

That said…

The Price of Bitcoin is a Side Show.

Granted, at the moment it’s a very exciting sideshow for those who are on the train. A long time customer emailed me as I was writing this asking “at what point has easyDNS’ profits from accepting and holding bitcoin exceeded the actual operating profits of the company?” I had never considered that but some quick math revealed that even after cashing a chunk out to buy gold (not my greatest trade), that happened last year.

But the price action around this isn’t what is exciting about Bitcoin and the crypto-currency revolution. What is exciting is that the centralized, bankster controlled monopoly over the issuance of money itself is finished. It’s over. Even if they successfully manage to co-opt some major crypto-currencies or issue their own, Gresham’s Law will assert itself as capital managers will select a truly decentralized crypto-currency wherein they control, or have the option to control, their own private keys to safely store their wealth while they’ll use the government version to pay taxes, etc.

Whatever state issued “digital cash” comes out in the near future, I’m suspecting it will be centralized with mandatory private key custody or escrow. When that happens it shouldn’t even be called crypto-currency, call it something else like “pseudo-crypto” or “fauxcoin” to differentiate.

Given the mostly bad analogies and unfounded criticisms being levelled at Bitcoin, let’s first take a serious look at what Bitcoin isn’t. Then in Part II we’ll look at what it is and why its different.

What Bitcoin Isn’t

“Backed by nothing”

This is the goto criticism for people who simply don’t understand that crypto-currencies are based upon mathematics, zero-trust, open-source and consensus. They think that bitcoins can simply be created “at will” and are backed by nothing.

They also say that as if the world’s reserve currency, the US dollar, isn’t, literally, “backed by nothing” and hasn’t been since 1972; and as if it can’t be created at will, which it most certainly has, with a vengeance.

Source: St Louis Fed

Indeed as Galbraith continued in our earlier passage:

“This was true in one of the earliest seeming marvels: when banks discovered that they could print bank notes and issue them to borrowers in excess of the hard-money deposits in the banks’ strong rooms”.

All fiat currencies today really are backed by nothing and can be created at will (that’s what the word “fiat” actually means), and perhaps unbeknownst to many we are right now in a protracted, global currency war. Every nation is “racing to the bottom”, trying to devalue their currency against their trading partners so they can:

  1. give their exporters a competitive advantage
  2. pull stronger currencies in to make money on the exchange, and
  3. service their ever expanding debts back with devalued, cheaper currency

This is why everybody’s purchasing power is going down despite tenured academics and central bankers incessantly complaining about “low inflation” and political spokesmodels always talking up a “strong currency”.

Bitcoin isn’t: “Backed by nothing”

 

What is? The USD and every other fiat currency in the world.

“Bitcoin is a ponzi”

The idea that Bitcoin or most crypto-currencies are “a Ponzi” is easily debunked by understanding what a Ponzi actually is.

As observed in CryptoAssets (Burniske & Tartar, 2017), it’s very simple: new investors pay old investors.

It is important to realize that in a Ponzi, the earlier investors are literally paid with funds being injected by the new investors in a “flow through” fashion (as distinct from later investors having to pay higher prices to earlier ones to induce them to part with an asset).

As long as the number of new investors and thus the influx of funds is growing at a rate faster than the payouts to the earlier investors, the Ponzi scheme thrives. When the expected payouts exceed the rate of input, it dies.

One doesn’t have to look very far to find mechanisms that fit the definition exactly: Social security programs are all classic ponzis. The demographic reality today is that with the entry of the “Baby Boom” generation into retirement, given that the subsequent generations are so much smaller in size, additionally penalized by falling real wages, rising or multiple taxation, decaying purchasing power on their money and returns on any savings they can eek out suppressed into negative nominal yields; this Ponzi is in its terminal phase.

(Given that these exacerbating headwinds which face later generations can be summed up with the phrase “financial repression”, it is only logical that capital would “flee” to some asset or currency which appears resistant to them.)

Granted, the current ICO craze probably includes some ponzis. The Cryptoassets book describes the OneCoin Ponzi as well as how to spot a ponzi in crypto-currencies. I would have been hesitant to even call OneCoin a crypto-currency at all. It wasn’t open source and had no public blockchain.

In Bitcoin or other true crypto-currencies, early holders are not receiving bitcoin from later entrants. In fact, quite the opposite is happening. Later entrants must entice earlier ones to part with their bitcoin. Since Bitcoin cannot be created at will, it must be mined at a rate that drops over time (this year approximately 640K new bitcoin will be mined, about 3.8% of the total supply).

Demand for bitcoin is simply outstripping supply of new coins being mined (for reasons we will discuss in Part II). If said price action rises dramatically (like for example, Bitcoin suddenly became the highest performing asset class in the world) then a feedback loop would occur. Ever higher prices would be required to induce earlier holders to sell.

Bitcoin Isn’t: A ponzi

 

What is: Social Security

Tulipmania

What is described above is the same dynamic that occurs in any “bull market”, as buying begets more buying, and “fear of missing out” kicks in. It is said one of the most accurate gauges of “happiness” correlates closely to how much wealth one has when compared to one’s brother-in-law. Alex J Pollock describes it in “Boom and Bust: Financial Cycles and Human Prosperity”, as “The disturbing experience of watching one’s friends get rich”.

The trick would be to have some understanding of when a strong bull market has crossed into Bubble territory. One of the more popular analogies for Bitcoin is Tulipmania: the financial bubble that occurred in 1630’s Amsterdam with none other than tulip bulbs. Bitcoin is compared to Tulipmania so often I decided to take a closer look at Tulipmania to see if the comparison was valid.

What I found was that it most of what we know today about Tulipmania is superficial and self-referential, deriving primarily Charles Mackay’s chapter on Tulipmania in his seminal “Extraordinary Delusions and the Madness of Crowds”(1841). It is a scant 9 pages and is purely anecdotal, describing ridiculous prices paid by the otherwise pragmatic and level-headed Dutch and then it all just blew up like all bubbles do.

Finally I found Anne Goldgar’s Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, which is the most in-depth investigation to the rise and subsequent fall of Tulipmania extant today. In it we learn about the circular references that went on to inform our present time about Tulipmania:

“If we trace these stories back through the centuries, we find how weak their foundations actually are. In fact, they are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism. From there we have our modern story of tulipmania.”

She traces the lineage of MacKay’s chapter:

“Mackay’s chief source was Johann Beckmann, author of Beytrage zur Geschichte der Erfindungen, which, as A History of Inventions, Discoveries and Origins, went through many editions tions in English from 1797 on. Mackay’s chief source was Johann Beckmann, author of Beytrage zur Geschichte der Erfindungen, which, as A History of Inventions, Discoveries and Origins, went through many editions tions in English from 1797 on. Beckmann was concerned about financial speculation in his day, but his own sources were suspect.

 

He relied chiefly on Abraham Munting, a botanical writer from the late seventeenth century. Munting’s father, himself a botanist, had lost money on tulips, but Munting, writing in the early 1670s, was himself no reliable eyewitness. His own words, often verbatim, come chiefly from two places: the historical account of the chronicler, Lieuwe van Aitzema in 1669, and one of the longest of the contemporary pieces of propaganda against the trade, Adriaen Roman’s Samen-spraech tusschen Waermondt ende Gaergoedt (Dialogue logue between True-mouth and Greedy-goods) of 1637. As Aitzema was himself basing his chronicle on the pamphlet literature, we are left with a picture of tulipmania based almost solely on propaganda, cited as if it were fact.”

 

(emphasis added)

Goldgar helps the reader in pursuit of truly understanding Tulipmania by rewinding to the late 1590’s, when there were no tulips in what is now Holland, or in fact Europe. Gardens were purely functional, for growing food, herbs or medicinals. Then tulips and other curiosities began coming into the country and Europe from merchant vessels trading in the Mediterranean and Far East.

The “flower garden” arose for the first time, and it was spectacular?—?giving rise to an entire movement of collectors and aficionados, whom in the early days were as a rule well-to-do and affluent. In later years, more people sought out, and then speculated in the tulip trade to not only profit, but to lay their own claims on what they perceived to be a higher economic class or status.

At the risk of over simplifying her work, the Tulip trade became intertwined and inseparable from, art.

“The collecting of art seemed to go with the collecting of tulips. This meant that the tulip craze was part of a much bigger mentality a mentality of curiosity, of excitement, and of piecing together connections between the seemingly disparate worlds of art and nature. It also placed the tulip firmly in a social world, in which collectors strove for social status and sought to represent themselves as connoisseurs to each other and to themselves.”

The more I delved into understanding Tulipmania, the more I couldn’t escape thinking that the analogy was much more applicable to a different “asset class” which did enjoy a momentous bubble in recent times, but it wasn’t bitcoin or crypto-currencies. To belabour my point, Bitcoin was impelled not by art, beauty or any semblance of collectibility but emerged primarily as a resistance to financial repression.

Something that was driven by uniqueness and fostered an aristocratic in-club all it’s own and until recently enjoyed stratospheric price action, was the aftermarket in domain names. This isn’t the place to conduct a post-mortem on that bubble, but suffice it say that the distinct characteristics of domain names more closely resembled that of tulip bulbs than Bitcoin does. (For the reader interested, I have written at length about the domain aftermarket here and here).

Bitcoin isn’t: Tulipmania

 

What was like Tulipmania? Domain names.

*  *  *

If Bitcoin isn’t a digital fiat backed by nothing, nor a ponzi nor Tulipmania, then what is it? Why has this come out of literally nowhere to become the strongest performing and fastest growing asset / currency in the world?

When I started writing this post I wasn’t sure myself. I had to go back through my library and look at history and try to find some historical antecedent for what was happening. After looking back through the origins of money itself and working forward I still wasn’t any closer to a mental model that “worked”.

Then around 2am the other night I woke up with the idea that I was looking in the wrong place, and it hit me with such force that I had a hard time getting back to sleep?—?even though I had made an “off the cuff” tweet that captured the basic idea of it a few weeks earlier (which I can’t find now).

I’ll take you through it in Part II. (Hope to have it up soon). But in the meantime, I’ll leave you with another megabank CEO who’s take on all this is very different from Jamie Dimon’s. Goldman Sachs’ CEO Lloyd Blankfein here muses on why it’s entirely plausible that money may evolve from being based on fiat to being based on consensus. Some truly extraordinary remarks coming from a man in his position.

Article.

Bitcoin’s wild ride: From record high to flash-crash low to huge recovery

The price of bitcoin dropped below $9,000 from an all-time high of about $11,000 before rebounding within hours after numerous exchanges and trading platforms crashed on Wednesday.

The world’s most popular digital currency tanked nearly 18 percent, according to CoinDesk. Bitcoin then managed to recover to the $10,000 level by 20:32 GMT.

John McAfee raises bet: If Bitcoin isn’t at $1mn by 2020 ‘I will eat my d*ck’ https://on.rt.com/8tf7 

 

The price dropped as two of the largest digital exchanges, Coinbase and Gemini, crashed on Wednesday morning, unable to keep up with the heavy trading volume. Many users were locked out of buying and selling cryptocurrencies. The collapse followed a surge to above $11,000 in early trading.

 rockets to $11,000 in massive sudden spike https://on.rt.com/8tc1 

 

Some users reportedly couldn’t log into their accounts on GDAX, Coinbase’s professional trading platform, and Bitstamp, a bitcoin exchange based in Luxembourg.

Coinbase experienced “all-time-high traffic” early Wednesday, causing some users to experience slowness, according to Dave Farmer, the director of business operations at the exchange service.

 

We are performing scheduled maintenance on Thurs 30 November at 11pm PT. Coinbase services will be offline for 1 hour. This will significantly increase the amount of traffic we can handle, and help to prevent slow performance and login issues during large traffic surges.

 

Coinbase, which says it has exchanged over $50 billion in virtual currencies since it started in 2012, reportedly provides services to more than 12 million users.

The Gemini digital asset exchange, launched by the Winklevoss twins in 2015, has reported that its system was under maintenance.

 

Resolved: This incident has been resolved. Gemini is now operational. http://stspg.io/797a6390f 

 

Bitcoin has experienced a meteoric rise since its launch in 2009. The digital currency started the year below $1,000 and was trading at $10,011 at 19:54 GMT on Thursday.

https://www.rt.com/business/411410-bitcoin-flash-crash-exchanges-collapse/

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8 Responses to “Are you going to be a victim of Bitcoin mania?”

  1. Tapestry says:

    This time it’s different. Currency based on consensus. Maybe. But consensus permits speculation. Regulation prevents it. It’s easy to manipulate an unregulated market. A banker’s dream.

  2. Mike says:

    Regulation prevents speculation? Evidently untrue. Money not of their making – a banker’s nightmare!

    • Tapestry says:

      Regulation of markets for example futures markets. The regulators allow a surge in a price, then demand an increase in the cash deposit required to trade until the flurry eases, or not if they want the price to keep surging. I always assume the big money is behind any price surge. They allow some easy gains which tempts in others. When the majority are bought in, then they sell out and crash the price and re-enter the market much lower down, while Mr Average has his fingers burned. They only start a price surge by buying into a market which no one is expecting anything to happen. They sell out when everyone is expecting further gains. In fact they trade on expectations.

  3. archer says:

    Appears to me that bitcoin is a tool to condition the masses in to accepting a ‘digital-only’ currency and the gradual removal of physical cash.

    • Tapestry says:

      Possibly true Archer, or alternatively the bankers will cause digital money to undergo such huge swings in value that it comes into disrepute and is effectively unusable as a day-to-day currency. Bankers like currency they control and profit from. They don’t like consensus currency. Operations against them are to be expected. Closed currency markets such as local currencies supervised by actual people who talk to each other might work, but worldwide ones are likely to come under attack. Some towns operate their own closed currency projects, and a digital version could develop out of one of those. The problem will always be infiltration.

      • archer says:

        Indeed, infiltration is probably at play, given the huge swings being seen.

        I’m no economist, but I guess bitcoin is fundamentally flawed, as it has no inherent value without a commodity backing. Not sure if it’s in the public domain either, but who controls the supply of bitcoin?

        The article above seems to be very conflicting as I can’t seem to gauge whether the author is saying bitcoin is good or bad (maybe it’s me?!). What I do know, is that if societal breakdown occurs (heaven forbid), all fiat currencies will be worthless… the new currencies will be food, water, fuel and weapons.

  4. Tapestry says:

    Money is wartime is golden and silver. Or geographical grade-ins like islands or countries. Human life becomes cheap. Then your list kicks in, Archer. Weapons secure the other three, and assume pole position.

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