This
Week in Barrons – 11-5-2017:
“Bitcoin will do to banks, what e-mail did to the postal service”… Rick Falkvinge
Bitcoin hit $7,500 this week; therefore, I’m
going to try and answer many of the digital currency questions that have been
asked of me over the past 2 months. Bitcoin,
often called a digital currency, is best viewed as a protocol (a set of code) that
delivers data (bitcoins) in defined quantities (blocks) that are stored in a
sequence (a blockchain) on a distributed set of global computers. Think of it as a decentralized, digital, gold-backed
currency – without the gold. But like gold, it’s in limited supply and you
need to ‘mine’ it. Unlike gold you can
spend it using a smartphone.
What
is it decentralized? Today, when you
wire money from the U.S. to Hong Kong, you must go through a centralized
banking system (called SWIFT), and various foreign exchange services. This
increases time (days) and cost because each node in the transaction is required
to uniquely verify and validate the previous information. In 2008, blockchain technology was created
that allowed for instant validation and verification.
What is Blockchain? Blockchain is not bitcoin. Blockchain is a software
protocol that uses math and cryptography (encryption) to create a decentralized
system. This decentralized system distributes a digital ledger that is
used to record an unalterable transaction record across many computers.
For example, imagine a digital ledger with a computing block attached. Every time a transaction occurs, a marker of
that transaction is attached to the block. This block is then attached to
the chain, so that every other block on the chain can see it. The block is
then managed by the network and not by one centralized system. This
decentralized network does not require a bank or middleman clearinghouse. Therefore, everyone who owns a bitcoin (effectively)
has the entire bitcoin bank and its ledger in their pocket. Blockchain technology can change everything that
requires validation and verification – from stock trading to mortgages to voting. Here is a link to free online course offered
by Princeton University: https://www.coursera.org/learn/cryptocurrency
What
are the issues? The more information
a block stores, the harder it becomes to scale the system. When bitcoin
was first introduced, it had only 1mb blocks, and would take about 10 minutes
to verify the transactions that took place on every block. Over the past year, the number of
transactions occurring in each one of these blocks has grown to the point that
1mb is not enough space to record the many transactions that were taking place.
What
is the upcoming bitcoin change? The most recent software change (called a
‘hard fork’ = Segwit2x) calls for a specific change to bitcoin's rule set, and invalidates
previous rule sets. This change termed
Segwit2x (Segwit = segregated witness, and 2x = double the size of the block)
allows for more data to be stored in each block, and also doubles the size of
the block from 1mb to 2mb. This ‘hard fork’ is different than its
predecessors (bitcoin cash and bitcoin gold) and offers an outcome that might
not be guaranteed. With bitcoin cash and
bitcoin gold, users could have ignored the upgrade and it wouldn't have
impacted their transactions at all. And on
certain exchanges, if you held bitcoin you may have received a new
cryptocurrency as a bonus. This same smooth outcome is not guaranteed
with Segwit2x. If ‘most’ of the bitcoin
miners upgrade their software, then the bitcoin blockchains will continue to function
but feature larger blocks and Segwit2x's rules will become the rules of
bitcoin. If only ‘some’ of the miners
upgrade their software, then two blockchains could be created – a ‘legacy’
bitcoin and a Segwit2x bitcoin with different rules and unique
cryptocurrencies. If SegWit2x is
successful, investors will have more confidence in bitcoin's ability to be a
tool for our global economy going forward.
What
should I do by November 16th?
A similar scenario happened earlier this year with Ethereum, and
resulted in a loss of Ethereum’s core value.
If you own bitcoin, the simplest way to protect against loss is to store
your coins off the grid before the fork happens. Then once the community
performs the upgrade, put them back out onto the chain.
Why is Bitcoin such a big deal? I'll be honest, when you look at bitcoin from a layman’s perspective,
it appears that someone has created something out of thin air. Yeah, it uses blockchain technology so that it
can be tracked, but is it any different than BestBuy Rewards points? Is it any different than creating a limited
supply of baseball cards? The differences between any fiat currency and bitcoin
are: (a) bitcoin is not controlled by governments or banks, (b) it’s
decentralized, (c) it’s limited in supply, and (d) offers virtual and immediate
validation and verification. That means
that it’s cheaper – better – and faster.
Can
Bitcoin be the new QE? The
effectiveness of central bank QE policies is already being questioned. How can QE stimulate the global economy
without adding more to a country’s already ballooned balance sheet? Earlier
this month the IMF was looking into the idea of turning their Special Drawing Rights
(SDR) into some form of blockchain cryptocurrency that would allow one global central
bank to infuse the world directly with free money. If the IMF were empowered
to act more like a global central bank, it would reduce the need for countries
to hold reserves. Jose Antonio Ocampo, a Colombian central bank board
member said: "Countries would not
have to accumulate reserves, which in and of themselves generate a contractionary
effect on the country’s economy."
What
about a Russian CryptoRuble? In
June, P.M. Putin met with Vitalik Buterin (the founder of the world's
second-largest cryptocurrency) and gave his blessing for Russia to develop a new
cryptocurrency – the CryptoRuble. "I confidently declare that we will run
CryptoRuble for one simple reason: if we do not, then after 2 months our
neighbors in the EurAsEC [Eurasian Economic Community] will,"
Nikiforov said. So, if you think Russia is alone in the national crypto-development
arena – think again.
What about a Chinese Crypto-RMB?
China is testing its own state-run digital currency. Earlier in June, the
central bank finished several digital currency trials involving transactions
between it and some of the country's commercial banks. The development of a digital currency comes
at an opportune time for China. The
rapid development of their own electronic payment system and thriving private
digital currencies have made it imperative for China's central bank to move
quickly in digital finance. Combine this with China's new oil benchmark to be launched later
this year, and this could be the start of a move to a global, cashless society.
Will
Amazon soon accept Bitcoin?
On October 31, Amazon registered
three more domains related to cryptocurrency, sparking speculation that Amazon
may soon begin accepting cryptocurrency. The domains are: amazonethereum.com,
amazoncryptocurrency.com, and amazoncryptocurrencies.com. Amazon already owns the amazonbitcoin.com
domain name. This is not the first time
a rumor has circulated surrounding Amazon accepting digital currency. Any move to do so by Amazon (one of the most
innovative and influential tech companies in the world) would have enormous
positive consequences for the sector.
After Bitcoin hit $6,000 and stayed
above it on Monday, its fan base is looking for it to hit $10,000 quickly, and
pundits continued to reiterate the longer-term $100,000 view. Why?
Because Coinbase is adding 30,000 new bitcoin wallets each day, and CBOE
futures and ETFs are coming by the end of 2017.
The feeling on Wall Street is that: “Things
are just gettin’ started”.
The Market:
This week I had the honor of spending
time with a dear group of friends that I have accumulated over the past 40+
years. All the while, the
U.S. stock market edged higher for the 8th week in a row. Some say the gains were because the president
introduced a new tax plan, and nominated Jerome Powell to head the Federal
Reserve. Some say they were a result of Broadcom
announcing the largest takeover bid for a chipmaker in history – over $100B for
Qualcomm Inc. And some say the gains
were a result of Aurora Cannabis (ACBFF) receiving its cultivation license from
Health Canada for its second mega-marijuana growing facility.
In terms of the tax plan, the following
chart shows who benefits from the new tax reform proposal – and it’s no surprise that the rich would be the
big winners.
This chart reflects: changes to both the individual
and corporate tax rates, the child tax credit, the expanded standard deductions,
and the limits to other deductions. One issue
that is not reflected above is the impact of repatriation – which would even
magnify the benefits to the wealthy.
This past week also brought us a
new jobs report, and more sector specific employment data. The following chart compares job growth in
the first 10 months of 2017 with the same period in 2016. Sectors such as professional & business
services, education & health care, and hospitality & leisure are still
adding tens of thousands of jobs every month.
3
things that jump out at me are: (a) Retail
is collapsing. So far in
2017, retail jobs have fallen by 6,600 per month, largely due to Amazon and other online retailers. (b) Manufacturing
and mining are coming back. With stable prices, a
weaker dollar and rising global demand – investments in oil
drilling and metallic mining are back, and so are the jobs. (c) Information is dying. The
Internet and the advancement of computer technologies have devastated employment
in traditional publishing, broadcasting, and telecommunications.
And then there was the latest jobs report
itself. It showed the U.S. adding
261,000 jobs last month, the unemployment rate inching down to 4.1%, and wages
growing a paltry 2.4% (even less than September’s number). One of my friends said it best: “They keep telling us how good things are –
yet I’m still paying my kid’s insurance and telephone bills. It’s the Potemkin Village all over
again. They’re trying to bluff us into
believing that everything’s fine.” [Potemkin
Village is a story of how Grigory Potemkin erected phony, portable settlements
along the banks of the Dnieper River in Russia – in order to fool Catherine the
II. The structures would be disassembled after she passed, and
re-assembled farther down her route to be viewed again as if new.] My friend was ‘spot-on’. While the talking heads were crowing about
the 261k jobs created – they never mentioned that 83% of them were ‘fake’ –
created as a result of the ‘birth/death’ model.
They also failed to mention that the number of individuals NOT in the
labor force increased by almost 1m last month.
If everything was so rosy – why are 1m more people leaving the labor
force?
But
the market momentum is in place, they're giddy about stocks, and for now the
only direction is up. 20 years ago, the Economist
magazine predicted that in 2018 a new global currency would be in place – and that’s
not too terribly far away. In the
meantime, (a) make what you can, and (b) don't think for a moment that any of
this is normal. Negative interest rates,
the Bank of Japan owning 50% of their own ETF market, or the ECB owning 11% of
all European corporate debt – none of that is normal. I think November will be ‘up’, but I’m not
sure about December. The upcoming rate
hike could be the bell that signals a time to ‘take something off the table’. If 2018 is going to be a tumultuous year,
they might want to get out ahead of the noise. In the meantime, lean long and keep a finger
near the sell button.
Tips:
This past week, Allianz’s chief economic adviser Mohamed
El-Erian joined the raft of Bitcoin skeptics that are softening their stance on
the cryptocurrency. Mr. El-Erian, who
previously stated: “Bitcoin should be
worth 50% of its value”, told CNBC
it was “trying to find stability. It's more of a commodity than it's a currency.” As
Bitcoin reaches new all-time highs of $7,500/coin on news of the CME Group offering
bitcoin futures by the end of the year – bubble concerns are beginning to take
a back seat. When El-Erian made
his previous comments in
September, Bitcoin was trading around $4,000.
With Coinbase adding 100,000 in the first 3+ days of November, he
modified his tune to: “My major concern
over the long term is making sure pricing maintains a consistent relationship
with reality?" For his part, Jamie
Dimon (after his infamous ‘fraud’ accusation) has remained silent on the matter.
While other JPMorgan senior executives
have gone on record saying the banking giant is open-minded on the issue of
cryptocurrencies in general.
Recommendations:
Bullish: (Sell PCS = Sell a Put Credit Spread):
-
Boeing
– BA (261.75) – Sell PCS, Nov 10th: +252.5 / -255, $0.35,
-
Caterpillar - CAT (136.93) – Sell PCS, Nov 10th: +133 / -135, $0.31,
- Carnival Cruise - CCL (65.43) – Sell PCS, Nov 10th: +62.5 /
-64, $0.28,
-
Russell
Small Cap - IWM (148.61) – Sell PCS, Nov 10th: +146 / -144.5, $0.15,
- Micron – MU (43.71) – Sell PCS, Nov 10th: +40 / -41.5, $0.16,
- Nasdaq - QQQ (153.27) – Sell PCS – Nov 10th: +149 / -151,
$0.16,
- Small Cap Bull - TNA (65.12) – Sell PCS – Nov 10th: +61 / -62.5,
$0.21,
- Wynn – WYNN (150.09) – Sell PCS – Nov 10th: +147 / -148, $0.31,
- BioTech - XBI (85.6) – PCS – Nov 10th: +80 / 81.5, $0.07
My Crypto-Currency Holdings continue to Include:
-
Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Dash
(DASH), Digix (DGD), MaidSafeCoin (MAID), Metal (MTL), OmiseGo (OMG), PIVX
(PIVX), Patientory (PTOY), Steem (STEEM), and NEM (XEM).
To follow me on StockTwits.com to get my daily thoughts and trades – my
handle is: taylorpamm.
Please
be safe out there!
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