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Musings Report #22 5-28-16 Powerful Reasons to Follow Crypto-Currencies
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Welcome to May's MUS (Margins of the Unfiltered Swamp)
The last Musings of the month is a free-form exploration of the reaches of the fecund swamp that is the source of the blog, Musings and my books.
Powerful Reasons to Follow Crypto-Currencies
I found it more than interesting that bitcoin's recent rise is being attributed to demand in China as capital controls increase.
As the media is finally realizing, Chinese will do crazy things to smuggle money out of the country.
As I noted in last week's Market Musings, "The great problem going forward for many people will be transferring their remaining financial wealth out of depreciating currencies in their homeland to some other currency in another more stable country.
When governments clamp down on bank transfers and impose other capital controls, this will become increasingly difficult in conventional channels."
In this context, crypto-currencies like bitcoin act as mediums of exchange between currencies such as China's RMB (yuan) and US dollars: the person in China buys bitcoin with yuan and then converts the bitcoin into dollars.
Bitcoin's transactions costs are low, so it makes an attractive medium of exchange. As I noted last week, "Unlike precious metals, crypto-currencies are easy mediums of exchange: you can send or receive bitcoin as easily as you send or receive dollars with PayPal, Dwolla or similar services."
I also found it interesting that bitcoin has diverged from gold, which has been weakening. Gold's deficiency as a medium of exchange may over time be one reason why bitcoin (currently $475/coin) could become more valuable than gold (currently $1214/ounce).
The primary reason to follow crypto-currencies such as bitcoin and Ethereum's ether is that they are outside the control of the self-serving exploitive elites that control the credit money issued by central banks and states.
Crypto-currencies are revolutionary because they are independent of central banks and a decentralized, peer-to-peer medium of exchange. Gold and silver are independent forms of money, but other than silver coins, the precious metals don't lend themselves to acting as mediums of exchange in an increasingly digital world.
Various attempts are being made to make gold digitally accessible, but none appear to be the "killer app" that would appeal to a broad base of users. In essence, existing platforms combine a credit card with a gold account. This links gold to the existing monetary scheme and all the risks of future capital controls/ expropriations.
The key point here is the current financial system is highly centralized, while crytpo-currencies are digitally decentralized. Should a government decide to recapitalize bank losses with a bail-in, i.e. expropriating depositors' money to cover banks' losses, as was done in Cyprus, the depositors have no recourse: the state sends the order to the banks and the depositors' accounts are legally robbed.
While some people believe the government will be able to outlaw the use of crypto-currencies, the decentralized nature of crypto-currencies makes this more difficult than in a system dominated by five Too Big To Fail banks and a central bank.
Another reason to follow the growth of blockchain applications (the technology underpinning bitcoin) is that these big banks have jumped on the blockchain and "smart contracts" technology of Ethereum. The politically potent banks recognize that they must either adopt these technologies or they will wither on the vine, and they will not look kindly on any government effort to outlaw the technologies that are their future.
The last reason to follow crypto-currencies is their potential to gain value. In the China-currency-swap example above, bitcoin acted solely as a medium of exchange between yuan and dollars. But due to the structural limit on the total number of bitcoin that can be created/mined (21 million, of which 17 million are in circulation), bitcoin is a store-of-value currency as well as a medium of exchange.
Global financial assets total $294 trillion.
All the privately held gold (i.e. not held by central banks) is currently worth about $7 trillion. This is why many people think gold could easily double, triple or even quadruple from $1220 to $5,000 per ounce: very few peoples own any gold, much less a significant amount. Any wide-spread demand could quickly boost the percentage of global financial assets held in gold--now a vanishingly small 2.3%--into a larger percentage.
Were gold to climb to 10% of global financial assets (and let's assume a hefty haircut of those assets in a recession, say from $294 trillion to $250 trillion), gold's value would rise from $7 trillion to $25 trillion, a 3.5 fold increase, equating to a price of $4,350/ounce.
All the bitcoin in circulation total $8 billion--an order of magnitude smaller than gold. Were bitcoin to represent 1% of total global financial assets, i.e. $2.5 trillion, that would represent a 312-fold increase, suggesting a price per bitcoin of $150,000.
That sounds insane, so let's say bitcoin becomes a mere 1/10th of 1% of total global financial assets. That equates to a price of $15,000 per bitcoin.
Impossible? let's check back in 5 years in 2021, and in 10 years, in 2026, before we declare this impossible.
Many people believe the federal government will outlaw bitcoin and crypto-currencies once it threatens the status quo. I disagree for a very basic reason: the big banks, major corporations and Silicon Valley all understand that blockchain/smart contract technologies (i.e. peer to peer trusted transactions) are the future. Those who ban them will be bypassed /leapfrogged. Those who embrace them will suffer disruption but this is the cost of having a future profit stream.
Politically powerful forces have embraced bitcoin / blockchain /smart contracts / decentralized autonomous organizations (DAO) as the future. I believe they will not allow the government to destroy their future.
From Left Field
What Is Bitcoin | Video (20:26)
Bernard Lietaer - Why we Need a Monetary Ecosystem (1:09 hrs) (via Lew G.)
Holy DAO! Reflections on the $155 Million (And Growing) Autonomous Behemoth -- decentralized autonomous organizations (DAO)...
Here’s What Bitcoin Offers That Private Wall Street Blockchains Won’t
A Venture Fund With Plenty of Virtual Capital, but No Capitalist
The price of Ether, a bitcoin rival, is soaring because of a radical, $150 million experiment
Public Pension Funds Roll Back Return Targets: Few managers count on returns of 8%-plus a year anymore; governments scramble to make up funding
Many unhappy returns: Pension funds and endowments are too optimistic
Losing Ground In Flyover America -- Federal Reserve policies hollowing out the economy....
Laser surgery restores Sainte-Chapelle stained glass window to Gothic glory -- will visit next trip to Paris....
Why You Can't Trust Yourself -- we are not what we think we are...
Julia Fischer - Grieg Piano Concerto (12:30) (via Lew G.) -- not many people are both concert-level violinists and pianists....
"It is better to be hated for what you are than to be loved for what you are not." Andre Gide
Thanks for reading--
charles |
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