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Here's a possible risk/competition to BTC – a theoretical, as-of-yet undeveloped "electronic cash" instrument (which I'll call "FedCoin") deployed by the Fed in order to co-opt the whole BTC deployment.
FDC would be convertible to USD cash 1:1, and the Fed would simply suck up the cost of maintaining the servers and infrastructure, much as they do in printing dollars in order to keep currency in circulation. The motivation: they prefer to maintain their monopoly on issuing money.
FDCs would be entered as cash on the Fed's balance sheet.
People with bank accounts – or with cash – could turn deposits or money into FDC in any number of different ways.
This would of course be a centralized model run by the Fed, but the money would not need to be traceable. For instance, if the Fed issued FDCs in "bills" – with no ability to split them – FDCs could circulate without touching a Fed server until a time of deposit into a banking institution, and validation could occur just using the Fed's public key.
So they'd be anonymous, and from the merchant's perspective, FDC would be a lot more stable in terms of value, and accepting FDCs would be just as advantageous as accepting BTCs are. From the standpoint of doing business, the merchant would definitely be a happier camper, because they wouldn't have the volatility of BTC to deal with. (Volatility is all well and good as long as the value just goes up, but its substantially less good when values fall).
And the buyer would have the same anonymity as cash (bills have serial numbers, after all).
And the depositing of FDC into bank accounts would be seamless, as would withdrawls.
Your friendly libertarian gang wouldn't like it, but – quite possibly – FDC would likely prove stiff competition for BTC.
This is just a speculation of course, and most likely if the gang in charge wanted to stomp out BTC they'd do it with Law Enforcement, but if instead they wanted to co-opt the whole internet cash party, this is one way they might do it.
If I were writing the BTC "business plan" I'd put this under the "Risks" section. Again, if the need is great enough – and we're talking about a prospective issuance of virtual cash with a total value of about 10% of the existing currency in circulation – what is to stop the central authorities from trying to come to the party too?
After all, issuing currency is their business.
Article from world bank on remittances:
So, not a trillion, more like 400 billion – but still a big number. And the 9% costs number is accurate. Could be an interesting market. Its in the emerging market countries, however. Currently the banks there have an absurdly high 'take' from the remittances cashflow so it would seem like a simple matter to compete with them. However, if you've ever dealt with business in an emerging market country, you'd know that poking your nose into a powerful local entity's revenue stream can result in a quick "accidental death." (I have friends who have told me about a possible business venture – "Oh I couldn't do that, I'd be killed." And these are people with connections. Someone without connections…I shudder to think.)
It would be a simple matter to set up a non-bitcoin remittance effort in competition to existing banks. 9% profit margin would seem to be ample incentive. Why hasn't that happened? I don't think the "easy money" is really that easy. Remittance customers want local currency to pay their debts & buy food. They don't want to hold BTC.
My prediction: it will start to happen, it will start to bite into local bank revenues, and then it will get stamped out by the authorities (tools of the local bankers) – fighting terrorism, money laundering, etc.
Regarding gold – If my assessment is accurate, and the total value of bitcoin "Internet Cash" is going to be perhaps 300 billion, and gold 7 trillion, I'm not certain I'd classify gold as being in "a fight for its life."
Lastly, when a big problem hits, people will flee to safety and local currencies – they want to be able to buy food and make debt payments. (No debt payments = they lose stuff they care about). If the actual utility from internet retail cash transactions hasn't come on line just yet, I believe that the speculative bitcoin holdings will be the first thing thrown under the bus. Deflationary event = speculative air in most markets get completely wrung out, and then some. Look at oil in the 08-09 crash. Oil runs civilization, yet it dropped from 140 to 30.
I might point out – gold fared much better than oil.
Here's a back-of-the-envelope attempt to sketch out a fundamental case for BTC – which is currently a prototype form of Internet Cash. First I look at how it compares to other means of purchase, and then I see what the need for Internet Cash really is, based on transaction volumes.
So many people suggest that the dollar is completely unbacked – a fiat currency, and the same thing is true for BTC. It is not true, the dollar is backed by what it can buy, namely stuff in America (at the most core-level analysis). Americans will always have a demand for dollars, to pay down all that dollar-denominated debt, and so they'll be willing to sell stuff to anyone that come with dollars in hand.
BItcoin is also backed by what people are able to buy with it. Here, BTC and the buck have the same type of backing, but because few people are willing to accept it (currently) for transactions, the backing is still bit sketchy. [When it is Big News that someone is willing to accept BTC for their house, that's a clue – for instance, its never news that someone is willing to accept USD for their home]
BTC is better than the buck regarding scarcity. The popular collectable card products (magic the gathering, baseball cards) retain value because of artificial scarcity. BTC has that same attribute.
Do copycat *coin products dilute BTC? Are they a way of breaking the artificial scarcity? I'm not sure MTG had any real competition in its genre – perhaps someone in the field can comment. I'm equally unsure of the competing *coin products. It remains an open question for me.
Counterfeiting & Fraud
BTC (assuming no cryptographic breakthroughs – which is a critical assumption) is seemingly impossible to counterfeit, and it has a cheap (but non-realtime) validation mechanism. In this, its better than any competitor – including gold. Gold can't be counterfeited, but validation is not so cheap. FRNs can be counterfeited; there are validation steps, but they don't approach the level of certainty that BTC has for the man on the street. In addition, official policy can result in vast amounts of counterfeiting/devaluation of FRNs too.
Credit cards have fraud issues (someone in the system has to stand ready to absorb the billions in credit card fraud losses) as do checks – and the person absorbing the fraud for checks is the selling party.
BTC seems like a win here – when you include fraud and validation costs, as long as the sale doesn't need to be realtime. What's more, there are no long term official devaluation issues.
Point of Sale/Interchange Fees
BTC seems to have a cost edge. Electronic (credit/debit) purchases all involve having a 1-2% skim from a bank. Paypal too. Gold (in many places) has a 3-5% bid/ask spread. FRN purchases are free for both parties – its the only zero-cost transaction mechanism. Checks are very low cost, but there is a serious fraud risk with checks. And currency conversion of any kind has a fee too – perhaps 2% as well.
So, where do BTC's strengths best apply, and how many of them do we need for the economy to work? And what does that imply for the eventual valuation of BTC (and/or some form of Internet Cash)?
Where does BTC work best?
How about shopping in person? No, FRNs win, credit products have other advantages, no delay is required for verification [BTC verification is non-realtime], etc. I think the volume of BTC in person transactions will not be that great.
How about shopping online? From a seller perspective, BTC is great, since the fees are quite low, there is no fraud, and transactions cannot be revoked. Things are less great for purchasers, since there are no chargebacks so the buyer loses power. However they are more anonymous – they serve the purpose of "internet cash."
This would seem to be an important (unserved) market. BTC won't replace FRNs in-person, nor will they replace credit as the vehicle of choice for buying most Internet products – it is just too handy to charge something back if you didn't get what you wanted.
While not every internet transaction really wants to be in cash (the remoteness of the transaction and the delay in fulfillment would seem to beg for some sort of revocation ability), for the percentage that do demand cash, BTC/Internet Cash is exactly the right thing.
The Need/BTC Valuation
So how much dollar-value Internet cash is needed out there anyway? Some simple math comparing the current cash in circulation with the total retail transaction volume might give us a ballpark number.
Right now, there is about 1.1 trillion USD and 900 billion euros in circulation worldwide. Call that 2.3 trillion in cash in the two major economic areas. Total retail transactions in 2012 were about 30 trillion worldwide. Round up, and call it a 30:3 (10:1) transactions:cash ratio. Internet e-commerce was about 1 Trillion. So let's say BTC (Internet Cash all put together) in circulation could top out at that same ratio – 10:1, which would yield an ultimate USD $100B in Internet Cash need. This suggests there is currently a massive unmet need for cash in Internet transactions.
12M bitcoins x BTC $1150 -> market cap $13.8B USD
So if we assume BTC is the primary form of Internet Cash, that would yield a value of:
100B Internet Cash need / 20M BTC = $5,000 USD per BTC
Sky is the Limit?
Is "the sky the limit?" I don't think so. But $5000…is a lot higher value than I first thought. Naturally speculation could drive it higher, but also this calculation assumes that BTC are needed for a decent subset of Internet transactions (perhaps 20-30%).
Are BTC used in $300 billion of Internet transactions per year? No. Right now, there is only a small fundamental need. It's a gold rush, with actual utility to be provided later. But the ultimate need does seem to be there.
Perhaps this will be like the Internet stocks. Right now, we don't need 100B in Internet cash to handle the current number of cash-based internet transactions. A great deal of the current value is pure speculation – gambling. Maybe this will be like CSCO or EBAY or AMZN – worth absurd multiples of their actual worth as companies at the top of the 2000 bubble, but slowly over time approaching realistic valuations based on actual ROI 13 years later.
This is not to be interpreted as a "buy BTC until it hits $5000" recommendation. A really massive amount of BTC demand right now is speculative, and is completely detached from the fundamental need of BTC as Internet Cash. BTC price could go anywhere. I watch price/volume to see what the speculative demand is doing at any given moment. And given the amount of money sloshing around the overall system today (SPX 1810!!) is it any surprise that some of it sloshed over into bitcoin?
If we had some sort of "deflationary event" I think it is likely BTC would dramatically sell off, since people would focus on the types of currency that allow them to pay off their debt. Of course most other things would sell off too – but the things with a larger speculative component in them would (more likely than not) sell off the most dramatically.
Provided for your amusement, not intended as financial advice, etc, etc.
Once you've felt the rush of seeing your net worth double, then double again the next day – any other investing is watching a slow turtle dance. The net effect is a very stabilized ecosystem. I don't think ANYBODY would have predicted this scenario or role even two months ago.
"Feeling the rush" is not what I call a good fundamental case for holding bitcoin. Its very clearly "the greater fool" theory, the same logic used during the bubble in housing. "I'm buying housing because its going up."
However, the charts suggest continuing buy side pressure so – its certainly fun for me to watch from the sidelines.
Once there is an ETF, then it can be borrowed, and then shorted.
Heck, let's get futures on bitcoins while we're at it…
I wouldn't short bitcoin on a bet right now. I'm seeing a series of cup & handle breakouts that just reeks of bullishness.
That dip-buy at 450 was the clue. People are treating each dip as their very last chance to get a bitcoin. You can see it in the charts.
Until that psychology changes, its up, up and away!
Implied volatility for hypothetical bitcoin puts would be extremely high.
Until you see bitcoin making a lower high, and then a lower low – shorting is a bad idea.
So this may explain why people are seeing price inflation in some specific sectors. 500 billion in chinese dollars are being dumped in specific sectors in the more developed countries. While this is not monetary inflation (i.e. its not an overall increase in money & credit in circulation) prices sure do go up when a bunch of new money starts buying stuff in a particular sector.
Likely too this explains some amount of Chinese gold buying. Certainly in modest quantities, there is nothing better than a bunch of gold bars – internationally accepted, untraceable, portable, and a concentrated store of wealth – for taking with you when you flee the jurisdiction.
Harvey Organ today included an article that claimed premiums in Shanghai today were $33. My calculations show that the premium is substantially lower. Why the difference?
First, the article:DEMAND IN CHINA remains robust as seen in Shanghai gold premiums. Closing wholesale premiums continue to strengthen, gold closed at a $33 premium at $1,265.69 (see table below) today, up from a $11.25 premium at $1,265.69/oz on Friday.Next, my process for checking.
First, the Shanghai daily open/high/low/close data for today is found here:
Closing price (in CNY/gram @ 15:30 in Shanghai) for today 11/25, on the Au(T+D) contract (the one that actually requires delivery – "physical gold") was 243.35. Do the math, and we end up with:
0.1631 CNY/USD x 243.35 CNY/gram x 31.1034768 grams/troy oz = $1234.50 USD/troy oz.
But the poster said the Shanghai price was $1265.69.
So where did the poster get his data? Bloomberg. His screenshot of the bloomberg screen says exactly what he reports – Shanghai gold appears to be $1265.69, at a time when COMEX gold was 1231.50. However, digging a bit further, we notice the quote in CNY/gram on the bloomberg screen is 247.95, not the 243.35 price we got from SGE as the closing price for Au(T+D).
Is it possible bloomberg was reporting a different instrument than Au(T+D)? Or maybe bloomberg was reporting a quote from an entirely different time? The timestamp on the Shanghai gold quote was 7:00, while the other gold quotes were all stamped as after 10:00. Regardless, it seems likely that bloomberg was reporting bad data, for the purposes of assessing the premium of "deliverable gold in Shanghai" over COMEX.
So to calculate the premium accurately, you have to get the COMEX 1-minute data and find the COMEX price at the moment Shanghai closed. 1530 Shanghai time = 0230 EST. Looking at my 1-minute COMEX data, I see the price at the COMEX at 0230 EST today was 1230.10.
So, the Shanghai premium as of the close in Shanghai was 1234.50 – 1230.10 = $4.40.
If you suffered through all this detail, congratulations! Hope your eyes didn't glaze over.
Bottom line: Shanghai premiums weren't $33 today, they were more like $4.40. If it sounds too good to be true, it usually is.
I'm not up on all the intricacies of the tax code. I know that losses in one stock can be used to offset gains in another, but I don't have a feel for the reasonable limits.
Me either. I know just the basics: overall your losses can be taken to offset your overall gains. If you have more losses than gains, up to some limit those losses can be applied to ordinary income. Last I checked the limit was $3k.
The bits about collectables, I have no clue.
So gold was hammered in asia by the usual short assault, and 7 hours later the assault was bought. This is the second time I've seen that happen in recent days, and that's a positive sign. Its not a guarantee of anything, but it does say there are buyers out there at these levels, which is good news.
I've done studies of intraday chart patterns in gold specifically, and this particular pattern (which I call rebound above point of departure, on a high volume spike down) often heralds a low. Not always, but often. Its a positive sign.
Other bits of good news: silver is leading gold higher; while gold is still red on the day, silver is green.
We still need to see gold move and close above 1250 to confirm.