Fear Centralization....of Anything

https://twitter.com/SteveFranssen/status/980225137403314176

Taxes and bitcoin

I am a little surprised at myself for not thinking through the tax implications of last year's massive increase in the bitcoin price. They are massive, and they have almost certainly put more downward pressure on the bitcoin price than my lone gunman theory.

In this article, bitcoin bull Tom Lee estimates that U.S. investors are on the hook for about $25 billion in taxes for their crypto gains last year.

This is an enormous amount of pressure to be placed on the rather illiquid market and it has certainly impacted price. Yes, we will still have to deal with the Mt. Gox trustee and his overhang, but if tax selling has been the main contributor to the bitcoin bear market, we should know relatively soon as April, 17th is tax filing day in the U.S.

Notice: This is not to be taken as investment advice.

Institutional Investors on the Way?

There are reports out this morning that George Soros' family office is ready to start trading digital currencies. This may be a sign that there is enough confidence in the institutional custody arrangements on offer for the institutional community to wade into the sector. This is Soros' family office however, and they may not be required to have the strong custody arrangements required of hedge funds given that they do not manage money for outsiders. My guess is that Soros isn't going to let some underling run around with a bunch of his money on a Trezor, so he must be satisfied with the custody issues.

Nevertheless, the bear market began due to the emergence of our lone gunman and the delay in the expected wave of institutional money. Progress on the institutional custody front should help to turn the tide.

Notice: This does not constitute investment advice.

The Lone Gunman of 2014

Trace Mayer, an early bitcoin convert, developed a ratio that he has used to describe frothiness or lack of interest in the bitcoin market. It is a simple ratio, the current price divided by bitcoin's 200 day moving average price.

Currently, the 200 day moving average (DMA) is $9455 and the current Mayer Multiple is 0.73 (source: https://twitter.com/tipmayermultple?lang=en). The Mayer Multiple has historically been higher more than 90% of the time throughout bitcoin's history.

An asset that appreciates in dollar terms over time will, on average, trade above the 200 DMA. For those who believe that bitcoin's monetary properties are vastly superior to those of fiat and the dollar, today's price seems like quite the bargain.

While bitcoin's history is relatively brief, it is worth our time to look at the only other extended period of time when the Mayer Multiple was at current levels.

Bitcoin sprang into existence in January of 2009 and never had a price above $1 until early in 2011. The 200 DMA then didn't really start to have any meaning then until 2012. The following graph hasn't been updated since February 5, 2018:

source: https://www.theinvestorspodcast.com/bitcoin-mayer-multiple/

Since publication, the Mayer Multiple has continued to fall. We can also see that the Mayer Multiple traded below 1.0 between early 2014 and the middle of 2015.

So, what was happening in the bitcoin world back then? In short, it seemed like the end of bitcoin to many. Silk Road, the online drug emporium, had been seized by the US government and its operator arrested. Also, Mt. Gox, at one time the largest bitcoin exchange went bankrupt.

Bitcoin skeptics claimed bitcoin was only good for illicit purposes and the  Mt.Gox' collapse made it difficult to establish a real bitcoin price. The real problem for bitcoin however, was the overhang of coins for sale. The US government confiscated 144,000 bitcoins in the Silk Road case and auctioned them off between June of 2014 and November of 2015.

The government then had for sale about one percent of all bitcoins in circulation. Given that prices are set at the margin and bitcoin holders are very short term in nature, bitcoin's price was under pressure while the overhang existed.

Today, the Mt. Gox trustee has sold 40k bitcoins and currently has a little less than one percent of all bitcoins available for liquidation. To me, the parallel of today's price pressure to the Silk Road case is obvious.

What is different however, is that bitcoin is far more entrenched today than in 2014 and its main use case, an escape from central banker dishonesty, is now well established. 2014-15 was an opportune time to acquire bitcoin and I suspect history will repeat itself in time.

Notice: This does not constitute investment advice. I cannot know your financial situation and whether these discussions are therefore, relevant.

Lone Gunman Fires Off a Couple More Rounds

Early in the morning in the U.S., Mark Karpeles, former head of Mt.Gox the now bankrupt bitcoin exchange, started posting on Reddit. He was there answering questions and we saw his response to a question about the Mt. Gox liquidation:

Question: According to Japanese law, to be able to process the Mt. Gox bankruptcy, trustee Kobayashi has to sell assets (BTC, BCH, BCG) and convert them to Japanese yen. Is that correct?

Karpeles: Yes, this is correct. Actually, this applies to most jurisdictions, bankruptcy means a liquidator is appointed to investigate assets and liquidate them, ie. sell everything.

With that, bitcoin headed down nine percent for the day. Perhaps there had been hope that the trustee would distribute bitcoins to the creditors instead of liquidating them for yen.

Since I posted my lone gunman theory, I have believed that the Mt. Gox bankruptcy liquidation has been the key driver of the bitcoin correction. This morning's price action didn't get me to change my mind.

It is true that bitcoin ran very hard in December on the belief that institutional money was going to come into the bitcoin trade in 2018. This has not happened due to the lack of infrastructure in place for these investors and this has also been part of the problem. Finally, the average holding period for bitcoin is only about ten days. That is, most investors who trade bitcoin do not care about its growing dominance in the field, its decentralized nature, its immutability or its capabilities as the best ledger and accounting system for value. They only care about direction and momentum, and the massive Mt. Gox seller has flipped momentum to the downside.

Cleaning up the Gox trustee here is the key, in my opinion, for the next leg of the bitcoin bull market. The institutional market is coming along, just more slowly than anticipated. If one looks at the depth of the bids in the market now, the bids are starting to massively outweigh the offers. Hopefully, bitcoin finds its bottom down here in the same range as we saw with the early February drop.

Nevertheless, I don't believe that bitcoin's price decline has been fundamentally driven.

Notice: This does not represent investment advice. These are only my opinions and I have no idea if bitcoin will work as an investment.

Crashing US Savings Rate Portends End of Dollar as Reserve Currency

I have documented the relationship between savings, growth and household net worth here and here. I bring this up because the latest net national savings rate for the U.S. shows a savings rate of just 1.3% of gross national income (GNI is just slightly different from GDP). Savings is the driver of both growth and wealth creation. If one judges by the increase in US household net worth over the past couple of decades, it would seem as if the U.S. is creating wealth like crazy, maybe amounting to 25% of GDP per year over the period. This figure hit 35% last year.

The problem is that GDP growth and savings amount to only a small fraction of the wealth creation numbers, and over time these must be equal. Perhaps just one fifth of wealth creation in the US has been backed up with savings and output growth over the past two decades. In short, the dollar isn't backed up by enough goods and services.

There is a paradox that results from one country issuing the reserve currency, it will become overvalued. This happens because people outside the country that issues the reserve currency will want to hold some, driving up its value. This will make businesses in the reserve issuing country uncompetitive. Recession will follow. To fight this, the Fed always prints new money and drives down interest rates. This has the perverse effect of pushing the savings rate down even further while driving up asset prices. We can see by looking at the graphs showing the secular crash in savings versus the massive levitation of net worth. This makes no sense. The gap between savings + growth and net worth gets ever larger. The dollar is a bad bet as there are few resources to back up all of the claims that dollar holders possess.

It has been clear to me for years (see here) that the Ponzi type structure of the dollar combined with the weaponization of money would lead China and Russia to attack the dollar's reserve status. Well, China isn't even couching their language any longer. Zerohedge reports:

The Global Times, the unofficial mouthpiece of the Chinese government, printed a remarkable story from one of its editors highlighting the petroyuan and its potential to topple the US dollar as the global reserve currency.

The ledger associated with the dollar is completely broken, and China and Russia understand this. Bitcoin (and to a lesser extent gold) is a better ledger of value (money) than the dollar and other fiat currencies and should benefit.

Notice: This is not investment advice. These are solely my opinions and they may be wrong.

If it's Centralized, it's Probably Corrupted

Watching the Facebook saga play out over the past few weeks highlights all of my previous posts about the centralization of information. Facebook rose to the the top of the social networking space by offering itself as the "trusted" network where only your vetted friends were allowed access. Facebook, like nearly everything that is centralized, was not to be trusted.

Now there are demands to regulate Facebook and other social media, but whom to trust as the regulator? I certainly don't want government in charge. I am not sure how the giant information silos will adapt to the new environment, but I am sure that blockchain, tokens and cryptography will provide entrepreneurs the tools required to offer people a better way to control and share their information.

With government, information and money and banking we should assume that centralization means corruption in some form.