Bitcoin Block size debate hits critical juncture

Epicentre Bitcoin talks with Mike Hearn (Bitcoin developer) about ‘Bitcoin XT’ his modified version of the Bitcoin core protocol that could potentially facilitate larger transaction Block size’s in the future.

The talk centres around scalability of the Bitcoin network and the proposal to increase transaction block sizes from 1mb to 20mb. The potential benefits and risks of making such a change to the Bitcoin protocol are discussed.

Two of the most Important Bitcoin Market fundamentals looking strong

Whilst its easy to get fixated on the speculative price movements of Bitcoin as a main indicator of the health of the Bitcoin economy (as we often see in the Main Stream Media).

In my opinion two of the most important metrics I personally pay close attention to in the is the direction of Venture capital (VC) and the number of Bitcoin transactions per day. 

Both these metrics are very important indicators of the current health of  the Bitcoin network & growing utility.  In addition they are good  for predicting  future growth of the network that will ultimately affect the Bitcoin spot price in the future.

The chart below shows growing divergence between total VC investment and the market price of Bitcoin. The current and potential development of infrastructure, services and utility from VC investment could be starting to indicate that the current spot price of Bitcoin is currently trading, or soon could be trading under the Net Asset Value (NAV) of the Bitcoin economy.

In addition to this, since the 2014 Bitcoin highs which saw Bitcoin trade over a $1000, the number of Bitcoin transactions per day on a  year to year basis are up around 100% from 2014. This is a really important metric showing that Bitcoin use is becoming more and more widespread.

Bloackchain Transactions 2

(Click for larger Image)

Should these statisics continue to climb in the current manor, we should eventually see more and more of this activity and productivity from VC investment being priced into the market.

Australian Senate Committee proposal – Bitcoin should be deemed as regular currency

Via Anthony Cuthbertson @ IBTimes.co.uk

“Bitcoin and other digital currencies will be treated the same way as traditional currencies under expected proposals from the Australian government, reports suggest”

“A Senate inquiry is set to overturn a ruling from the Australian Taxation Office (ATO) from July 2014 that classified bitcoin as an “intangible asset” for Goods and Services Tax (GST) purposes, according to the Australian Financial Review, giving a much needed boost to local bitcoin businesses”

Read More here….

The Distorted UK property market – One big dangerous game?

It seems today in the UK, that you cannot go anywhere without constant reminders of just how crazy the property market is as we move into Q2 of 2015.

Whether it’s walking down a street and seeing several letting agencies within 100 yards.

Whether it’s the saturation of property related TV programming and daily news articles, either reporting record prices, or bashing ‘Buy to let’ landlords.

Or whether it’s the constant talk of property price speculation from the Baby Boom generation, or Millennials complaining about their extortionate rents. The signs of a late stage property bubble are everywhere.

The housing crash and subsequent financial crash of 2008 it appears is a distant memory. The lessons of the last financial crisis have already been forgotten in this new normal of ‘It’s different this time’ house price nirvana.

Why I’m avoiding this market:

Whenever you see a major excess or shortage of any asset, it’s always a clear indication of massive intervention in the free market, which leads to mispricing. And in this case of the UK housing market it’s no different.

Whilst you have to look at each individual market based on its own merits as an investor; there are 3 main attributes I look for when it comes to long term investments in these types of market.

  • Do the fundamentals indicate future growth, are they sustainable or in-line with the current Net Asset Value (NAV) of the market?
  • Is the market (based on historical measures) overvalued or undervalued?
  • If I plan to sell these assets in the future, who will I be selling them too?

Let’s take a look at the UK housing market based on these attributes:

From my analysis, the underlying supply/demand fundamentals of this market that should give us accurate price discovery, have been completely decimated by out of control money creation through the likes of Quantitative easing (QE) & Fractional reserve banking (FRB). As well as other out of control government policies designed to exacerbate what is in my opinion, an already over valued asset bubble.

These policies have led to extremely low artificial interest rates, which has led to the impotence of yielding assets. This in turn has led to a perfect storm of yield chasing property price speculation, based mainly on the belief of ever increasing extension of credit, debt and low interest rates; in order to justify the current price valuations.

Does this look like well balanced government policy, or a desperate attempt to prop up an overvalued housing market that contributes a disproportionate amount to the UK GDP calculation.

If we took away all of the policies above and allowed the free market to determine price discovery, it is highly unlikely we would have the exuberant house price valuations that we see today.

In the event of a currency crisis and or market forces pushing interest rates higher from there record lows; are these valuations going to stand up to even a modest interest rate rise?

The reason I doubt this is because of the extreme divergence we are beginning to see in the Average House price: Average Income ratio.

Historically, house prices has found a mean of around 3.5X – 4X the average income, from data measured between 1983- 2000.

If we look at the average income now of £27,000 compared to the average house price of £195,000 (1) in Q2 of 2015, it shows a current ratio of 7.2X. This is around double the long running average and in some areas such as London ,South East and the South West we have seen eye watering ratios, ranging anywhere from 10X to 20X the average income.

Guardian £500,000 headline september 2014

We are beginning to see an undeniable large divergence between these 2 key indicators.  

Housing article - growing income - price divergance

Where is the future support for this market going to come from? – A look at ‘demographics’:

Another key aspect of this market  to analyse, especially when looking at the potential sustainability of the graph above is  ‘demographics’.

Is the upcoming millennial generation going to be able to sustain the current level of artificially elevated consumption, in order to support the demand side of this market in the future?

In my opinion, there are 3 important reasons why this will not be the case:

First is the student debt bubble.  Millennials are now leaving University with an average of £40,000 in student debt  (3).It is highly unlikely this demographic will be lining up to buy £200,000 – £500,000 houses in the future, when they already have such huge debt burdens upon graduation

The first point is further exacerbated by the increasing automation of industries all over the world. From the property markets perspective; this is having unwanted side affects of increasing competition in the labour market and reducing quality jobs which puts constant downward pressure on wages.

Things like ‘Blockchain’ technology (decentralised public ledgers) , ‘Industry 4.0’ (4) and the advent of Decentralised Autonomous Corporations (DACS) (5), are also individually & collectively threatening a whole range of long standing professions:

Percentage risk of jobs lost automation

The third reason that Millennials may not be able to support current property price levels going forward, is the general decline in ‘real’ productivity in the UK.  Long extended periods of low interest rates has led to mal-investment and speculation rather than grass root SME development and Capital expenditure.  The graph below shows the real world effects of this; as imports increase and exports decrease, the UK current account deficit hits record highs:

Current accoutn deficit

Summary:

Rather than letting free market forces determine the right price of the housing market, it appears the government has instead decided to play an extremely dangerous game of blowing a short term house price bubble, as a means to support GDP figures.

This favours unproductive speculators & rent seeking activity and has the unwanted side effect of hollowing out the real economy; by punishing workers and wealth creators. Essentially, the government instead of the free market is deciding who wins and who loses in this economy and history has shown repeatedly that this can lead to massively detrimental outcomes in the long run.

It could be argued that the government (as well as the BOE who have failed to raise interest rates here’s why) have created an economic ticking time bomb, that requires an ever increasing extension of debt, credit, and low interest rates in order to sustain current price levels.

Hedging risk:

By partly tying the fate of the UK economy to the housing market and vice versa, I would personally not enter the UK property market today without being hedged with an allocation of sound money like Bitcoin or Bullion; to protect from potential currency collapse and tail risk in the UK and global economy.

Its unlikely big speculators and momentum traders are going to hang around in the property market once interest rates rise and the tide turns. Eventually every market corrects to fair market value.

Personally, I am more focused on what I believe to be undervalued assets with huge growth potential at the moment, such as precious metals and cryptocurrencies.

Whilst these assets are in no doubt still risky to hold, they potentially offer a Risk:Reward perspective that is much more favourable than the current UK property market, especially to millennials, many of which will never even get close to raising the capital required for a mortgage down payment.

It’s not impossible to rule out further nominal gains in UK property prices. However, it’s becoming harder to see in real terms, where future gains in this market are going to come from.

Disclaimer

Foot notes:

1) http://www.theguardian.com/business/2015/jun/03/house-price-rise-puts-average-cost-of-uk-home-at-195k

2) http://www.theguardian.com/business/2014/sep/16/house-prices-record-bubble-interest-rates-uk

3) http://university.which.co.uk/advice/how-much-debt-will-i-actually-get-into-by-going-to-university

4) http://en.wikipedia.org/wiki/Industry_4.0

5) http://en.wikipedia.org/wiki/Decentralized_Autonomous_Organization

 

 

War on Cash – Australia Set to Tax bank deposits

From Simon Black via the Sovereignman.com:

“Several months ago, the government of Australia proposed to tax bank deposits up to $250,000 at a rate of 0.05% (5 basis points).

Their idea was for the money to be invested in a rainy day Financial Stabilization Fund to insure against in the unlikely event of a banking crisis… or all-out collapse.

And as of this morning, it looks like the levy might just pass and become law in Australia. All parties support the idea. Which means that Australia might just have a tax on bank deposits starting January 1, 2016.

To be clear, the proposal seems to plan on taxing the banks based on the amount of deposits they’re holding—but it’s pretty obvious this will be passed on to consumers in the form of lower interest rates”

Read more @ sovereignman.com….

War on Cash – France planning ‘anti cash’ capital controls – Q3 2015

From Joseph Salerno via Mises Institute,

  • “Prohibiting  French residents from making cash payments of more than 1,000 euros, down from the current limit of  3,000 euros.
  • Given the parlous state of the stagnating French economy the limit for foreign tourists on currency payments will remain higher, at 10,000 euros down from the current limit of 15,000 euros.
  • The threshold below which a French resident is  free to convert euros into other currencies without having to show an identity card will be slashed from the current level of 8,000 euros to 1,000 euros.
  • In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.
  • French authorities will also have to be notified of any freight transfers within the EU exceeding 10,000 euros, including checks, pre-paid cards, or gold.”

Read more @ Zerohedge.com….

War on cash – Greek Government proposes ‘Tax on Withdrawals’

From Zerohedge:

“The Greek government is now proposing to instate a tax on withdrawals from ATM’s in the country and aims to raise 180M EUR in additional fees due to this measure. This is clearly aimed at containing the current ‘soft’ bank run that’s going on in the country. Additionally, all wire transfers of in excess of 1,000 EUR will also be subject to the tax”

“With this idea, Greece is effectively introducing a capital control in the country, and it obviously would not do that if the situation didn’t demand for drastic measures to be taken”

Read more….

 

China Announcements V Bitcoin price – And why investors should look at the bigger picture

In the last few months, there is no doubt that many in the Bitcoin investment space are getting weary of the constant threats emanating out of China and the PBOC with relation to Bitcoin regulation. In particular with how Bitcoin exchanges and financial services can operate within China.

In fact whilst many investors obviously want China and the Chinese citizens to participate in the Bitcoin economy, especially due to the high trading volume they bring to the market. They are now looking to the Chinese government to officially state their position regardless of what it is, to try and underline the ambiguity surrounding their regulatory stance.

The goal of this? To end the uncertainty which has plagued the bitcoin price over the last 5 months (which we will look at shortly). This has no doubt played a part in frightening away the weaker hands which helped fuel Bitcoin’s $1000+ move back in November 2013.

Whilst there is no definitive answer or evidence as to why there has been so much ambiguity and uncertainty regarding China’s official stance on Bitcoin regulation. Possibilities discussed range from a lack of understanding on the part of regulators grappling with this new technology, to deliberate manipulation in order to lower the bitcoin price.

So what has been the effect of the announcements on the bitcoin price? And should current or potential investors really fear the regulatory stance of China?

The effect of the announcements:

The following charts show the price drop following Chinese regulatory announcements/rhetoric from the beginning of the announcement to the end of the short term down trend.

Dec 5th: Peoples bank of China Starts rhetoric on restricting financial institutions from handling Bitcoin, issues statement Baidu and China Telecom stop accepting Bitcoin

Price drops $1130 to $540 – 52% drop.

China Price drop December 5th 1130-540

Dec 16th:  China’s payment processors told not to deal with Bitcoin.

Price drops $857 to $381 – 55% drop.

China price drop December 16th 857-381

Mar 28th: Rumours of new China bank restrictions.

Price drops $570- $339 – 40% drop.

China price drop Mar 28th 570-339

April 25 2013: – PBOC further restrictions Bitcoin exchanges, restricting Bitcoin transactions through rechargeable funding codes.

Price drops $500 – $438 – 12.5% drop (currently)

China drop April 25th 500-438

 

Summary:

Chinese price drop summary table

Whilst you have to take into account other factors such as profit taking, technical weakness, momentum trading and the Mt.Gox affair over this 6 month consolidation period. It is clear that these Chinese announcements have had a profound effect upon the drop in the bitcoin price.

But looking at the summary, the effect of these announcements appears to be diminishing as bitcoins move into stronger hands and new investors enter the market looking for bitcoins that are potentially offering a discount under fair market value.

The Bigger picture:

For people currently invested or looking to invest in bitcoin, it is important to remember that Bitcoin is a lot bigger than any one country, even if that country is one of the biggest players on the world stage.

It could and has been argued that Bitcoin is one of the biggest and most important technological innovations in human history and the likelihood of it going away anytime soon, could be conceived as being very low. Whilst bitcoin remains a speculative high risk investment in the near term, it is worth bearing this in mind.

In addition to this, regardless of China, there are approx 200 sovereign states in the world not all of which are taking such a hard stance towards Bitcoin regulation.

These states cumulatively have tens of trillions in wealth currently located in stock markets, pensions, savings accounts, bonds, forex and commodities. Not to mention the wealth in offshore accounts that some estimate to be around $21 trillion.

If even a small percentage of this money makes its way into the Bitcoin market, it is not difficult to conceive a bitcoin price many multiples of its current $5-6 billion market cap.

It is also worth remembering that bitcoin is a global currency. As such, the opportunity for regulatory arbitrage ensures that there will always likely be a state that recognises the value of Bitcoin and are open and willing to cooperate with Bitcoin entrepreneurs, exchanges and start-ups to help build a robust Bitcoin economy. Evidence of this is the growing amount of Venture capital (VC) moving into the Bitcoin space, which is estimated to total approx $500 million by the end of 2014. A number almost in line with the rate of VC the internet attracted during its early stages.

It is these states that will likely force the hand of the more reluctant states in the long term, as they enjoy the competitive advantage that comes from a growing Bitcoin economy that benefits from the use of an efficient, low cost, frictionless transaction network.

Conclusion:

Whilst it is likely beneficial to take note of any regulatory moves from individual states that affect the bitcoin price, when making an investment decision to enter of leave the market. It is always worth bearing in mind the bigger picture of Bitcoin as a whole and why the underlying fundamentals perhaps offer an opportunity much greater than can be affected by any individual state.

Disclaimer

 

 

The Elephant in the room – Rising Sovereign Debts, Rising Interest rates

It’s been over 5 years since the epic events of 2008 that should have marked the end of the runaway fiat currency, debt saturated global economy which we have been thrown into by a combination of loose regulation and easy credit that was willingly administered by the quote, ‘too big to fail banks’.

However, since 2008 it is fair to say there has been no real fundamental reform of economic policy, banking regulation and the very nature of the institutions that brought us to our knees. As a result UK debt levels continue to escalate.

In addition to this there has also been no real evolution in the mainstream media’s (MSM) coverage and rhetoric on the fundamental reasons and critical state of sovereign debt levels.

In particular how the need to maintain low interest rates on these debts, make any chance of a genuine recovery a near impossibility.

Despite all the talk of recovery and ‘green shoots’ in the economy that I hear on a daily basis, backed up by the pseudo backdrop of record high equity markets, bond markets and a propped up housing market still benefiting from artificially low interest rates. It is still evident that sovereign debt levels mostly inherited by past bank bailouts and servicing of interest on that debt are growing worldwide and are predicted to grow further throughout 2014.

G7 Soverign Debt levels

Of course the chart above only shows sovereign debt, when corporate, financial sector, private debt and unfunded liabilities are factored in, the debt to GDP in the UK is estimated to be around 900% GDP.

G10 Debt DistributionThe UK’s approach to this crisis (as well as many other countries globally) has led them to quantitative easing (QE).  This is essentially money printing where the central bank (BOE) monetizes debt through the purchase of government bonds (Gilts) from other financial entities such as banks and corporations. The two main objectives of this is supposed to keep interest rate low by creating artificial demand for gilts and to stimulate growth by funding SME’s.

However, it could be argued that the very same forces designed to stimulate growth are actually undermining the real economy at the same time as the increase in base currency through QE and fractional reserve banking is causing asset price inflation in essential commodities.

This in turn not only drives up living costs and reduces disposable income for large parts of the population, but has the knock on effect of damaging businesses due to reduced demand, leading to layoffs that create an excess of labor and dropping wages.

What we have ended up with is a catch 22 situation that is not being widely discussed in the MSM. The very steps to try and resolve the crisis is undermining the real economy by driving up total sovereign debt which almost ensures the need for even more debasement of the currency through QE in the future, to roll over maturing debt and the interest on the sovereign debt.

This in turn will again lead to more inflation and the erosion of purchasing power of fiat currencies including the pound, creating a dangerous negative feedback loop in the economy.

With sovereign debt approaching £1.4 trillion and what looks like a reversal of the gilt bond market into a secular bear market in May of 2013, signaling rising interest rates on Index linked bonds and new gilt purchases.

The opportunity for the government to make and meaningful reduction on the UK’s sovereign debt to a sustainable level, is looking more and more insurmountable.

Disclaimer

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