1/16-22/2018
Back in 2012 I sought help to set up arbitrage software for BitCoin. The idea was simple, high volatility with low transaction rates makes for a lot of market inequity. Buy low, sell higher, hold some residual. I was looking to accumulate at around $5-10 sell at the spikes around $15-20 then modify and repeat based on a modified version of an options algorithm tracking momentum & volume. Programmers fell through and since automation was the key in my mind, and I believed the price was never really going to go anywhere -how could it? It's based on nothing - and various other structural & time problems I never pulled the trigger.
Cut to the massive run up in market price in 2017 ($19,056) and now everyone wants in. This is a terrible idea.
Price at write up: $11,115 to $10,848
Target: $0
MarketCap: $190,240 Million USD - 16,807,175 BTC
BitCoin is something called Cryptocurrency, though I'm not sure it satisfies the definition of currency:
The goals of Crypto
Ideally the goal is supplant fiat currency (non-asset backed currencies that make up modern government run money systems) with an unregulated digital asset. The goal here is fairly noble in that the perceived lingering problem with traditional fiat currency is that governments can just print more of it if they decide to, the Wiemar republic and Zimbabwe are typically thrown around as examples as illustrations of this downside.
The trouble is that Crypto is also a fiat currency, so it can't solve fiat currencies claimed weaknesses of not being based on anything. It is proported that BitCoin has fixed total cash pool and, if true, that would be it's sole advantage over traditional fiat currency because cryptocurrencies themselves also have no basis in value other than what the users attribute to it. That leaves the claim that they allege to fix the problem of printing extra money, however with the prevalence of "hard forks" even that fixed total is a lie - it can be changed, has been changed, and it almost certainly will be changed again. While the older forks are supposed to become irrelevant this is usually not the case just ask BitCoin, BitCoin Cash, BitCoin Gold, BitCoin Classic, BitCoin Unlimited . . . not to mention all the other base crytocurrencies still have non-zero market value. That's a lot of coins made from nothing and then split into new pools out and available on the open market. How is that any simpler than the traditional system?
Crypto isn't based on anything and doesn't have a fixed cash pool, and so is in no way better than the USD in these reguards with the additional problem of not having the same buy-in as USD. Underlying it's ideals are good core principles, no single point of failure, enforceable rules with automated enforcement. Fortunately these are principles in blockchain and Crypto just hasn't gotten the rest of it's problems right yet, and little is preventing blockchain technology from being integrated into USD transactions (particularly international exchange).
Unstated benefits of Crypto
Without a central controlling agency or nation to hold accountable and it's distributed nature with a perceived anonymization of data; BitCoin is actually quite good at concealing the source of funds (compared to traditional banking & cash) so it's useful to buy illegal things, launder money, use as a medium for extortion, purchase black market items & services, and so on. Proponents argue that this is an unintended consequence of block chain and not it's intended primary purpose, but the intent doesn't actually matter as it is explicitly part of the design. Like high-explosives: TNT & C4 are useful for mining and occasionally manufacture but also really good at mass destruction which is why they're highly regulated and a good reason why government's won't allow crypto to go unregulated. Since a primary goal of crypto is to be unregulated, governments will use force to ensure this goal is practically unattainable at scale anyplace anywhere. It will likely maintain a niche in the black market, but that isn't the principle transaction marketplace for civilized countries who - coincidentally - have both the wealth and means to apply force to assets and end it before it can begin.
So while there's no evidence per say that there's a large criminal holding of BitCoin, its a reasonable assumption. Criminal Cartels for example make millions they need to stash. Swiss banks are all but shut down to the storage of illicit funds and money laundering but with a few basic alterations to the business plan much of that cash can be stored in BitCoin - or at least used as an intermediary to conceal the source of those funds (money laundering) - then leave host countries and become usable to the bosses internationally. And if they aren't doing it, they should be. In the hereto for unregulated environment it would've been a brilliant move. If organized crime isn't into cryptocurrency they're foolish, and if they're organized they can't be that foolish. Ergo, some almost certainly have a stake.
False scarcity
One of the core tenants, and often touted benefits, of crypto is that the total pool is limited. Hard assets like gold, platinum, copper, and silver have industrial value and cannot be created from nothing. This is the comparison made with BitCoin to imply it should be valuable too. However precious metals have an intrinsic fundamental value in addition to their market value. Diamonds by contrast have a much higher market value than intrinsic value achieved through market & perception manipulation, much like BitCoin. Fully one sixth of all BitCoins are controlled by 100 bitcoin addresses which might well be controlled by fewer than 100 people according to Bloomberg, with 40% of all BitCoins being held by 1,000 users.
De Bears owned 90% of the diamond industry in the late '80s. After several entities left the cartel, and many class action lawsuits, it owned closer to 40% in 2012. Having ceded it's explicit control of the market but maintaining enough stake for continued market manipulation. This is nessessary as "Diamonds are intrinsically worthless," - Nicky Oppenheimer (De Bears chairman, 1999).
For a supposedly distributed currency not subject to controls, that's a lot of power in concentrated hands, enough for a Dimond Cartel and I submit enough for a BitCoin Cartel. Diamonds are at least in principle limited, despite not being particularly rare, and can't be created with a few keystrokes via a "hard Fork". Cryptocurrencies will have limited pools of coins as long as it benifits the chief holders of those coins and will be changed as soon as they decide to do so. It's already happened several times why would they stop now?
BitCoin is non-transactable
In my opening I pasted the definition of currency. Fiat currency doesn't have real value, as any finance nerd can tell you, other than you can use it to buy a house, a car, or a coffee, and if you're employed your employer gives you fiat currency in exchange for your work. There is virtually nothing else with the near 100% buy-in that fiat currency has. Even people who claim they don't buy in to the dollar and prefer to transact in gold, citing the gold standard, continue to price their time & products in dollars then convert that to ounces of gold to transact with a customer who bought ounces of gold with dollars. Why aren't we all doing it? Why do we all cut out the extra step and avoid transacting in gold - besides the fact that it's cumbersome and ineffectual?
What is the Cryptocurrency buy-in? I have no idea, but I'm sure I can't use it directly to buy a coffee or a car in as much as I can't buy coffee with Facebook shares. What's the value in adding extra steps to a currency? It makes trade harder not easier. At best crypto is not actually a currency but a digital asset. And not a particularly strong asset at that given it's volatility, it is after all based on nothing. Thankfully none of My house, car, nor coffee have depreciated by 40% since last month. None have appreciated by 1,200% at any point in the past year either as you might expect, but my house, car, and coffee are also not the object of significant speculative interest and I have the added benefit of their utility as I physically use them everyday.
The chairman of the European Securities and market Authority echoed that sentiment in a Bloomberg interview in Hong Kong “It’s . . . not broadly accepted.” and investors “should be prepared to lose all their money”.
BitCoin solves the wrong problem
In any currency transaction fraud is almost always the biggest problem. That's why we have escrow companies. It's why PayPal succeeded. I want to buy something from you, you want money from me. Even if we basically trust each other an intermediary is incredibly helpful when you buy a $150,000 house where real trust is needed. This is what blockchain is proported to solve, though it hasn't yet. Currently we trust a third party to both hold the down payment and the money from the bank loan, the same third party the bank trusts, and when I transfer the title/asset and thus complete the transaction with that same 3rd party the title company gives me the money and you the house. That's about as uncomplicated as such a transaction can be made. Blockchain can theoretically solve this problem, cheaply, but Cryptocurrency currently just makes it worse. There are no safeguards with BitCoin. Multiple transactions on the same wallet before a block is resolved is still an easy exploit. While defrauding someone out of their credit card money is easy it is safer for the victim due to insurance and other institutional protections, so much so that most people don't even think about it. BitCoin has no protections of any kind and headlines are rife with tales of fraud.
BitCoin not only has all the vulnerabilities of cash & credit but additional liabilities related to the storing of the coins, the time it takes blockchain to confirm a transaction, and on top of a total lack of the protections cash & credit enjoy. Fraud is still the biggest problem with all transactions and BitCoin is worse then Cash.
Regulation
As of this writing (Jan 2018) a big obstacle to BitCoin acceptance is the realization by world governments of what I'm describing here. So while China, Japan, and South Korea are/were major drivers of the BitCoin market, those governments are clamping down.
China, to me, was an early principle driver of BitCoin's market price with it's capital lock downs. In China's eye's keeping funds in country are a way to ensure re-investment, but plenty of Chinese have more money than they know what to do with and stashed their money in Crypto instead. Bitcoin allowed people to store funds virtually off shore - illegally - though any crackdown would likely cause the Chinese to sell off their BitCoins. Then, as any time a major player leaves an asset class (digital or not), the market price is generally significantly devalued. A corresponding blip can then be seen in other asset classes in an open market (maybe not the case here). China's central bank had a meeting to discuss it's concerns: chiefly fraud, money laundering, and the central government added in energy costs (it takes a reported 4 gigawatts of electricity to conduct the Chinese mining operations) so the government took action and promptly banned initial coin offerings from start up cryptocurrency/blockchain groups.
But that's just the tip. China is clamping down on Cryptocurrencies. Shuttering exchanges, mobile apps, online platforms, and blocking access to all non-domestic sites. While peer-to-peer transactions haven't been blocked (as that's probably not possible) all the quasi-institutional means of trading and otherwise transacting cryptocurrencies have been targeted for elimination. Although in a somewhat ironic move, the Bank of China has launched it's own Cryptocurrency.
People in South Korea account for 3.5% of all Bitcoin trades and are mortgaging their homes to purchase them which brought in the watchful eye of regulators. The spike of cash spiked both the global price of BitCoin predictably and interestingly the local price. They were among the last to the party but their ire will linger. There remains hope among speculators that regulators will go easy, but anyonee holding BitCoin in S. Korea will not come out unscathed. The increase in regulatory pressure in S. Korea is paired with that 40% local premium on acquiring cryptocurrencies. A premium which indicates not only South Korean's domestic exuberance for BitCoin but in the current environment becomes an immediate additional 40% realized loss on the open market translating to a real 64% loss since December which is not insignificant in any asset class.
These moves by regulators are directly affecting the market price even now. "[T]he light touch that has allowed the crypto-boom to explode may be coming to an end,” said EXT Capital's Neil Wilson, senior Market Analyst in a note to investors. BitCoin might not even be able to survive regulation.
The trouble with BitCoin storage
The best place to store your BitCoin is on a hardware key, the equivalent of putting a bunch of cash under your pillow (a so called cold wallet) and just as safe. And yes it's still the safest option. Let's just say you have $12 million in bitcoin, no bank will hold it. You could keep it on an exchange, but those things are actually less secure than putting it under your pillow if you can imagine that. And someone with 12 mil under the pillow might not be particularly discrete about it, so all a nefarious actor has to do is look under your pillow. Putting it on your phone, computer, or an exchange leaves it open to Internet attacks as long as it's connected to the internet. But it must be stored somewhere, for all it's digitalness it still has access keys. If you lose those access keys (your pin or the seed) you lose all your coins. I remember when BitCoin was worthless and some dude threw away the hardware he had mined it with, 5 years later it was worth a few million and he considered digging up a landfill to find it - he couldn't get the financing to do that in the end. Stories like that are everywhere. It is literally like having a 12 million dollar golden ticket at home, what the hell do you do with that when nearly everyone knows golden tickets can be ridiculously valuable and your spouse, friend, child, or co-worker idly mentions it to the wrong person?
Worse, whenever you want to transact in BitCoin you need to connect your hardware key to one of those less secure access points: cellphone, computer, or exchange. Unlike a golden ticket you can break off a piece and keep that in a digital wallet. However not only is the wallet suseptible, at some point the sum total of your BitCoin address thing needs to be live to complete the process. That's when it's most suseptible to direct hacks and interceptions like Trojans (notably CryptoShuffler) that will copy your clipboard and redirect the funds from your wallet to a hijacker's wallet if you aren't careful. A bit of Fraud no institution will currently protect you from.
Rampant Market Manipulation
BitCoin price is manipulated. Because BitCoin isn't officially a security (the IRS calls it a digital asset) it isn't subject to the same rules and investor protections. However, 100 or so people with the most substantial holdings have already discussed when to drive up the price and when to cash out. In BitCoin the top 100 wallets hold 17% of all the cryptocurrency (the top 1000 hold 40%), in Ether the top 100 hold 40%, in smaller cryptocurrencies that number can be as high as 90%. When your buy-in price is near zero and your only goal is to make money it behooves you to have an exit strategy, and price fixing is as good as they come. That's why financial markets have rules against that sort of thing. It's the sort of thing people in this country can go to prison for.
The incentive is well known and the price fixing in BitCoin is confirmed. Price fixing a market cannot escape scruitiny, but for now it has escaped regulation in many countries. No small amount of the BitCoin market manipulation is conducted by people who steal BitCoin and, relatedly, more than 10% of the money raised by Initial Coin Offerings (ICOs) has been stolen. The "investing" craze itself has caused some of these ICOs to essentially be fraudulent themselves by preying on "investors" who are a little too eager to jump on the blockchain/crypto bandwagon. All it takes are a few developers who are wholly unafraid of throwing together systems with substantial conflicts of interest between themselves and the coin holders, scarily similar to pump and dump, and this has been done and will likely continue.
People will drive the price of an asset up even when they know it's going to zero
In An experimental study of competitive Market behavior, 1978, Vernon Smith (who received a Nobel Prize in economic sciences in 2002) found that prices will equilibrate around the convergence of supply and demand. In the modern era this is now obvious, however applied to the argument I'm making here - where market manipulation is rampant - a soaring price is expected. As the market is flooded with requests to purchase BitCoin and cash is rich; crypto currency prices necessarily increases quickly. Interestingly this is exactly what is predicted from another seminal paper by Smith. What happens when traders are aware the value of the asset will go to zero? Traders knowingly trade above the real value of an asset purely on momentum and hope they aren't the last to get out, described in Smith's 2000 paper "Momentum and overreaction in experimental asset markets". This so strong that in 2011 he demonstrated in yet another paper that as early buyers leave new buyers not previously in the market will come in and buy the asset above it's actual value in the hopes of repeating the process they just experienced, where they bought an asset well above it's fundamental value which the early buyers dumped on them (Double Bubbles in Assets Markets with Multiple Generations). I believe this is happening now with BitCoin and by proxy this has been my experience with traders of BitCoin: they know it's worthless, they site previous profits, they point to the influx of new cash, and demand the process can continue. This ponzi-scheme like behavior is empirically untrue and we all should know that by now. Here again bubbles have a sharp run up in price and then plateau near that high price which soon plummets after a few rounds of failing to rise. When the decline will hit is harder to predict if the underlying asset doesn't have a clear fundamental value, and while the fundamental value of all cryptocurrency is essentially zero as it's a fiat currency there remains fluctuation in the speculative value of it's fundamental value. In this case trading can remain inflated as long as there is cash flowing in. The world may not run out of suckers, but they will run out of money. New entries herald bubble formation, exits herald bubble collapse and both are exacerbated by inexperienced traders (Smith 2011).
Design issues
More than once scaling and systemic risk in BitCoin trading has come to light. A system that was described on a handful of pages and rolled out by a tiny group of people in 2009 ran into a host of problems, can you believe it? SegWit seems to have solved one of the latest that developed in late 2016 with much less fan fair than anticipated. There are more moves to try and make the blockchain easier to run on graphics cards, though I'm not sure if this is adding a feature or taking one away. But this is illustrative of the core changes that occur to the blockchain that is purported to be inviolate. BitCoin aside blockchain needs to be faster if it ever hopes to gain ground, decuppling it from mining and currency might provide an easy way for that to occur.
Trading in BitCoin is cheaper than the alternatives, but with a less certain future.
Exchange fees are probably on the order of 0.2% for Bitcoin which is great. While most of my financial/security transactions come in on the high end around 1% and average around 0.3-0.2% with a low of under 0.1%; trading in BitCoin is likely cheaper than most alternatives for the average person. Trading fees can really eat into your trading profits so, if you're going to speculate, blockchain is probably the way to go and cryptocurrencies do happen to be available right now.
However there is no reason to believe the BitCoin will be the winner against it's peers merely because it was the first one. I like Kodak as an apt illustration of a market leader tanking but a Car analogy will be more familiar to most here.
François Isaac de Rivaz developed a car run on hydrogen in 1808. Siegfried Marcus built the first gasoline powered engine in 1870 first with a two-cycle engine, then in 1880 the four-cycle engine. Nikolaus Otto developed the four-stroke ICE (still the most prevelent IC engine) in 1876. Rudolf Diesel patented his engine in 1893. Friedrich Schönbein conceived of the hydrogen fuel cell in 1838. Ányos Jedlik developed the electric motor in 1827.
Remember all that in the context that Karl Benz developed a gasoline powered automobile in 1885 which became the first production vehicle. The Model A was produced and began selling in 1903 and Ford produced 15 million Model Ts by 1927. Look at those names and years again. Whose do you recognize? We still don't have mass production hydrogen fuel cell vehicles and Tesla only recently released a mass production electric car. It's about 180 years from the initial conception.
Which winner do you pick before they go mainstream? How could you have determined before they even started winning who was going to win? What technology was invented but never did or hasn't yet made it to production vehicles? These things are practically unknowable. The only thing that gives you information on the future success of a new market is actual success in that market, and BitCoin hasn't succeeded at anything other than a high Market price - which I submit is merely over exuberance. If you'd bought the Schönbein idea in 1838, the patent would've expired in your lifetime and you'd have never made a cent on it before you died.
Pricing
My principle focus is security analysis. Stocks and bonds have underlying value (fundamental value) in the business they do in fiat currency. The price of those assets is at least somewhat corelated with the underlying buisness, it's growth potential, profitability, management & the board of directors, markets, as well as the sentiment of the public on the asset itself. All of those things can be studied and understood to a degree. The price of BitCoin however is manipulated by a small number of entities. What are their motivations? What are they going to do next? It's a black box and very difficult to discern an advantage over the market. Unlike stocks, bonds, and Treasuries, BitCoin gorillas/market makers are guarding all the doors and holding all the keys. As stated in the Bloomber article above: “There’s no transparency to speak of in this market,” says Martin Mushkin, a lawyer who focuses on bitcoin. “In the securities business, everything that’s material has to be disclosed. In the virtual currency world, it’s very difficult to figure out what’s going on.”
You missed the boat
If you're not an educated investor, and you've just recently become interested in BitCoin (I heard about it around 2010) you missed the boat. When everyone is excited about an investment, especially the average citizen, that's a prime indication that the good times are over. The experienced investors soon leave and take the new influx of cash with them, possibly your cash. When everyone is bullish, especially the average citizen, it's time to be bearish. When everyone is bearish, it's time to be bullish. BitCoin of late 2017 is the Pets.com of early 1999.
In the summer of 2016 BitCoin popped onto a lot of people's radar and the influx of traders likely drove the price up (as described by Smith 2000, 2011). Now that it's on the radar and everyone is talking about it BitCoin is unlikely to see any similar rises unless another influx of inexperienced buyers with cash can be found, but who's left?
What could change BitCoin into a Currency
Regulatory acceptance and buy-in of the finance industry. Much like the derivative market and it's lack of transparency the upside potential of BitCoin seems huge. LedgerX is now available for options trading and is licensed as a swap execution facility and derivatives clearing organization and FINRA is launching an alternative trading system for the trading of blockchain assets while CME group launched BitCoin options and derivatives. All of these will allow large financial institutions to enter the game.
Ripple (XRP) is a competing blockchain (& cryptocurrency) that is already used by financial institutions to wire funds internationally as it is faster and cheaper than traditional alternatives.
Ethereum is also available for options trading.
Coinloan allows you to use BitCoin to secure loans.
BitCoinIRA.com allows people to hold BitCoin in their retirement accounts.
These new companies are interesting but highly speculative and each will tell you it's probable you'll lose your entire investment.
Coinbase and Kraken are increasing the security of BitCoin trading. Potentially solving a critical weakness in the chain of custody.
Cryptocurrencies and blockchain allow avoiding financial middlemen, in theory they can completely remove the need for banks and possibly reduce fees from exorbitant to almost trivial. This is one possible future I see for Blockchain.
Fear about any given fiat currency heralds a rush to BitCoin. Without a government or economy to pull it down a quick look makes it appealing to people looking to rush to other asset classes that have a higher market value than their domestic currency. BitCoin and the like are financial assets without boarders, oversight, or (importantly) government support. While it lacks the intrinsic value of plutonium it's more portable and easier to transact then a 500lb lump of metal.
Conclusion
Gambling is fun. If you like gambling, BitCoin can be a good time. But, if you are looking at it with real profit in mind, are actually any good at BitCoin trading, and understand how to find an edge then you should probably just try your hand on the real deal: securities, guns, or real estate. Maybe just securities.
I think it's important to remember that humans are not good at finance (a central tenant of my investing philosophy) and humans are fundamentally irrational when it comes to money. January is typically a low point for most cryptocurrencies, so Bitcoin might just be on sale right now. Every time someone sells something another person necessarily must buy it, so you'll be buying what others are selling. When new clients bought in Bernie Maddof paid old clients, that didn't change the fact that Bernies paper and claims were worthless. All those initial investors made a lot of money, true. So are you an early investor still? Probably not. There may be plenty of money still ready to pour into BitCoin and other cryptocurrencies, but the crypto field is large. Who will win and who will be left holding the bag? In 2006 everyone could buy a house and today everyone can buy BitCoin. Good luck.
While I couldn't have predicted that BitCoin would ever have a market value I can easily predict that it eventually won't have one - unless a substantial proportion of high GDP states and financial institutions put significant value into crypto which BitCoin's founding principles explicitly disincentivise. Interestingly the development of a futures market may well hasten BitCoin's decline in value as it forces buyers to think about a future price. However the counter argument to all this is that with sufficient advertising and push BitCoin could become as worthless as diamonds while providing even less utility.
I've seen this all before, haven't you? The new boss is the same as the old boss.
Due Diligence - Dutch Tulip bulbs, Ripple, Etherium, Diamonds, Lure feathers.
Back in 2012 I sought help to set up arbitrage software for BitCoin. The idea was simple, high volatility with low transaction rates makes for a lot of market inequity. Buy low, sell higher, hold some residual. I was looking to accumulate at around $5-10 sell at the spikes around $15-20 then modify and repeat based on a modified version of an options algorithm tracking momentum & volume. Programmers fell through and since automation was the key in my mind, and I believed the price was never really going to go anywhere -how could it? It's based on nothing - and various other structural & time problems I never pulled the trigger.
Cut to the massive run up in market price in 2017 ($19,056) and now everyone wants in. This is a terrible idea.
Price at write up: $11,115 to $10,848
Target: $0
MarketCap: $190,240 Million USD - 16,807,175 BTC
BitCoin is something called Cryptocurrency, though I'm not sure it satisfies the definition of currency:
cur·ren·cyˈkərənsē/noun
money, legal tender, cash, banknotes, bills, notes, coins,
synonyms:
"foreign currency"
Be that as it is, BitCoin was apparently the first working conception of Cryptocurrency, after several white papers and 2 failed runs, intended to work without a central bank or central administrator over a peer-to-peer network using a distributed public ledger called blockchain. There's an incentive for this peer-to-peer network to be run called mining which basically gives those running the infrastructure BitCoins to compensate for the network's construction and maintenance (which is an expensive endeavor both in terms of capital and energy costs). Blockchain technology likely has a future, cryptocurrency in it's current paradigm will not. BitCoin has already got a somewhat long and sordid history, which can be illuminating.
"the term gained currency during the second half of the 20th century"
synonyms: prevalence, circulation, exposure
The goals of Crypto
Ideally the goal is supplant fiat currency (non-asset backed currencies that make up modern government run money systems) with an unregulated digital asset. The goal here is fairly noble in that the perceived lingering problem with traditional fiat currency is that governments can just print more of it if they decide to, the Wiemar republic and Zimbabwe are typically thrown around as examples as illustrations of this downside.
The trouble is that Crypto is also a fiat currency, so it can't solve fiat currencies claimed weaknesses of not being based on anything. It is proported that BitCoin has fixed total cash pool and, if true, that would be it's sole advantage over traditional fiat currency because cryptocurrencies themselves also have no basis in value other than what the users attribute to it. That leaves the claim that they allege to fix the problem of printing extra money, however with the prevalence of "hard forks" even that fixed total is a lie - it can be changed, has been changed, and it almost certainly will be changed again. While the older forks are supposed to become irrelevant this is usually not the case just ask BitCoin, BitCoin Cash, BitCoin Gold, BitCoin Classic, BitCoin Unlimited . . . not to mention all the other base crytocurrencies still have non-zero market value. That's a lot of coins made from nothing and then split into new pools out and available on the open market. How is that any simpler than the traditional system?
Crypto isn't based on anything and doesn't have a fixed cash pool, and so is in no way better than the USD in these reguards with the additional problem of not having the same buy-in as USD. Underlying it's ideals are good core principles, no single point of failure, enforceable rules with automated enforcement. Fortunately these are principles in blockchain and Crypto just hasn't gotten the rest of it's problems right yet, and little is preventing blockchain technology from being integrated into USD transactions (particularly international exchange).
Unstated benefits of Crypto
Without a central controlling agency or nation to hold accountable and it's distributed nature with a perceived anonymization of data; BitCoin is actually quite good at concealing the source of funds (compared to traditional banking & cash) so it's useful to buy illegal things, launder money, use as a medium for extortion, purchase black market items & services, and so on. Proponents argue that this is an unintended consequence of block chain and not it's intended primary purpose, but the intent doesn't actually matter as it is explicitly part of the design. Like high-explosives: TNT & C4 are useful for mining and occasionally manufacture but also really good at mass destruction which is why they're highly regulated and a good reason why government's won't allow crypto to go unregulated. Since a primary goal of crypto is to be unregulated, governments will use force to ensure this goal is practically unattainable at scale anyplace anywhere. It will likely maintain a niche in the black market, but that isn't the principle transaction marketplace for civilized countries who - coincidentally - have both the wealth and means to apply force to assets and end it before it can begin.
So while there's no evidence per say that there's a large criminal holding of BitCoin, its a reasonable assumption. Criminal Cartels for example make millions they need to stash. Swiss banks are all but shut down to the storage of illicit funds and money laundering but with a few basic alterations to the business plan much of that cash can be stored in BitCoin - or at least used as an intermediary to conceal the source of those funds (money laundering) - then leave host countries and become usable to the bosses internationally. And if they aren't doing it, they should be. In the hereto for unregulated environment it would've been a brilliant move. If organized crime isn't into cryptocurrency they're foolish, and if they're organized they can't be that foolish. Ergo, some almost certainly have a stake.
False scarcity
One of the core tenants, and often touted benefits, of crypto is that the total pool is limited. Hard assets like gold, platinum, copper, and silver have industrial value and cannot be created from nothing. This is the comparison made with BitCoin to imply it should be valuable too. However precious metals have an intrinsic fundamental value in addition to their market value. Diamonds by contrast have a much higher market value than intrinsic value achieved through market & perception manipulation, much like BitCoin. Fully one sixth of all BitCoins are controlled by 100 bitcoin addresses which might well be controlled by fewer than 100 people according to Bloomberg, with 40% of all BitCoins being held by 1,000 users.
De Bears owned 90% of the diamond industry in the late '80s. After several entities left the cartel, and many class action lawsuits, it owned closer to 40% in 2012. Having ceded it's explicit control of the market but maintaining enough stake for continued market manipulation. This is nessessary as "Diamonds are intrinsically worthless," - Nicky Oppenheimer (De Bears chairman, 1999).
For a supposedly distributed currency not subject to controls, that's a lot of power in concentrated hands, enough for a Dimond Cartel and I submit enough for a BitCoin Cartel. Diamonds are at least in principle limited, despite not being particularly rare, and can't be created with a few keystrokes via a "hard Fork". Cryptocurrencies will have limited pools of coins as long as it benifits the chief holders of those coins and will be changed as soon as they decide to do so. It's already happened several times why would they stop now?
BitCoin is non-transactable
In my opening I pasted the definition of currency. Fiat currency doesn't have real value, as any finance nerd can tell you, other than you can use it to buy a house, a car, or a coffee, and if you're employed your employer gives you fiat currency in exchange for your work. There is virtually nothing else with the near 100% buy-in that fiat currency has. Even people who claim they don't buy in to the dollar and prefer to transact in gold, citing the gold standard, continue to price their time & products in dollars then convert that to ounces of gold to transact with a customer who bought ounces of gold with dollars. Why aren't we all doing it? Why do we all cut out the extra step and avoid transacting in gold - besides the fact that it's cumbersome and ineffectual?
What is the Cryptocurrency buy-in? I have no idea, but I'm sure I can't use it directly to buy a coffee or a car in as much as I can't buy coffee with Facebook shares. What's the value in adding extra steps to a currency? It makes trade harder not easier. At best crypto is not actually a currency but a digital asset. And not a particularly strong asset at that given it's volatility, it is after all based on nothing. Thankfully none of My house, car, nor coffee have depreciated by 40% since last month. None have appreciated by 1,200% at any point in the past year either as you might expect, but my house, car, and coffee are also not the object of significant speculative interest and I have the added benefit of their utility as I physically use them everyday.
The chairman of the European Securities and market Authority echoed that sentiment in a Bloomberg interview in Hong Kong “It’s . . . not broadly accepted.” and investors “should be prepared to lose all their money”.
BitCoin solves the wrong problem
In any currency transaction fraud is almost always the biggest problem. That's why we have escrow companies. It's why PayPal succeeded. I want to buy something from you, you want money from me. Even if we basically trust each other an intermediary is incredibly helpful when you buy a $150,000 house where real trust is needed. This is what blockchain is proported to solve, though it hasn't yet. Currently we trust a third party to both hold the down payment and the money from the bank loan, the same third party the bank trusts, and when I transfer the title/asset and thus complete the transaction with that same 3rd party the title company gives me the money and you the house. That's about as uncomplicated as such a transaction can be made. Blockchain can theoretically solve this problem, cheaply, but Cryptocurrency currently just makes it worse. There are no safeguards with BitCoin. Multiple transactions on the same wallet before a block is resolved is still an easy exploit. While defrauding someone out of their credit card money is easy it is safer for the victim due to insurance and other institutional protections, so much so that most people don't even think about it. BitCoin has no protections of any kind and headlines are rife with tales of fraud.
BitCoin not only has all the vulnerabilities of cash & credit but additional liabilities related to the storing of the coins, the time it takes blockchain to confirm a transaction, and on top of a total lack of the protections cash & credit enjoy. Fraud is still the biggest problem with all transactions and BitCoin is worse then Cash.
Regulation
As of this writing (Jan 2018) a big obstacle to BitCoin acceptance is the realization by world governments of what I'm describing here. So while China, Japan, and South Korea are/were major drivers of the BitCoin market, those governments are clamping down.
China, to me, was an early principle driver of BitCoin's market price with it's capital lock downs. In China's eye's keeping funds in country are a way to ensure re-investment, but plenty of Chinese have more money than they know what to do with and stashed their money in Crypto instead. Bitcoin allowed people to store funds virtually off shore - illegally - though any crackdown would likely cause the Chinese to sell off their BitCoins. Then, as any time a major player leaves an asset class (digital or not), the market price is generally significantly devalued. A corresponding blip can then be seen in other asset classes in an open market (maybe not the case here). China's central bank had a meeting to discuss it's concerns: chiefly fraud, money laundering, and the central government added in energy costs (it takes a reported 4 gigawatts of electricity to conduct the Chinese mining operations) so the government took action and promptly banned initial coin offerings from start up cryptocurrency/blockchain groups.
But that's just the tip. China is clamping down on Cryptocurrencies. Shuttering exchanges, mobile apps, online platforms, and blocking access to all non-domestic sites. While peer-to-peer transactions haven't been blocked (as that's probably not possible) all the quasi-institutional means of trading and otherwise transacting cryptocurrencies have been targeted for elimination. Although in a somewhat ironic move, the Bank of China has launched it's own Cryptocurrency.
These moves by regulators are directly affecting the market price even now. "[T]he light touch that has allowed the crypto-boom to explode may be coming to an end,” said EXT Capital's Neil Wilson, senior Market Analyst in a note to investors. BitCoin might not even be able to survive regulation.
The trouble with BitCoin storage
The best place to store your BitCoin is on a hardware key, the equivalent of putting a bunch of cash under your pillow (a so called cold wallet) and just as safe. And yes it's still the safest option. Let's just say you have $12 million in bitcoin, no bank will hold it. You could keep it on an exchange, but those things are actually less secure than putting it under your pillow if you can imagine that. And someone with 12 mil under the pillow might not be particularly discrete about it, so all a nefarious actor has to do is look under your pillow. Putting it on your phone, computer, or an exchange leaves it open to Internet attacks as long as it's connected to the internet. But it must be stored somewhere, for all it's digitalness it still has access keys. If you lose those access keys (your pin or the seed) you lose all your coins. I remember when BitCoin was worthless and some dude threw away the hardware he had mined it with, 5 years later it was worth a few million and he considered digging up a landfill to find it - he couldn't get the financing to do that in the end. Stories like that are everywhere. It is literally like having a 12 million dollar golden ticket at home, what the hell do you do with that when nearly everyone knows golden tickets can be ridiculously valuable and your spouse, friend, child, or co-worker idly mentions it to the wrong person?
Worse, whenever you want to transact in BitCoin you need to connect your hardware key to one of those less secure access points: cellphone, computer, or exchange. Unlike a golden ticket you can break off a piece and keep that in a digital wallet. However not only is the wallet suseptible, at some point the sum total of your BitCoin address thing needs to be live to complete the process. That's when it's most suseptible to direct hacks and interceptions like Trojans (notably CryptoShuffler) that will copy your clipboard and redirect the funds from your wallet to a hijacker's wallet if you aren't careful. A bit of Fraud no institution will currently protect you from.
Rampant Market Manipulation
BitCoin price is manipulated. Because BitCoin isn't officially a security (the IRS calls it a digital asset) it isn't subject to the same rules and investor protections. However, 100 or so people with the most substantial holdings have already discussed when to drive up the price and when to cash out. In BitCoin the top 100 wallets hold 17% of all the cryptocurrency (the top 1000 hold 40%), in Ether the top 100 hold 40%, in smaller cryptocurrencies that number can be as high as 90%. When your buy-in price is near zero and your only goal is to make money it behooves you to have an exit strategy, and price fixing is as good as they come. That's why financial markets have rules against that sort of thing. It's the sort of thing people in this country can go to prison for.
The incentive is well known and the price fixing in BitCoin is confirmed. Price fixing a market cannot escape scruitiny, but for now it has escaped regulation in many countries. No small amount of the BitCoin market manipulation is conducted by people who steal BitCoin and, relatedly, more than 10% of the money raised by Initial Coin Offerings (ICOs) has been stolen. The "investing" craze itself has caused some of these ICOs to essentially be fraudulent themselves by preying on "investors" who are a little too eager to jump on the blockchain/crypto bandwagon. All it takes are a few developers who are wholly unafraid of throwing together systems with substantial conflicts of interest between themselves and the coin holders, scarily similar to pump and dump, and this has been done and will likely continue.
People will drive the price of an asset up even when they know it's going to zero
In An experimental study of competitive Market behavior, 1978, Vernon Smith (who received a Nobel Prize in economic sciences in 2002) found that prices will equilibrate around the convergence of supply and demand. In the modern era this is now obvious, however applied to the argument I'm making here - where market manipulation is rampant - a soaring price is expected. As the market is flooded with requests to purchase BitCoin and cash is rich; crypto currency prices necessarily increases quickly. Interestingly this is exactly what is predicted from another seminal paper by Smith. What happens when traders are aware the value of the asset will go to zero? Traders knowingly trade above the real value of an asset purely on momentum and hope they aren't the last to get out, described in Smith's 2000 paper "Momentum and overreaction in experimental asset markets". This so strong that in 2011 he demonstrated in yet another paper that as early buyers leave new buyers not previously in the market will come in and buy the asset above it's actual value in the hopes of repeating the process they just experienced, where they bought an asset well above it's fundamental value which the early buyers dumped on them (Double Bubbles in Assets Markets with Multiple Generations). I believe this is happening now with BitCoin and by proxy this has been my experience with traders of BitCoin: they know it's worthless, they site previous profits, they point to the influx of new cash, and demand the process can continue. This ponzi-scheme like behavior is empirically untrue and we all should know that by now. Here again bubbles have a sharp run up in price and then plateau near that high price which soon plummets after a few rounds of failing to rise. When the decline will hit is harder to predict if the underlying asset doesn't have a clear fundamental value, and while the fundamental value of all cryptocurrency is essentially zero as it's a fiat currency there remains fluctuation in the speculative value of it's fundamental value. In this case trading can remain inflated as long as there is cash flowing in. The world may not run out of suckers, but they will run out of money. New entries herald bubble formation, exits herald bubble collapse and both are exacerbated by inexperienced traders (Smith 2011).
Design issues
More than once scaling and systemic risk in BitCoin trading has come to light. A system that was described on a handful of pages and rolled out by a tiny group of people in 2009 ran into a host of problems, can you believe it? SegWit seems to have solved one of the latest that developed in late 2016 with much less fan fair than anticipated. There are more moves to try and make the blockchain easier to run on graphics cards, though I'm not sure if this is adding a feature or taking one away. But this is illustrative of the core changes that occur to the blockchain that is purported to be inviolate. BitCoin aside blockchain needs to be faster if it ever hopes to gain ground, decuppling it from mining and currency might provide an easy way for that to occur.
Trading in BitCoin is cheaper than the alternatives, but with a less certain future.
Exchange fees are probably on the order of 0.2% for Bitcoin which is great. While most of my financial/security transactions come in on the high end around 1% and average around 0.3-0.2% with a low of under 0.1%; trading in BitCoin is likely cheaper than most alternatives for the average person. Trading fees can really eat into your trading profits so, if you're going to speculate, blockchain is probably the way to go and cryptocurrencies do happen to be available right now.
However there is no reason to believe the BitCoin will be the winner against it's peers merely because it was the first one. I like Kodak as an apt illustration of a market leader tanking but a Car analogy will be more familiar to most here.
François Isaac de Rivaz developed a car run on hydrogen in 1808. Siegfried Marcus built the first gasoline powered engine in 1870 first with a two-cycle engine, then in 1880 the four-cycle engine. Nikolaus Otto developed the four-stroke ICE (still the most prevelent IC engine) in 1876. Rudolf Diesel patented his engine in 1893. Friedrich Schönbein conceived of the hydrogen fuel cell in 1838. Ányos Jedlik developed the electric motor in 1827.
Remember all that in the context that Karl Benz developed a gasoline powered automobile in 1885 which became the first production vehicle. The Model A was produced and began selling in 1903 and Ford produced 15 million Model Ts by 1927. Look at those names and years again. Whose do you recognize? We still don't have mass production hydrogen fuel cell vehicles and Tesla only recently released a mass production electric car. It's about 180 years from the initial conception.
Which winner do you pick before they go mainstream? How could you have determined before they even started winning who was going to win? What technology was invented but never did or hasn't yet made it to production vehicles? These things are practically unknowable. The only thing that gives you information on the future success of a new market is actual success in that market, and BitCoin hasn't succeeded at anything other than a high Market price - which I submit is merely over exuberance. If you'd bought the Schönbein idea in 1838, the patent would've expired in your lifetime and you'd have never made a cent on it before you died.
Pricing
My principle focus is security analysis. Stocks and bonds have underlying value (fundamental value) in the business they do in fiat currency. The price of those assets is at least somewhat corelated with the underlying buisness, it's growth potential, profitability, management & the board of directors, markets, as well as the sentiment of the public on the asset itself. All of those things can be studied and understood to a degree. The price of BitCoin however is manipulated by a small number of entities. What are their motivations? What are they going to do next? It's a black box and very difficult to discern an advantage over the market. Unlike stocks, bonds, and Treasuries, BitCoin gorillas/market makers are guarding all the doors and holding all the keys. As stated in the Bloomber article above: “There’s no transparency to speak of in this market,” says Martin Mushkin, a lawyer who focuses on bitcoin. “In the securities business, everything that’s material has to be disclosed. In the virtual currency world, it’s very difficult to figure out what’s going on.”
You missed the boat
If you're not an educated investor, and you've just recently become interested in BitCoin (I heard about it around 2010) you missed the boat. When everyone is excited about an investment, especially the average citizen, that's a prime indication that the good times are over. The experienced investors soon leave and take the new influx of cash with them, possibly your cash. When everyone is bullish, especially the average citizen, it's time to be bearish. When everyone is bearish, it's time to be bullish. BitCoin of late 2017 is the Pets.com of early 1999.
In the summer of 2016 BitCoin popped onto a lot of people's radar and the influx of traders likely drove the price up (as described by Smith 2000, 2011). Now that it's on the radar and everyone is talking about it BitCoin is unlikely to see any similar rises unless another influx of inexperienced buyers with cash can be found, but who's left?
What could change BitCoin into a Currency
Regulatory acceptance and buy-in of the finance industry. Much like the derivative market and it's lack of transparency the upside potential of BitCoin seems huge. LedgerX is now available for options trading and is licensed as a swap execution facility and derivatives clearing organization and FINRA is launching an alternative trading system for the trading of blockchain assets while CME group launched BitCoin options and derivatives. All of these will allow large financial institutions to enter the game.
Ripple (XRP) is a competing blockchain (& cryptocurrency) that is already used by financial institutions to wire funds internationally as it is faster and cheaper than traditional alternatives.
Ethereum is also available for options trading.
Coinloan allows you to use BitCoin to secure loans.
BitCoinIRA.com allows people to hold BitCoin in their retirement accounts.
Coinbase and Kraken are increasing the security of BitCoin trading. Potentially solving a critical weakness in the chain of custody.
Cryptocurrencies and blockchain allow avoiding financial middlemen, in theory they can completely remove the need for banks and possibly reduce fees from exorbitant to almost trivial. This is one possible future I see for Blockchain.
Fear about any given fiat currency heralds a rush to BitCoin. Without a government or economy to pull it down a quick look makes it appealing to people looking to rush to other asset classes that have a higher market value than their domestic currency. BitCoin and the like are financial assets without boarders, oversight, or (importantly) government support. While it lacks the intrinsic value of plutonium it's more portable and easier to transact then a 500lb lump of metal.
Conclusion
Gambling is fun. If you like gambling, BitCoin can be a good time. But, if you are looking at it with real profit in mind, are actually any good at BitCoin trading, and understand how to find an edge then you should probably just try your hand on the real deal: securities, guns, or real estate. Maybe just securities.
I think it's important to remember that humans are not good at finance (a central tenant of my investing philosophy) and humans are fundamentally irrational when it comes to money. January is typically a low point for most cryptocurrencies, so Bitcoin might just be on sale right now. Every time someone sells something another person necessarily must buy it, so you'll be buying what others are selling. When new clients bought in Bernie Maddof paid old clients, that didn't change the fact that Bernies paper and claims were worthless. All those initial investors made a lot of money, true. So are you an early investor still? Probably not. There may be plenty of money still ready to pour into BitCoin and other cryptocurrencies, but the crypto field is large. Who will win and who will be left holding the bag? In 2006 everyone could buy a house and today everyone can buy BitCoin. Good luck.
While I couldn't have predicted that BitCoin would ever have a market value I can easily predict that it eventually won't have one - unless a substantial proportion of high GDP states and financial institutions put significant value into crypto which BitCoin's founding principles explicitly disincentivise. Interestingly the development of a futures market may well hasten BitCoin's decline in value as it forces buyers to think about a future price. However the counter argument to all this is that with sufficient advertising and push BitCoin could become as worthless as diamonds while providing even less utility.
I've seen this all before, haven't you? The new boss is the same as the old boss.
Due Diligence - Dutch Tulip bulbs, Ripple, Etherium, Diamonds, Lure feathers.