A month ago, we wrote about the bitcoin fork. We described the fork:
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!
This fork came about from a disagreement among the bitcoin miners,
those who control the blockchain and hence the currency. The equivalent of
the disgruntled Acme Bank group left to form bitcoin cash, the equivalent of
Wile E. Bank. However, it has often been said that necessity is the mother of
invention. Applied to bitcoin, that means that what happened due to
irreconcilable differences in this case, could also occur deliberately later.
Why would someone do this deliberately? Well, as of this writing (Saturday
afternoon), bitcoin cash is trading for $568.28. This copy of the original
bank ledger is worth over fahv hunnert Benjahminns! Actually, not the ledger.
Each record in the ledger. The ledger as a whole is worth $9.4 billion.
For anyone—or a cartel of someones—who can fork bitcoin, there are now 9.4
billion reasons to do so. Think about that. Take as long as you need.
Now, we don’t want to disparage anyone. We are absolutely certain that
everyone who is speculating to get rich in bitcoin will turn away from
forking. It just doesn’t feel right, and it couldn’t possibly be moral to
create forks on purpose, to get richer quicker.
But if someone did wish to do it, there is a powerful
incentive. Economics tells us that if a powerful incentive exists to do
something, then someone will do it. For example, if the government subsidizes
borrowers by pushing down the interest rate then there will be all sorts of
borrowing that would otherwise not occur (to finance all sorts of activities
that would otherwise make no sense). Or, if it subsidizes insurance for
people who build in flood plains, then many people will build in flood
plains.
We now live in a world where altcoins are proliferating. There is
a crypto currency named for a set of Internet memes called Doge.
There is PotCoin for the marijuana industry, and even PepeCash and PutinCoin.
There is a coin named for the most popular four-letter word. By this
standard, it makes sense to fork bitcoin as many times as one can. To fork
and fork and fork until the marginal ForkCoin has value lower than the cost
of forking.
Snark aside, and in all seriousness, the point of our article a month ago
is that the fork shows the contradiction in a ledger of liabilities unbacked
by assets. By dispensing with the need for assets, the liabilities can
proliferate—fork—and there can be any number of alt liabilities too.
Our point in this article is that this contradiction creates a powerful
perverse incentive, that someone sooner or later will take up. We prefer the
term “perverse incentive” to “unintended consequence”, because it puts the
focus where it belongs. We look at what is profitable for someone to do,
rather than the real or alleged intentions of the designers. In some cases,
the intention is obviously evil. For example, Obamacare was designed to
destroy the insurers and drive America towards socialized medicine. In other
cases, perhaps in bitcoin, the designer did not foresee much less intend the
outcome.
However, here we are. Both the possibility to fork and the incentive are
now obvious. We would not bet against it, as we would not bet against Boromir
putting on the One Ring. In a Middle Earth minute.
We have not much focused on price, other than how rising price makes
bitcoin unsuitable as money or how bitcoin does not have a firm bid. We do not subscribe to
the view that bad means the price must go lower soon. However, let’s look at
price of an asset in a bubble starting with the dollar.
The dollar, it is often and loudly asserted, has value only because of
faith. As soon as the faith is pricked, the air will rush out of the bubble.
This partly explains why the gold bugs latch on to every story about gold
repatriation in Germany or Treasury Secretary Steve Mnuchin visiting Fork
Knox. Mnuchin said, “I assume the gold is still there,” and thus began
quite a tempest in a tea pot.
The belief is that as soon as the
one-awful-fact-they-don’t-want-you-to-know becomes known, then the dollar
will collapse. And gold will go to $65,000 (price measured in collapsed
dollars). It’s a quest for the holy grail. Now, we enjoy tilting at windmills
as much as Don Quixote, but this view is wrong. The dollar does not have
value because of some fragile, collective faith.
The dollar has value because of the struggles of the debtors. What are you
willing to sell, in order to avoid foreclosure on your house, repossession of
your car, or bankruptcy of your business? Your labor and the products of your
effort. As much as you need to sell, in order to service your debts and avoid
default.
However, there is no real borrowing in bitcoin. What holds up the value of
bitcoin?
There is a risk that a series of forks could prick this bubble of faith.
There were big moves in the metals markets this week. The price of gold
was up $31 and that of silver $0.56. The price of gold hasn’t been this high
in just about a year, which is another way of looking at the one-year low
price of the dollar. From its high over 27.5mg gold in mid-December 2016, the
dollar has dropped 11% to its current 23.5mg.
Will the dollar fall further? In the short term, anything is possible.
Once speculators smell blood in the water (i.e. a strong looking chart
pattern), they may enter bigger trades with leverage. We will, of course, see
that as a rising basis which is a contrarian signal. In the longer term,
prices cannot go up too far or remain high if there is not a renewed demand
to hold gold metal.
One possible driver of this is portfolio rebalancing by those who bought a
small allocation of bitcoin or Etherium which is now not-small. Will these
folks sell their cryptocurrencies, which are anti-dollar plays, to buy more
dollars? Or will some of them buy real money? This remains to be seen.
As always, we are interested in the fundamentals of supply and demand as
measured by the basis. We will show intraday basis charts this week as there
are some interesting features.
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 down.
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 (Dec contract), this time showing intraday
resolution for the full week (here is the regular gold basis chart).
We have posted many graphs showing basis correlating with price. That is,
as price rises so does basis. Basis is the spread between futures and spot. A
rising basis means futures are rising faster than spot, which occurs if the
buying pressure is occurring in the futures market. If the buyers are mostly
speculators.
Something should immediately leap out at you on this graph. This
relationship broke down Thursday afternoon (GMT). First there is a minor sell
off seen in the price move from about $1,307 to $1,305. The basis drops from
about 1.17% to 1.12%. The basis begins to rise with rising price after that,
but it trails. It recovers the 1.17% level but only when price is about
$1,317—ten bucks higher. Then as price keeps rising, basis is sideways until
midnight. Basis makes one more rally approaching 7am (GMT), then falls back
sharply as price continues to rise. Especially late in the day. Even if we
ignore the last part below 1.11% as liquidity is dropping with the rest of
the world offline and only whatever trading volume remains in the US Friday
afternoon before a major holiday weekend (Monday is Labor Day), we still see
a falling basis with rising price.
Demand for gold metal has picked up, even at this higher relative price.
One of gold’s unique properties is that demand can rise as price rises,
without any particular limit (even if it hasn’t happened much in recent
years).
To put this into perspective, we would not characterize the current market
state as a gold shortage. Every contract is in contango (Sep basis is over
0.5%). The continuous gold basis has been in a rising trend for two
months. Gold is not exactly scarce, nor facing massive demand for physical
metal and shortage. As our old buddy Aragorn would say, “today is not that
day.”
However, the basis move is notable in contrast to the price move. The rise
in basis has not been much, considering how much the price has risen—about
$120 in two months. Now the December contract, which matures in under 120
days, has a basis below that of 3-month LIBOR (about 1.3%).
The calculated Monetary Metals gold fundamental price was up $25, to
$1,355.
Now let’s look at silver, with a similar graph of the week’s action (here
is the regular silver basis chart).
At the risk of turning these charts into Rorschach Tests, this one does
not look the same to us at all. The silver basis tracks the silver price,
though a skew occurred on Wednesday and widened on Thursday. The movement of
both traces were a close fit on Thu and Fri. Note the spike down in the basis
at the end of the day on Friday (as in gold, though gold had been falling all
during the London day through the US day).
Our calculated Monetary Metals silver fundamental price increased $0.46.
And, though our calculated Monetary Metals gold:silver ratio fundamental
price has dropped a bit, it was rising the last three days of the week.
© 2017 Monetary Metals
