Enter Decentralized Technologies
What is to come of the world which sits at historically low-interest rates and historically high levels of debt?
Published:17 Jun 2019 06:05 ET
Dr. K’s Crypto-Corner
by Dr. Chris Kacher
Cryptotechnologies… Kryptonite for Governments™
(This was originally published in a more truncated form HERE.)
QE Ad Infinitum
The state of the stock market remains bullish as the head of the European Central Bank joined in on the chorus to cut rates and loosen monetary policy. ECB President Mario Draghi who had been saying the ECB would eventually have to raise rates left open the possibility that rates may need to be reduced. This, together with Trump’s softer stance on trade issues, sent stocks higher earlier this week to continue what is looking to be the start of a new uptrend though the market seems to have put in near stalling action since the follow-through day though this could be due to digestion of the recent sharp bounce, so the situation remains fluid.
That said, CME Fed Futures predict 3 more rate reductions of 25 basis points over the next 5 Fed meetings. Thus by the Fed meeting on December 11, 2019, there will have been 3 rate reductions if the CME futures hold true. The dovish stance taken by the Federal Reserve and other central banks around the world will ultimately be bullish overall for the world’s tallest standing midget, the U.S. stock market.
Don’t Try To Predict Bubbles
Furthermore, any additional weakness due to the trade wars is likely to be met with additional quantitative easing. QE has been the market’s safety net since 2009. It should remain as such for reasons I wrote HERE though should condition materially deteriorate, we will see it in the chart patterns. Trying to predict the bursting of the debt bubble, should it burst, is futile. Bubbles often massively overshoot predictions. Remember Greenspan’s “irrational exuberance” speech in 1997, well before the bubble burst in March 2000?
Trying to predict the bursting of any bubble is futile. It is far more accurate to keep a close eye on price/volume action in major indices and stocks as every bubble that has emerged over the last several hundred years has signature tell-tale price/volume patterns of increased volatility in leading stocks and the major indices leading to behavior that is far more erratic. Selling on a weak reaction rally when such action occurs after a climactic move has generally been our approach to a relatively safe exit whether its stocks, tulips, Florida land boom, bitcoin or what not. Since the late 1980s, I have fine-tuned my “chart eye” in terms of interpreting human emotions on price/volume charts. The legendary William O’Neil with whom I worked closely for several years always said charts are human nature on parade.
In March 2000, we had no idea the market was putting in a major top but I was back in cash 3 days off the March top. All of O’Neil’s handpicked portfolio managers also switched to 100% cash within several days after the top. In a more recent example, on January 30, 2018, I went from nearly 100% invested to cash as bitcoin had signaled a major sell signal prompting me to sell my alt coins which had continued to move to new highs, but knowing that most if not all would eventually get pulled down with bitcoin, it was relatively easy to go to 100% cash.
How To Profit From Grayscale ETNs GBTC and ETCG
Bitcoin-based on its price history has typically corrected between 30–40% when it breaks its parabolic rise to the downside. Thus bitcoin having topped around $9000 should find a major low around 6000 before heading to new multi-month highs above 9000. But as I’ve written in prior reports, if bitcoin instead rises above 9000 on definitive volume, then THIS TIME IS DIFFERENT. Indeed, bitcoin has risen as far as $9392 as I type but volume remains relatively light, thus, just as with a stock that breaks to new highs on tentative volume, the breakout remains suspect until bitcoin can either continue appreciably higher, or sufficient buying pressure in the form of the material volume is observed. In other words, bitcoin may still repeat history and correct down to around the 5500–6500 area before definitely heading higher. Stay tuned.
Major Bitcoin Tailwinds Afoot
But if this time is different, bitcoin will not have to retest 5500–6500. But whether it does or not is immaterial. There are a number of the tailwinds that are accelerating demand for bitcoin including:
1) Millenials inheriting around $30 trillion from the baby boomer generation over the next several years and beyond.
1a) Millenials being more friendly toward bitcoin over gold in general.
2) Institutions starting to get more involved in bitcoin in various capacities.
2a) Regulations which may act as a headwind at first but ultimately help the space mature to allow institutions to get involved in a far greater capacity.
3) Major companies such as Facebook making announcements of launching their own private coins which adds legitimacy to the blockchain space.
4) A growing number of families and individuals using bitcoin to transact value often to move savings offshore well beyond the maximum allowed.
Thus the two ETNs, GBTC (bitcoin) and ETCG (ethereum classic) are liable to continue to make excellent investments. While both trade above par value, this should remain a non-issue until a bitcoin ETF is approved in the U.S. Such approval will most likely not occur until sometime in 2020, so there is still ample time to make money from these ETNs. Grayscale is also launching the ETN ETHE which will track the price of ethereum.
The transition from a trust-based economy to one of self-sovereignty will drive one of the largest wealth transfers in history. Barry Silbert who runs Grayscale and the two ETNs GBTC and ETCG says that, as I noted above, $68 trillion will be transferred to the millennials over the next 25 years. According to Silbert, “For the younger generation, money is digital.” Silbert’s position comes from the fact that the people in the ‘baby boomer’ generation are either retiring or getting close to retiring. According to a recent Accenture study, $30 trillion in wealth belonging to the generation born immediately after World War II is already being passed down to the younger generation. 90% of this generation has taken a pragmatic liking to Bitcoin over gold. While both bitcoin and gold are scarce, fungible, malleable, and durable, bitcoin does each of these better. Some examples:
1) Bitcoin’s ease of value transfer.
2) Bitcoin’s ease of storage.
3) Diminishing volatility in bitcoin as Bitcoin matures thus bitcoin’s unit of account will solidify.
4) Bitcoin’s supply level is fixed and transparent. This eliminates fears of the typical inflationary pressures associated with overproduction of gold that could diminish its value.
5) Bitcoin is on a disinflationary supply schedule while the global supply of gold has increased by 1–2% annually over the last century. The amount of gold could spike higher. Major advances in mining technology and space exploration could bring a surprising amount of gold supply onto the market.
6) While gold is used in industry, bitcoin’s store-of-value trumps gold’s use cases for numerous reasons cited in the section above.
7) Bitcoin transactions will eventually be instantaneous while storage in wallets or cold storage will become relatively hack-proof. Bitcoin is also counterfeit-proof unlike gold: https://strategiccoin.com/why-bitcoin-is-superior-to-gold/
Silbert has also mentioned how more than 70% of its bitcoin buyers are now institutional. While much of this institutional money is from small crypto hedge funds, it is nevertheless institutional, akin to small and micro-cap mutual and hedge funds that invest in stocks. Even though they are small, it does not disqualify them from being part of what is referred to as institutional capital. This is yet another illustration of how big money is starting to get involved in the blockchain space. This is akin to the dot-com boom of the 1990s. Retail investors kicked it off but eventually institutional capital dominated the space by 1999. That said, mainstream retail has yet to invest in cryptocurrencies, thus another major tailwind is on its way, first by mainstream retail, then by institutional.
Government Control vs. Digital Self Sovereignty
While governments have always attempted to control the flow of money, blockchain undermines their attempts. Just because something has always happened in the past such as the U.S. government controlling anything to do with money does not mean it will continue to do so with the same level of success. The Chinese government has certainly been undermined by bitcoin despite its on again, off again attempts to squeeze the life out of bitcoin by way of outright bans against certain aspects of the technology. Indeed, many of its wealthy citizens are able to transfer millions outside of the country, overriding the $50,000 equivalent maximum. Russia’s Putin at first banned the technology until they realized its massive utility. Putin met with Vitalik Buterin, the founder of Ethereum, last year.
A major global shift is taking place from centralized forms of power to decentralized platforms which already enable the transfer of value outside of the hands of governments. DAOs (decentralized autonomous organizations) will further facilitate this evolution.
While some believe decentralized crypto exchanges (DEX’s) will cease to exist should the U.S. ban them because that’s the attitude the U.S. has always taken when it comes to the control of money, such exchanges are by their very nature not easily controlled. As an example, peer-to-peer illegal file sharing continues to grow since the days of Napster in the mid-1990s despite the tens of millions of taxpayer dollars used to attempt to quash such decentralized platforms.
While some say the U.S. will simply control the service providers who host such exchanges, VPNs and mesh networks are easy workarounds. In other words, there is always a way to circumvent policy as tech always trumps policy. Further, the government tends to be the slow animal in the herd thus policy has been, is, and will continue to be trumped even more so today than ever before as blockchain technology takes hold. The regulation will help the blockchain/cryptospace mature enabling institutional capital to enter en masse.
Record Levels Of Debt And The Great Decoupling
While QE rages on, interest rates at or near historical lows and going lower over the foreseeable future has pushed global debt to all-time highs. This has exacerbated the breakdown of the traditional correlation between US income and GDP growth as shown in the chart below. The crossing between these two measures occurred in the mid-1980s and was dubbed the “Great Decoupling”.
Since the CPI is well under what it should be due to the government removing components since the 1980s that rose in price the fastest, even the artificially inflated GDP numbers should be materially lower than reported. This has resulted in economic distress for the majority of Americans and Brits, two of the economically leading nations of the world. Income disparity between the top 1% and the bottom 90% has never been greater. This has led to a search for off-grid solutions since major governments are not helping but instead, second-order effects from QE are enriching the top 1% who tend to hold a greater share of hard assets, real estate, stocks, and bonds.
One off-grid solution has had the fastest growth over the last decade. Forbes did an article a few years ago on how the D market (dark market) is the fastest growing market in the world. Note, goods, and services exchanged in the D market are not typical of an illegal nature as the D market represents faster and more efficient ways of transacting typically at a lower cost. Blockchain tech will accelerate this trend. The total value of the D market at the time stood at $11 trillion vs the U.S. GDP at $16 trillion. Forbes guessed that the size of the D market would surpass the U.S. market within a decade.
While bitcoin is the method of choice to transact value in the D market, blockchain by its very nature is transparent thus some governments have taken an interest in using blockchain to reduce or eliminate money laundering. Bitcoin having the highest hash rate by a massive margin makes it the most private and secure network which government agencies could utilize to track capital flows. So while bitcoin may have started out as a way to transact value for nefarious purposes, it will more likely be used to stop criminal activity as it matures. Indeed, using bitcoin for illicit activities will become far more difficult than using cash. That said, coins such as Monero, Zcash, and Dash which hide transactions may eventually be banned by more governments, in which case, these platforms will go underground much as illegal peer-to-peer file sharing continues to thrive two decades after Napster was taken down. For every p2p platform that gets shut down, ten new ones pop up. The billions of dollars in taxpayer money the U.S. government has spent since 1995 to stop this activity has come to naught.
Digitally Sovereign Decentralized Platforms
In any respective country, there is only one choice of currency. This is what drives banks’ and central banks’ margins. The great global monetary shift that takes place over the next several years will foster an ecosystem of many cryptocurrencies for applications existing on digitally sovereign decentralized platforms on the internet. This is transformational as such platforms will be outside the jurisdiction of governments and central banks. For those who insist the U.S. government controls all, their attempts to shut down p2p file sharing were ludicrously feeble.
At least the SEC recognizes that bitcoin cannot be controlled short of blowing up the planet. The electricity shut off? There are always workarounds via alternate power sources combined with mesh networks, satellite, and so forth. Anything the government tries to do to stand in the way of decentralized progress has been and will continue to be futile. While control has always been achieved prior to decentralized tech, bitcoin, p2p file sharing, and other platforms represent the first type of tech that appears relatively invincible in its progress. Bitcoin itself has relentlessly grown in value from 0.001 in 2009 to over $9000 today despite various governments trying to derail it. Nothing in the history of speculation even comes close to how far bitcoin has appreciated since it was created in 2009.
Bitcoin facilitates value transfer. The SEC has declared bitcoin decentralized thus not under regulatory scrutiny. That said, should its layer 2 technology Rootstock get underway in full measure, such companies with centralized authority that utilize Rootstock would have to register with the SEC as securities to remain compliant.
So despite attempts over the years to ban bitcoin by entire nations such as China and Russia, Bitcoin remains the most secure and private platform due to its massive network effect which continues to grow exponentially. Bitcoin adoption (user base) doubles every 12 months. Bitcoin adoption is currently at roughly 1–2% of the world’s population. Therefore, it took 10 years to get to 1–2% adoption (2009–2018). Over the next 10 years, bitcoin’s user base could rise from the current 1–2% to 50% as the S-curve wave adoption approaches based on its adoption rate doubling every 12 months. Advantage: S-curve.
Another S-curve tsunami that is coming is the tokenization of most assets. The former CEO of the NASDAQ stock exchange recently said all stocks will be tokenized in 5 years. The CEO of CoinMetro thinks this will happen even sooner. The renowned angel investor Naval Ravikant would agree. He said 2 years ago that 90% of jobs on Wall Street will be gone in 7 years. I have said, “Transform or die.”
Buckle up… we’re going into a new era.
(͡:B ͜ʖ ͡:B)