Category Archives: Finance & Economics

Buy on the Mood, Sell on the Metric

So far this has been a pretty good model for buying stocks and measuring investments.

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

Bitcoin 5

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 naïve 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.

From Zerohedge: Bitcoin’s Problem: 1,000 Investors Control Half the Market

If You Don’t Own Any Bitcoin, Read This

Bitcoin

This week it hit $19,000. What’s next?

Wow. Just….wow.

Bitcoin’s price has gone ‘beyond exponential’ this week. Just yesterday, as I started working on this article, it shot up 22% — from $14,000 to $17,000 (hitting an intraday high of over $19,000).

And that’s after a mind-blowing upwards rocket ride over the past several months.

I think it’s safe to say that the vicious melt-up in price over such a short timeframe has surpassed the expectations of even the starriest-eyed Bitcoin fanboys.

The whole world, especially the 99.99% of us that own zero cryptocurrency, is asking: What happens next? And, What should I do?

Is this insane trajectory going to continue for a lot longer? Do I need to get in now to avoid missing this once-in-lifetime fortune-making opportunity?

Or is this a classic bubble blow-off top? Is this the deadliest time to enter, right before the price implodes?

An Expert’s Take

I had the chance to ask these questions Wednesday to a long-time veteran in the digital currency space. We met at a gathering of online media ‘mavens’; this guy has published news and analysis on cryptocurrencies since 2011, for both investors and developers. He knows the space exceedingly well.

Unsurprisingly, he holds a lot of Bitcoin. I didn’t ask directly how much; but knowing that he was covering the space back when Bitcoin traded in the single-dollars range, my conservative mental math quickly concluded he’s probably worth more than most people I’ve met in my life.

So here what I learned during my chat with him:

  • He thinks the current price action is “nuts”: To his veteran eye, the current frenzy is a speculative mania and will end in a massive sell-off, resulting in huge losses for those buying in at these prices. He’s watched Bitcoin long enough to have seen it experience several 70%+ corrections. In his mind, this will simply be the latest one. And there will be more in the future, he predicts.
  • But he’s not worried in the long run: Like many longtime crypto investors, he sees a much higher price potential for Bitcoin. But to reach that level and sustain it will take years. The currency will need to be much more widely held among the general populace and used in a material percentage of transactions (i.e., not just being held by speculative investors). Until then, he expects lots of volatility (both up and down) of the sort we’re seeing now.
  • He admits that Bitcoin could lose out to a superior successor: When asked if the capital currently flowing into Bitcoin could flee for a better crypto ‘mousetrap’ in the future, he says “sure”. Which is why he has diversified holdings across a number of cryptocurrencies and watches new entrants into the the space closely. But one advantage Bitcoin increasingly has over the rest of the crypto field is scale. He gave a highly-technical argument for how the blockchain actually has limited value without a platform to offer it sufficiently critical scale. “Does Bitcoin offer that critical scale yet?” I asked. “Probably not yet” he answered, “But it’s much closer to it than any other competitor at this time. And it’s growing faster than the rest.” Translation: Bitcoin is the odds-on winner at this point.
  • He expects the world’s central banks to criminalize the cryptocurrencies: We talked about the central banking cartel’s longstanding monopoly of the money supply and its historic ruthlessness for squashing all competition. He agreed that the central banks would like nothing more than to replace the current cryptos as well as all paper fiat currencies with digital sovereign versions. And he predicts they will likely try to do exactly this. How successful will they be? Uncertain. He can certainly foresee a time when they ban ownership of Bitcoin and its brethren, criminalize transacting with them, and shut down the exchanges. Though while the cartel may be able to seriously curtail Bitcoin et al, he doesn’t see it succeeding in driving them to extinction for several reasons. One he offered that I hadn’t heard before (but have since verified) is that private investors have put a network of satellites up in spacededicated to making it possible to transact in Bitcoin anywhere on Earth even if the terrestrial networks are taken down by the authorities or natural disaster.

His overall takeaway? Don’t buy at today’s prices; wait for a correction (it could be a really big one). But once it happens, buy in and hold, as he sees the price going much, much higher over the next decade.

By the way, I’d share this guy’s name with you but he asked me not to. Given how stratospheric Bitcoin has risen over the past year, he says his biggest priority right now is to fly under the radar and have as few people as possible be aware of his crypto holdings. Apparently this has recently become a real concern for Bitcoin investors who have suddenly become overnight multi-millionaires (Or hundred-millionaires. Or in the case of the Winklevoss twins, even billionaires). A vast windfall like this makes you an alluring target to criminals.

Just one more unexpected consequence of this crypto mania we’re watching play out in real time.

The Peak Prosperity View

The above expert’s views match well with those of our team’s outlook here at PeakProsperity.com.

Charles Hugh Smith, who has been writing about Bitcoin for us since it traded below $600 has long had a price target of $17,000 — which seemed unattainably high even just one short week ago. That underscores how insane the price moves of the past few days have been.

With the $17,000 milestone hit so quickly, does he think a large correction could ensue? Very possibly. (I should make clear though, he remains quite bullish about Bitcoin’s long-term future potential).

Davefairtex, our resident charting expert, notes that his model now shows Bitcoin’s level of overvaluation at “nosebleed” levels with a daily RSI of over 98 and the forecaster clearly predicting a reversal:

And reader mrees999, our community’s most-respected educator on the cryptocurrency space — and one of the biggest advocates earlier in the year for buying Bitcoin — offered the following words of caution yesterday:

I probably wouldn’t get in now. It’s gotten irrational with FOMO. I’m selling into this rally and waiting for a massive correction once the bit shorts come in with the futures trading about to begin.

(Again, I should point out that mrees999 remains robustly optimistic about Bitcoin’s longer-term future price potential.)

To the above, I’ll simply add two additional pieces of data to show how quickly Bitcoin has outstripped any sort of rational justification for its recent price explosion.

The first is this chart below, which shows how Bitcoin’s price has blown above the maximum Fibonacci extension between its previous swing low and yesterday’s swing high (note: this chart was created before the price continued higher to $19,000):

(Source)

And lastly, here’s a table showing the accelerating compression of time it has been taking for Bitcoin to hit each new $1,000 price milestone:

(Source)

That right there, folks, is the madness of crowds. It’s a FOMO-driven mania to make the South Sea Bubble blush.

Advice For Those Who Missed The Rocket Ride

So, if you’ve been feeling like the loser who missed the Bitcoin party bus, you’ve likely done yourself a favor by not buying in over the past few weeks. It is highly, highly likely for the reasons mentioned above that a painful downwards price correction is imminent. One that will end in tears for all the recent FOMO-driven panic buyers.

To that point: as I’m finishing up this article, Bitcoin has retraced back to $15,100. That’s a 21% loss in less than 24 hours for those who bought at yesterday’s $19,000 high. If yesterday indeed proves to have been the blow-off top, that loss could get a lot uglier quickly.

But even if it doesn’t, what can those of us who don’t currently hold any cryptocurrency do as we wait for the dust to settle here?

Here’s our current guidance:

  • Open an account with a crypto exchange: While we maintain Bitcoin and many other cryptocurrencies are in a bubble right now, we reiterate our position that they are worth having exposure to in your portfolio — albeit not at today’s prices. So, while waiting for (possibly much) lower prices after the inevitable blow-off top, you should open an account with a leading crypto exchange (like Coinbase, Kraken, Bitfinex or Bitstamp), so that you’ll be positioned to buy when the insanity is over. These exchanges require a fair amount of personal information that they use in account verification, and some of them take a surprising amount of time and effort to set up before your account is approved and/or funded to transact. So get all of that out of the way now, while your waiting on the sidelines.
  • Build cash: We’ve been beating this drum for a while because it’s not just Bitcoin that’s in a bubble. As laid out in previous reports, nearly all financial assets are dangerously over-valued in today’s financial markets. Keep building your cash reserves as “dry powder” to deploy when the next big market correction hits. Chances are likely that at some point in the next 0-2 years, you’ll have the opportunity to buy cryptos, stocks, bonds and real estate at generous fractions of the prices seen today.
  • Hold on to your precious metals: Holders of gold and silver have watched Bitcoin’s moon-shot with a lot of understandable envy. This is the kind of massive re-pricing boom they expected the precious metals to experience as world fiat currencies inflate away their purchasing power. Were PM investors wrong? Did they pick the wrong horse in this race? Should they have piled into the cryptocurrencies instead? While it has been a painful five years, we expect precious metals holders will be rewarded in the end. Separate from the current emotion-driven FOMO blitzkreig, the reasons informed investors are buying Bitcoin have heavy overlap with the rationale for owning gold and silver. Capital will return to the PM market as soon as the current nested set of financial bubbles begins bursting. And if you think the jump in Bitcoin has been tremendous as a money tsunami has flooded into this small market, remember that Bitcoin’s market capitalization is now substantially larger than that for all the world’s above-ground silver. How high could we see silver go when that metal become en vogue again?
  • Practice emotional resilience: Hey, Bitcoin could still rally higher from here — much higher. It’s still a small market with a lot of hot money fighting to enter it. How long the mania will last is unknowable — we could be seeing the end of it right here (Bitcoin’s price dropped below $15,000 as I wrote the last paragraph), or it could still go on for a lot longer than we can imagine. If it does, don’t let the twin devils of fear and greed compel you to be one of the “last fools” to jump in before a correction takes hold (remember: that’s how Isaac Newton lost his fortune in the South Sea bubble). And don’t beat yourself up for not being one of the very few people to make millions from this craze. It’s like being jealous of lottery winners. Instead, focus on the real wealth in your life (hint: it’s much more than the money in your bank account), take time to appreciate what you have, and plan on sustainable ways — instead of speculative ones — to increase it. Those looking for some guidance on how to best do this can find our thoughts here.

Don’t Ignore The Revolution

While we’ve made the case that Bitcoin’s current run-up has been “too far, too fast” and a painful correction is highly likely, the new cryptocurrency era is a bona fide revolution. The underlying technology of the blockchain will transform industry and commerce on a similar scale as the Internet has.

While we urge prudence and caution regarding the conditions under which you invest in the cryptos, we don’t recommend you ignore their significance.

Charles Hugh Smith has written several reports for us designed to demystify the digital currency space and help you understand the future value that the blockchain promises to unlock for society.

If you feel you don’t yet have a good grasp on all this, make his report Understanding The Cryptocurrency Boom your mandatory reading over the next few days.

Written just a few short months ago, when Bitcoin was a mere $2,600(!), this publication and its excellent companion report, The Value Drivers Of Cryptocurrency, explain in layman’s terms the real utility value of digital currencies and why a long-term view can justify prices that may ultimately be much higher than where they are today.

Don’t let ignorance or a sour-grapes frustration from missing out on the first big run make you blind to the revolution underway. Whether you participate in it or not, and at what price, is up to you. Just make sure your decisions are well-informed ones.

Click here to read Understanding The Cryptocurrency Boom (free to all readers).

From Zerohedge: Bitcoin

The Zealous Pursuit Of State-Sponsored Collapse

Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force. But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.  The United States government is no exception.

Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window. The grease shines and smells of something fierce.  The layers of government grime also drip and ooze into every crack and crevice of the economy.

These days, for example, it is impossible to carry out a simple private transaction with your barber or barista without some form of government interference. Has your barber obtained the required license and paid the obligatory fees to be able to legally taper your neck line?  Has your barista’s espresso bean grinder passed city health inspection?

Is the hot Cup of Joe served in a paper cup of appropriate recycled material composition? Did the hot beverage exceed the legally accepted temperature standard?  Did state and local governments receive their tax exaction upon payment?

When it comes to more complicated matters, where real money’s on the line, government interference is an absolute disgrace. Did you know that it costs 10 times more to have an appendectomy in the United States than in Mexico?  Is the procedure 10 times better?

Obviously, this is nothing new. Governments have been regulating and impressing their fingerprints all over commerce since society first granted its leaders the opportunity.  People are so accustomed to it that they accept government intervention as necessary to better their lives.

When it comes to price fixing, wage controls, and dictating oil production, things quickly go haywire. This is because prices, wages, and resources have their own independent relationships beyond what can be legislated.

When the price of a certain good or commodity is artificially fixed below its natural equilibrium, scarcity and shortages follow. In short, when the price of bread is decreed below the cost of the wheat that goes into it, bakers go fishing.

Credit Market Intervention

Perhaps the most nefarious of all government intervention, is that which directly affects a nation’s money stock.  Many people don’t recognize its occurrence.  But they do misdiagnose its effects.

Wage stagnation, for instance, is often blamed on greedy executives off-shoring their production.  In reality, this is merely a consequence of a forced monetary regime that inhibits genuine capital formation and earned savings in favor of asset price inflation. Of course, only a complete killjoy would bother scratching below the surface to uncover such minutiae.

Without question, the last decade has brought forth some of the craziest monetary policy experiments in human history.  If you recall, the Federal Reserve dropped the federal funds rate to near zero in December 2008, and kept it there until December 2015 – exactly seven years.

Since then, the Fed has hiked the federal funds rate four times – 0.25 percent each time – bringing the federal funds rate up to 1.25 percent. The Federal Open Market Committee (FOMC) meets on December 12 and 13, and will likely raise the federal funds rate another 0.25 percent.

It is also anticipated that the Fed will raise rates three times in 2018, assuming financial markets and the economy don’t break down before they can accomplish this.

Concurrent with the Fed’s interest rate raising efforts, they’ve also begun to reduce their balance sheet.  They’re selling some of the roughly $3.6 trillion in Treasury and mortgage-backed securities purchased as part of their Quantitative Easing program. This reversal of the Federal Reserve’s Quantitative Easing program reduces the pool of available credit in the financial system.

It doesn’t take much imagination to visualize the effect this will have on an economy and financial markets that are wholly addicted to cheap and abundant credit.  So where does the GOP’s tax bill fall within this landscape?

The Zealous Pursuit of State-Sponsored Collapse

Here we turn to David Stockman, former Director of the Office of Management and Budget under President Reagan.  Stockman’s more than four decades of in-the-trenches experience, study, and contemplation of taxes, budgets, and deficits, and how these all influence and affect the economy, is unrivaled. As he explains:

“All tax cuts are not created equal.  Their impact for good or ill depends on: (1) which taxes are cut; (2) how the revenue loss is financed; (3) when they occur in the business cycle; and (4) how they impact that nation’s underlying fiscal posture.
 
“Our point today is that the GOP gets an “F” on all four components of the test.  That’s because a deficit-financed tax cut is never a good idea, but is especially counter-productive if done late in the business cycle in the face of a structural deficit that is high and rising (owing to inexorable demographic pressures on entitlement spending); and in the teeth of an unprecedented cycle of monetary contraction, which is exactly what the Fed’s interest rate normalization and balance sheet shrinkage (QT or quantitative tightening) amounts to.”
To clarify, if you’ve been out of school for a while, “F” stands for fail.  Most notably, financing tax cuts with money borrowed from the future is doomed to fail.  Hence, the great GOP tax cuts represent but another fail milestone in the zealous pursuit of state-sponsored collapse.
We should point out that the spike to $19,000+ in BTC was confined to the Coinbase exchange, where a huge premium developed during the trading day. It was not replicated at any of the other exchanges, where BTC peaked just below $16,000. This is mainly a sign of inefficiencies at said exchange (BTC routinely trades at a premium there, but it is usually much smaller). It took a while for arbitrageurs to bring the premium back down, but they succeeded eventually.

A Species of Robbery—John Taylor, 1852

There is also another political party, who desire, through the influence of legislation and coercion, to level the world. To say the least, it is a species of robbery; to some it may appear an honorable one, but, nevertheless, it is robbery. What right has any private man to take by force the property of another? The laws of all nations would punish such a man as a thief. Would thousands of men engaged in the same business make it more honorable? Certainly not. And if a nation were to do it, would a nation’s act sanctify a wrong deed? No; the Algerine pirates, or Arabian hordes, were never considered honorable, on account of their numbers; and a nation, or nations, engaging in this would only augment the banditti, but could never sanctify the deed.

I shall not, here, enter into the various manners of obtaining wealth; but would merely state, that any unjust acquisition of it ought to be punished by law. Wealth is generally the representation of labour, industry, and talent. If one man is industrious, enterprising, diligent, careful, and saves property, and his children follow in his steps, and accumulate wealth; and another man is careless, prodigal, and lazy, and his children inherit his poverty, I cannot conceive upon what principles of justice, the children of the idle and profligate have a right to put their hands into the pockets of those who are diligent and careful, and rob them of their purse. Let this principle exist, and all energy and enterprise would be crushed.


John Taylor. Government of God, 1852, p. 23.

Overtaxation

The only people who need 75% of your money are people who cannot manage money.

In my opinion, you are participating in organized crime if your government takes more than 40% of your wealth.

Really, more than 30%.

It is amazing how many people lecture others about not being greedy…

right before they demand the lion’s share of their wealth.

That said: obey the law. Pay your taxes.

Vote to lower them in the meantime.

Corporate Tax Rate: 20 Percent Is Better

The House and Senate have passed bills cutting the federal corporate tax rate from 35 to 20 percent. This overdue reform will spur capital investment, strengthen the economy, and reduce tax avoidance. Republicans have long championed this reform, and President Trump had proposed an even lower rate.

So it was surprising that the president commented Saturday that a 22 percent rate would be fine. That would be snatching a defeat from the jaws of victory. Congressional Republicans should stick with their 20 percent. Senator Marco Rubio is incorrect that there is no economic difference between a 20 and 22 percent rate. Economics is all about decisions at the margin, and in an increasingly competitive world, every cost reduction for American businesses helps.

Policymakers need to remember that in America state taxes pile on top of federal. So while in Britain the federal rate of 19 percent is also the overall rate, our overall rate in California would still be 27 percent even as we cut our federal rate to 20.

A Council of Economic Advisors Report on corporate taxes noted that international investment flows are “highly responsive to cross-border differences in tax rates.” And further that “an additional margin along which changes in corporate tax rates are likely to affect growth is through profit shifting by U.S. firms to foreign subsidiaries … This profit-shifting has increased substantially since the 1990s.”

So for more investment flowing in, and less paper profits flowing out, we should cut our corporate tax rate as low as we can. Most other countries have figured this out, as the chart below shows.

According to KPMG, the average corporate tax rate across 171 countries today is just 24 percent. The United States with a federal-state rate of 40 percent is the outlier at the top of the chart. Rates have fallen in Africa, Asia, Europe, and Latin America. American businesses generally face their biggest competition from businesses in Asia and Europe, and those are the regions with the lowest rates.


Chris Edwards is the director of tax policy studies at the CATO Institute and editor of http://www.DownsizingGovernment.org. He is a top expert on federal and state tax and budget issues. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.