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Cryptocurrencies: Dinosaurs, Gold and My Mother

By Glenn HowellCryptocurrencyAug 11, 2017 11:41
za.investing.com/analysis/cryptocurrencies-dinosaurs-gold-and-my-mother-200195958
Cryptocurrencies: Dinosaurs, Gold and My Mother
By Glenn Howell   |  Aug 11, 2017 11:41
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We asked Glenn to give us his opinion on Cryptocurrencies, here's what he had to say:

Howard Marks, billionaire co-chairman of Oaktree Capital Management says that Bitcoin isn’t real, and we can all blame Millennials for its rise. (1)

“Digital currencies are nothing but an unfounded fad based on a willingness to ascribe value to something that has little or none beyond what people will pay for it”, Marks said in his latest memo to investors. (2)

Well, Mr Marks, I’m not sure if I qualify as a millennial, but I think that you are a dinosaur.

And here is why, as you say in your own words, ”But they’re not real!!!!! Nobody has been able to make sense to me of these currencies” (2)

Not understanding cryptocurrencies isn’t a good enough reason to discount them, Mr Marks. They won’t go away simply because they are outside of your comfort zone.

In this piece, I’m going to discuss three concepts around cryptocurrencies. They are

  1. Why cryptocurrencies are incredible, and cannot be ignored
  2. Why you can forget about day trading them (for now)
  3. How you can responsibly get involved (if you’re a believer, that is)

Before I get started, I have to be completely open. I am not an early-adopter of cryptocurrencies. I don’t have a digital wallet, I don’t own a single Bitcoin, and I’m by no means whatsoever an expert on the topic. What I’ve done is spent some time doing my research, and I’m outlining to you what I have found, and what I intend doing about my own dinosaur-ness.

Maybe you disagree with everything I have to say. That’s OK, let’s chat about it over a cup of coffee.

Just before we start, I’m going to stop using the word ‘cryptocurrencies’ and start using ‘Bitcoin’, simply because Bitcoin is the belle of the ball (Ethereum being its awkward step-sister), and because it’s much shorter word to write and say.

Let’s get to it.

Why Bitcoin is incredible

Have you ever heard of a man called Frederick Barber Campbell? No? Well on the 5th of April 1933, President of USA, Franklin D. Roosevelt signed Executive Order 6102 in law, “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” (3).

In other words, private citizens had to sell any physical gold they had to the government at a fixed price of $20.67 per troy ounce. The penalty for failing to do so was a fine of $10,000 and ten years in prison. Once the US government had bought all the gold back, they revalued the gold price at $35 per troy ounce – this is a side note, but it should raise a red flag in the back of your mind about how devious central banks and governments can be. We’ll come back to this point.

Not everyone complied with Executive Order 6012. Campbell was one of the non-compliers who at the time had 5000 ounces deposited at Chase Bank. Campbell tried to withdraw his gold, and the bank refused (that’s another red flag), forcing Campbell to sue the bank. In response to his lawsuit, the bank filed a counter suit, and a federal prosecutor indicted Campbell for not giving up his gold.

Campbell didn’t see any jail time, but the US government confiscated his 5000 ounces.

The story of Frederick Campbell is just one example of how banks and governments have proven that they cannot be trusted to store wealth. Campbell’s story scores double points because we’re not even talking about valueless pieces of paper (the things we buy our coffee with today that banks can just print and print, read: Zimbabwe). We’re talking about a physical thing – gold. Central banks, no matter how desperate they get, cannot print gold to cover debts.

Bitcoin and its accompanying blockchain technology represent something that we all wish gold could be – a store of wealth that can’t be printed (deflated in value) by central banks, but could, in theory, be used to pay for things.

Let’s talk a bit about the practical aspect of paying for stuff. If we decided that we couldn’t trust central banks world over (which we can’t), and their fiat currencies, we might all carry around bits of gold. Paying for a cup of coffee? Out comes the sandpaper and you grind off some gold dust into the cash register. Not that practical, right? That’s why printed cash is useful. We can use it for everyday transactions. Gold cannot fulfil this task. Bitcoin might be able to.

Contrast this with how your bank operates. When you buy something with a credit card, or heaven forbid, purchase something overseas and have to deal with a currency conversion, you get hit with all sorts of fees. Credit card companies love it, don’t they? Your bank is pretty thrilled with the status quo, charging you for having an account, charging you exorbitant amounts for using your account (read: transaction fees to buy stuff), charging you interest and doing this all on a sliding scale. The bigger your transaction, the more your bank can charge you.

How does Bitcoin compare? Transaction costs are low, and fixed (i.e., don’t get bigger with bigger purchases). You also don’t need to worry about currency conversions, filling in balance of payments documents, waiting for “funds to clear” for ages, and a major bonus - fraudulent transactions are largely impossible with cryptos using blockchain.

Let’s take a quick detour and talk about blockchain. It matters because blockchain technology is what makes cryptos work.

Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.

Information held on a blockchain exists as a shared — and continually reconciled — database. This is a way of using the network that has obvious benefits. The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet. (4)

If you buy something with Bitcoin, the whole world can track that transaction (we won’t know it’s you, only you can prove that, so don’t worry about your anonymity). But if all the world’s Bitcoin transactions are contained on a ledger we can all see, then the guy you just bought something from cannot pretend he didn’t get the money, can he?

Let’s go back to this idea of Bitcoin as a store of wealth, like how gold would be in an ideal world. Bitcoin is mined digitally, but it has many parallels to how gold is mined out of the ground. For example, it costs real resources to mine Bitcoin. You need processing power, and lots of it to mine a single Bitcoin. You can’t just decide to ‘have Bitcoin’. Either you buy it, or mine it.

And just like how we assign a value to gold because of its scarcity and difficulty to obtain, the same is true for Bitcoin. Bitcoin has a one-up over gold because we don’t know how much gold is left to mine. We know, based on Bitcoin’s inherent design, that there are and will only ever be 21 million Bitcoins available. Bitcoin’s mining schedule is also ingenious in that the rate at which new Bitcoins are mined, is steady. As the world throws more and more processing power at mining Bitcoins, the algorithm that those miners have to solve to unlock new coins, becomes more and more challenging. You can track how difficult it is to mine Bitcoin right here: https://bitcoinwisdom.com/bitcoin/difficulty

Aren’t both the mining process and blockchain technology so beautifully transparent and elegant?

No central bank or a single institution, no matter how big or powerful, could ever control the production or value of Bitcoin.

Of course, central banks and governments are going to try and control the transactional nature of cryptocurrencies – it’s in their nature. We’re in for some fireworks when that starts.

Crypto’s are incredible because of the technology they are driven by (fraud, fees, storage) and because they can both store wealth and be used to transact, and they are currently immune from sociopathic central bankers and governments. No other asset class in the world can claim this.

You can’t day trade cryptos

Here is why

Ethereum, a shining star in its own right but less famous that Bitcoin, plunged to 10c from $317 in a matter of seconds on the Coinbase operated, US based exchange GDAX. (5)

Price recovered soon after, but not before 99.99% of long positions were stopped out.

If you poked around any social media posts talking about the crash, you would have found thousands of speculators had been wiped out. Yes, wiped out. But what if you had a 1% or 2% stop-loss at risk? Well, dear reader, that means absolutely nothing when there is no liquidity to help you out.

Let me explain. Let’s say that you bought Ethereum at $250 on the exchange, much like how you would trade any currency pair. Let’s say that you’ve moved your stop-loss on your long trade to $300, locking in $100 if price were to reverse. All of a sudden, someone dumps a huge amount of Ethereum on the market. Maybe it was a mistake; maybe it was something more sinister. We’ll come back to that.

Anyway, price plunges. And because the selling pressure is so huge, when price gets to your $300 stop, your position is not closed. Your stops are jumped. Remember, just because you wanted to sell at $300 doesn’t mean anyone else wanted to buy. Finally, the buyers step in at ten measly cents, and it’s at that price that your trade is closed.

Sound far-fetched? It shouldn’t because that is exactly what happened. Your Etheruem is gone, just like that.

The big issue is the lack of liquidity. Let’s also consider that most of the exchanges offering you trades on cryptos aren’t regulated. Have a dispute with an unregulated exchange? Tough. You can try and take them on in court yourself, but there is no overseeing body that is going to help you out.

As a professional trader and money manager, a flash crash from $317 to 10 cents and back up again in a largely unregulated market mean that I will not be trading cryptos anytime soon. It will happen again.

Let’s also consider the idea that some exchanges will be full-on bucket shops. This means that they are taking the other side of your trades (i.e., not acting as brokers, but as market makers). The implication is that if you lose, they win. So if 99.99% of an exchanges’ clients get wiped out, and the exchange had the other side of those positions? Free money.

Finally, I’d like to share this chart published by Nautilus Investment Research (6)

Gold Spot Weekly
Gold Spot Weekly

The Gold price, from the 1950’s to today, is being compared to Bitcoin’s price moves from 2012. A very interesting correlation! Could Bitcoin’s volatile moves over the last six years just be an accelerated version of what gold did over 60 years? Looks a bit that way, doesn’t it? The similarities between the two assets continue. However, until Bitcoin settles down a bit, I don’t believe that day trading it is a very smart idea. Gold is considered a fairly volatile asset, in its risk on/risk off nature. To say Bitcoin is ten times more volatile is an understatement.

How can you get involved, responsibly

I think there is opportunity for cryptos in three areas

  1. Mine them
  2. Buy and hold them
  3. Develop a secondary offering that supports their growth

I don’t want to dig too deeply into mining. Essentially, you can buy the hardware you need and pay for the electricity and mine yourself, or you can buy into one of many third-party mining organisations that take a monthly subscription from you and mine on your behalf. How much money might you make mining? Well, that depends on the future price of whatever you are mining, doesn’t it?

Cryptos are here to stay. They will be transactional, and they will be a store of wealth. That doesn’t mean that Bitcoin is going to be the coin that wins out. Bitcoin might be the MySpace of cryptos. Maybe GlennCoins will be the Facebook. In short, don’t back just one horse especially if you are forking out a lot of money for hardware to mine by yourself.

If you go with a third-party miner, you might be buying into a huge Ponzi scheme. Do you know if they take your money and mine Bitcoin, or just take your money and pretend to mine Bitcoin? You don’t, do you? A good friend of mine (excuse the pun) is using a third-party miner to do his digging, and he is getting 15% returns a month. Incredible! He is four months in, and in two month’s time, he’ll have his initial investment out. He and I have both agreed that he could simply be an early buyer in a huge Ponzi scheme. He is OK with that because he knows the risks and if he is one of the first, he’ll be fine. It’s the guys who buy in late that never see a dime back. You have been warned.

I think buying and holding cryptos remains the best opportunity if you want to get involved but you’ll need to be OK with your coins potentially losing 90% of their value as price swings around wildly.

We’ve all seen the “if you invested $1000 in Bitcoin back in 2010 they would be worth Bill Gates money now” posts online, but the question is, is price going to continue to gain in the long term? My belief is that it is. I think the finite number of coins available, combined with their ability to store wealth and the fact that we can use them to transact in an everyday way (in the future, of course) means that we’re nowhere near the ceiling in price. Can you stomach your investment losing 90% of its value (and maybe staying there for months or years) before recovering? That’s the real question.

Finally, you might make a killing by developing support services to cryptos. I’ve got lots of ideas here, so I’m not going to post them just in case I want to follow through on some. The obvious ideas (and existing) are things like cryptocurrency industry magazines, courses teaching people how to invest and understand, building exchanges, launching new coins, creating mining services, etc.,

I want to close with a final note. When Bitcoin was hitting its highest peaks (to date at that time) of $2800 back in early June 2017, I got a phone call from my mother. She had just received an SMS urging her to buy Bitcoin because of how well it was doing, and she was asking me what I thought of it.

Now, I’m willing to bet that your mother is a lot like my mother. My mom is retired; she knits, sews, plays with her grandkids and does a lot of gardening. Her interest in investments is limited to the institutions that manage her pension.

And here she is being urged to buy a cryptocurrency.

Of course, when I saw that SMS I tried to explain as best I could what it was (I wasn’t that clear myself at the time) and I told her why I didn’t think she should not pursue it. She told me she had already deleted the message and was just curious. So why am I talking about this?

Well, in the world of trading and investments, when family members are telling you about hot stock picks around the dinner table, and urging you to buy into them before it’s “too late”, that’s the ideal time to sell. As my mom would say, “true as Bob”, shortly after her SMS, BTC price fell some $600.

Morbidly then, it’s encouraging to this trader to see that the smart money is including cryptos in their rather deceptive way of getting the general public to buy when they want to cash out. Yes, folks, that is how trading works. The smart money wants to unload at the top to suckers who think they are going to miss out.

This implies that the smart money is already playing the game. Sorry for you, Mr Marks.

(1) MarketWatch

(2) Oaktree

(3) Executive Order 6102

(4) BlockGeeks

(5) Investing.com

(6) Nautilus

Cryptocurrencies: Dinosaurs, Gold and My Mother
 

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Cryptocurrencies: Dinosaurs, Gold and My Mother

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Hopewell Mbonambi
Hopewell Mbonambi Oct 14, 2017 7:11 GMT
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Im diving into this deep blue see of crypto currencies well aware of the sharks , although my financial advisers warned me but i can't let this chance elude me , its a risk worth taking & im backing ethereum!!!
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Lester Thobejane
Lester Thobejane Aug 14, 2017 18:45 GMT
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Well said looking forward to see the future of cryptocurrencies.
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Johan Barnard
Johan Barnard Aug 11, 2017 10:07 GMT
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This is an awesome article and a real eye opener. Thanks Glenn!
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Disclaimer: Unum Capital (Pty) Ltd (formerly Vunani Private Clients) is an Authorised Financial Service Provider (FSP 564), 3rd Floor, Menlyn Corporate Park, Menlyn Maine, Pretoria. Although Unum Capital is an authorised Financial services Provider, any opinions and/or analysis contained in this article are for informational purposes only and should not be considered advice or a recommendation to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, any comments, opinions and analysis is rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any share, instrument, sector, region, market, country, investment or strategy. Copyright 2017 by Unum Capital (Pty) Ltd
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