Bitcoin – The Bull that refuses to back into its cage

Bitcoin is now trading above the ceiling predicted to be its cap – it is the bull that remains uncontrollably volatile but unashamedly confident.

bitcoin-2643159__340  In a previous post, I explored how Bitcoin worked and explained the functionality of the centralized ledger. This week I have a new question. Why do people have faith in a currency that has no tangible resource backing it? Traditional currencies use gold, what does Bitcoin have? Hope? I will supply two reasons I find particularly compelling that may explain sudden interest for Bitcoin, however bear in mind that there a multitude of factors, and there is no monocausal reason for the sudden growth of Bitcoin.

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Firstly, financial commentators have commented on the magnitude of growth Bitcoin would experience if it were to be backed by a finite resource like gold. Bitcoin is a currency that has no tangible resource dictating its value. Its value is based precisely in what people think it is worth (or will be worth). Currently, Bitcoin is not backed by gold, or any other finite resource, but what if it were?

Standpoint Research’s Ronnie Moas reported that there is $200 T tied to cash, stocks and bonds. He stated:

“I am not excited about putting my money into any of those – If 1% of that $200 trillion finds its way into crypto in the next 10 years, you will be looking at a 2 trillion-dollar valuation – 10 times what it is today”

A theme common with cryptocurrencies. People are investing on the whim that it “could be” massive.

Secondly, trading Bitcoin may become safer – and hence attract attention from more conservative hedge fund managers. The more investors, the more Bitcoin will grow. Last week, the world’s largest exchange operator by market value (CME Group) has announced it is readying plans to offer futures on Bitcoin.

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This will give momentum to cryptocurrencies’ move away from the fringes of finance. But more importantly, the Chicago–based trading venue said it intended to add Bitcoin to its stable of futures on interest rates, stock indices, commodities, and currencies by the end of the year.

If hedge fund managers can long and short different prices, they can hedge against volatility. Currently, Bitcoin does not allow this. If it were to, which the CME have suggested, then Bitcoin becomes more attractive to less risky investors – once again increasing the amount of investment, and the “normativity” of the currency.

These two points share something. Both signpost to us that Bitcoin is doing well because people think it will do even better in the future. The potentiality for the currency is very high. And, although now there is little tangibility to Bitcoin besides hope and (somewhat) empty prediction, it seems that in the near future Bitcoin could become a global phenomenon.

Does the currency of the future have a future?

Bitcoin’s success has been remarkable. Its most important characteristic, and what makes it different from money (USD or GBP for example), is that it is decentralized. No single institution controls the Bitcoin network. This puts some people at ease – as it means banks and government have no control over their money. Bitcoin is the Rocky Balboa of economics. During the start-up, one Bitcoin was valued around $35; now, it soars anywhere between $5000 to $6000 dollars. This being said, Bitcoin is incredibly volatile. Prices rise and dip considerably month to month, and sometimes day to day. In this week’s article, we will take a look at how bitcoin works, and see what experts predict of its future prosperity. Let’s see if Bitcoin can go the distance.

Bitcoin is a cryptocurrency monitored by a ledger. The ledger is available to be downloaded by anyone, and with it, you can see every account and every transaction ever made. If I want to buy a sofa from you and pay you 0.5 bitcoins, then the coins will go from my e-wallet to your e-wallet and this will be marked onto the ledger. This is available for everyone to see. Simple.

Although all records of transaction are in the public domain, each user remains anonymous. Transactions and accounts (E-wallets) are tracked by a number, and not a name. It would be impossible to trace an account to a person using the ledger alone. Although anyone can check the ledger, they cannot use it to link a transaction to an individual. But this anonymity comes at a price.

As all accounts on the ledger are mathematically coded, the ledger needs constant work to be kept up to date with pending transactions. When you pass money to someone, it creates a key which creates an e-signature from your personal wallet code and the recipients’. This mathematical key is unique and cannot be replicated.

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When you make a sale, everyone in the world’s ledger is updated with this new transaction, and everyone can match this transaction against the ledger. This keep Bitcoin secure.

Mathematicians will link pending transactions to past transactions, this way, everyone’s ledger agrees. Coincidentally, this is how Bitcoins are distributed to people. Someone links a transaction onto past transactions and is paid in Bitcoins. This allows for Bitcoin to be self-sufficient, and have no centralized authority, like the federal reserve to the dollar. This process is called data mining. In turn, no one can print money and Bitcoin is distributed by the system for updating the ledger. Bitcoin is safeguard by everyone, for everyone; and any person who owns a Bitcoin is a part of the Bank of Bitcoin.

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It sure is interesting to see how it works; and, even though it can be daunting understanding it at first – Bitcoin is a simple concept. The founder stated that once understood, it makes much more sense than centralized currency as it is maths. But how does it compare to hard currencies? And does it have a future in the way the world works?

Goldman Sachs made its position clear, they believe “gold wins out over cryptocurrencies in most of the key characteristics of money.” They compared the two in terms of durability, sustainability, intrinsic value, and unit of account. On the other hand, cryptocurrencies take up significantly less space – but new alternatives are being created every day. There is no competition when it comes to the value of gold, but there is to the bitcoin. Goldman rounds of their statement by pointing out that Bitcoin is dangerously volatile. The Bitcoin-to-U.S. dollar volatility on average was nearly 7 times that of gold this year (2017).

Frustratingly, there is not enough evidence to come to any conclusion as to how Bitcoin will do in the future. But the central question we need to bear in mind isn’t whether or not Bitcoin is a fad or has staying power, its whether Bitcoin has the potential to be the new gold. Whilst commentaries from Goldman’s state it does not, it is worth mentioning that they are in the process of building their own tech to help decrypt and data mine. This indicates that despite their comments, they still have some faith in the “currency of the future.”

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Henry James and James O’Leary do not hold any stake in Bitcoin.

 

 

 

Amazon’s hostile takeover

In my previous article we investigated the new strategy implemented by Starbucks in which they closed their online stores and force consumers to physically enter their stores to purchase something. This runs strictly against the business models of giants like Amazon who are happy to sell to consumers in the c omfort of their own home – epitomized by the launch of Amazon Prime – a same day delivery service on selected items bought on Amazon.

But what are Amazon (AMZN) doing in response to this apparent new culture of buying in store? In true Darwinian fashion, they strike back with their own vision of how consumers will be purchasing in the years to come through an appropriation of the semi-monopolized safeguarding market.

ffElectronic payments are a growing market. Traditionally, everyone had a bankcard that was linked to two providers – Mastercard (MA) and Visa (V). These two safeguard companies are well trusted by users and renowned worldwide as being safe, secure and trustworthy. Since the launch of the internet, new providers came along such as PayPal (PYPL) – who ensured a safeguarding through internet transactions. But the market seems to be shifting in another direction now, which will leave these companies in the rubbish-bin of history.

Moody’s Stephen Sohn and his team of analysts tell us that the electronic payments market is large, with plenty of new entrants. This poses a threat to current payment ecosystems of networks and cards. The potential interlopers include, but are not limited to: Alphabet Inc’s Google (GOOG), Amazon.com Inc. (AMZN), and Apple Inc (AAPL). The new goal is to create a gateway system that bypasses Visa and MasterCard’s safeguarding by doing it in-house. Alongside this, we are seeing a myriad of new entrants into the market. If this happens, we could see an even more centralised power from online companies.

We can infer two things from this shift. Firstly, the fact that there are new entrants into the market means that there is a market to be tapped into. This must mean that consumers feel more comfortable doing in house deals with companies than in the past. If there is more competition for roles that were traditionally accomplished by Visa and Mastercard, then it means people are not as suspicious as they once were – which is understandable – consumers often have a lot of faith in companies like Amazon and Google.

Secondly, that online companies are themselves pushing for easier trading on the internet – which is directly opposed to Starbucks’ (SBUX) vision of the future. If this market were tapped by online retailers, they could cut out costs making it cheaper and quicker to purchase online.

This being said, Sohn reports “material displacement of traditional electronic payment providers remains unlikely.” As we have established, Visa and MasterCard have near universal acceptance in the USA which will make them very difficult to dislodge. This may make it difficult for online companies to fulfil their ambition of securing their place in this market.

As a generalisation, tech companies such as Alphabet and Amazon subscribe to the philosophy “if you can’t beat ’em, join ’em.” So far, there have been collaborations between already existing safeguard mediums (Visa and Mastercard) and new-comers into the market (inc. GOOG and AAPL).

So, what can we make of all of this?

It seems that there is a heavy focus on consumer perception to predict the future of sales. Amazon are dependent on online sales to survive and cannot allow Starbucks, or any other competitor such as Nike, to create a social-trend where experience is crucial in the buying of goods. Their response to this is in creating better and easier ways to buy and sell online. Although Starbucks wish to create a new trend, online companies are building on an already existing one.

We will have to wait and see how consumers react to Amazon’s adaptation of buying online.

 

(Please note: James O’Leary does not currently hold a position in: Amazon (AMZN), Starbucks (SBUX), Nike (NKE), or PayPal (PYPL). Henry James International Management does not currently own a position in: Amazon (AMZN), Starbucks (SBUX), Nike (NKE), or PayPal (PYPL).

(Please note: James O’Leary currently holds a position in: APPLE (AAPL), VISA (V), and MasterCard (MA. Henry James International Management currently owns a position in: APPLE (AAPL), VISA (V), and MasterCard (MA).

 

What can we learn from companies shutting down online stores?

Starbucks has recently shut down its online stores. As a pioneer in sales and marketing strategy, Starbucks may be telling us something about the way businesses will have to operate soon. Since jumping onto the Central Perk culture from hit TV-series – Friends, they have revolutionized food and beverage in the last few years by making customers pay and pre-order using their smartphones. Their culture of fast coffee purchases using smartphones was influential enough to inspire credit card companies to produce cards the contactless cards we all have today. Starbucks are always ahead of the game.

 

Starbucks has been a innovator of trends for the last decade
Starbucks has been a innovator of trends for the last decade

 

In the last few years, companies have shifted from high-street retailers to online websites, selling their goods using only their web-client as a means to interact. It is easier for the client, it is cheaper for the company, and it means that people have better access to goods and services. So why have Starbucks shut down their site and discontinued online selling?

Starbucks’ new campaign strives to get people to leave their houses and come into their stores as opposed to surfing their products at home. Their CEO stated that he wants Starbucks to be an “experiential destination.” Customers can surf the net and check out their products using the app, but cannot buy anything without entering a store. This means you can order a coffee on the app and pop in and grab it, but you cannot have anything sent to your house. There must always be some physical interaction with the brand.

This is an interesting move. Why is it that we are seeing this shift back to high street retailers? What is it that companies value in such strategic shifts? Firstly, it allows companies to compete with giants like Amazon, who have a large market share, and sell the products of others. When we think about it, Starbucks would be extinct if Amazon found a way to sell their coffee online. This revolution would hit Amazon hard if Starbucks managed to make a trend of “experiential destinations,” as Amazon do not have a place where customers can come in. If this becomes a trend, it will make companies with a physical presence shine.

Secondly, it makes their product more valuable. Nike and other fashion companies have saturated the market with their goods, they are no longer seen as special. The consumer engagement is lower and people care less and less about high-quality Nike products. They are also available on Amazon. It is more than likely that Nike will swiftly follow suit, and emulate the synthesis of internet marketing and in-store experience. This could be the future for all big companies that sell goods online.

If successful, this business model will have a significant impact any company whose business model is focused in online sales. It will give power back to retailers, and will hinder “middle men” like Amazon. But before all this, they are going to have to convince the world that experiential destinations are successful.

 

 

Starbucks is a place we can work in or relax
Starbucks is a place we can work in or relax

(Please note: James O’Leary does not currently hold a position in: Amazon, Nike, or Starbucks. Henry James International does not currently own a position in: Amazon, Nike, or Starbucks)

 

The Run-Up to Christmas

The period running up to Christmas can be one of the most important months of the financial year. Not only can increased consumer spending help to motivate the retail sector, but it also gives a clear indicator as to how the public are feeling economically, whether they are more or less inclined to spend money.

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In Brazil this holiday season, the public’s feelings on Christmas spending are clear – this is a year to tighten your belt. According to a survey by Deloitte, Brazilians will spend 20% less this year than they did for Christmas 2015. The survey shows that, on average, people in Brazil plan on buying only four gifts this year, and intend to spend just $98. This is largely based on the country’s widespread financial insecurity, with the Brazilian GDP having shrunk by 4.4% over the last four quarters. Disappointing news for all those who were hoping Brazil was primed for a turnaround, and a much more restrained holiday season for inhabitants.

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Back in the US, the 12 days of Christmas are a little more expensive this year! This is according to PWC Wealth Management’s annual Christmas Price Index. The exercise is a humorous way to track inflation, with Maids A-Milking and Pipers Piping reflecting real labor costs and Five Gold Rings representing commodities. In the study’s 33rd year, birds, pipers and drummers have got more expensive, where everything else has remained the same or gotten slightly cheaper. This is in-line with the economy’s gradual expansion and reflects the cautiously optimistic attitude of consumers.

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This turn of optimism and expansion has triggered a move by the Federal Reserve to increase interest rates again for the first time since December 2015. The demand for labor has increased almost exactly to the level predicted by Wall Street, pave of growth has quickened and unemployment has continued to drop, now standing at 4.6% from 4.9% last month. Wage growth has yet to recover but this is not enough to stay the Fed’s hand and interest rates are set to go up before Christmas.

One industry is set to have an excellent holiday season for sure, and that is the travel industry! With an expected 3.5% boost in December holiday travellers, US airlines are set to have a record-breaking Christmas season, with a predicted 45.2 million passengers flying between Decemberwhite-male-1771597_1920 16th and January 5th. This means an average of 73,000 more passengers traveling each day in year which saw over 800 million people flying in and around the US. Major airlines are set to add 99,000 additional seats each day to accommodate the rush and this, despite the persistently low fare prices, ought to provide a healthy boost to end the year.