ICO Nonsense Tops $3 Billion

According to CoinSchedule.com ICO sales have topped $3 billion on 201 “offerings”. As far as I can tell very little is being produced by any of the entities that cashed in on this craze. Sure, there are a few companies that might make it. Two problems with all these bets:

  1. The ICO’s you are investing are long shots to make it in and of themselves
  2. The ICO’s are (for the most part) launched on Ethereum which itself isnt guaranteed to survive.

So when investing in an ICO you’re making a bet on a bet. I’m not here to say it can’t all work out. But my feeling is that you have all sorts of gunslingers out there who want to get rich quick. Most people “investing” in ICO’s are looking to get rich quick and/or think they deserve a seat on Shark Tank. Most of these ICO’s don’t even give you equity or anything like a dividend. Essentially the ICO is a donation to the enterprise launching the token.

To me this all looks like a massive wealth transfer from guys who got it early on Ethereum and aren’t satisfied. The famous saying on Wall Street is “Pigs get slaughtered” and I fear thats what will happen here.

What annoys me most about all of this is that the ICO market threatens the respectability of Ethereum. I believe that Ethereum could be a game changer, but if ICO’s draw increased scrutiny and or regulatory issues it could hurt Ethereum in a major way. Not to mention there are some very interesting, sincere projects launching tokens which are being washed out by the noise of nonsense offerings.

The market will eventually regulate itself, punishing those who tossed money at bad offerings. Who knows when that happens or at what price – but the current state of things is unsustainable.

Cryptos Fear Credit

Interesting article, worth posting here. I agree with some of what he says – all too often when a system stops working (like many argue our financial system has) the answer is to go 180 degrees from that system. In this case too much credit almost blew the global economy up in 2008 – so the response from “hardcore” Bitcoin folks is often “lets eliminate all credit.” What’s needed is a happy medium. Responsible lending – responsible risk.

I would say that ICO’s are pretty much either a loan at best or a donation at worst. Participating in ICO’s and buying tokens gives money to entrepreneurs to build their businesses – however all they offer in return is hope and in some case – nothing at all. You could draw parallels to how easy credit was leading into 2008 and how money is thrown at ICO’s today.

Cryptos Fear Credit

Proposals for monetary reform, whether mild or radical, are always and everywhere informed by some underlying theory of money.  A week ago I spent two days talking with a group of technologists and lawyers–perhaps I should say digital coders and legal coders–and pressed them on this point.  Chatham House rules prevent me from associating views with actual people, but the views themselves are the important thing.

So far as I understand, and it is important to emphasize that there was not consensus on the details, the technologists see themselves as creating a form of money more trustworthy than that issued by sovereign states, more trustworthy because the rules of money creation (whether proof-of-work or proof-of-stake or whatever) limit issue to a fixed and finite quantity.  Scarcity of the tokens today, and confidence that scarcity will be maintained in years to come, are supposed to support the value of the tokens today.  Importantly, no such confidence can be attached to state-issued money; quite the contrary states are seen as reliable abusers of money issue for their own purposes.  Cryptocurrency is digital gold while fiat currency is just paper, subject to overissue and hence depreciation.

From this point of view, current holders/users of cryptocurrency are just early adopters.  Once everyone else realizes the superiority of cryptocurrency, they will all want to switch over, and the value of fiat currency will collapse.  The (fluctuating) prospect of that eventual switchover shows up today in the (fluctuating) exchange rate between crypto and fiat (as here).  And the (fluctuating) prospects of different cryptocurrencies shows up today in the (fluctuating) exchange rates between different cryptocurrencies (as here).  According to the theory, one of the cryptocurrencies will be the future global currency, replacing the dollar, but no one knows which one.  People who got into Facebook at the beginning are all multimillionaires; early adopters of the future global cryptocurrency will be too, but which one will it be?  That’s what the lack of consensus about the details is all about.

One of the most fascinating things about the technologist view of the world is their deep suspicion (even fear) of credit of any kind.  They appreciate all too well the extent to which modern society is constructed as a web of interconnected and overlapping promises to pay, and they don’t like it one bit.  (One of my interests these days is “Financialization and its Discontents”, and I dare say that the discontent of the technologists is as deep as that of the most committed Polanyian, but of a completely opposite sort.)  Fiat money is untrustworthy enough, promises to pay fiat money are doubly untrustworthy.  One way around the problem would be to require full collateralization of all such promises, maybe even using so-called “smart contract” technology to ensure that promised payments are made automatically, basically an equity-based rather than debt-based system.  In effect, we have here a version of Henry Simons’ Good Financial Society, but with peer-to-peer cryptocurrency taking the place of his 100% reserve money.  Simons was of course responding to the global credit collapse of the Great Depression; the cryptos are responding instead to the more recent global financial crisis.

I view all of this through the lens of the money view, which places banking at the center of attention, views banking as fundamentally a swap of IOUs, and views money as nothing more than the highest form of credit.  It is view developed not so much around a philosophical ideal but rather as a way of making sense of the operation of the world as it actually exists, outside the window as it were.  In that world, the payment system is essentially a credit system, in which offsetting promises to pay clear with only very minimal use of money.  And prices arise from the activity of profit-seeking dealers who absorb fluctuations in demand and supply by standing ready to take any excess onto their own balance sheet, relying on credit markets to fund the resulting inventory fluctuations.  One can imagine automating a lot of that activity–and blockchain technology may well be useful for that task–but one cannot imagine eliminating the credit element.  Credit is not a bug, but a feature.

This point of view draws special attention to the place where markets are being made to convert one cryptocurrency into another, and especially the place where markets are being made to convert cryptocurrency into so-called fiat.  Someone or something is making those markets, and in so doing expanding and contracting a balance sheet, in search of expected profit (see here for example).  Cryptos fear credit, but I suspect they will soon discover that credit is a feature not a bug, and that will require them to re-examine the implicit monetary theory that underlies their coding.  To date, technologists seem to have felt that they have nothing to learn from the operation of the existing monetary and financial system, as their disruption is intended to replace it with something better.  But from a money view standpoint, it is the institution of credit that is the real disruptor, which is fundamentally why it is feared, by cryptos and also by the rest of us.  The answer, as Bagehot long ago taught us, is not to eliminate credit but rather to manage it, and “Lombard Street has a great deal of money to manage”.

North Korea is Mining Bitcoin But So Is….Fidelity?!?

There is a story here about North Korea using excess coal reserves to mine Bitcoin.I’m not really sure what the value of Bitcoin is to them if they lose all of their trading partners. I guess its all Black Market stuff they would be buying – I’m just not sure the Bitcoin black market is big enough to satisfy the needs of a sovereign nation. That being said I’m totally ignorant on the subject.

What I want to note here is the dichotomy between North Korea, our arch enemy, and Fidelity – a darling of Wall street and all that America stands for. Read here about Fido.

They’re both mining Bitcoin! If both the bad guys and the good guys see the utility in Bitcoin then what does that make Jamie Dimon?

I would have thought the news about Fidelity mining bitcoin would have pushed the bitcoin price up a bit more – but some rumors out of South Korea (the “good Korea”) banning ICO’s put a bit of a damper on things. I would note that at the time of this writing Bitcoin recovered to ~$4,200 USD but ethereum had not regained $300. Certainly this ICO news (if verified) would hit Ethereum harder than Bitcoin.

Morgan Stanley is On the Other Side of Jamie Dimons Bitcoin Trade

Bitcoin prices are heading higher today which some are attributing to the ECB (Euro. Central Bank) saying that Bitcoin and crypto was outside of their jurisdiction. I’d point out that regulating and taxing are two different things. I also don’t think that regulation is bad per se – there are a lot of scam artists out there.

Something I found quite a bit more interesting was that Morgan Stanleys CEO said Bitcoin was “more than a fad” shortly after news came out that former Morgan Stanley CEO John Mack is looking into launching an ICO. If this is true its a huge boost to the credibility of crypto, ICO’s and could pave the way for other big names to enter.

This is in sharp contrast to JP Morgans CEO Jamie Dimon who has been shredding Bitcoin the past several weeks.

Chinese Bitcoin Ban and Mining Dominance Could Be a Problem

While the world tries to figure out what China is doing in regards to Bitcoin I think there is one serious threat that is not being reflected in the Bitcoin price. While its been widely reported that China is essentially closing all Bitcoin exchanges another news source is reporting that Bitcoin “executives” are forbidden from leaving the country and makes a note that all Bitcoin businesses in China are under threat. Including miners.

So what?

Chinese dominate bitcoin mining, and therefore are the engine of the Bitcoin network. If they shut off tomorrow who is to say exactly what would happen – but the Bitcoin network would most certainly slow way down.

China dominates Bitcoin Mining

While its certainly possible for other countries to pick up what China drops, it wouldn’t happen overnight.

I really do not know how real this threat is, but its important to be aware of what may lie ahead.

Remain CALM: About the China Bitcoin Exchange Ban Rumors

 

Update – it appears that we were right:

Note: this is how I understand the Chinese Bitcoin Exchange situation. Its my opinion only.

The bitcoin, ethereum and crypto markets all fell ~10% on a rumor that china was going to ban bitcoin exchanges. At this point it seems that through translation something was taken out of context. It looks like what China is looking to do is regulate bitcoin exchanges to prevent money laundering. There is a huge difference between “banning” and “regulating”.

Here is a link to the article that appears to have started the fire, as you can tell its a bit tough to understand just what they are saying:

Caixin China Bitcoin News

This reads more like the government isnt allowing exchanges between Bitconi and or Renminbi.

That was picked up by articles like the one below – saying that Exchanges were going to be shut down.

Forex Live markets misleading headline read here.

Hold tight – don’t panic until its clear whats going on.

This GBTC Bitcoin ETF Analysis Hurts My Head.

From seeking alpha comes this gem about GBTC the Bitcoin ETF. The author acknowledges the extreme premium in which the ETF trades over the Bitcoin price. In other words if you buy GBTC you are currently paying >80% or more than just buying Bitcoin. (see more here)

First, he claims that “buying directly through coinbase has a +40% premium”. I don’t know why and he doesnt support his claim in the article. Yes, coinbase charges a fee, but it is not where near 40%.

He offers that GBTC offers cold storage through Xapo, and Coinbase offers insurnace but it comes with astericks – see authors article here.

Ok, so lets say that GBTC is more secure for storage of Bitcoin over Coinbase. The author ignores the fact that most responsible crypto owners get a hardware wallet or some other “off exchange” wallet.  This fact doesnt help justify the massive premium you’re paying for GBTC.

Finally there is this, the author presents an argument by a GBTC investor:

“I’ve decided to go with GBTC as a way of safely getting exposure to Bitcoin via my brokerage account, because I’m VERY long on it, and I can easily liquidate high dollar amounts (over $10K) at any time I want. And it’s all on the up-and-up, easily trackable for tax purposes, which I care about. My thesis is that the current premium is less important to me than the exposure because it’s 41% (or whatever the current percentage is) of a small fraction of what the ultimate price of bitcoin will be 10 years from now. It’s not perfect, I acknowledge that, but it strikes me as my best option, especially if I’m viewing this as one of my high-risk, high-reward investments.”

The argument is that in 10 years, the GBTC premium will be irrelevant. Of course, this leaves out he problem of P/E compression, or the potential catastrophic failure of Bitcoin in general. But, this line of thinking is congruent with the thinking of a Bitcoin bull. This isn’t “blind” investing or totally ignorant. I can respect part of this.

This completely ignores the fact that there are at least two other proposed Bitcoin ETF’s with the SEC. Care to bet that in 10 years there will be even more? Whats going to happen to the GBTC premium when other ETF’s come out which dont trade a premium?

INVESTORS WILL GO TO THOSE OTHER ETFS, THEREBY ZAPPING THE PRICE OF GBTC. If you’re ETF currently trades at an 81% premium to Bitcoin, and that premium erodes to zero – thats a loss.

I think you lose holding GBTC, there really is no way around it.

Government Making the Case for Regulation

It seems clear that the US government is making the case for Bitcoin regulation. It seems they’ve kept it in their periphery, but as of late they are more dialed in. Government headlines are coming “fast and furious” as of late. They probably figure that they will float ideas and statements out to the public to prepare everyone.

This all syncs up with the big arrest of the Russian guy who stole untold sums from his Bitcoin exchange, and is allegedly tied to Mt Gox.

So they point the finger at some possible shenanignas, make a move on some bad guys and say “See, we told you so! Now we’re coming to clean it up!”

Regulation and government intrusion is sure to make many “purists” in the crypto community upset. These are the guys who fled to bitcoin to flee their oppressors.

But for regular investors I think the regulation further paves the way for larger investments from Wall st and the like.