Cryptocurrency Dreams and Nightmares

Cryptocurrency mania is in full force and many people are throwing their money at the “latest and greatest” token or coin offering.

First, let’s attempt to distinguish between a token and a coin.

Tokens tend to be a currency that is needed to run a specific software application in a specific business model. An analogy is the Chuck E. Cheese tokens needed to play video games in their arcade. You trade your hard currency for cheap tokens to put in the machines to make them run.

The reasons for using a token are many:

The tokens can be of any size (think microtransactions) and can be cheaper to transact if they are centrally issued and processed (which removes the need to have an expensive mining/blockchain model). This comes at the cost of giving up censorship resistance as the issuer/administrator can reverse transactions “at will” or under the pressure of outside influence.

Tokens are a great way to “pre-sell” products and services. Think of them as pre-sold gift cards that can be redeemed for the goods and services of the issuer. They are a contingent liability of the merchant issuer.

Breakage. Many of the tokens will be lost or go unused resulting in profits to the issuer.

Tokens are a great way to raise money for a startup or growing company.

“Coins” are more like “community currencies” or “affinity currencies” and are for the sole purpose of creating an alternative currency. Their success is dependent upon both their monetary features (scarcity, censorship resistance, etc.) and the willingness of the community to trade their goods and services for it. They can be built and promoted around affinity groups like “cat lovers” or “belly dancers”, etc.

“Community currencies” have arisen from the most highly valued commodities – evolving into a medium of exchange within those communities. Gold (being durable, divisible, and scarce) became one of the most popular in previous times.

It is the most useful commodity that becomes the primary medium of exchange.

Nevertheless, there always exists certain sub-communities and affinity groups that, for whatever reason, choose certain commodities as their own preferred medium of exchange. The ultimate value of these currencies rests upon what someone is willing to trade for it. The most commonly accepted are the most liquid. Those holding the minority currency face ongoing liquidity challenges. Without strong enough support by their respective communities these currencies can wither and die.

There are many community currencies in the crypto space with bitcoin being the largest and most liquid. In fact, due to its size, acceptance and immutability, it has become the primary (and often only) gateway to all other coins/tokens.

Tokens and coins often overlap in their uses as described above.

While there is no end in site for the current novelty of these technologically-enhanced financial instruments, be careful to not let it cloud your judgement when evaluating potential opportunities.

A key point to remember is that most startups fail and, if they have issued a special purpose token, it is likely that the token will fail along with it. Caveat emptor.

Bitcoin is the “new world currency” Peter Thiel wanted PayPal to be

From Quartz:

Bitcoin prices rose on a Wall Street Journal report (paywall) that Peter Thiel’s investment fund recently made a major wager on the cryptoasset, adding to the list of bigwigs whose support for the market has inflamed the mania. But the PayPal co-founder is no bitcoin arriviste—he’s had a vision for a stateless digital currency for nearly two decades.

Founders Fund, the venture-capital firm co-founded by Thiel, bought $15 to $20 million worth of bitcoin last year, the Journal said yesterday, citing unidentified sources. Those holdings are now reportedly worth hundreds of millions, as bitcoin’s price climbed 14-fold in 2017. Bitcoin rose as much as 13% to $15,392 on the CoinDesk price index in the 24 hours since news of the Founders Fund holdings broke.

When Thiel started PayPal, he never saw it as simply a payment mechanism for eBay sales, or a way for millennials to split bar tabs. In a Reddit “Ask Me Anything” session in 2014, Thiel talked about his failure to deliver on his original ambition to turn PayPal into a “new world currency.” (The company’s website now says it’s “committed to democratizing financial services.”)

What exactly would Thiel’s “new world currency” achieve? Here he is at a company meeting in late 1999, according to Eric M. Jackson, an early PayPal marketing executive and the author of a book on the company:

“PayPal will give citizens worldwide more direct control over their currencies than they ever had before. It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure.”

PayPal was founded in 1998 by Thiel, an avid libertarian, and others. He wanted to use cryptography to send money online, according to Nathaniel Popper’s 2015 book Digital Gold. But the company ran into roadblocks over concerns that it could help foster illegal activities like money laundering. As restrictions mounted, PayPal scaled back its ambitions and Thiel eventually left the firm. Digital currency was seen as an “unfulfilled dream of Silicon Valley,” Popper writes.

Does that ambition sound a little like a “peer-to-peer electronic cash system” that bypasses centralized authorities like banks and mints? That’s what the pseudonymous Satoshi Nakamoto described in his Oct. 2008 paper (pdf) setting out the mechanics of bitcoin.

Bitcoin has benefited from the interest of high-profile institutional backers. Though Wall Street’s involvement remains minuscule, news of interest in the burgeoning market has added fuel to the crypto boom. Major global exchanges in Chicago have developed derivatives that could help institutional traders and investors participate in the mania. One of those firms could be Goldman Sachs, which is setting up a trading desk for cryptoassets, according to Bloomberg. Bloomberg itself recently added price data for ethereum, litecoin, and ripple to its terminal network that’s used by professional traders. Donald Wilson (paywall), founder of high-speed trading firm DRW, set up a crypto unit in 2014.

News of such endorsements is the closest thing to “fundamental” information that could assign a value to these digital coins. Stocks, for example, are issued by companies whose earnings can help the equity’s worth; fiat currencies’ value often depends on the interest rate that the government pays on its debt. For now, the value of a bitcoin mainly depends on the faith that more people, like Thiel, will embrace it.

Correction: a previous version of this story referred to Goldman Sachs as a future bitcoin investor. It is reportedly setting up a trading desk to make markets.

Mining Bitcoin Saves Energy and Lives

Do you own your life or are you a slave?

If you own your life then it follows that you also own the product of your life energy.

This is your property.

If someone takes your property without your voluntary consent, they have taken a piece of your life.

And you are their slave to some degree.

Bitcoin, properly used, can be difficult to take from you without your voluntary consent.

Bitcoin is a tool that can help you protect your property and thus, your life.

Bitcoin is a matter of life and death.

Save energy, save your life.

Choose life, choose bitcoin.

H/T TopNewsBitcoin

When borrowing to buy bitcoin is a rational choice

The knee-jerk reaction by most financial advisors is to scoff at the idea of borrowing to buy bitcoin. But what if this decision is the rational choice after weighing the facts, risks and opportunities?

Here are just a few facts:

The US dollar has lost over 98% of its value since 1913.

The US National Debt is over 20 trillion. The only way they can deal with this is to default or print more money – either way they destroy the purchasing power of the currency.

In a situation where the world accelerates the “flight to real values”, one of the most attractive destinations will be bitcoin due to its scarcity and security. Capital always flows to where it is respected and protected. Bitcoin offers a refuge like no other.

Ask, what are the odds that bitcoin will continue to appreciate at a faster rate than what you are paying on the borrowed debt?

Here are some historical examples of borrowing non-scarce assets (fiat money) to purchase scarce assets:

Real Estate

It goes without saying that people have been borrowing to purchase real estate for some time now because it has historically been a great hedge against inflation. The one thing we can practically count on is that politicians and central bankers like to print money.

Post WW1 Germany

The German government, struggling to pay war repatriations, resorted to the running of the printing press. Financially astute Germans (which included many of the Jews) saw the writing on the wall. They mortgaged and bought up as many assets as possible – primarily businesses and real estate. They leveraged their purchases by putting the smallest down payment possible and obtained long-term, fixed-interest rate debt – payable in German Marks. Within a few years (1917- 1924), after the currency was destroyed by hyperinflation, they were able to pay off all these mortgages for the equivalent cost of a postage stamp. The end result was enormous wealth and free and clear assets. Tragically, this led to widespread resentment of the Jews which helped fuel the rise of Hitler (take heed bitcoiners, you could quickly become the new “hated class”).

Key Points

If you do decide to borrow, make sure that the debt can be paid back with only fiat. Make sure that it is long-term, fixed-interest rate debt. You don’t want any adjustable rate mortgages. Figure out how you plan to service the debt if the bitcoin profits fall short and decide if you are willing to accept the consequences if you are unable to.

If you fully understand the risks and opportunities – and are willing to accept them – then this sophisticated arbitrage strategy may make sense for you.