After having traded Bitcoins successfully since 2017, in the past few weeks we have been shorting Bitcoins again. The first time at 50’000. a position we closed with the expiry of the March Future contact at 53’000 and again last week at around 59’000, a position that we closed this morning at 60’175 as our stop loss was executed.
Bitcoins are hovering around 62’000 at the time of writing and are in the midst of a massive bubble, with the expected listing of Coinbase today, the largest Cryptocurrency exchange at around USD 100 Billion.
As we have highlighted long ago, the current forms of Crypto-currencies, Bitcoin being the biggest and most famous, are neither a medium of payment, nor a reliable store of value.
As with all limited-supply and unlimited-demand types of asset, their price volatility is way too high to enable trading goods and services by paying with them, and as a store of value, what drives their prices up – more buyers than sellers – is what makes them extremely dangerous to hold when things turn and that there suddenly are more sellers than buyers.
The entire history of Bitcoins and crypto-currencies is about those wild swings up and down as psychology changes.
Bitcoin and all other cryptos run on the Blockchain technology that purports to be invulnerable to hacks because what amounts to an electronic ledger is shared instantaneously among all users. So a debit to your account appears as a debit across the entire Blockchain infrastructure. There is no control or central authority that oversees the transactions. If the debit is recorded on the “ledger”, the transaction is written in stone.
But since there is no central bank or regulator oversight, and since Bitcoin investors are anonymous by definition, there is no one to stop or control movements in prices, be they manipulated or just herd mentality.
At the end of the day, Bitcoins have no intrinsic value, they are just a piece of code, issued in limited quantity and consuming massive energy to be increased.
As we saw with the recent GameStop short squeeze, a relatively small group of traders can manipulate the price of any asset. The spread between the “bid” and “ask” on Bitcoin, for which the value is in tangible, can vary considerably. But if the bid and ask are filled by groups working in unison to raise Bitcoin value, market economics are replaced by manipulation. The manipulators – acting as buyer and sellers—can easily boost value before cashing out and enjoying their profits.
As most buyers today tend to be a younger generation that take its cues from social media forums, a small group of “influencers” can entice large numbers of inexperienced investors to buy all at the same time, something that is clearly happening right now.
Bitcoin’s behaviour today is just another testimony of the Wild Wild West of America’s financial markets since the FED has been pumping printed dollars into the system while the US Government has been accumulating debt at a 7.8 Trillion pace ( 35 % of the US GDP ) just to hand out checks to Americans who did not need them for most.
Asset Prices have been flying, stocks, bonds, commodities, art, even memes and gifs, at a rate never seen in history leading a herd mentality that has seen the largets amount of money flying into stocks ever seen in a 100 years of history of the financial markets in just the past couple of months.
Bitcoins, Gamestop, SPACS, TSLA and IPOs are all the extreme illustrations of the mother of all bubbles engineered by a FED that is playing with fire by pouring unlimited liquidity in already overhyped and over valued financial markets.
When the game stops, the fall will be extremely hard…
And the game will ultimately stop either now, when the base effect on real goods and services inflation gauges creates a shock in the numbers to be reported in the coming weeks, or at the beginning of 2022, when real inflation will start appearing in a sustainable way.
Then, interest rates and bond yield will jump, pulling the rug from under equity valuations and will curtail corporate profits at the very time new tax hikes will hamper them as well.
Governments hate cryptocurrencies
Besides the sheer dangers of the current speculation in Bitcoins and Cryptocurrencies, another danger is the building pressure for Governments to clamp down on the current forms of cryptocurrencies and their drive to build their own, Government-controlled, version of them.
Bitcoins and crypto-currencies have become the perfect payment method for criminal activities. Whether it is cyber-criminality or even more traditional forms of criminality, criminals all prefer the anonymity of Bitcoin to less anonymous alternatives.
Trading in Bitcoin is also normally subject to capital gain taxation like any other asset or commodity, but governments seeking to calculate and collect these taxes are usually hard-pressed to determine those gains and losses for tax purposes.
With the traditional state-backed currencies of nations, there is no issue of capital gain or loss. There is none. Your basis in cash is its value. The basis of the things you buy with it is the price you paid for them.
Controlling the fluxes in crypto-currencies has become a priority for Governments, whether to track criminal activity or to tax speculators on their gains.
Another area where Governments are sounding the alarm bell is the amount of energy consumed – and pollution generated – to mine the crypto-coins. The Model developed by the inventors of Bitcoins is one that requires massive computing power to solve complex equations and lead to the issuance of one or a fraction of new coins. And a s the rule diminishes the number of new coins for the same equation-solving in regular sequences , the amount of energy consumed to create a new Bitcoin is becoming worrisome.
Central Bank Digital Currencies (CBDC)
Central Bank Digital Currency, has been a notion since at least the mid-to-early 2010s. In 2015, the Bank of England Chief Economist, Andy Haldane, suggested CBDC as a means of setting rates at the Zero Lower Bound, a zero or sub-zero interest rate. ZLB effectively signals the end of traditional monetary policy; a situation where, as is the case now, monetary policy no longer works to stimulate growth because interest rates are at zero.
The discussion then was all about monetary policies. But the debate has now evolved to creating state-backed digital currency as the ultimate form of payment, withdrawing anonymous banknotes from circulation.
Haldane reiterated his view favoring the concept of CBDC in a recent speech, noting the greater viability of CBDC as a payment platform.
The benefits to governments of CBDC over Bitcoin and its clones are innumerable.
CBDC use technologies that allows “controllable anonymity,” meaning buyer and seller can be anonymous, but government authorities can readily track suspicious transactions.
Payments are made via phone numbers, without SWIFT, and require only electricity and mobile networks.
Users can transfer money between accounts by tapping phones, much like having physical cash change hands. The digital currency will be legal tender, so it can be exchanged without needing a bank as an intermediary.
CBDC are set to revolutionise the banking industry by eliminating it from payments systems. Money will be held and transferred digitally form one phone to another, form one wallet to another, capitalising on all the benefits of the blockchain technology underlying Bitcoins but without the volatility and secrecy.
From tracking payments to avoid criminal activity, to more direct and effective monetary policy, to piercing the barrier of the ZLB, to aiding in the elimination of tax fraud, to simplifying the c costs and effectiveness of payments worldwide and eliminating banknotes, CBDC clearly benefits the national interest of each and every country.
China has already taken the lead
In 2020, the People’s Bank of China PBOC, China’s central bank, unveiled a digital Renminbi and encouraged its use by Chinese citizens. It was the first digital currency launched by a large economy and is a direct competitor to Bitcoin and other digital currencies.
It had been run via small pilot programs in a few pilot cities including Shenzhen, Suzhou, and Chengdu with civil servants getting half their pay in the form of the digital yuan before its formal launch.
Xi Jinping, China’s leader, who has targeted 2050 for the year China would surpass the United States as the world’s preeminent global superpower and to displace the USA from that post, has already “set the rules” for central bank digital currencies (CBDC) globally.
The launch of the digital yuan is now allowing China to gain considerable visibility as it will be used in the 2022 Beijing Olympics. the Olympics will be a showcase of the benefits of a state backed digital currency.
The digital yuan will allow customers at the Olympics to pay vendors by tapping an NFC-enabled payment device with their telephone, much like Apple Pay.
The global attendees of the Olympics will have that technology tied to a digital yuan account, and will probably take it home around the world, especially if the digital yuan can be translated to the Olympic guest’s own country’s currency instantaneously by the payee’s device in his or her own country.
Cash is already used much less often in China than elsewhere in the world thanks to the widespread adoption of services like Alipay and WeChat Pay.
By enabling transfers with no need for an internet connection, the digital-yuan ensures that commerce can continue as long as power and mobile networks are available
“Digital Currency Electronic Payment” as “e-RMb” or “Digital RMB” can also be sent almost instantaneously internationally, to foreign governments, to commodity traders but also to and between individuals of various countries.
Payments across borders can be sent to a cell phone much easier and efficiently than they can to SWIFT or other interbank payment systems, which require a banking infrastructure to deliver funds.
The e-yuan will immediately became a global currency, a no-fee debit card, accepted everywhere without transaction or exchange fees to customer or merchant.
All this presents significant advantages to businesses and consumers, but it also represents a an extremely serious threat to the USD’s “exorbitant privilege” as the world’s reserve currency.
Suddenly, people don’t need dollars anymore. They have Digital wallets in their phone to pay everything, everywhere in e-Yuans.
The DCEP, as with any central bank digital currency, undermines SWIFT as well as bank debit and credit cards.
And finally, one of the most significant aspect of the digital yuan will be to allow anyone to circumvent US and other countries sanctions, which are all based on the use of a country’s currency,
China’s digital strides draws attention to how the U.S. needs to modernise its own financial infrastructure. FED Chairman Jerome Powell said in testimony recently that developing a Fed-backed central bank digital currency, or CBDC, is a “very high priority project“
The USD has been the world’s reserve currency since roughly the end of WWII when it replaced the British pound sterling. As one of the few developed Northern Hemisphere economies that had not been damaged by war and with a political system that was not in fear of the post-war tumult of communism and socialism that had swept or threatened much of the post-war world, the USA was the world’s “safe haven”.
That standing was further enhanced as America became the financier of the post-war European and Asian economic recovery under the Marshall Plan.
In the three-quarters of a century since the end of the war, America’s large financial markets, together with most commodity markets being priced in USD, have continued to make the USD the principal majority reserve holding of most foreign central banks’ foreign currencies.
But the standing of the USD as the currency of global trade has been at issue, with the EUR taking an increasing volume of USD trade and even surpassing the USD last October for the first time since 2013.
MIs-management of the US infrastructure and Public Accounts over decades and the outbreak of COVID-19 that has set back America and a large portion of the leading Western economies significantly in terms of public deficits, public debt, unemployment and investments are also creating an environment of loss of confidence in their FIAT Money, one of the reasons put forward to explain the desire of investors to hold Bitcoins and cryptos as a hedge.
The development of the e-RMB will offer THE alternative, a stable, secure, convenient and cost effective currency to be used in global trade and exchanges backed by the world’s largest economy in 2028 and the only one that has sound public finances.
The emergence of the e-RMB will considerably weaken the status of the US dollar as the world’s ultimate reserve currency, leading to a structural rise in the value of the Yuan against the US Dollar, a phenomenon that has already started in 2020.
The race is on for a dominant CBDC, and China has taken an enormous lead in that field as it has in the development and the deployment of the 5G technology were the US is absent and way behind in terms of adoption.
China’s lead will be turbocharged at the 2022 Beijing Olympics with major attendance by developing nations where huge swaths of the population are unbanked, and visitors who can see the technology at work.
The convenience, stability, and central-bank backing of CBDCs, as well as the “controllable anonymity” (meaning buyer and seller can remain anonymous to each other, but the government can determine the principals in suspicious transactions) that is built into the e-RMB will likely be adopted by other CBDCs and will ultimately make CBDCs the only “official ” currencies and forms of national and international payments
The shift is in process in Europe and even in the US where currency and cash reforms are ready to be rolled out. But it may take another few quarters before they are rolled out.
The US prototype technology from the Boston Fed/MIT USD based CBDC will almost assuredly be shared with the EU, Japan, Australia, South Korea, India, and the UK in order to catch-up with China to ensure Western Nations retain control of the world’s payments systems and of their own domestic currencies.
But China is already way ahead of the pack…
The End of Crypto-Currencies
Countries will eventually criminalize the possession or use of Bitcoin and other digital currencies, given that it can be exchanged anonymously or pseudonymously. Criminal justice administrators around the world already have a reasonable predicate to ban its use given its use in multiple serious criminal activities and in tax evasion.
Beyond criminality, Bitcoins and Crypto-currencies are a threat to the sovereignty of Nations which is ultimately expressed through their monopoly to issue payment methods and means to store value.
They are also a threat to the efficiency and control over monetary policy.
In the West, the crackdown will probably come sooner than later – within a few months of there being an e-USD.
It has already happened in China where the Government has already banned the use, trading and exchange of crypto-currencies. China is also highlighting the massive and unwanted impact on pollution and energy consumption coming from Bitcoins and crypto-currencies mining.
Bitcoin mining consumes an estimated 128.84 terrawatt-hour per year of energy — more than entire countries such as Ukraine and Argentina, according to the Cambridge Bitcoin Electricity Consumption Index, a project of the University of Cambridge.
China accounts for around 65% of all bitcoin mining globally — Inner Mongolia alone accounts for about 8%, due to its cheap energy. In comparison, the United States accounts for 7.2% of global bitcoin mining.
Inner Mongolia, located in northern China, failed to meet central government assessment targets regarding energy use in 2019 and was scolded by Beijing. In response, the region’s development and reform commission laid out plans to reduce energy consumption.
Part of those plans involve shutting down existing cryptocurrency mining projects by April 2021 and not approving any new ones.
While the Chinese government has backed the development of bitcoin’s underlying blockchain technology, it has already cracked down on digital currencies themselves.
A sudden decision by China to completely ban Crypto currency mining could come as a massive hit on the head for the current holders of Bitcoins.
Finally and far more worryingly, the latest rise in Cryptocurrencies has been fuelled by an “institutionalisation” of crypto-currencies, whereby financial institutions have started adding the asset class to their offering under pressure form their clients and against their own beliefs and rational analyses.
The rise of Bitcoins and other crypto currencies since June 2020 has led to a Fear Of Missing Out psychology that has led to billions of US dollars chasing these limited-supply pieces of code and pushing their prices to stratospheric levels.
Corporations like TESLA have actually invested some of their Treasury funds into the asset class.
When the upward momentum stops and prices start to fall, massive amounts of the same will be for sale and Bitcoins and other crypto-currencies will collapse, especially if the motives are a criminalisation of the detention and payment through cryptos.
The listing of CoinBase at a USD 100 Bln valuation may well actually herald the beginning of the end of crypt-currencies.
Beyond all that, the e-RMB, (and the e-USD, an e-GBP, an e-JPN, and an e-EUR) that will have identical (and probably better) capabilities and will be as readily available for commercial transactions as cash will make the use and detention of crypto-currrencies even less compelling.
When the situation settles, Bitcoin holders will be left holding the bag: the same “tulips” their predecessor Dutch speculators held in 1500, with nobody willing to buy as the only buyers will be those willing to hold and use a contraband currency.