[Editor’s Note: The following post is by TDV contributor, Chris Horlacher]
A lot of attention has been paid to bitcoin in the last couple of weeks. As Chinese buyers piled in to the market, a gathering of bureaucrats in the United States gave their blessing to the nascent currency. The price movements in bitcoin have been jaw-dropping, to say the least. The naysayers, looking for any reason to belittle this digital innovation, leaped on a Bank of China announcement that prohibited Chinese banks from dealing with the currency. To those that have been paying attention, China has had a ban on virtual currencies since June of 2009 so this comes as no surprise. Other investors and speculators are painting pictures of tulip bulbs for us in the mainstream news, but even the Dutch didn’t see action this intense. Like Rocky Balboa, this new invention refuses to stay down.
So after making parity with gold, retreating and immediately recovering to what still feels like rarefied new heights, the next logical question is where does it go from here? Bitcoin millionaires are being minted by the hour and they will be leading the development of the bitcoin economy. Already we’re seeing numerous retailers adopt bitcoin as a system of payment and even if they don’t want to hold bitcoin themselves. Services like Bitpay and Coinbase allows them to access a market segment commanding over $11 billion in purchasing power. The message is clear; businesses want bitcoin and they’re willing to give you stuff in order to get it.
Bitcoin’s current valuation may seem high today, particularly when compared against many corporations. A single bitcoin is worth more than a share in Apple, once the darling of the NASDAQ. But bitcoin isn’t meant to be equity. It, like gold, is a currency and should be analyzed as such. Compared to the world’s major currencies, bitcoin still has a long, long way to go before it could ever rival them.
Compared to the top 6 currencies, Bitcoin is but a grain of sand and therein lies its major opportunity. Bitcoin is destined to supplant these behemoths; it is the automobile in a transportation market saturated by horse breeders.
"Now the advent of the Information Age implies another revolution in the character of money. As cybercommerce begins, it will lead inevitably to cybermoney. This new form of money will reset the odds, reducing the capacity of the world's nation-states to determine who becomes a Sovereign Individual. A crucial part of this change will come about because of the effect of information technology in liberating the holders of wealth from expropriation through inflation. Soon, you will pay for almost any transaction over the Net or World Wide Web at the same time you place it, using cybercash.
This new digital form of money is destined to play a pivotal role in cybercommerce. It will consist of encrypted sequences of multihundred-digit prime numbers. Unique, anonymous, and verifiable, this money will accommodate the largest transactions. It will also be divisible in to the tiniest fraction of value. It will be tradable at a keystroke in a multitrillion-dollar wholesale market without borders." (The Sovereign Individual)
Current payment systems simply can’t compete with bitcoin’s fees, security and convenience. Why spend hundreds of thousands of dollars on bank fees per year and lose hair as money transfers bounce from bank to bank during a wire transfer sometimes taking days to reach its destination, when it can clear within minutes and for mere pennies? As a currency, no sovereign can match it. As a payment system, no financial institution can compete with it. As a distributed network, no government can stop it.
Therein lays the real power of bitcoin; by granting individual businesses the ability to instantly settle international transactions the creative destruction of the marketplace has obliterated the hold that banks have over these long-distance payments through the SWIFT, TIPANET or any of the dozens of RTGS networks around the world. As adoption of bitcoin grows, it will displace more and more of the global M2 supply and, consequently, grow exponentially in value. Below you will see the value of bitcoin in today’s dollars should it expand to a certain portion of the whole of M2. For convenience, I’ve also put in the fractional units of bitcoin; milli and microbitcoins as you will soon be denominating bitcoin transactions in that manner so best to start familiarizing yourself with them now.
Some of these numbers may seem crazy, but they don’t lie. Keep in mind that if a 25% share seems optimistically high to you, remember that China currently holds a 27.8% share of global M2 and they got there in a relatively short time span.
Banks should not fight this transition. Their core operations as borrowing and lending centers will remain unmolested by the expansion of the new Bitcoin economy. There is much they can do to capitalize on it as well as further its implementation. By granting BTC-denominated letters of credit, providing escrow services, integrating Bitcoin wallet software in to their online portals and connecting Bitcoin to existing capital markets, banks could bring new profits in to their traditional lines of business. There is a very bright future ahead indeed for Bitcoin and for us all.
Chris Horlacher is a contributor to The Dollar Vigilante and a Chartered Accountant practicing in the Greater Toronto Area. Formerly an auditor to Fortune 500 companies with Deloitte & Touche, he now provides project management and consulting services to mid to large enterprises, specializing in financial institutions. His work has included helping launch a successful stock brokerage, insurance and tech company. Chris is also the Vice-Chair of the Mises Institute of Canada and an advisor to the Bitcoin Alliance of Canada. His company website is www.mycfoweb.ca.
A fierce cold has crept over much of the USSA. Those of us in this bankrupt police state and declining empire nearest to the North Pole are trying to keep our spirits up even as the daylight hours shrink to an afterthought. We live our lives in increasing gloom, both physically and financially.
But as we watch winter chew away at the sunlight hours and as we watch the central bankers gnaw away at our purchasing power, a few us keep the tiny but growing flame of Bitcoin hope huddled close to our hearts.
As much as we love Bitcoin and its possibilities, however, it is not a basket in which we would recommend anyone put all their eggs. Smart diversification is still in order. You have to have some dollars and you have to have some precious metals...but you should have them in the right places...
Even if you aren't able to leave the USSA permanently, you should put your assets solidly out of Uncle Sam's easy and increasingly desperate reach. That's where TDV Offshore can help. Click here to learn more. Make sure your existing wealth is well protected. (And make sure to have at least a bit of skin in the digital currency-that-could.)
Editor, The Dollar Vigilante
December 10, 2013
[Editor's Note: Tim Price, Director of Investment at PFP Wealth Management and frequent Sovereign Man contributor is filling in for Simon today.]
For practitioners of Schadenfreude, seeing high-profile investors losing their shirts is always amusing.
But for the true connoisseur, the finest expression of the art comes when a high-profile investor identifies a bubble, perhaps even makes money out of it, exits in time – and then gets sucked back in only to lose everything in the resultant bust.
An early example is the case of Sir Isaac Newton and the South Sea Company, which was established in the early 18th Century and granted a monopoly on trade in the South Seas in exchange for assuming England’s war debt.
Investors warmed to the appeal of this monopoly and the company’s shares began their rise.
Britain’s most celebrated scientist was not immune to the monetary charms of the South Sea Company, and in early 1720 he profited handsomely from his stake. Having cashed in his chips, he then watched with some perturbation as stock in the company continued to rise.
In the words of Lord Overstone, no warning on earth can save people determined to grow suddenly rich.
Newton went on to repurchase a good deal more South Sea Company shares at more than three times the price of his original stake, and then proceeded to lose £20,000 (which, in 1720, amounted to almost all his life savings).
This prompted him to add, allegedly, that “I can calculate the movement of stars, but not the madness of men.”
The chart of the South Sea Company’s stock price, and effectively of Newton’s emotional journey from greed to satisfaction and then from envy and more greed, ending in despair, is shown above.
A more recent example would be that of the highly successful fund manager Stanley Druckenmiller who, whilst working for George Soros in 1999, maintained a significant short position in Internet stocks that he (rightly) considered massively overvalued.
But as Nasdaq continued to soar into the wide blue yonder (not altogether dissimilar to South Sea Company shares), he proceeded to cover those shorts and subsequently went long the technology market.
Although this trade ended quickly, it did not end well. Three quarters of the Internet stocks that Druckenmiller bought eventually went to zero. The remainder fell between 90% and 99%.
And now we have another convert to the bull cause.
Fund manager Hugh Hendry has hardly nurtured the image of a shy retiring violet during the course of his career to date, so his recent volte-face on markets garnered a fair degree of attention. In his December letter to investors he wrote the following:
“This is what I fear most today: being bearish and so continuing to not make any money even as the monetary authorities shower us with the ill thought-out generosity of their stance and markets melt up. Our resistance of Fed generosity has been pretty costly for all of us so far. To keep resisting could end up being unforgivably costly.”
Hendry sums up his new acceptance of risk in six words: “Just be long. Pretty much anything.”
Will Hendry’s surrender to monetary forces equate to Newton’s re-entry into South Sea shares or Druckenmiller’s dotcom capitulation in the face of crowd hysteria ? Time will tell.
Call us old-fashioned, but rather than submit to buying “pretty much anything”, we’re able to invest rationally in a QE-manic world by sailing close to the Ben Graham shoreline.
Firstly, we’re investors and not speculators. (As Shakespeare’s Polonius counselled: “To thine own self be true”.)
Secondly, our portfolio returns aren’t exclusively linked to the last available price on some stock exchange; we invest across credit instruments; equity instruments; uncorrelated funds, and real assets, so we have no great dependence on equity markets alone.
Where we do choose to invest in stocks (as opposed to feel compelled to chase them higher), we only see advantage in favouring the ownership of businesses that offer compelling valuations to prospective investors.
In Buffett’s words, we spend a lot of time second-guessing what we hope is a sound intellectual framework. Examples:
- In a world drowning in debt, if you must own bonds, own bonds issued by entities that can afford to pay you back;
- In a deleveraging world, favour the currencies of creditor countries over debtors;
- In a world beset by QE, if you must own equities, own equities supported by vast secular tailwinds and compelling valuations;
- Given the enormous macro uncertainties and entirely justifiable concerns about potential bubbles, diversify more broadly at an asset class level than simply across equity and bond investments;
- Given the danger of central bank money-printing seemingly without limit, currency / inflation insurance should be a component of any balanced portfolio
- Forget conventional benchmarks. Bond indices encourage investors to over-own the most heavily indebted (and therefore objectively least creditworthy) borrowers. Equity benchmarks tend to push investors into owning yesterday’s winners.
In the words of Sir John Templeton,
“To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”
So be long “pretty much everything”, or be long a considered array of carefully assessed and diverse instruments of value. It’s a fairly straightforward choice.