It is Going to be a Bloodbath

There was a time when I scoffed at bitcoin and some of the lofty price predictions people threw around. No longer.

Central bank debasement has forced financial asset prices to ridiculous extremes and destroyed fiat currency's legitimacy. This is creating multiple effects that will continue for years:

1) Silicon Valley cannot ignore the magnitude of the financial markets. In rough numbers, the tech world believes they now have the tools in bitcoin and crypto to go after markets that dwarf anything they have ever seen. Perhaps as much as $10 trillion in negative yielding bonds, $8 trillion in gold, $20 trillion in fiat paper and as much as $50-70 trillion in M2. They will never go away, they will not flag and they will not tire in pursuit of such monumental sums. The current financial system has a giant bullseye painted on it courtesy of irresponsible central bank debasement.

2) The existing financial system made a deal with the devil and is now destined to lose to Silicon Valley. They bet everything on government. They trusted central banks who, via an out of control policy of debasement, forced the existing financial system to make poor decisions regarding deployment of their capital. Bubbles followed by massive losses culminating in a soft government takeover of the financial system followed by more bubbles were the result. They are hamstrung and must now play the game against far more entrepreneurial and motivated players from the West Coast. It is the existing financial system run by the government vs. ASICS, bitcoin, bandwidth, crypto and programming talent....It is going to be a bloodbath.

The financial establishment will beg the government for help via more regulations on bitcoin, on that there can be little doubt. It won't matter because the existing players made their deal with the devil. They must play the game with the coin of the realm, fiat. There will be no escaping that. It is also their death warrant. Debasement is now permanent, the cost of operating in the fiat realm will now always increase. This will weaken the financial establishment while bitcoin's army from Silicon Valley will grow stronger by the day. Time is on bitcoin's side.

Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!

Eagles Beat Patriots

It was a great Super Bowl as the upstart Eagles took down the dynastic New England Patriots and their 40 year old quarterback, Tom Brady. Sure, Brady had another typical year and Super Bowl where he displayed why he is one of the greatest players in NFL history, but time marches on.

The Pats may win a few more Super Bowls before the Brady-Bellichick era is done, but it will end. Pats fans know it,  and the rest of the NFL can't wait for it to happen. We can revel in what they have accomplished and be awed by their achievement of staying at the top for so long, but we will someday have to say goodbye.

The same is true for the dollar as the world's reserve currency. The Fed and the rest of the world's central banks have inflicted too much damage on fiat currencies for them to be able to continue their run as the base of the global financial system. Fiat debasement is now a requirement. Regardless of recent price action, the dollar will weaken into the future while bitcoin strengthens. There is no way around this. Like the Pats and Tom Brady, there will still be occasional glimpses of the old glory, but fiat's decline and fall is on the way.

Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!

The Fiat Building is on Fire!

A couple of days ago I bashed Nobel laureate Paul Krugman for his silly view that the blockchain, as yet, wasn't good for anything. Additionally, he thought that cold fusion was likely to happen before a real use case emerged.

The counterpoint is that the bitcoin use case allows us to avoid having to deal with the never ending debasement of fiat currencies. This morning, the head of the Bank of Japan said that he would buy an unlimited amount of ten year bonds at 11 basis points. At 11 basis points the head of the BOJ is so terrified about the state of the Japanese financial system that he is willing to unleash an infinite amount of newly created yen to keep ten year rates at stupidly low levels. This is suicidal. If this doesn't convince you that there is no way out of this mess, then nothing will.

Bitcoin isn't just the most elegant, decentralized and immutable accounting system for value that has ever emerged, it has emerged at precisely that moment in time that the world's central bankers are trapped. They must either incinerate their currencies, or incinerate their financial markets. The building built by fiat money is on fire and they want to trap us all inside. Bitcoin is the way out.

Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!

Fear, Uncertainty and Doubt

The Wall Street Journal ran a story this morning about the fact that bitcoin is having its worst month in three years. The price has fallen 50% in USD since its peak in December and the FUD is everywhere. This is the Journal"s list:

1) SEC halts $600 million ICO.

2) Facebook bans bitcoin and ICO ads.

3) Threat of South Korean legislation.

4) The hacking of Coincheck and theft of $500 million in cryptocurrencies.

5) Tether (a cryptocurrency issued by a company of the same name) and Bitfinex were issued a subpoena in December.

Yep, that all looks bad. Do you want to know something? It always looks bad for bitcoin, and somehow bitcoin rebounds from every problem and it emerges stronger because of the battle testing it has gone through. In the words of Nassim Nicholas Taleb, bitcoin is antifragile.

The history of bitcoin is littered with crises, none bigger than the scandals that followed the arrest of the operator of the Silk Road website and the collapse of Mt. Gox, the bitcoin exchange that was responsible for 70% of the trading volume of bitcoin. Here is a prescient comment from an article titled Don't Panic issued by a prominent bitcoin backer in 2014 as the Mt. Gox storm swirled around bitcoin:

Every month or two, a new crisis emerges. Mt Gox dies and it’s going to destroy Bitcoin. China bans Bitcoin and it’s going to destroy Bitcoin. A mining pool gets too much hashing power and it’s going to destroy Bitcoin! Every so often a new supervillain jumps up from under a rock. Not long ago, Mike Hearn was going to destroy Bitcoin. with redlists and Then there was the legion of evil behind CoinValidation, who wants to track all Bitcoin users. Recently Ben Lawsky has emerged as the latest moustache-twirler out to destroy Bitcoin with his bitlicense superweapon.

The idea that anyone could ban Bitcoin is a joke.....

You know what’s going to destroy Bitcoin? Nothing, that’s what. Maybe a nuclear war or a giant meteor could do it, but not much else. The problem with Bitcoiners is that they think Bitcoin is fragile when it is really antifragile. It is no coincidence that Bitcoin keeps surviving every crisis. It survives because it is immortal.

Daniel Krawisz (2014)

Disclaimer: This is not investment advice.

Bitcoin's Killer App

So the blockchain is interesting, but not yet clear whether it is useful for anything. And investing in bitcoin still looks a lot less reasonable than investing in cold fusion.

Paul Krugman


The root problem with conventional currency is all the trust required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currency is full of breaches of that trust.

Satoshi Nakamoto


The first quote above comes from a Nobel laureate in economics while the second quote comes from the creator of bitcoin and the only one of the two who deserves a Nobel in economics.

Krugman thinks the blockchain does not yet serve any useful purpose. Satoshi understands that bitcoin's killer app is that it allows you to free yourself from the morally corrupt central bankers who can only be trusted to completely debase fiat currency. It really is that simple.

Sure, gold the metal cannot be debased, but it is still controlled by central banks and leaves you exposed to their machinations. The only thing that one can be sure of in the world of economics is that fiat currencies will fail. It is too easy to create them and central bankers just cannot help themselves. This constant printing of money from thin air creates incredible economic distortions, bubbles and inequality.  Central bankers are therefore, deliberately burning down our economic house. The goal now of the governments of the world is to lock people inside this burning building of fiat. Bitcoin is your way out. Heed Satoshi, not Krugman.

Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!

Censorship Resistance

 The internet enabled the free flow of information, terrifying those who wanted to control communication. Bitcoin enables the free flow of value, terrifying those who want to control your money.

Andreas Antonopoulous


It is no secret that free speech is under attack by western governments. Therefore, no one should be surprised that the U.S. government is contemplating nationalizing the 5G network, and shutting out the telecom companies.

It isn't as if the telecom companies haven't been giving the government everything it wants, but nationalization of an important network is more than a little disturbing. The ability to turn off the service of someone whose speech the government disapproves of is a rather serious threat to liberty. Of course, they claim that their involvement is to protect us from Chinese interlopers. I doubt they have much interest in protecting me. The bigger threat comes from the possibility that the government would use their control over the network to spy on their own citizens and squash speech they find offensive.

Here is what I love about the bitcoin community; censorship resistance is a driving force of the movement. We are not just talking about how secure the blockchain is or how distributed is the network of nodes, but these guys are launching and leasing satellites in case the terrestrial networks go down or become inaccessible. Famed VC and bitcoin proponent Tim Draper is launching a blockchain based satellite network, while Blockstream is working on leasing satellites to support bitcoin.

The bitcoin community is making massive investments in censorship resistance on many levels.

Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!

What Shocked Me Regarding Bitcoin

The most shocking thing about my deep dive into bitcoin was how much it changed my view of gold as money.

My initial thought regarding bitcoin is that it represented an inferior form of money relative to gold. Gold was immutable. Bitcoin was not. I didn't think that you could be sure of what bitcoin was going to be in ten years. In fact, bitcoin is a monetary construct created by man, and all manmade monetary constructs have been abused. Gold must be a better form of money than bitcoin.

I was wrong.

The discussion of money generally centers around three properties:

1) It is a unit of account. This means it is an accounting system for value.

2) Store of value (SOV)

3) Medium of Exchange (MOE)

I am going to drop in an excerpt from an email that I sent to some friends regarding an article that tried to make the point that gold was a better form of money than bitcoin because gold is immutable. From the email:
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Down the page we come to a paragraph where the author defines money in the way that just about everyone accepts as truth, but that I now believe is incorrect (I will italicize the author's words):

What is money? Going back to basic economics textbooks, money is a few different things — a medium of exchange, a unit of measure, and a store of value.

The author answers his question:

I would suggest that being a medium of exchange is not the foremost utility value of money, a store of value is.

IMO, this approach is incorrect. Money is a unit of account, an accounting system for value. SOV and MOE are how we use money. The accounting system is the thing and SOV and MOE are uses in the same way that a car is the thing and transportation is how we use it.

This distinction is important. 

We all know gold's impressive characteristics:

Inert

Jewelry usage initially

Only product (until bitcoin) produced not to be consumed

Rare

Difficult to debase because of the above two items

These characteristics helped to make gold money. However, the real reason gold became money is that it made the accounting system for value more difficult to defraud and easier to trust. Because gold has the above characteristics, we trusted it as the basis of the accounting system for value more than anything else that we could come up with....until now. The controversial leap that I am going to make here is that money didn't have value because it was backed by gold, but that gold was given great value (beyond its use as ornamentation) because it was chosen as the unit of account.

The author knocks out a couple of more points that most probably agree with, and they are points I have used to rationalize my own investment in gold:

Gold stores energy in a form that is indestructible. That is the key, right there, in a nutshell.

It is the only element with properties that make it completely immune to the forces of entropy. (author's emphasis)

gold is not just good money, it is the only form of money completely resistant to financial entropy. (author's emphasis)

Here is where the author errs. He confuses gold the metal and the accounting system for value that is based on gold. Gold the metal is not subject to entropy and decay, gold the accounting system for value is. 

Bitcoin's accounting system for value blows away the accounting system based on gold because it has completely done away with centralization (this is why the recent block size debate was so important) and it is audited real time. We always know where all of the bitcoins are. 

Gold is massively centralized and has been since the US accumulated 45% of all of the gold ever mined by 1945. Since that time, the world's central banks have worked overtime to destroy gold as an accounting system for value. They have done this through things like the London Gold Pool, the European central banks disgorging huge amounts of physical gold in the late 1990s through the early 2000s. Today, most gold is still held by banks as custodians (which are regulated and controlled by governments). We also see regular, massive, instantaneous liquidations of paper gold in the futures markets by central banks or their banking agents. This centralization of the gold market and the lack of trustworthiness of those at the center of the gold market has served to make investors fearful of using gold as money.

Gold was important and initially chosen as money because it allowed people to trust the books better than the alternatives of the day. To the extent you trust bitcoin's distributed nature and the cryptography, then bitcoin is a vastly superior accounting system for value and its use as a SOV and MOE will increase based on this superior accounting system. It will become money.

After I wrote the email above, I read the book Digital Gold by Nathanial Popper. It is an account of the early days of bitcoin. In the book, he profiles an Argentine entrepreneur by the name of Wences Casares who is now the CEO of Xapo, a cryptocurrency storage firm. The book recounts Casares' realization that the accounting system for value was the thing:

He saw that bitcoin's lack of any transparent intrinsic value didn't matter when looked at against the history of money. The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money. And it was used as money because it did what all good money did: it served as a sort of physical ledger on which society could keep track of who was owed what. Each piece of gold represented a slot on the ledger of all outstanding gold, which anyone could verify by checking the mass and the volume of the gold....

"What is value?" he would ask. "It is that it is the ledger." 

This is the only other explanation that I have seen that frames bitcoin's primacy as money in terms of its superiority as a unit of account. 

I think that most people who become bitcoin fans have an aha! moment. The above was mine.

Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!