The Unavoidable Asset Class

Happy Thursday!

Nearly there, over the hump, and on the downslope to the weekend.

But before we get there: coffee and crypto.

The Demise of Bitcoin Has Been Greatly Exaggerated

After the Bitcoin “Bad News” Bears had BTC clocking down to $30,000, it made a stunning recovery.  BTC now trades in the $37,000 area.  Here’s a 5-minute chart of its trading activity.

Doesn’t look very bearish, does it?

The event that initially sent BTC down was how the FBI reclaimed the ransom from the Colonial Pipeline hackers.  The key is the FBI didn’t hack the blockchain.  That remains impossible.  

The FBI traced the series of transactions meant to launder the coins to a single wallet address.  The FBI happened to have the private key for that particular wallet.  They refused to divulge how they came by that important bit of information.  But they were able to recover the funds.

“I don’t want to give up our tradecraft in case we want to use this again for future endeavors,” Elvis Chan, an assistant special agent with the FBI’s San Francisco office, said.

Yes, this will send criminals running – and the corresponding trading algorithms as well – but it’s far from breaking the blockchain itself.

An interesting quote from the story is this:

“Because these transnational, organized criminal groups are facilitating these payments in cryptocurrency, and because of the transparency and traceability that cryptocurrency provides, you can actually more effectively follow the money and potentially mitigate and arrest illicit activity within this ecosystem, than you can with traditional finance and fiat currencies and payments,” explained Jesse Spiro, Global Head of Policy for Chainalysis.

Next time someone tells you, “Crypto is only for criminals,” you know how to respond.

Now that everyone is calming down a bit, BTC has recovered nicely.  To be sure, it’s nowhere near its all-time high.  But it’s not cratering anymore; far from it, it’s looking very strong over the past 24 hours.

The Great Un…banked?

Another bit of important news came from El Salvador, of all places.  The Central American country became the first in the world to designate Bitcoin as legal tender.

Before we go crazy, El Salvador’s economy is about the size of a smaller Fortune 500 company, with a GDP of $27 billion.

The GDP, or Gross Domestic Product, is the sum of all goods and services produced within a country’s borders.  I like to call it “Grossly Deceptive Product,” as it misses a bunch of things and is more a measure of spending than production.  But hey ho, it’ll do for now.

The designation allows bitcoin to be used to buy goods and pay taxes and bank loans. Businesses would be required to accept bitcoin for payment, with the bitcoin-dollar exchange rate set by the market.  (I’m not in love with the business requirement, as I think you should be able to trade whatever you like… for whatever you like.  But this is how they’re doing it.)

Also, converting Bitcoin into other currencies won’t be subject to capital gains tax.  Nice.

Since 2001, the US dollar has been El Salvador’s official currency.

The country’s dollar use provided macroeconomic stability as remittances from Salvadorans abroad grew steadily to reach a high of almost $6 billion last year.

As a percentage of GDP, it’s now over 20%.

Source: World Bank

The move to Bitcoin stems from the US government’s incompetence in dealing with El Salvador and its own crisis.

“Dollarization in times of crisis takes away the possibility of using monetary policy to stimulate economic activity,” Ricardo Castañeda, senior economist at the Central American Institute for Fiscal Studies. “It’s like eating Chinese food with just one chopstick.”

Indeed.  If you surrender your currency, you surrender your country.  It’s why the UK refused the Euro.  (And why George Soros – insane libtard though he is – deserves a knighthood for breaking the Bank of England and knocking the UK out of the Exchange Rate Mechanism in 1992.  Make that a dukedom.)

El Salvador President Nayib Bukele said the use of bitcoin would increase financial inclusion, as 70% of Salvadorans don’t have access to traditional financial services.

Can the Great Unbanked save El Salvador’s economy?  I don’t know.

But it will be interesting to see how a government deals with not having any control at all over the medium of exchange its citizens deal in.

F.A. Hayek, whose book The Denationalization of Money foresaw this development, smiles from above.

Bitcoin’s Vol is Insane

Note: “vol” is short for “volatility,” not “volume.”

Just for a goof, I decided to download the last year’s price data for Bitcoin.  Here’s what I got:

High: $63,503.46

Low: $9,045.39

Last: $36,879.88

Annualized Vol: 61.22%

It’s little wonder why monetary experts reject Bitcoin as a medium of exchange right now.  Its value is all over the place.

This is the main objection to Bitcoin, and I completely agree – for now.  But I expect this vol will calm down in the coming years.

I came across this website commentary on ospreyfunds.io that I recommend you read in its short entirety, but I’ll paraphrase it for you here.

First, this chart was created in January, but we’re probably not too much farther up the curve.

Source: ospreyfunds.io

This shows how early we are in the adoption of cryptocurrency.  Since the liquidity is quite low, you’ve got to expect large price swings.  That’s how illiquid markets work.

But once it’s quicker and easier to access Bitcoin, I think Bitcoin’s use will increase markedly.  And it just got a whole lot easier…

Ask and You Shall Receive!

I trade options on Interactive Brokers.  When one of my clients offered to pay me in crypto, my first thought was, “Can I use IB to receive it?”

It would’ve been so easy, as I was already set up.  As it happens, I couldn’t as IB doesn’t offer the option.

So I went to Binance.  What amazed me was how easy it was to set up and use, compared to only a few years ago.  And that ease is leading to new avenues.

Now, according to Bloomberg, IB will also offer cryptocurrency trading.

“Customers certainly are asking for it, and we expect to be ready to offer it to them by the end of the summer,” Interactive Brokers Chairman Thomas Peterffy said.

This will be big, I think.  There are plenty of traders who’ll now dip their toes in the water.

And why not?  If you can convert back to USD easily and trade stocks and options, surely you’re more likely to give it a go.  As far as well-diversified portfolios go, this makes it much easier to maintain.

The more participation, the more liquidity.  And that may calm down the volatility a bit.

I know you, like my colleague Jim Rickards, love gold.  And there’s certainly a place in your portfolio for it.  But crypto is an unavoidable phenomenon now.

I ask you this: if the Fed loses control and gold shoots to $15,000/oz, are your profits a well-timed and prescient hedge… or a speculative gain?

Now replace “gold” with “Bitcoin” and “$15,000” with “$60,000.”

Your conclusion may reveal a blind spot – and save your financial bacon in the process.

Until tomorrow, have a great Thursday!

All the best,

Sean

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