There Goes Bitcoin… Again!

Bitcoin hits $50,000… again.

Is the greatest Ponzi scheme of all time finally about to start its journey to $100,000?

Or is this the final flourish before it comes crashing down?

By the way, we kid about the Ponzi scheme stuff.

But we know that’s how most folks still think of Bitcoin.

And yet, if you compare Bitcoin with cash, it’s fair to say that in terms of trust, Bitcoin is far more trustworthy. Not only that, but it has greater faith in it than any government-issued currency on Earth.

We’ll explain why. First, today’s market action…

Market Data

The S&P 500 closed down 0.1% to end the day at 5,021.87… the NASDAQ fell 0.3% to close at 15,942.54.

In commodities, West Texas Intermediate crude oil trades at $77.07, up 56 cents…

Gold is $2,033 per troy ounce, down $6…

And bitcoin is $50,129, up $2,540 since Friday.

Now, back to our story…

“The Bitcoin Story Has Only Just Begun”

To begin with, we’ll make one thing clear: your editor is not a Bitcoin bull. We don’t understand the technology behind it. We don’t understand cryptos as a whole.

It’s all foreign to us.

So whether Bitcoin goes to $100,000 or zero, we couldn’t care less.

But we do understand that other people understand it. And we’ve always found the pro-Bitcoin arguments to be more thoughtful and logical than the anti-Bitcoin arguments.

To show our bone fides on this matter, for a bit of fun, we thought we would share some research with you that we co-authored with one of our current Bitcoin experts, Sam Volkering.

We wrote this back in August 2013, still a while before the Bitcoin craze really took off. It’s somewhat embarrassing to read it now, but what the heck?

Here goes (note the prevailing Bitcoin price at the time!):

Bitcoins are a completely anonymous digital currency. They exist solely online. They are (currently) ‘created’ in blocks of 25 coins by an extremely complex mathematical problem. One way to get Bitcoins is to ‘mine’ them. And by ‘mine’ I mean use a powerful computer to solve the mathematical problem.

If you solve the problem and the Bitcoin community agrees you have done so, your reward is a block of Bitcoins, so 25 coins. These coins are then yours to keep, use, or sell. The mathematical problem that ‘creates’ Bitcoins is designed to get exponentially harder each time the problem is solved. Only 21 million Bitcoins will ever exist. Currently, just 11.5 million have been ‘mined’. And when all 21 million are in circulation… that’s it, no more Bitcoins will be available.

Bitcoins have been around since 2009 and infamously gained mainstream attention via the illegal drug website Silk Road. They shot up from literally 1 US cent to USD$30 in the space of a couple of months. They then crashed back to USD$3 when a number of Bitcoin sites and Bitcoin holders were hacked and their Bitcoins stolen. The problem is Bitcoins are anonymous, so the ‘hackees’ had no way of finding, tracing, or getting back their stolen Bitcoins.

Since that time the Bitcoin price has been on a steady march upward. In January this year, the price of one Bitcoin was floating around the USD$15 mark, now you can get one Bitcoin for about USD$105.

Bitcoins are independent too. There is no government regulation or bank interference. The overriding supervision of the currency is by the Bitcoin Peer-to-Peer (P2P) community.

Aside from ‘mining’ for coins, the only other way to get Bitcoins is to buy them on a Bitcoin exchange. The biggest exchange is MtGox. MtGox handles Bitcoin transactions in a variety of denominations, UDS, GBP, AUD, EUR, and JPY amongst others. But by far the biggest volumes go through the USD exchange.

Beware! Bitcoin prices are volatile, intraday swings of 10%–20% aren’t uncommon. And you’re a sitting duck for hackers if you don’t have cyber security. But all risks aside, the Bitcoin story has only just begun.

If only your editor had really understood what the whole thing was about… maybe we could have bought some for $105!

Aside from that, you’ll note we mention the Mt. Gox exchange. It wasn’t even a year after we wrote our essay that Mt. Gox shut operations after the loss of hundreds of thousands of Bitcoin due to fraud on the exchange.

One of the common claims that anti-Bitcoiners will make is that it doesn’t have any “intrinsic value.” That it doesn’t have earnings… it doesn’t generate an income… there are no business cash flows from it.

They say the only reason people buy it and hold it is because they hope to sell it for a higher price at a later date.

And that seems to be the extent of the argument.

But that’s also true of many other assets… and many of those other assets don’t generate positive cash flow either.

Vintage cars don’t have any positive cash flow… it’s all negative. The same with owning racehorses… it’s all negative until you’re one of the lucky few to own one that wins.

Fine art held privately doesn’t have a positive cash flow. If you have insurance against it, then it’s negative cash flow… unless you can lease it for display.

All the cash flow comes when you sell it.

Heck, government-issued coins and paper money don’t have any cash flow either… and barely any intrinsic value. A $10 bill in your wallet today will still be a $10 bill a year from now.

It hasn’t generated any cash flow.

Even worse, government and central bank-induced inflation is nibbling away at its value… with no way for that $10 bill to earn back that value… unless you exchange it for something else, which can earn it back.

For instance… Bitcoin or any other asset that has the potential to appreciate in value. There’s only one asset we know that can’t appreciate, and that’s cash.

Sure, with deflation the purchasing power of cash can increase. But that’s a different subject.

Of course, just because Bitcoin has hit $50,000 again doesn’t mean that it’s a straight line to $100,000 or more from here.

But “breakout” traders – those who like to see asset prices move higher or lower from a trend and then join in that momentum – will likely see this as a positive sign for further gains.

Providing Bitcoin can stay above or around the $49,000 level.

We’ll continue to watch it with a keen interest.

Unconnected Dots

Our main task at the Daily Cut is to try to “connect the dots.” That is, we help you figure out what events are about, what makes them important, what their consequences are, and what it all means for you.

But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will connect to anything.

Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.

Today’s unconnected dots…

• Speaking of cashflow, we note this story from Bloomberg:

  Private equity funds last year returned the lowest amount of cash to their investors since the financial crisis 15 years ago, according to Raymond James Financial Inc., hampering buyout firms in their efforts to launch new investment vehicles.

  Distributions to so-called limited partners totaled 11.2% of funds’ net asset value, the lowest since 2009 and well below the 25% median figure across the last 25 years, according to the investment bank.

  Higher borrowing costs, volatile markets, and economic uncertainty have made it more difficult for private equity firms to exit their existing investments through sales or initial public offerings. This in turn has hampered their ability to return capital to pension and sovereign wealth funds, besides other key investors, meaning once-reliable clients are struggling to find cash to allocate new money to the asset class.

What does it all mean? Any market relies on circulating funds within an asset class and from outside the asset class. That’s the nature of a market.

If money can’t get in or get out of the market, the circulation stops. It makes it harder to attract new investors, and existing investors… especially those who may be in financial trouble, will seek to exit at any price.

Even assuming they’re able to do that, that alone can impact valuations, creating a knock-on effect. It could even impact borrowing covenants, where a fund may have to maintain a minimum debt-to-equity ratio, for instance.

Anyway, right now, perhaps it’s no big deal. But keep an eye on a story like this. Sometimes “no big deals” can have a habit of turning into “big deals.”

More Markets

Today’s top gaining ETFs…

• Amplify Transformational Data Sharing ETF (BLOK) +4.4%

• SPDR Kensho Clean Power ETF (CNRG) +3.2%

• Invesco S&P SmallCap 600 Pure Value ETF (RZV) +3%

• Invesco Russell 2000 Dynamic Multifactor ETF (OMFS) +3%

• Invesco S&P SmallCap Consumer Staples ETF (PSCC) +2.7%

Today’s biggest losing ETFs…

• WisdomTree India Earnings Fund (EPI) -1.8%

• Franklin FTSE India ETF (FLIN) -1.1%

• First Trust NASDAQ Cybersecurity ETF (CIBR) -1%

• iShares U.S. Technology ETF (IYW) -0.8%

• iShares Global Tech ETF (IXN) -0.8%

Cheers,

Kris Sayce
Editor, The Daily Cut