Gosh.. who would have thot?

I should warn readers there mght be a lot of “apparentlys” and “maybes” in this morning’s Porridge about Cryptocurrencies.

“It will rip your throat out Jim! Hah, I’d like to meet his tailor…”

Gosh… the Bitcoin bubble is bursting. Who could possibly have predicted that?

I should warn readers there mght be a lot of “apparentlys” and “maybes” in this morning’s Porridge about Cryptocurrencies.  

I was going to write about real stuff… like the inflationary threats of stagflation/debtflation/inflation, the sovereign debt bubble and when it bursts.

I did think about a dive into the shallow end of the EV bubble: about how 150 new EV and battery companies expect to each be selling at least 5 million cars/batteries by 2030. Analysts expect a 25 million EV market by 2030, and that batteries are expected to cost less than $10k, meaning it will be a very competitive $250 bln battery market. All these EV makers are currently valued by the stockmarket at over $1.1 trillion – which, to be fair, is mostly Tesla… Before I take a slice, just one question – what’s the profit margin?

I suspect Tesla will still be a bubble next week… Bitcoin might, as the FSA has warned, be worth nothing….  That’ll be a bit embarrassing for JP Morgan: Bitcoin could reach $650k

Yesterday Bitcoin tumbled 11% to $31k, down 25% from its top around $41.5 k earlier this month. We’ve been here before… haven’t we. There are all kinds of reasons for the crypto-bubble bursting this time, but underlying everything about Bitcoin is gaming human psychology, our flawed identification of risk, and our desperate desire to get rich for the minimum possible effort. 

Fortunately, I have been gifted with the blessing of not being particularly clever, and being intellectually lazy. (Ah… how well I remember a former boss, a nasty little Belgian we’d poached from CSFP, berating me for lacking the “intellectual curiosity” to calculate a swap from first principles. I replied… “Ok, if I do it, what is Howard going to do?” referring to my swaps quant who is still a great guy and positively relishes hard stuff.)

I’ve never understood why we need Bitcoin. I don’t pretend to understand the way it works, and I haven’t actually bothered trying to delve into the sacred white paper texts that underly the cult. Blockchain lost me at the pages full of difficult sums, and I can’t admit any close familiarity with its underpinings. Being a keen student of history, I quickly concluded all codes can be broken if you use a powerful enough computer. (Guess what the Chinese have developed…)

But I do understand markets, money, and the greed that drives people to desperately want to believe in things that will make them rich. The propensity of greed to cloud common sense is what has fed the legions of scam artists who’ve fed off speculative bubbles since the moment the concept of barter was invented.. 

What’s triggered Bitcoin’s collapse this time? 

It might have been the UK’s FCA warning retail investors to be prepared to lose everything, and reminding them they won’t be covered by any banking insurance if they do. The reaction of the crypto-prophets has been hilarious: suggesting that by discouraging Bitcoin buyers from buying safe exchange-traded crypto-products, the regulator is forcing them into the “wild-west” of offshore bitcoin dealing. Or, on the crypto notice boards libertarian fan-boys are posting it’s all a Bill Gates plot to keep Joe Public from getting rich on the unlimited upside potential.  

Or, it might have been Janet Yellen stating the need for regulation in her senate confirmation hearing on the basis that about the only real commercial justification for Bitcoin it’s is use to facilitate untraceable transactions on the dark web by terrorists, criminals, drugs lords, and who knows… Russians wanting bitcoin in exchange for dodgy Moscow hotel room films… but that’s a whole other story.

Or, it might be the debunking of the myths that Bitcoin is now real money, with increased value as it becomes widely accepted as a store of value, a viable investment vehicle, and transactable medium of exchange. We’ve all read about Ruffer selling gold for bitcoin and making out like a bandit. I wondered out loud how many bitcoins have actually been used to pay for anything on Paypal, the moment, so we are assured, that bitcoin became “absolutely” legitimate last year. You can use Bitcoin to buy 3 other cryptos, or real money, but you won’t actually be able to buy the groceries with it till later this year. 

Or, it might be something to do with the rumour it was the sale of a measly 150 bitcoins earlier this week that’s caused the market to tumble. Or maybe it was a rumoured $615 mm Whale trade that spooked everyone? That such trades can unsettle the market shows too things: 1) how “investors” are terrified the smart money will exit, and 2) it’s an incredibly illiquid market. Of the 18.7 million bitcoins “mined” thus far, about 20% of them have apparently been lost – like the unfortunate chap who’s apparently forgotten his password to $220 mm of them, or the 20 Whales who are said to hold 95% of the total number of bitcoins.

Or, maybe it’s all the “Hodlers” who can’t spell hold and are determined to hold bitcoin forever on the basis it has no physical existence, and as many have discovered, no virtual existence either when they discover their crypto-wallets have been hacked and ransacked. The reality is the “free-float” in Bitcoins is absolutely tiny, which drives the volatility. 

Or, it might be the swirling fog around the massive swindle at the core of the Tether? Apparently the crypto-stable-coin linked to the dollar and secured by iFinex, which holds one-to-one dollar assets behind tether, has somehow lost $800 mm it deposited with an unnamed Panama bank which it never signed any contract with. The only reason for Tether’s existence would seem to be to allow buyers who can’t buy bitcoin on domestic exchange. They buy Tethers with unlimited leverage from iFinex to buy bitcoin on offshore crypto-exchanges… you see where this is going…  Naughty iFinex…

Or it might have been a fundamental tenant of the Bitcoin cult being broken – a double-spend in the Bitcoin Blockchain continuum.. whatever that might be. This one intrigued me.. after all isn’t the blockchain as secure as Fort Knox? Or at least until someone gets a quantum computer up and running – like the one the Chinese announced recently..

So I set out to find out what a “double-spend” is and whether it’s possible (because if the blockchain ain’t sacrosanct then is busted).. What I found absolutely did my head in… After much delving through arcane texts and indecipherable pentagramed symbolic parchments – in other words a 3 min internet search, I came across this on a “respected” crypto journal. I’m a former journalist turned banker, and in 36 years in markets I’ve never read such utter, absolute tosh and spurious nonsense presented as irrefutable fact: “The Bitcoin Double-Spend that Never Happened”.

As a bond salesman I know crap when I see it. It’s all complete and utter twaddle, reinforcing my suspicions the blockchain tech and bitcoin cult are spurious nonsense. 

If you truly believe that Bitcoin is digital gold, or is set to replace fiat currencies because its cybernetically clean, simple, honest and totally impossible to scam, and it will stop governments abusing fait currency – then good luck understanding this: 

Since the fee was so low, the transaction took a while to confirm, so the sender tried to outpace it by sending what’s called a “replace by fee transaction” (RBF). Instead of the RBF replacing the slow transaction as intended, however, the lower fee transaction cleared first and made it into the block that was mined onto the longest chain. Meanwhile, the higher fee transaction found its way onto the stale block. The final result: 0.00062063 BTC is recorded as existing on the address 1D6aebVY5DbS1v7rNTnX2xeYcfWM3os1va on the irrelevant transaction history while 0.00014499 BTC exists on the same address but on the relevant transaction ledger.

Of course it all makes perfect sense.. 

Nope. It doesn’t. If you are cryptobeliever, and you find the above paragraph makes you feel safe… I still have 3 KG of unicorn poop for sale. 

Rule 1 of Money. People have to trust it.

Rule 2: The more complex, the more clever, the easier it is for fraudsters to convince credulous fools its genuine, playing to the mark’s pride and desire to be considered clever.. 

I can best explain through the mental image of a naked fat-man with a crown on his head, wearing a suit he’s been told only very-clever people can see. 

Out of time, and have a great weekend..

Bill Blain

Shard Capital