cryptocurrency

Bubble Watch: NFT’s

Bubble Watch: NFT’s 150 150 JP

I am going 180º in the opposite direction than Gary Vaynerchuk and what seems like every other social media influencer on this one. NFT’s are all garbage. Just like sports cards. Does that mean people shouldn’t or won’t pay a lot of money for them? No. Too many people are paying hundreds of thousands of dollars for cardboard based on a desire to want something rare. This happens even when the “scarcity” is bullshit. That said, I do think that we’re going to have a massive collapse in this market to accompany or front run collapses in other markets.

On a side note, I am not a proponent for heavy government regulations; however, I can see a huge parallel to the early 1900’s when the Securities and Exchange Commission initiated its laws for the securities markets. I can see why these agencies felt they needed to do that, especially when you have a large number of people being influenced by a few hype artists, formerly called snake oil salesmen. The same thing is happening right now with NFT’s and Cryptocurrency. We’ll see how long it lasts.

Crypto Will Not Save The World

Crypto Will Not Save The World 150 150 JP

I don’t think it will ruin the world, but it’s not going to make things better for the masses. It’s like to make things worse.

Energy consumption is a problem.
Trading leverage is a bigger one.
Decentralization is a pipe dream.
Anonymity is a complete lie.
Value is based on the next buyer.
Wealth concentration is higher than USD.
Hackers can and will still get your crypto.
Inflation is driving prices the most.
FOMO is a very close second.
Price does not equal value.
Digital oil? Digital gold? Nah.
No need for additional layers of complexity.
Further attaches humans to technology.
It doesn’t actually solve real problems.
Is crypto making water easier to access?
Is crypto helping with climate change?
Is crypto bringing the masses out of poverty?
Is crypto able to give you or me more skills?

There are too many bubbles across the economy.
A collapse is coming. I don’t know when.

The Cryptocurrency Adoption

The Cryptocurrency Adoption 150 150 JP

Have been wrong so far with Bitcoin and all the other Cryptocurrency in terms of price appreciation. Click here for my first post on it. That was written in 2018, and from a money standpoint I would love to have bought in that year. Right now, you should feel the same way. However, I don’t have a time machine and I still look at these digital assets the same way today as I did back then.

Cryptocurrencies remain are a misnomer at best, a fraud at worst. If they are going to be adopted as an asset, fine. Bitcoin alone will not be and should not be adopted as a global single payment system. Ethereum should not be the only platform to build the next internet on. That’s the problem with us. We’re always looking for the next iteration on what is already pretty awesome. The internet is awesome. Now we want it to be decentralized, while still using the current backbone protocols.

I look at the crypto market like the equities market. These instruments are man made (have scarcity), carry a high degree of risk, but unlike the equities market ARE NOT usually tied to some productive underlying asset. Ethereum and Cardano may have some value under the token layer where applications can be built, but why? Is it because the dollar is being inflated to oblivion? Or, is it because these new applications actually solve real problems that people are incapable of solving?

This is where my skepticism reaches epic proportions.

I’ve been in finance for two decades, analyzed complex assets at every level of the economy, and I still don’t see any other reason than popularity and the greater fool theory as to why people want to own the digital assets. Also, the ownership of the high valued tokens (e.g. BTC, ETH, etc) is concentrated in very similar ways to that of high valued equities. It’s like website programming circa 1998; it was a skill few people had, but by 2018 no one needed to worry that much about it because well… plug and play. Right now, it’s hard to create your own crypto, but give it another decade. That could be a deflationary process that crushes the token value while the underlying blockchain remains used for building. In a truly capitalist environment, the price of the token would become less valuable as the use value of the underlying asset (i.e. blockchain, apps, etc.) gets more valuable.

A penny saved WAS a penny earned…

It’s pretty dumb to use the same inflationary metrics when thinking about technological use value of blockchain or cryptocurrency (still hate saying it) as we do with overall economy. Inflation is not a good thing. Too many companies are miss priced on the high end not because of value alignment, but rather because of inflation… in other words, the dollars used to buy the stock are getting cheaper rather than the company itself gaining value. So, we have a market where many companies are trading at 10x to 30x sales without any path to profitability. There’s no reason to get profitable when interest rates are so low and dollars keep getting pumped into the economy. At that point, growth is key… and at any cost. In other words, there’s a lot of bad capital allocation decisions being made hourly at the moment.

This is why it seems that many people want crypto to keep going up and up. As long as the music keeps playing, no one knows the house is built on sand ready to crumble. Fact is that the original thesis has been crushed, but I’m not saying that crypto is a bad idea or even worthless. Bitcoin and ethereum could be like Microsoft and Oracle or myspace and friendster when the next flip happens… TBD. These fraudulent currencies could be banned by the first world altogether; however, that’s unlikely until the tax liabilities are extracted first. There’s a lot of unlocked value in them for governments too and a collapse would mean billions of missed tax revenue.

Democracy demands the decentralized crypto market to grow, so we’ll see.

The U.S. Dollar is Garbage

The U.S. Dollar is Garbage 150 150 JP

There’s not much you can do about it. Look no further than a made up digital currency that can be mined from a Google Cloud instance. Bitcoin was $219 per coin in 2015, today it is priced at $35,000 per coin. There are a lot of bone head decisions I made in 2015. $1,000 (USD) a month put into bitcoin that year and I would have over $1 million worth today. Will the same bet pay off in the next decade? That’s for you to decide. My guess is no. But, I find it easier to find beaten up stocks than which alternative asset bandwagon to hop on next.

That said, there’s really no reason why the value of Bitcoin has to go up and up and up; however, in terms of the US dollar, it might keep going up forever. Back in 2014, I kept reading about how many VC’s were getting behind Bitcoin and it seemed likely to go higher, but the current run has been mind boggling. It has gone higher because people have been willing to trade more dollars per Bitcoin. Again, this is just as much about the destruction of the fiat currency as it is the power of the blockchain, yada yada.

Mining Bitcoin involves solving a computationally hard mathematical problems. The Bitcoin system consists of transactions (that is, transferring money between users), and these transactions are registered in a public ledger, called the blockchain. The blockchain, as the name suggests, is a linked-list of blocks of transaction data. Mining Bitcoin involves finding a valid next block, which in turn, gives you, the miner, a prize — currently, 12.5BTC for every block you find.

In 2014, with Bitcoin at $808 per, there were 12 million in circulation and 25 new coins are created every 10 minutes. Every few years the creation rate will be cut in half and Bitcoins will continue to be released for more than a hundred years. 25 new coins every 10 minutes means 2 blocks found 6 times an hour, 144 times a day, good for 3,600 Bitcoins. Fast forward to 2020 and only 1,000 Bitcoins are mined daily. That equates to roughly $29 million paid out to miners for securing the network. They’re paid for the work they do, capitalistic style as the market seems to be paying more for the harder work.

What will happen with the Securities Exchange Commission getting involved is anyone’s guess. BTC will likely be considered an asset and not a currency, just because of the sheer amount of capital that has been created out of thin air, by simply solving math problems. As far as society is concerned, the U.S. Dollar needs to keep its place in the world affairs and if BTC goes up further, the government may not have any other choice than to crack down.

Here’s a great video on how BTC actually works.

The Current U.S. Markets are Overvalued

I’m feeling a lot like Warren Buffett in 1969 when he wrote to his limited partners about the lack of good ideas. The value investor that isn’t having a hard time finding ideas today is likely fooling themselves because the money is burning a hole in their pocket. I get it. Money on the sidelines is losing value, but that seems better than continuing to chase the bubble.

Market valuations have been ridiculously high for a number of years in my analysis, but that hasn’t prevented even higher highs. The proverbial joint continues to be passed around, but the end has to be in sight. The world is drowning in debt. Global GDP is around $80 trillion. Global debt is closing in on $300 trillion. The total market capitalization of U.S. markets is $36 trillion.

This is exactly why these digital assets keep rising in value.

Debt.
Inflation.
Mistrust.

The Future is Decentralized?

The Future is Decentralized? 150 150 JP

According to Tyler Winklevoss (smart guy), Bitcoin is digital gold and Ethereum is digital oil. In fact, Ethereum seems to have the most upside potential as a global disruptor because of the decentralized application idea. A decentralized application (dapp) is an application built on a decentralized network that combines a smart contract and a frontend user interface. This is like the internet does with websites, but instead of running on a server at Godaddy, it runs on a p2p (peer-to-peer) network, the internet itself.

The internet is itself a p2p network, one that governments can still shut down or take over if necessary. So, don’t go thinking that this is the end all be all for circumventing government. Of course, the 60 year olds of today will not be running the government in 5, 10, 20 years and those that do could easily make changes to decentralization. That would be the best case scenario, actually.

Real estimates of Bitcoin ownership in the United States comes out to roughly 2 to 4 million people, which is around 20% of the total ownership; however, only around 1,000 people own 40% of the entire share of the digital asset. Ethereum has 5 million owners, but only 400 people control one-third of the tokens. To say that it would be used as a global currency would mean building government currencies on top of them. Don’t forget, every fiat currency is digital too, just not decentralized. There’s not a bureaucracy in the world that would go for that.

To me, the greatest long-term value could be in the new tech which may be built on top of the decentralized network, the dapps. The tokens/coin look like a massive bubble helping the rich get richer and the bandwagon is getting really full. That said, happy to see this digital asset made up by solving mathematical problems become as a valuable as gold. We are living in a technology driven society where people would already rather engulf their lives into their smart devices. Why not have a digital asset that could easily be replicated (and has been) replace the tangible production costs of mining gold.

Thoughts on Cryptocurrency

Thoughts on Cryptocurrency 150 150 JP

There are these new things in the world called crypto-currencies. You’ve probably heard about them. The most famous and valuable of them (at least right now) is bitcoin. As a collective they are very dangerous. In fact, on the back of this newly found popularity and price, there has been an abundance of scams perpetrated on buyers caught up in hype and sizzle.

However, this is exactly why investors should take flight. Because as much criticism as there has been going around the world of finance about Bitcoin, if you got in at $5, $50 or even $500, you’re very happy right now with that decision, regardless of whether or not it’s speculation and mania. If you got in at $15,000, that’s a different matter. Bitcoin and others are likely to wipe out as much wealth as they created.

The cryptocurrency (a misnomer) is priced just under $5,000 USD per coin (3:08pm EST) and many are calling the bear market for alt-coins over. Meanwhile, Twitter/Square CEO Jack Dorsey believes that bitcoin will be the world’s single currency in a decade. Really? As a collective, alt coins are dangerous.On the back of this newly found popularity and price, there has been an abundance of scams perpetrated on buyers caught up in hype and sizzle. ICO’s are hot right now, but most are illegal securities offerings at best. It would be one thing if they were exclusively available for accredited buyers with the means to risk and lose all money allocated. They’re not and we believe that people are going to get hurt.

Cryptocurrency is Counterfeit.

Despite the IRS designation as an asset, Bitcoin and others are imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. Anyone starting a cryptocurrency in the hopes of creating a better currency is committing a crime.

Calling cryptocurrencies a digital asset makes it a more likely viable long-term option. However, if the SEC or other regulatory bodies find that many companies are using these assets to sell interests in the underlying organization, the gig is up and the house of cards will fall before any foundation is placed under it, leaving the only real asset associated with this whole thing in the first place — the blockchain technology.

There are thousands of cryptos: Ethereum. Ripple. Litecoin. Dash. NEM. Monero. Zcash. And, the creators and founders have made lots of dollars because of the massive shift to using decentralized currency. All are running on the blockchain thesis, but there are other forms of IP that will emerge as more valuable than the lot of fraudulent money.

In fact, the best part about this year’sCBOE deal is that people can now make money when (not if) Bitcoin implodes. It’s also a way for the exchange to make a little money for itself on this market and if it does become a viable market long-term, it will be the leader.IT IS unlikely that these tokens/coins will go away, rather be implemented in another way or decline in popularity.

It will be interesting to see either way.

Gold is Real Money

Gold is Real Money 150 150 JP

Gold is real money. It always has been and always will be. The bitcoin / crypto currency faction may believe otherwise, but while speculation may (definitely) drive up the price of bitcoin and other cryptos, the stability of gold is exactly what makes it real money. This post will be short and is directed at the value of real money versus other assets, historically.

Average Home Price

In September 1966, the price of gold was $35 an ounce. At the same time, the price of an average home in the United States was $23,300 (median = $21,400). So for about 665 ounces of gold, you could own a home in 1966. Fast forward to 2016, with gold trading at $1,350 an ounce and the average home sells for $358,000. Do the math and you’ll see that homes are actually cheaper today than they were 50 years ago because it only takes 265 ounces of gold to buy now.

S&P 500

On this day in 1966, the S&P traded just above $80 a share, or for 2.25 ounces of gold. Today, the S&P 500 closed at an all time high of 2,187! Yet, priced in gold, that’s still just 1.62 ounces of gold. And, while the margin is much less than on home prices, it’s still a large enough difference to question your investment in the stock market all these years.

Fast Forward

As with many things financial, its all about timing/pricing. For example, 20 years ago, when the average home price was $159,000, gold was trading at $387 an ounce. That’s still 410 ounces vs today’s 265.

What about the S&P? It was traded at 665, still more expensive at 1.73 ounces of gold. Rewind to 1980, when gold topped at $675, the S&P was at 125 (0.20oz) and the average home was 76,000 (110oz), that was the time to sell gold and buy other interest producing assets, if you were using real money.

What’s the future look like? Who knows! We do believe that business leaders need to keep an eye on the price of gold to other assets and even use it as a hedge for a long term store of value.