We have covered many reasons why bitcoin is unsound and not money. It’s a
ledger of unbacked liabilities. It is designed to have finite quantity but
therefore indeterminate and hence volatile value. This makes it unusable for
borrowing or lending and hence savings, but a great a vehicle for conversion
of one person’s wealth into another’s income. It is not a
commodity—discussion of the usefulness of the network notwithstanding—nor is
it backed by a commodity or any asset. It is a perfect, cryptographically
secure record—of itself. People use it to get rich quick. In other words,
it’s the very model of a (post)modern monetary marvel (OK, Keith is not the
next Gilbert and Sullivan).
And bitcoin has a questionable feature. Transactions are irreversible.
First it should be addressed that irreversible transactions have an appeal
to merchants. Everyone who sells on eBay knows the frustration of shipping
merchandise to a customer only to have the customer claim it was never
received. Merchants would surely love the idea that once payment is made, it
cannot be unmade.
However, there are good reasons why our payments system was designed as it
is. Sometimes there is a clear mistake. No one has an interest in allowing
the payee to keep $100,000 when $10,000 was the purchase price of the used
car. No one wants to see Jon Schmidt get the money that was intended for John
Smith. There is also the occasional case of fraud. If someone breaks into
your account, you want recourse to recover the lost funds. Irreversible
transactions are not a dream come true for consumers who are defrauded by
merchants.
Consider that bitcoin’s designer, Satoshi, built the system so that
transactions cannot be reversed. Is this a merchant’s dream come true? Or a
criminal’s? Qui bono (who benefits?) It is hard to even think of a
good legitimate case for this.
Now also consider that bitcoin was designed so payments can be sent and
received anonymously. You not only cannot reverse a
transaction, but you don’t even know who got it, so there is no way to know
who to sue in court. Your money (well your bitcoin) is irretrievably lost.
The combination of irreversible and anonymous may still seem to have some
legitimate appeal, but let’s acknowledge the elephant in the room. It’s
perfect for criminals. Anyone who sells fake driver’s licenses or murder for
hire would love it.
As an aside, bitcoin’s anonymity is not perfect. The ledger shows every
transaction, which means that if your identity is ever discovered, anyone can
go through the history of what you have done. For example, if you sell
bitcoins in an account at an exchange, and wire the dollars to your bank
account.
To address this problem, there is the bitcoin
mixer. It is designed to mix up your bitcoins with the bitcoins of others
who also want to hide the identity of their coins and their origin. It seems
almost as if it is designed for money laundering. While irreversible
transactions may have some legitimate use cases, this is a whole ‘nother
beast. If you steal millions of dollars of bitcoin from an exchange, hack a
DAO, sell rocket launchers to terrorists, or even infect companies with
ransomware, the mixer is great. You need a way to get paid, without
anyone being able trace your loot.
It’s just like bags of cash left in the phone booth at 2am across the
street from the all-night diner (as we recall from detective shows in the
1970’s), only better. In those shows, the bad guy always demanded “unmarked”
bills, but no one ever clearly showed what “marked” vs. “unmarked” looked
like. Well (we assume) bitcoins that have been tumbled are unmarked.
Irreversibility, anonymity, and untraceable unmarked bills. That may still
sound attractive to a consumer, an end user of the system. However, that is
not the main question, which is: are these desirable features for businesses
who sell you things? Are they appropriate features for financial businesses
who ask you to trust them with your life savings?
If no trust is possible, if civil society ever breaks down so far that no
one can trust anyone else, that transactions are conducted between two armed
groups with cash exchanged for goods under cover of more armed men with
rifles, then we will have arrived in Keynes’ long run—a dark age.
This has not happened just yet. So let’s continue with our inquiry into the
nature of anonymity, irreversibility, and untraceability.
It takes us now to the concept of transparency. Let’s look at some
examples outside finance. A grocer sells tomatoes labeled “locally grown”.
Consumers want to be able to trust the label, and not have to be suspicious
that they were really grown in Venezuela. If E Coli breaks out, everyone has
an interest in tracing the tainted produce back to the packaging plant or
farm which introduced the bacteria.
If a solar panel company tells you that its panels generate 15 watts per
square foot, you want to trust that it is not only telling the truth but the
whole truth. Is this figure for residents of a high altitude southern desert
like Albuquerque or is it for a northern city like Oslo?
If an electric car company claims that its HEPA air filter is good enough
to block biological warfare agents, buyers want to know if
this has been validated by a credible third party.
It’s one thing if such marketing claims are mere puffery. We don’t know if
any Tesla buyers are planning to drive through war zones where anthrax
bacteria are in the air. We assume it is more about so called bragging
rights:
“Oh yeah, your 911 turbo S can out-accelerate my Tesla in super-duper
ludicrous insane mode?! Well can it do it under conditions of biological
warfare??”
It is quite another when a company custodies client assets, or brokers or
conducts financial transactions. A responsible financial business thinks
constantly about—and establishes systems and controls for—conflicts of
interest, unsustainable structures, shady transactions, and all factors which
affect pricing or execution for its clients. For example, Monetary Metals publishes
graphs of the offers that set the gold interest rate in its lease auctions.
You would expect disclosure statements, documented processes, guidance from
a credible law firm, and an auditor—not to mention due diligence. Conversely,
if a firm seems optimized to avoid government scrutiny, if there is no way to
discover who owns it much less its liabilities, then it may not be seeking to
build a great business for the long term.
Like it or not, we live in a world which is demanding more transparency
from the companies we trust. And consumers and savers should like it.
In this light, let’s look at two interesting promises of the blockchain,
One, there is no need to trust in a counterparty. Two, it enables realtime
audit and verification.
The reality is any coalition of miners that controls a majority of the
mining power can do whatever they want. For example, they can fork to undo a
transaction. Whether you realize it or not, you are giving your trust to
them—whomever they are. As the capital investment required to be a serious
player in bitcoin mining has increased, mining power has consolidated. As the
electricity consumption of serious mining power increased, miners
consolidated in regions with subsidized electricity prices.
We do not believe that most people understand or appreciate that bitcoin
governance is political.
As to realtime audit, how many cryptocurrency financial firms show even
just their assets on the blockchain? (This would be of limited value without
the liabilities also). It is telling that MtGox, before it collapsed, was a
leading (if not the leading) bitcoin exchange and account provider. Serious
allegations have emerged that MtGox was operating in a state of insolvency
for years. A leading firm in the space. It was insolvent for years. A leading
firm. Think about that. Take as long as you need.
The hype-reality spread is wide indeed.
Finally, we get to the so called Initial Coin Offering, or ICO. Raising
capital is difficult and expensive under securities regulations. Many
regulations serve to protect incumbents (see this article by Keith). It would seem to be a good thing
to bypass all this, and sell a newfangled thing that is not called a security
but a token.
However, it must be said that early-stage companies are risky. Regulation
or no regulation, a responsible entrepreneur does not raise capital from
people who don’t understand the risks and/or cannot afford to bear them. Yes,
that means retirees living on a fixed pension. Responsible entrepreneurs do
not promote their offerings with unrealistic promises of huge gains, while
omitting a discussion of risks. They certainly do not use the proceeds to
speculate on asset prices or plow them into the next startup’s hot deal (said
next startup having an undisclosed relationship with management, of course).
For that matter, and this also needs to be said, no good comes of raising
too much money too early in a company’s development. In a sane world,
investors do not inject $30,000,000 into a company with a white paper and a
partial management team. So what does that make the ICO world?
As the bitcoin mixer is designed to help criminals evade law enforcement,
the ICO is designed to help businesses raise money that they have no business
raising.
We are not lawyers, however one thing seems clear enough. The tokens sold
in ICOs are securities. Sooner or later, regulators will crack down on
issuers. And if innocent investors are bilked of their savings, the crackdown
will be sooner.
This discussion brings us full circle. Bitcoin proponents will tell you
that bitcoin is going to a million dollars. That may be, but it helps make
our point that while the price is going up everyone is happy and fraud often
goes undiscovered. Bernie Madoff was not caught until December 2008, when
stocks crashed in the global financial crisis. If the Fed had kept the boom
going for another 5 years, it’s likely that Madoff would have gotten away
with it until 2013.
We are not, by the way, big fans of prior restraint regulation.
In practice, regulatory compliance—whatever its stated intent—often means
guilty until proven innocent. It demands that you constantly prove your
innocence, at your own expense, under threat of being convicted of the crime
of not complying.
However, we firmly believe that if a crime is committed then law
enforcement should obtain a warrant and ask financial intermediaries for
documentation related to the suspicious transactions and persons of interest.
And we believe that responsible businesses keep records of transactions and
clients for a number of reasons, including that they want to assist law
enforcement catch criminals. No honest person benefits from aiding and
abetting criminals.
A responsible financial business makes money by making money for its
clients. It does so whether it operates in a free market or in a severe
regulatory environment. Conversely, regulation does not stop the bad actors.
Witness Bernie Madoff, who stole tens of billions, in a Ponzi scheme that
endured perhaps 30 years (the start of the great boom fueled by falling
interest rates since 1981).
Regulation, or not, a responsible business does not tout incredible gains,
cherry pick performance numbers, conceal the source of funds, obscure its
activities, ignore its liabilities, or understate or deny the risks while
hyping the possible gains.
Of course, most businesses involved in bitcoin are not dishonest, the same
as people elsewhere. However, it cannot be ignored that the bitcoin ecosystem
has features which seem tailor-made for criminal activity.
Our final caveat is that law enforcement may allow things to proceed for
years. When it enters a new technology arena, law enforcement can be like a
steamroller. It doesn’t move forward quickly. However, once it grabs a toe,
it will keep rolling right over the body, until it is made one with the
pavement.
The prices of the metals dropped $17 and $0.35, and the gold-silver ratio
rose to 77.
A look at the chart of either metal shows that a downtrend in prices (i.e.
uptrend in the dollar) that began in mid-April reversed in mid-July. Then the
prices began rising (i.e. dollar began falling). But that move ended Sep 8.
One way to think of these moves is as the addition of energy into the
market. Like tossing a pebble into a still pond (not quantity of water, but
energy that perturbs it). Once the speculators get the idea that gold and
especially silver should go up, well it becomes self-fulfilling.
Statements by the Fed, the ECB, or even the fatboy who rules North Korea can
all have an effect.
Buying begets buying, as the chart shows signs of a breakout. But then,
especially in this moribund market, the energy of new speculation is
depleted. And the price subsides, until new energy is added by the next
event. We are in that mode right now.
We will look at an updated picture of the fundamentals of supply and
demand of both metals. 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 rose.
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 intraday gold graph showing Friday’s action (you can see the
regular 3-month gold basis chart).
This is interesting. From a bit after 6am (GMT) the price of gold is
rising but the basis is falling. That means the buying was fundamental, i.e.
gold metal was bought. This lasted until a bit after 7am. At around 10:30am,
something different occurred. Speculators started buying futures. They drove
the price up from $1,288 to $1,290, but this took the basis up from 0.8% to
0.83%. After that, the basis tracked the price. That is, when price was
falling basis was falling (i.e. futures were being sold) and when price was
rising basis rose with it (i.e. futures were bought). By the way, don’t pay
too much attention to the end of the day, as particularly on a Friday
liquidity is dried up and the signal can be spurious.
Our calculated Monetary Metals gold fundamental price fell $30 to
$1,348.
Now let’s look at silver intraday (here is the regular daily silver basis chart).
Interestingly again, we see the same fundamental buying of silver after
6am from $16.80 to $16.86 while the basis drops from 0.5% to 0.47%. After
that, like gold, the price action was driven by speculators in the futures
markets.
Our calculated Monetary Metals silver fundamental price fell $0.25 to
$17.05.
© 2017 Monetary
Metals
