The Market Value of Bitcoin

On June 12, 2022, the crypto lender Celcius Network froze all assets for which it was custodian. On July 13, 2022, it declared Chapter 11 bankruptcy. After another flash crash of crypto, Celcius was left with millions more in liabilities than assets. It couldn't pay back it's customers what was owed. This also broke the Luna synthetic stable coin and it'w own tokens. It was the biggest crypto firm to crash at the time and caused a lot of collateral damage. Bitcoin had already been in a bear market, and after Celcius, traded in a range between $20,000 and $23,000. Down from a high over $64,317 in November, 2021.

It's important to understand that the entire crypto space, and every single firm built around it is unregulated or nearly so. It's wildcat banking. Tulip speculation. Snake oil. Rug pulls. Ponzi schemes. Or, what Warren Buffett calls rat poison. Even Coinbase, the most respected and well run company I am aware of, has a business based on a trash heap of scams.

In November, 2022, we got to witness the massive failure of FTX. FTX was considered the stable rock in crypto-land, having bailed out several companies in the aftermath of Celcius. It was all a facade. Turns out it was being run like Enron with no internal controls and was gambling customer assets with it's sister company Alameda Research. Even though it was an unregulated company based in the Bahamas, the executives involved might be facing criminal charges and there may be a million creditors as part of it's bankruptcy. In the aftermath, bitcoin traded in a range between $16,000 and $17,000. This was a true curiousity to me. How could bitcoin maintain some semblence of liquidity and value after FTX? Were people really paying $16,000 to buy it and keep it propped up? Was institutional money that was torched in FTX still pumping naive fiat into bitcoin?

Then, I had an epiphany. Bitcoin has failed at every level as a currency. It's too slow. It's expensive. It requires a fantastical amount of energy (and growing) simply to maintain it's existence. It's a blight on the world due to climate impact. It's been duplicated (hard forked) more than 20 times. Yes, bitcoins can be copied like you copy/paste text. What defines which fork is the "true" bitcoin is decided by an informal consensus of developers and miners. But, it has a real market value. The rise of bitcoin has enabled a very profitable industry of ransomware, money laundering, and extortion scams. While bitcoin wallets can be tracked after receiving ransomware/extortion payments, or buying bitcoins with dirty money, the crypto can be spun through washing services like Tornado Cash (now under US sanction). The mix of coins coming out the other end of Tornado can be converted back to fiat somewhere in the world and ... profit!

While the instrinsic value of bitcoin turned out to be zero, like the other ten thousand crypto projects so far, there is a market for illegal activity that is more attractive at the moment than using traditional global banks with their own tainted history. If all crypto disappeared tomorrow, money laudering would continue at some level in the banks but under the scrutiny of regulators. And the ransomware problem would be greatly diminished if not eliminated. It wouldn't be an ideal world but it would be an improvement.

A reasonable person could argue that anonymous cash can, and is, used for illegal activity. But, the purpose, the value of fiat cash is not based on ransonware or money laundering. The scale is not even close. Bitcoin has value because crime pays. If, at some point in the future, the cost of laundering money with bitcoins/crypto exceeds the energy cost of minting it, I think it would collapse to it's intrinsic value of zero.

Update: 11/23/2022
The Wall Street Journal came to many of the same conclusions I did in this article...

Traditional finance had little incentive to build connections to crypto because, unlike government bonds or mortgages or commercial loans or even derivatives, crypto played no role in the real economy. It’s largely been shunned as a means of payment except where untraceability is paramount, such as money laundering and ransomware. Much-hyped crypto innovations such as stablecoins and DeFi, a sort of automated exchange, mostly facilitate speculation in crypto rather than useful economic activity.

Republicans plan to cut Social Security

Marketwatch had an interesting piece on a plank in the Republican platform (paywalled) to cut Social Security benefits by various amounts, depending on average income. The punch line is that middle income people (~58,000/year) would get 77% of promised benefits, higher income (~96,000/year) would get 40% of promised benefits AND full retirement age would be pushed from age 67 to 69.

So much for the smart move of waiting to claim your benefits. Worse, the Republicans plan to happily cut the legs out from under retirees that don't have much else in the way of income. Congrats, you now get 40% of your promised benefit. I guess Social Security is no longer the third rail in politics.

Like any government policy, they are altering the deal. Pray they don't alter it any further.

Return of the Aristocrats

On March 24, 2021, I decided to shift my 100% bond ladder to a dividend growth stock as the bonds matured. That decision was driven by very low yields on all kinds of bonds. Since then, I've made 8 investments using that strategy and 7 have been profitable. I started to have doubts that my strategy, while successful so far, may not have been keeping up with the S & P 500 index, or maybe it was keeping up but was not worth the extra effort and management. So, I went back and calculated how many shares of the S & P 500 I could have bought on each day that I made a stock purchase, then calculated the current value of those shares, and added in all the dividends that would have paid by those shares since then.

Finally, I compared the value of my stock purchases now plus all the dividends that have been paid. It turns out my stocks have outperformed the S & P 500 with dividends reinvested by 23.27%. That's a surprising number and gives me pause to switch back to index only investing. It is true that half of my outperformance was due to one lucky purchase of CVX in 2021. But even excluding the appreciation on that one lucky pick, the portfolio outperformed the index by over 10%. That convinced me to continue with the strategy as long as it remains a winning one. Even a 10% outperformance is worth some midnight oil.

Per capita national income vs national debt

Starting in late 2009, the national debt per capita first exceeded the national income per capita. That trend has only accelerated. I can't say what the consequences will be down the road. Much probably depends on how the same curve plays out in other countries. As always, Japan is the canary in the coal mine.

As of 8/17/2022:
National Income per capita: $64,091
National Debt per capita: $91,295

Numbers do not include state and local debt, corporate debt, or personal debt.
sources:
https://research.stlouisfed.org/fred2/series/NICUR
https://research.stlouisfed.org/fred2/series/GFDEBTN
https://www.census.gov/popclock/

Blockchain belligerent

In August, 2017, I wrote a blog post titled "Blockchain Believer". I wrote this:

I am still not persuaded that bitcoin itself will be more than a launchpad, but do believe that one of the technologies used in bitcoin, the blockchain, is destined for greatness.

Time for a mea culpa. Bitcoin has operated for over 10 years. Ethereum almost as long. There are now thousands of crypto projects and the blockchain hasn't really solved anything that centralized computing couldn't do better. But it is much, much, worse than that because crypto consumes so much energy, and produces nothing useful, it is a blight on the economy and the world. It causes environmental harm. It doesn't work as a currency for a variety of reasons. It doesn't work for anything as far as I can tell. The entire space is unregulated and rife with scams, ponzis, and "rug pulls".

My stance is no longer a believer in the possibilities of the tech, but as a belligerent to the harms caused, now and in the future.

Could Celsius go to absolute zero?

The Celsius Network is a crypto firm that lets you lend your crypto "assets" and collect interest (rates vary according to the asset), and also borrow against them to lever up. The amount of margin you can get is fairly conservative. You can only borrow up to 50% of your asset value on deposit. Most traditional brokerages let you borrow up to 100%. The lower leverage rate makes margin calls less likely -- unless you are trading unregulated digital tokens of questionable value. With about a 65% drawdown on crypto since the peak in November, margin calls are probably coming into play now at Celsius. Six days ago, Celsius was not even worried:

We have made it through crypto downturns before (this is our fourth!). Celsius is prepared. At this already challenging time, it’s unfortunate that vocal actors are spreading misinformation and confusion. They have tried unsuccessfully, for example, to link Celsius to the collapse of Luna and falsely claim that Celsius sustained significant losses as a result.

But as of today, Celsius froze all withdrawls and swaps. It's like they are worried, or something.

Due to extreme market conditions, today we are announcing that Celsius is pausing all withdrawals, Swap, and transfers between accounts. We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations.

I wonder how they define "over time". Could be a day, a week, or the year 2525, if man is still alive. I don't think Celsius deposits are FDIC insured, but you'll have to check the fine print.

NFTs for the loss!

A hilarious article at NBC News recounts the tale of an investor who bought an NFT on a celebrity recommendation and is now struggling to buy gas and groceries.

“This basically financially crippled me,” said Tyler, who asked to be identified by only his first name because he fears online trolls who ridicule unsuccessful NFT investors. Now, especially with inflation, Tyler said, he is struggling to afford gas for his car and groceries to eat.

This reminds me so much of the dotcom era "all that counts are eyeballs" as a way to value tech startups, or the CDO squared products conjured during the first housing bubble. Here, buy this abstract reference to crypto smoke and mirrors. The whole crypto space has become as cesspool of fraud. I still think there are use cases for centralized and distributed blockchains, like tracking shipments or rewards program points. I'll continue to watch from afar as people shoot themselves in the foot (or head) again and again.

Public Debt vs M2 Velocity

Maybe debt matters after all. A little at first is OK, even a lot. But eventually, there appears to be an impact on the economy. Correlation is not causation, but if there is causation here, the trend is not our friend. It's a song of fire and ice, and winter is here.

Based on a simple linear regression, velocity should slow as the debt continues to grow. At 50 trillion in debt, the predicted M2 velocity is 1.0129424.

Here is what M2V/Public Debt looks like with a linear regression line (produced with scikit-learn and matplotlib).

I tried various regression models but many of them stopped making predictions outside the training data. One that didn't was Gaussian process regression. That one predicted that M2 velocity would go negative at 35 trillion in debt. I am not sure if a negative velocity makes sense in the real world. There are a half dozen hyperparameters for Gaussian process regression and I don't understand it well enough to have a high confidence in the predictions.