April 15th, 2013 by Dissolving Dollars

I’ve been waiting for this to happen and am surprised it took this long; there is an old fashioned shake out going on in the precious metals. This is called shaking out the weak hands. The more people that get scared and sell, the quicker a bull market in metals can resume. But the longer people hold on, the further prices could fall. As I said Friday, the prices of the metals were at the edge of a cliff, and they decided to jump Sunday evening when trading resumed. Now gold and silver are near the edge of another cliff. Whether the suppression of metal prices is a conspiracy or not, the fact is the prices are what they are…even when there is a disconnect between paper and physical prices. Like I’ve been saying, I expect gold and silver to trade lower rather than higher for awhile (although they’ve already moved down quite a bit). But the highs will be broken in due time. It just might take a few years or so. Gold and silver are a global market. When things align globally for the metals, things will change. These markets are small and when big money has to go into them, they will have to go up big.

Anyway, it’s been an exciting and eerie few weeks with Cyprus, Bitcoin mania, and now the metals shake out. And now before I hit post I’m seeing this Boston Marathon news, which gives a whole new layer of meaning to the title I gave this post.

April 15th, 2013 by Dissolving Dollars

April 12th, 2013 by Dissolving Dollars

Gold and silver have been selling off. And they are right at the edge of a potential longer term sell off (see Martin Armstrong’s technical take on silver and gold). I’d personally love to see silver go down below $20, because I’d double my holdings at that price. I’d likewise love to see Bitcoin below $20, I’d much more than double my Bitcoin holdings at that price. Gold and silver, like the recent Bitcoin bubble, have been the centerpiece of big bubbles in the past. And Gold and Silver will likely be in big bubble territory again before the end of this decade. (Check out this cool article showing 10 of the biggest bubbles in history with charts.) In the meantime, I wouldn’t be surprised to see a surprisingly strong dollar (relative to other fiat currencies). That won’t be good for gold and silver until the dollar starts to weaken again and the stability of the U.S. starts to come into widespread question. Although at times it seems dumb, I don’t trade in and out of the precious metals, I just accumulate them. I’m doing the same with Bitcoins. I save trading for things like stocks, not for assets that are a hedge against declining confidence in things like government and the banking system. Plus, the broader stock indexes (since they are so big) tend to be a lot easier to predict. But anyway, anyone looking to buy silver (or gold), this may not be the low yet.

April 11th, 2013 by Dissolving Dollars

Trading of Bitcoin on Mt.Gox, by far the biggest Bitcoin exchange, was halted today. Mt.Gox said it needed a cooldown of 12 hours to upgrade its system, which hasn’t been able to keep up with trading recently. With Mt.Gox closed, that sent Bitcoin prices plummeting on the smaller, secondary exchanges like BTC-E. Like I’ve said before, the current problem with Bitcoin is not the ability to sell it, but instead the difficulty of trading fiat for it. It’s easy to move Bitcoin to sell over on a secondary exchange, but just about no one has cash to buy Bitcoins on those exchanges except the people who already sold Bitcoins on those exchanges. So, it will be interesting to see what prices do when Mt.Gox reopens. I personally don’t intend to ever sell my small stash of Bitcoins for dollars. I’m not interested in the potential tax implications, nor am I interested in holding dollars. This Bitcoin craziness is what happens in a free undeveloped market where there are no futures contracts or short sellers with the incentive to buy while everyone is selling. The Bitcoin soap opera just keeps getting more and more interesting.

April 10th, 2013 by Dissolving Dollars

There have been a lot of people waiting for the Bitcoin bubble to burst. When the FinCEN report aimed at Bitcoin came out a month ago, that is when the price started getting crazy. And that is also when people started crying Bubble. Today, after hitting $266, Bitcoin crashed hard going down over 50%. And that’s the kind of stuff that happens in markets that go parabolic–especially developing markets prone to things like denial of service attacks. Bitcoin is in a phase transition. When the parabolic rise eases, that doesn’t mean it is going to zero like a bankrupt stock; it just means it has found an equilibrium between people who see Bitcoin’s value and want to convert their fiat for Bitcoin and people who think only government or nature makes money real. Just because Bitcoin involves money, people automatically think of it as a bubble. I would relate it more to something like people getting an email address, people joining Facebook, or just people moving from land lines to cell phones. Were those bubbles? No, because people don’t trade things like email addresses, they instead just perhaps stop using them. Despite the volatility caused by the financial nature and thus emotional nature of Bitcoins, the long-term trend of Bitcoin should end up looking more linear. Bitcoin is a new tool and its adoption will take time. For one, Bitcoin will have to climb a wall of worry full of ill-informed naysayers (and conspiracy theorists)…as it has for the last four years already.

As someone who feels under-invested in Bitcoin, I certainly haven’t been a fan of the big price run-up. And I’m enjoying watching the most recent crash. But the fact is the run-up has proven the potential demand is there. There is actually still a backlog of demand since the difficulty of trading fiat for Bitcoin has kept most people on the sidelines hoping for a crash. But if Bitcoin is destined to become a world-wide currency, the price has barely moved yet. Even at $250 that was only a market cap of about 2.5 billion. To people that don’t understand Bitcoin, it is a bubble. To people who understand Bitcoin and aren’t intimidated by technology and volatility, it is a new digital gold with a big potential for changing the world for the better. Bitcoin is a paradigm change. And as I’ve already written, the quicker a person gets in tune with that new paradigm the better. You can start understanding Bitcoin better here.

Even a lot of the gold bugs disappoint me in their dismissal of Bitcoin. The hard money folks don’t trust digital money. Well, I hate to break it to them but technically, even gold is digital; it is essentially a highly encrypted form of matter that takes a whole lot of energy to replicate. Our understanding of the universe is only as good as our best metaphor. There was a time when the clock was the best metaphor and the universe was thought of as a windup clock. Today the best metaphor is to think of the universe in terms of digital information. With enough energy, gold can be manufactured. And I would venture to say that someday it will be manufactured; perhaps not cheaply but manufactured nonetheless. Also, someday there will be quantum computers that can crack code in no time. With the advent of quantum computers, Bitcoin will not become worthless, it will just have to switch to quantum encryption.

So anyway, I find the developing story of Bitcoin fascinating. The highs and lows are like a soap opera. It’s a lot more interesting than watching the relentless low volume melt up in the stock market.

April 7th, 2013 by Dissolving Dollars

Perhaps the real flip-side of Dissolving Dollars is Rising Crypto Currencies. Therefore, I want to get more into exploring the growing world of crypto currencies on this blog. Bitcoin has a younger sibling: Litecoin. Litecoin is essentially a kind of silver, while Bitcoin is a kind of gold. However, unlike silver and gold, the ratio between the two is only 4 to 1. I wouldn’t be surprised if Litecoin makes its way to parity with Bitcoin, both in market cap and acceptance. A parity market cap with $150 Bitcoin would mean about $37 Litecoin. Currently, Litecoin is trading at about a tenth of that. And rumor has it that Litecoin will soon start trading at Mt.Gox. Some speculate that the recent big price run-up of Litecoin has been instigated by Mt.Gox buying up a Litecoin reserve to get Litecoin up and trading. You can trade Litecoin today at BTC-E, but funding a BTC-E account with something other than Bitcoin is not easy (which is why Bitcoins are always cheaper at BTC-E).

Litecoin, development wise, is about where Bitcoin was two years ago. What Litecoin offers is a Bitcoin alternative. It most notably offers an alternate encryption. The market won’t want to put all its eggs in the same basket, which is why Litecoin is perhaps a valuable compliment to Bitcoin. In the chance that there is a problem with Bitcoin, there is Litecoin. So, I could imagine in the future–if cyrpto currencies take off as I suspect and hope they will–people holding near equal amounts of Bitcoin and Litecoin in terms of purchasing power (and maybe there will be a third or forth main option too). And if crypto-currencies really become the new gold standard, then, relative to today’s gold prices, an equally distributed market cap between Bitcoin/Litecoin compared to gold today would mean that by the time all coins have been mined there’d be an equivalent price of $200,000 per Bitcoin and $50,000 per Litecoin. (It is estimated that there has been about 160,000 metric tons of gold mined in the history of mankind. One metric ton is 32,150 ounces. At 1,600 per ounce, that equals a total value of $8,230,400,000,000.)

Beyond Bitcoin/Litecoin, I can see perhaps a kind of Creditcoin coming into existence that uses finite crypto currencies as reserves. The Creditcoin system would allow people to produce their own credit based on their Bitcoin/Litecoin reserves. In turn, everyday transactions would take place in Creditcoin while savings would be in Bitcoin/Litecoin. Borrowing beyond a 1 to 1 ratio would accrue interest. That interest would be paid from the debtor’s reserves automatically and distributed to the balance of everyone else’s reserves. The interest rate could easily be calculated by the system itself and could constantly adjust based on credit relative to reserves and length of time the credit is outstanding. Plus, individual reserves could be tied to a kind of reputation system that monitors a person’s credit worthiness based on past behavior relative to the unique codes of that persons reserves; the system would thus adjust credit limits accordingly and encourage holding onto the same reserves (digital wallet) for extended periods of time to build a good credit reputation.

I think the make or break of crypto currencies will depend not on what incompetent governments try to do to ruin the systems but instead on how the credit system is worked out. There is a system called Ripple that factors in credit, but I don’t know enough about it to comment on it. Nonetheless, if, like the crypto currencies themselves, the credit system is open source, peer to peer, decentralized, and the rules are built into the system, then crypto currencies will be the backbone of the monetary system of the future…which will take the power away from centralized sources like governments and banks. It is that potential future that has me excited about crypto currencies.

April 6th, 2013 by Dissolving Dollars

Nice little talk about Bitcoin with Jeffrey Tucker. And this is a cool site: listen to Bitcoin live. Both those who think Bitcoin is just a bubble and those who think it is the future can enjoy listening to it.