Are we allowed to talk about Bitcoin?

I don't know that the whole world has bought into it as a currency. How many people are conducting commerce in bitcoin -- or any cryptocurrencies?

Its actual value right now is as a speculative vehicle, and in that regard it probably isn't much different than beanie babies or cabbage patch kids when they were in (albeit smaller) speculative manias. as bitcoin surely is. ... and a lot of other things are right now too, not coincidentally, because the money supplies of almost every traditional currency have been debased so much and this is what that does.

The thing most limiting it as a currency (let alone as actual money, instead of a piece of paper denoting someone else's debt, which is what all currencies have become), in fact, is the speculative quality. The wild swings in price relative to traditional currencies such as the dollar, euro, yuan, etc. makes it difficult for sellers to accept bitcoin or ethereum or bitcoin cash. If you price something in one of them, by the time you convert it ti the currency where you do business, the effective price you got for whatever you sold could be plus or minus a large difference. It's too unpredictable in this kind of environment.

Right now, there are more than a dozen cryptocurrencies doing an impressive amount of trading volume as speculative vehicles. And there is a mania around them. Not just in bitcoin, but in a number of blockchain cryptocurrencies. There are hundreds of them now.

The technology itself has tremendous potential as a payment system of some sort, although people are still working on how to harness it and commercialize it in some way -- there has been some major investment by some very big players. But as a "non-governmental currency" of some sort, in which the people take back credit creation from sovereigns and try to create a sound money system, there are several major problems, not the least of which is that there isn't a country in the world that hasn't seen its debt explode over the last several decades, and needs to control its ability to expand its money supply (which they all have to incredible degrees lately) to try to inflate away as much of that debt as possible. That is not going to end without an attempted clampdown if crytocurrencies become a problem for them. If history is a guide, in fact, it won't end until they destroy their own currencies, at which point maybe the world will be looking for real sources of money. ... and then who knows?

Also, from a practical standpoint, the main problem with blockchain as a source of money is that everyone has to buy into just one thing (or maybe just a few things), for it to have widespread acceptance. And we aren't anywhere near that yet. There has been an explosion of competing cryptocurrencies. .. ethereum, ripple, litecoin, dash, etc. are all in speculative manias right now, too. And this has been its problem all along. You can limit the number of bitcoins that can be mined, but you can't limit the number of vehicles using blockchain technology. Until that gets figured somehow, it limits its use as "money."

But I agree with you that it is fascinating.

 

Thanks Buck.

I actually own a little bitcoin and a little ethereum. I had more, but I can't buy and hold something that is trading this way, so I trimmed what I owned. It's amazing how exchanges to trade them sprung up over the last few years, but they are markets that are being dominated by kids who have no clue that markets can trade in two directions. This is more frenzy than reason at work. At the same time, fundamentally, I do believe there is a good reason for why they have increased in value relative to the dollar (generally). Just in the last decade, when we really escalated the race to the bottom, the dollar has lost close to 20 percent of its value using the BLS's own CPI. ... which deliberately underestimates purchasing power for a variety of reason. Put in terms of what they have done to M2 money supply in the U.S. alone, and the dollar is likely worth much less than that "official" debasement measure. Now add in several major currencies that have been debased even worse than that, and it should be no surprise that people want to protect their capital somehow.

I am holding onto a little cryptocurrency, just because it's something relatively new that is interesting as a potential store of value. ... in a world in which the dollar of the country I live in is being robbed of a large percentage of its value, that interests me. And who knows what the future holds? Even if the cryptocurrencies come back down in dollar terms to where I bought them, and I am prepared for that, as long as there is a race to zero in terms of the debasement of all the world's major currencies going on, I'd expect the biggest cryptocurrencies to find at least some buyers out there. It's rational. But a lot can happen in terms of governments stepping in and that can potentially crash these prices if an unexpected hammer comes down. ... and also they are trading purely on momentum right now, and that is great for a trader, but often doesn't end well for investors in something.

In my last post, I said that the speculative frenzy isn't really different than what happened with beanie babies. I believe that. At the same time, unlike beanie babies, cryptocurrencies have utility value, which makes them very different. There is an amazing payment system for goods and services buried within them. Blockchain technology could end up being transformative for our lives. And the technology is still improving. That has been an impetus for several of the bitcoin competitors, actually. ... speeding up the transaction mechanism.

As for it being something more than a potential payment system, central banking and the credit monster they have created is a sinking ship, so more and more capital is fleeing right now. That is going to continue if things keep going this way. I don't know if bitcoin is where much of that capital will go, but I can think of less reasonable speculative things to do than to park a very small percentage of your assets in a basket of cryptocurrencies.

A lot of traditional traders and investors look at these and see the speculative frenzy right now, and they are writing them off.

But just because there is a speculative fever, doesn't necessarily mean cryptocurrencies are a fad or a gimmick, the way new things inevitably get written off. For example, Paul Krugman wrote an obituary for the Internet in the late 1990s. He said that by 2005, its impact on the economy would be no greater than the fax machine. A few years ago, he called bitcoin "evil," finding all kinds of things wrong with it as a form of money, in his estimation. But if you read it, his arguments were all couched in his paternalistic view of the world. ... as in, things HAVE to be a certain way. They really don't. In relatively recent history, things weren't the way they are now in terms of central banks creating runaway credit machines and endlessly increasing their money supplies to try to inflate away more and more debt creation in a vicious cycle. Inflating of money supplies has happened quite a few times in history (just in the last couple of centuries it happened quite a bit), though, and it always has had a similar outcome. It has led to more resets than we can count -- in which things DID change by necessity. ... and then who knows? Maybe cryptocurrencies will play a role of some sort if there is a move toward sound money.

 

I didn't know there was an actual Bitcoin token. Looks like it came from a Bond movie.

 

The price action has been classic speculative mania. Among other things, first China threatened to cut off exchanges (and then followed through). Then, Jamie Dimon called bitcoin a fraud at the Delivering Alpha Conference and said he'd fire anyone trading it. That got a big reaction. From its peak a week and a half ago to a low point this morning, it was off about 38, 39 percent.And then it spiked about 15 percent off that low. It's hard to ever know what useless piece of "news" the zit faces trading this reacted to, but it might have been a report that China gave two of the larger exchanges until end of October to shut down, and the Chinese may be getting cold feet over their exchange ban altogether.

 

I sold most of what I owned long ago. I still own a little bitcoin and a little etherium, which is in a speculative mania also. I don't want to sell -- I didn't buy them for speculative reasons. But I am going to sell what I own very soon -- maybe this afternoon. It is giving me no choice.

Right now, there is no easy way to short bitcoin. But the CME goes live with a bitcoin futures contract within the next few weeks and NASDAQ announced today that it is going to launch its own futures contract sometime early next year. The major brokers are already worried about the CME contract because people with no experience with derivatives trading who jump in, are going to get wiped out by the leverage and volatility. Which is why I am expecting the margin requirements to be particularly steep on the bitcoin contract.

When the pros who are licking their chops right now get their chance to short it in an easy futures contract, you actually might get more of a run up in price as the herd tries to squeeze them and test their resolve. And a bubble can blow ridiculously big before it pops. There is so much fresh central-bank driven liquidity sloshing around in various speculative vehicles right now -- with bitcoin being a poster child now -- and the debt levels that have created imbalances all over the place have gotten staggering over the last few years and are still growing. Monetary conditions are looser worldwide right now than ever, even during this last 9 years of insanity. In the case of bitcoin, it is going to be tragic because a lot of naive people are going to get sucked in before it ends. I saw a story yesterday about how the google search term "buy bitcoin with credit card" is around its historic peak.