Chinese Crypto: A Bitcoin Threat?

Does China’s 14th five-year plan intention to add a Yuan-based blockchain, convert Yuan to a digital currency, and a rival to Bitcoin in the form of a Chinese Yuan-based cryptocurrency pose a threat to Bitcoin’s ultimate domination and success? No. The fatal flaw that a central government governs the Yuan-based blockchain is that Chinese politics make any future cryptocurrency one without autonomy. For this reason alone, it cannot have the same depth and flexibility enjoyed by Bitcoin. While this new turn of events may indeed dissuade an enormous segment of the Bitcoin market in favor of Chinese crypto, the world is a big place. Those trading Bitcoin for Yuan-based coin represent a small fraction of the potential world market.

Back in the day, my software company was one of the first to offer bar code graphic generation to non-professionals. For a short while, we were the only game in town. Graphic designers could create their own bar codes for bookjackets, CD covers, and product packaging. Then Microsoft, Adobe, and Corel announced plans to enter the market with competing products. When asked if we were concerned, my answer then was the same as it is now that Bitcoin faces competition. The world is a big place, and there is plenty of room for competition. Microsoft and Adobe contemplating entering the market only validates the importance and longevity of the category. We welcome the rival products. This proved to be true. Our products continued to sell for another twelve years until we sold our company, and our products folded into a portfolio of the parent company.

Bitcoin has already reached one trillion dollars in market cap and a high of $58,400. For it to grow another trillion dollars and again double in value doesn’t require a miracle. Much of the required financial products and mechanisms are finally in place. Bitcoin futures, Bitcoin funds, options, and ETFs trade daily. Already, market managers are scheming for ways to do what Elon Musk did with his 1.5 billion dollar investment in Bitcoin. Statistics show 67% of Bitcoin trades are made by new investors. Governments worldwide are beginning to contemplate what Bitcoin and other cryptocurrencies mean for their own fiat currencies.

If the Chinese investor doesn’t recognize this as a boost for Bitcoin, the rest of the world should. Cryptocurrencies are here to stay, and Bitcoin is much safer than Yuan-based crypto, subject to the whim of Chinese politics.

Gamestop Story Continued

This entry is a follow up to yesterday’s Gamestop (GME) post. GME finished the day at $330. The whole story is much more interesting than I could have imagined. It seems that heavily invested hedge funds were into shorting GME based on examining its fundamentals and some reasonable speculation. When you short a stock, you are hoping that it goes down.

Meanwhile, on Reddit’s subgroup, WallStreetBets, several folks were betting on GME continuing its gains. It turns out that this not-so-small group started putting its money behind its mouth and buying stock. They bought so much of GME that there was little left for the hedge funds to purchase when GME started showing signs of resistance to the short interest. That, in turn, had the net effect of causing the stock’s price to rise. As the hedge fund pressure to purchase shares to cover their Put Options and additional interest from the Reddit folk, the stock took off in price. What was happening to GME is called a short squeeze.

This morning in pre-market news, GME had hit $405.00 and opened at $330. By 10:30 am, GME’s price hit $400 again. Some controversy arose when Robinhood, the preferred trading app of the ‘little guy’ suspended trading in GME altogether. The Reddit folk cried FOUL! While Robinhood was selectively deciding on which stocks they would allow trading on their site. I would agree with Reddit’s WallStreetBets folk.

Gamestop (GME) Up 600%

In the past week, Gamestop’s (GME) stock price soared from $40 to this morning’s pre-market price of $240. This sudden price rise is not the first time a stock has leaped to astronomical values through nothing more than wild speculation. In 2007, Dryships roared from a few dollars at the beginning of the day to over $100. by midday. In the stock market, however, at some point, cooler heads prevail. Knowing full well that a closer examination of sales, profit margins, and quarterly reports will not justify such lofty prices, these stocks’ prices rebound. Combined with the built-in mechanisms the stock market has for reigning in such wild enthusiasm in the form of short sales and put options, stock prices have a way of finding their natural level. In the case of Dryships, regulators stopped trading altogether when the stock’s price was in the range of thousands of dollars until they could determine what was going on. Coindesk reports that Anthony Scaramucci, who’s company Skybridge Capital, now investing in Bitcoin, postulates that this sort of retail investor speculation is just the find that can cause Bitcoin’s sudden rise.

The scale at the right is in billions of dollars.

While retail investor speculation might indeed have been the reason for Bitcoin’s meteoric rise in the past couple of months, Bitcoin is not grounded by the same financial constraints nor disciplines. After all, there isn’t going to be a Bitcoin quarterly report to shareholders. There will be an examination of the holdings of the companies speculating in Bitcoin, however.

Scaramucci is doing what so many others are attempting to do, to find a cause and effect for what most feel is Bitcoin’s likely trajectory, that it rises to values that have as yet defied explanation. He’s right in the sense that Gamestop’s performance these last couple of days shows how powerful armchair speculation can be and that when the big boys with lots of money get involved, the effect is that much more significant.

What is Blockchain? Why It Matters?

Blockchain, simply put, is an accounting system. In 1494 Luca Pacioli invented double-entry accounting, which in its time revolutionized accounting and changed how commerce raw, and the world in which business is conducted forever. Blockchain promises to do the same once again. Before double-entry accounting, bookkeepers would write down transactions but never had any faith in their transcriptions’ accuracy. If a ship laden with cargo came into port, the accountants’ job was to make ledger entries for each item. Faith in the accuracy of their ledgers, accountants, conducted business. A simple error could cost a company thousands with no recourse for mistakes. 

If the scribe at the dock wrote: 

Storehouse: 400 bushels, when it should have been 
Storehouse: 4000 bushels, 

there would be no way of discovering the error. Double-entry accounting changed all that. Instead, the accountant writes: 

Storehouse Credit: 400 bushels, 
Ship Debit: -400 bushels, 

Balance sheet: 

Debit: 400 bushels
Credit:-400 bushels
____________________

Total: 0

Now, there was little chance of an error. The accountants used the “balance sheet” to add all debits and credits together with the result equaling zero as a second way of checking the work. Even if there were errors, the sheet wouldn’t balance.  

In a world where arms-length negotiations are preferable over face-to-face meetings, the accounting we use is challenged to ensure transactions are not scams and fulfillments are real. How can we be sure that the money a stranger pays with is his to use and that he keeps his word? Blockchain does that. Bitcoin was the first use of this new technological invention called blockchain and has proven to be hugely successful. Pay attention to this space. Blockchain is now being designed into many other transactional enterprises.  

Bitcoin Will Go Higher

Hosting a fundraiser for a friend, I’ve been wondering what compels a person to donate money and, if so, how much do they decide to contribute. I think they do a mental exercise to determine what they are willing to give based on many experiences and their condition. Indeed, any contribution is in line with their wealth and ability to provide charity, yet there is wide latitude to their involvement within that parameter. I think the same equation holds for investors. Based on their ideas about risk/reward, their financial condition, and willingness to participate, they choose an amount and a target. The same is true when deciding on a gift for a favorite niece or nephew.

In the end, an amount is decided upon, and investment or gift is given. Mathematicians have probably written equations to work out these amounts according to agreed-upon parameters, but most people don’t use such equations. Instead, they perform a mental exercise, invoke feelings and intuitions, and take the plunge. The same holds for Bitcoin purchases.

Now major banks and investment funds have decided it is time to be involved in this new asset class, Bitcoin, for fear of missing out (FOMO). To what extent do they get involved. The same equations apply. Each manager must decide using feelings and intuitions and commit funds. Some have a penchant for cutting-edge financial endeavors, while others have an abiding commitment to stability or growth. Their decisions would fill the entire spectrum of a risk/reward chart.

Bottom line — most are getting involved, some more, some less. Since there is a fixed, limited number of Bitcoin, and all that is in circulation already belongs to someone, those wishing to own Bitcoin have to entice those existing owners to part with some. Bitcoin prices go higher.

Bitcoin: All-time High — $34,803.73

Bitcoin sets a new all-time high within 24 hrs. of the previous record. Any prediction that Bitcoin is going to move sideways, even for a little while, are sadly mistaken. There doesn’t seem to be any headwinds and the reaction in the marketplace, on the world stage, and according to global politics is going to be with the speed and ferocity of attracting magnets. All indicators are positive.

Bitcoin: All-time High — $33,173

What a difference an hour makes in this crazy Bitcoin tumult. Up over $1000 in the last hour, Bitcoin is taking off in the New Year. 2021 looks like the year Bitcoin has arrived. If the big investors were waiting for the New Year, hear me roar.

Bitcoin: All-time High — $31,917

Bitcoin sets an all-time high price of $31,917.

So much for moving sideways. Another upward move wasn’t expected until we were well into January. With the Electoral College vote on January 6, and the inauguration on January 20, with the tumult guaranteed to surround Trump’s exist from Washington, his break with the GOP and distancing himself from politics, and profit taking in 2020, another move was not expected for several weeks. Oh, well.

Bitcoin is a Hard Sell

At age 97, my father thought Bitcoin was a good idea when pitched to him. That surprised me. Dad was a C.P.A., cautiously conservative with investments, money, and protecting one’s nest-egg. But when the evolution of money, from gold to paper to electronic to digital Bitcoin blockchain-enabled transactions, was explained to him, he was all-in. Most people have a problem with the idea that Bitcoin does not exist physically. There are no precious metal Bitcoin coins or counterfeit-proof Bitcoin paper notes. Most people have a problem with anything that takes longer than sixty seconds to explain or comprehend. Most people do not perceive the mechanics inherent in banking, posting, and clearinghouses for electronic transactions as problematic. Nor do people find fault in having currency controlled by a government subject to the whims of politics. So, to explain banking infrastructure and government financial policies as bad usually falls on deaf ears. Bitcoin is a hard sell.

Adoption Curve of New Technology

Bitcoin follows a path similar to the adoption curve of a new technology closely. New technologies typically take fifteen years to be adopted by mainstream users (to the 85th percentile). November 2020 is the beginning of year thirteen for Bitcoin (Bitcoin’s introduction in Oct. 2008). High estimates predict valuations for Bitcoin at $375,000, $400,000, and $500,000 per coin, which would put Bitcoin at $318,000/Bitcoin by the end of 2022, one year from now. That foretells explosive growth between now and then. Bitcoin goes from $28k to $318K in twelve months.  

Bitcoin is currently going through what Geoffrey A. Moore calls “Crossing the Chasm,” a book he had published in 1991. The “chasm” he describes is the vast divide between what Bitcoin has experienced so far in its adoption curve and where it needs to go to get further. The Bitcoin owners up until now Moore would label early adopters or visionaries. The Bitcoin owners of the future represent ten times as large an audience as we have seen to date. Moore refers to these as Main-Streeters. Early adopters and Main-Streeters have very different wants and needs. Making the transition from one to the other is what has to happen before Bitcoin goes further.  

An early adapter likes to fiddle with new things. To a visionary Bitcoin adopter, “you are the first” is music to their ears. If the idea works, they’re thinking they are going to be champions in their organizations. To Main-Streeters, “you’ll be the first” is cause to cut and run. Remember the commercial “Nobody ever got fired for buying IBM?” They were selling to Main-Street. You can hook an early adapter with a sales pitch like “we make it work the way you want it to work; our technical support staff is available 24/7.” A Main-Streeter wants none of that. He assumes it does what it does without fuss. Any mention of technical support is going to scare off a Main-Streeter. Nothing needs to be customized in his eyes. It just works the first time correctly, out of the box. This is the “chasm” Bitcoin has to cross. Any new Bitcoin enthusiasts are going to be Main-Streeters and have to be treated as such.  

Heating Curve of Water demonstrates that the liquid phase remains for a very long time while heat is continuously added before water turns to gas.

For Main-Streeters, the discussion is over. It’s not a question of whether or not Bitcoin. Bitcoin is a done deal. Bitcoin’s price chart may also look like the Heating Curve of Water. We’d still be considered in the liquid phase of water at the level marked ‘boiling.’ You’ve heard the expression “A watched pot never boils?” The author undoubtedly was experiencing the liquid phase of the Heating Curve. As heat is continuously being added, the liquid gets hotter, but there is a long pause before it boils. Likewise, Bitcoin has to gather much more energy without much price appreciation to show it as it changes states from liquid to gas. Another way to think about this period is to think about Main-Streeters, whose buy-in price will be considered their base price. Someone who owns Bitcoin purchased at $2,500 is a very different sort of investor from one who has recently purchased Bitcoin at $26,000 per coin. Two weeks ago, no one owning Bitcoin had a purchase price of over $16,000. Before we move higher, all new money will have purchased Bitcoin for $26k or more.  

It is also no coincidence that this “chasm” in Bitcoin’s price comes at the transition period between the Trump and the Biden administrations. Nor is it coincidental that we are amid the coronavirus pandemic and that vaccines are just now being rolled out. We have just entered the holiday season and begun year-end tax processes. Bitcoin most likely moves sideways until after the New Year, Biden’s win of the Electoral College on January 6th, and Biden’s inauguration on January 20th. After that, the sky’s the limit. The stock market will have rebounded from pre-end of year sell-offs and places for managers to park low-risk money.