The Global Elite’s Crackdown on Bitcoin
- How North Korea could give the US government an excuse to move against bitcoin
- The backdoor approach governments will use to regulate and control the blockchain
- Bubble dynamics and bitcoin: what bitcoin’s meteoric rise tells you about the dollar
Many advocates of bitcoin and other cryptocurrencies have a naïve belief that their digital assets are ‘beyond the reach of governments’, ‘cannot be traced’, and ‘cannot be frozen or seized’.
But it’s really not true.
On 12 September, China announced that it was banning the launch of initial coin offerings (ICOs) in China and closing all Chinese bitcoin exchanges. The next day, it was reported that China demanded the books and records of those exchange customers and all transactions.
From there, it’s just a short step to arresting customers for violating foreign exchange and tax regulations in China.
The attack on bitcoin does not stop with China.
North Korea’s cyber-brigades have hacked into South Korean bitcoin exchanges both to steal customer bitcoins and demand bitcoin ransom to cease the attacks. North Korea is building up a bitcoin stash to pay for weapons and food as the US ramps up sanctions on conventional banking channels.
This operation reflects the fact that using bitcoin on the dark web is a haven for criminals, arms dealers, tax evaders, and state enemies of the US. How long will it be before the US joins the effort to shut down, interdict and disrupt bitcoin message traffic on the dark web and the bitcoin exchanges themselves?
Bitcoin prices fell 40% in response to these and other developments before stabilising to some extent. But it remains highly volatile.
Now, I said it last week, but I’ll say it again…
When it comes to cryptocurrencies like bitcoin, I take a laissez-faire approach. Do your own thing. If you want some bitcoin in your portfolio as part of a diversified bundle of assets, that’s up to you. If you want to speculate in some of the other lesser-known cryptocurrencies, that’s fine, too. You might make a lot of money.
My only advice is buyer beware. You need to take the time to understand how it works and what the risks are.
Governments enjoy a monopoly on money creation and they’re not about to surrender that monopoly to cryptocurrencies like bitcoin.
But governments know they cannot stop the technology platforms on which the cryptocurrencies are based. Blockchain technology has come too far to turn back. These technology platforms are usually called the ‘blockchain’, but a more descriptive term now in wide use is ‘distributed ledger technology’, or DLT.
There’s no denying that fortunes have been made and still will be made in various DLT applications.
And while I’m not necessarily a fan of individual cryptocurrencies, I am a believer in this technology.
Governments don’t want to kill it; they want to control it.
They seek to do so using powers of regulation, taxation, investigation, and, ultimately, more coercive powers, including arrest and imprisonment of individuals who refuse to obey government mandates with regard to blockchain.
As I also explained last week, the blockchain depends on critical infrastructure, including servers, telecommunications networks, the banking system and the power grid, all of which are subject to government control, as the Chinese action shows.
That’s the back door governments will use to regulate and control the blockchain.
There’s something else to consider about cryptocurrencies…
If the power grid goes down for whatever reason (ask Puerto Rico after Hurricane Irma), good luck accessing your bitcoins. Bitcoin may have made you a millionaire on paper. But what good does it do if you can’t access it when you need it most?
People will always accept gold and silver in emergency situations. My advice is to stock up before the crisis strikes.
They will be unavailable once a crisis arrives.
I was actually singled out in this past Saturday’s New York Times for my advice on ‘how to survive the apocalypse’.
Holding gold, silver and other hard assets is definitely part of that plan.
Read on below…I show you the dynamics behind the bitcoin mania. Is it really a bubble?
When the dollar price of one unit of any asset leaps from $1,938 to $4,425 in one month on no news, it’s fair to ask if we are witnessing bubble dynamics at work.
This is exactly what happened to bitcoin between 16 July, 2017, and 17 August, 2017.
This spectacular 128% gain in one month, which annualises to more than 1,540%, comes on top of the fact that bitcoin rose from $580 just about one year ago — an actual gain of 630% in the past 12 months. Two years ago, Bitcoin was $225, so the two-year gain has been 1,870%.
Whether looking at one month, one year or two years, annualised or actual, these gains are breathtaking.
The answer to the bubble question is almost certainly ‘yes’, but that tells us little about what’s driving the bubble or how long it might last.
It serves no purpose to assess bitcoin based on ‘intrinsic value’. Bitcoin has no intrinsic value and neither does any other form of money, including dollars or gold. Intrinsic value is an obsolete economic theory that was abandoned by economists in 1871. The phrase ‘intrinsic value’ is bandied about frequently, but it is of no use in valuing bitcoin.
Instead, economists use subjective value as a way to consider prices. The subjective value theory says that the price of something is what a willing buyer will pay a willing seller based on the utility of the goods and services to the buyer.
That’s helpful, but ‘utility’ can be a slippery concept. Sometimes utility is entirely practical. (‘I need a car to get to work to earn my pay, so the car has some utility I can value.’) But sometimes, utility is idiosyncratic. (‘I get a rush from gambling so I’ll spend money in Las Vegas even though I know the odds are against me.’)
Bitcoin certainly has some utility to some people. It is easy and inexpensive to make payments. It offers anonymity to those who value that (including criminals and terrorists). It is useful as a way to evade capital controls for those trapped in closed systems such as Cuba, North Korea or China. It can also be a lifesaver for refugees who are vulnerable to assault and confiscation as they flee from country to country.
Yet, there is little doubt that much of the price action in bitcoin comes from the utility of a ‘get rich quick’ or ‘something for nothing’ mentality. Greed and the thrill of gambling have utility to some, and bitcoin can certainly satisfy those needs and wants.
I pointed out above that the rise in the dollar price of bitcoin can also be viewed as a collapse of the dollar if bitcoin is a stable store of value and an acceptable numeraire. That’s because bitcoin and dollars are both forms of money, and their cross-rate is just a currency swap, not an investment.
If bitcoin is held constant, then the dollar has collapsed 75% against bitcoin in 2017.
What other evidence is there for a generalised collapse in the dollar?
The answer is none.
Both gold and the euro have rallied this year, but only in the 10-20% range, nothing at all like the 1,540% annualised gains seen in bitcoin recently. (If there was a generalised collapse of confidence in the dollar, as evidenced by gold prices, bitcoin would surely benefit. But for now, bitcoin is the outlier.)
In the absence of evidence from other markets that the dollar is collapsing generally, the seeming collapse of the dollar measured in bitcoin appears detached from prosaic definitions of utility and therefore can only be explained by the utility of greed. That’s bad news for bitcoin because the one recurring lesson from speculative markets is that greed can turn to fear overnight.
There are many examples of bubble dynamics in which hyperbolic price action in dollars, detached from other information about a dollar decline, reversed quickly in a catastrophic collapse. The action in the NASDAQ 100 Index from 1996 to 2000 — following the Netscape IPO — is a helpful and somewhat recent example.
The 75% decline in NASDAQ after January 2000 is a good predictor of what will happen to the dollar price of bitcoin once a catalyst changes greed to fear. Several of those catalysts are discussed below. Bitcoin at $200 or lower (about where it was when the most recent hyperbolic stage began) seems likely in the next two years.
What matters is not the specific dates or index metrics, but rather the bubble dynamic displayed in the hyperbolic phase of the curve. Will bitcoin suffer the same 75% collapse that the NASDAQ 100 Index suffered after that bubble popped in 2000?
The jury’s still out, but initial indications are not good for bitcoin. In the first two weeks of September, the dollar price of bitcoin crashed 35% from $4,950 to $3,226. It has recovered somewhat since then, but it remains to be seen if this price action is a true ‘buy the dips’ opportunity or a sucker’s rally. My estimate is that it’s the latter.
Another important aspect of bitcoin valuation is that fact that bitcoin has never experienced a full business cycle. As discussed above, bitcoin was invented in 2009.
That was also the year the current business cycle recovery began.
It’s true that this economic recovery has been one of the weakest on record, with US growth only averaging about 2% per year, compared to 3% or higher in previous recoveries. But it’s a recovery nonetheless and one of the longest ever. No one knows when the next recession will occur, but after a near-record 96-month expansion, no one should be surprised if a recession occurs soon.
Recessions are not the same as financial panics. Sometimes recessions and panic go together, as in 2008. Sometimes recessions occur without panics (1990), and sometimes panics occur without recessions (1998). Either way, bitcoin has never seen a recession or a panic.
Investor behaviour in financial adversity can take many different forms. Sometimes bonds sell off, sometimes stocks, sometimes commodities. The one thing recessions and panics all have in common is that everyone wants liquidity.
When the next recession or panic happens, probably soon, will the global demand for liquidity force holders to sell bitcoin to meet their debts and margin calls? Will a spike in unemployment force holders to sell bitcoin to pay their bills?
If so, will all of that forced selling and demand for liquidity cause the price of bitcoin to collapse — if it hasn’t already collapsed — due to the bubble dynamics described above?
We’ve seen how stocks, bonds, gold, real estate and other assets perform in recessions and panics in the past. But we have no idea how bitcoin will perform because it has never experienced an adverse economic climate.
My estimate is that bitcoin will suffer in a liquidity crunch as investors sell all forms of assets, including bitcoin, for more liquid forms of money that governments and creditors are prepared to accept. A 75% or greater collapse in the dollar price of bitcoin, therefore, seems likely.
Bitcoin is money, but money is a confidence game. It’s good to bear that in mind.
The problem with confidence — as the basis for determining the subjective value of money — is that it is ephemeral. It can be here today and gone tomorrow, based on crowd behaviour that is easy to model in theory and impossible to predict in reality.
Do you have your gold yet?
If not, go here.
For The Daily Reckoning Australia