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So bitcoin forked.
You did not know this.
Well, if
you’re saving in gold perhaps not. If you’re betting in the
crypto coin casino, you knew it, bet on it, and now we assume happily diving
into your greater quantity of dollars after the fork. You don’t have a
greater quantity of bitcoins; bitcoin has no yield. Bitcoin simply sells for
a greater quantity of dollars now than it did before. But who wants to sell?
Bitcoin’s going to a million bucks—at least.
So bitcoin,
whatever it
is, forked. Whatever forking
is.
To understand these
two concepts, let’s consider an analogy.
Picture a bank, the
old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road
Runner growing up). A group of disgruntled employees leave. They take a copy
of the book of accounts. They set up a new bank across the street, Wile E
Bank. To win customers, they say if you had an account at Acme Bank, you now
have an account at Wile, with the same balance!
Is this just the
sort of evil thing a greedy bankster
would do? Do we need regulation to keep them from doing it (is it even
illegal currently)? No, it’s actually impossible. The problem is that
Wile E Bank doesn’t have the assets. It does not have the bills and
bonds and loans payable to Acme. So it would be suicide to take on the
liabilities. It would be nothing more than offering free money to people.
Of course, no one
would to do that. It would not be a crime, but an act of altruism. Or perhaps
an act of “Wile E Coyote, Super Genius.”
Yet, this is what
happened with bitcoin. Bitcoin
cash set up across the street (so to speak). Anyone who had a
bitcoin balance as of the moment of the fork—when the Coyote and his
posse set up shop—has the same bitcoin
cash balance now.
To understand how
this could be possible, we have to drill down into what makes a currency, a
currency. Most in the gold and bitcoin communities would agree on one thing.
The dollar is a fiat
currency. People use it, because the government has various ways to force
them (including especially a monopoly in schools).
The bitcoin people
will tell you that bitcoin is not a fiat currency. And they are right.
It’s true, no government forces anyone to use bitcoin (if anything,
it’s the opposite).
This does not give
us enough resolution to see the issue clearly, so let’s keep going
deeper. The dollar is not only fiat, but also irredeemable. That means the issuer of the
currency will not redeem
it for a fixed amount of money. And let’s explain that statement, which
may seem rather cryptic (OK, pun intended).
At the time America
was founded, there was no question that money meant gold and silver. And when
you deposited money in the bank, there was no question that you were entitled
to get back the same amount. The dollar was merely a way of standardizing the
size of the deposit, so that it was consistent from bank to bank and
therefore anyone could read any bank’s or any company’s financial
statements. It’s better if everyone agrees on how long a foot is, how
much weight is in a pound, how much time is in a second. And how much gold is in a dollar.
By a slow process
of erosion, in many incremental steps over two centuries, the government
severed any link between the dollar and gold. After 1933, the dollar was not
redeemable in gold by the American people. After 1971, it was no longer
redeemable even by central banks.
You can exchange
the dollar for anything else, including gold. But there is no contractual
obligation of the issue to redeem for a fixed amount of gold or else be
declared bankrupt. And we see that the terms of exchange, including price,
are constantly changing. And the change is generally adversely to those who
hold dollars.
Bitcoin, like the
dollar, is irredeemable. It can be exchanged for most things, including gold.
But there is no issuer per se, much less no contractual obligation by any
issuer to redeem for an agreed amount of gold.
However, there is
another key concept which differentiates the dollar and bitcoin. That concept
is backing. The
dollar is a liability, backed
by an asset. Yes, it’s true that the backing is debt (government and
corporate bonds primarily), and this debt is payable in dollars. Which is
backed by this debt. It’s circular, and would surely be a criminal
activity of done by private, for-profit actors.
However, for every
single dollar you or anyone may have, there is a debtor who is working to
pay—or at least service—his debts. Every debtor must sell goods
or services of some kind in exchange for dollars, to pay the monthly vig. Or
else.
Or else what? If he
doesn’t pay, that is called default. And in defaulting, he will lose
his home, car, business, etc. The threat of taking away someone’s
business or home makes them quite highly motivated to sell whatever they have
to, to raise enough cash to keep servicing the debt.
This explains why
the dollar has retained so much value, why its value is as stable as it is,
and why manufacturers are more and more aggressive to sell better and better
stuff.
It is commonly
accepted to say the dollar is “printed”, but we can see from this
line of thinking it is really borrowed. There is a real borrower on the other
side of the transaction, and that borrower has powerful motivations to keep
paying to service the debt.
Bitcoin has no
backing. Bitcoin is created out of thin air, the way people say of the
dollar. The quantity of bitcoins created may be strictly limited by
Satoshi’s design.
It is possible for
bitcoin to fork, because it is not backed by any asset.
The blockchain is
an important new technology. It’s a public ledger that can record
anything, with each record indelibly stamped with the date and the recording
party. This is useful to record assets. It could revolutionize supply chain
management, for example making it possible to track food from farm to table.
But something must
be emphasized here. A ledger is useful for recording something, but bitcoin
is a recording only of itself.
So in this light,
it should be clear why a new bank can’t just offer free dollar (or
gold) accounts. The old bank has a bunch of assets, say $1.1 million. And a
bunch of liabilities, say $1 million. The new bank would declare $1 million
in new liabilities but it would have no assets at all.
For 46 years, the
dollar has been perfectly irredeemable. However, it is backed by bonds.
Bitcoin is not only irredeemable, but also unbacked. That is a big
difference—in favor of the dollar.
We have heard
bitcoin proponents defend this by saying this is better because there is no
risk of loss of the assets. This is akin to saying that being dead is better
than being alive, because there is no risk of death.
Being unbacked and
irredeemable, bitcoin is just a number in a ledger. Well, now two numbers in
two ledgers. Bitcoin and bitcoin cash forked, remember?
We are not here to
prognosticate on the bitcoin price. It may or may not be a good speculation
today. However, we want to observe one thing. There are small unsound
structures, such as a Jenga tower just before someone pulls the last stick.
There are big unsound vehicles, such as the RMS Titanic sailing in the
iceberg-infested waters of the North Atlantic Ocean. And there are the…
pugnacious…
systems such as bitcoin. The boldness of bitcoin’s promoters is matched
by the unsoundness of bitcoin’s monetary design (as opposed to the
technological soundness of the blockchain). This combination will result in
devastating losses to whomever is left holding the bag at the end.
Usually, there is
no opportunity to call out these things. Or else, one looks at the crowd of
believers, and decides discretion is the better part of valor. But this week,
bitcoin forked. This is now the time to say that forking is proof that
bitcoin as presently constituted is unsound. The crypto emperor is naked.
We want to clarify
one thing. We are not
saying that anyone involved in bitcoin, is a dishonest person. The principles
of monetary economics are not obvious, and we do not fault anyone for
participating in the bitcoin market or for thinking that bitcoin is money.
The prices of the
metals came down this week, especially silver on Friday, which was -2.7%. Was
it manipulation? We doubt it. The manipulators were away from the metals
markets
this week… something about a fork in another money market which
we’ve been told is a bigger threat to the hegemony of the Federal
Reserve.
Was is speculators
taking profits and getting out of their silver positions? Was it softness in
the market for actual metal? Below, is a graph of the silver action on
Friday. And also graphs of the true measure of the fundamentals.
But first, here are
the charts of the prices of gold and silver, and the gold-silver ratio.
 
Next, this is a
graph of the gold price measured in silver, otherwise known as the gold to
silver ratio. The ratio moved up this week, especially on Friday. We find it
interesting that the ratio did not fall farther.
In this graph,
we show both bid and offer prices for the gold-silver ratio. If you were to
sell gold on the bid and buy silver at the ask, that is the lower bid price.
Conversely, if you sold silver on the bid and bought gold at the offer, that
is the higher offer price.
For each metal,
we will look at a graph of the basis and cobasis overlaid with the price of
the dollar in terms of the respective metal. It will make it easier to
provide brief commentary. The dollar will be represented in green, the basis
in blue and cobasis in red.
Here is the gold
graph.
The dollar rose a
bit this week (the mirror image of the falling price of gold). As the dollar
rose, the cobasis increased. Gold became a bit scarcer.
Our calculated gold
fundamental price fell about $20 (chart here).
Now let’s look
at silver.
In silver, the move
up in the cobasis is greater. Keep in mind that we are approaching the expiry
of the September silver contract, which has been in temporary backwardation
for over a month.
The continuous
basis in silver moved up, but not so much (chart here).
Our calculated
silver fundamental fell a few pennies (chart here).
Here is a graph of
the September silver basis overlaid with price for Friday, showing the drop
from around $16.70 to below $16.30.
Notice how the
event began. At 12:30 (GMT), the price began dropping. But basis is not
really responding. This is an even selling of both metal and futures. Slowly
at first, the basis moves down, and continues even after the price stabilizes
and begins a slow rising trend a little after 14:00. This is the speculators
selling getting with the program, and selling. No one wants to hold an asset
that’s going down! This is a relatively big move in the basis, around
70bps.
So is the silver
selloff over? It’s hard to tell. The fundamentals were firming this
week—the fundamental price did not move down much during the move.
-$0.09 from Thursday to Friday. On the other hand, speculators may be putting
in sell orders over the weekend and may decide to bail out on Monday. Momentum can be self-fulfilling.
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