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).

 

December Debt – The Price of Christmas in 2016

With less than a week to go until Christmas, many families and industries are going into overdrive in an effort to have everything ready for the holidays. Last week saw freezing temperatures across much of the US, in contrast with a warmly welcomed recovery from the oil and gas sector. Good news too for the financial sector, with Novembers Bank of America Merrill Lynch survey showing fund managers’ allocations to banking stocks had leapt up, with a net 31% overweight, up from net 25% last month. But how is this Christmas going to be financially for the average Joe? Studies suggest the outlook may be quite different.

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According to global performance-management company, Gallup, the average American adult will spend around $785 on gifts this Christmas, up from the $728 they planned to spend in 2015. This fits in with the gradual upward trajectory in Christmas spending seen over the last few years, but is still a long way off from the $900 average seen just before the recession hit. These are, however, only average spends, 54% of those who took the Gallup survey said they planned to spend between $500 and $1000 this Christmas.

Last year 78% of those buying gifts for Christmas did not expect to borrow to fund these purchases, but this year it may be a different story. In a poll run earlier this year by the Associated Press and the NORC Center for Public Affairs Research it was discovered that two thirds of Americans say they would have difficulty in find $1000 to cover an emergency, even in higher-income households. So, where are Americans finding this money to cover Christmas gifts?

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An article published on NerdWallet this week states that overall US household debt has grown by 11% in the last decade, with a considerable chunk of that being credit card debt. Another article in Magnify Money from January last year claimed that holiday debt added almost $1000 to American households’ debt.

And for those Americans who do not use their credit card, there are a pool of loan companies who go into overdrive to offer Christmas loans to families to help cover their holiday expenses. These tend to be glorified payday loans with extortionate rates of interest, which may leave individuals in so much debt that they are still paying it off next Christmas. What it means to be building an American Christmas on debt remains to be seen. Let’s hope that the USA achieves a 3% GDP rate of growth in 2017 and that middle-class America receives the gift that an expanding economy gives – an increase in disposable income and a brighter future.

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For questions regarding anything in this article, or all other investment matters, please do not hesitate to reach out to us via telephone on 917-951-5170 or by email at info@hj-intl.com.

Trump’s Effect on the US Economy

Four weeks have passed since Americans across the country took to the polls and chose Donald Trump as the next President of the United States – but what effect has that had on the US Economy?

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The first thing of note is that, contrary to the example set in Britain post-Brexit, US stocks have soared since Trump’s election. The S&P 500 index, Dow Jones Industrial Average, and Nasdaq Composite Index have all reached record highs since November 8th. This upward swing is even being called a “Trump rally” by some.

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Experts’ feelings on Trump’s economic plan – which involves boosting public spending and introducing tax cuts and reforms – is divided, though most believe it will lead to a sharp increase of both growth and inflation. Trump’s promised corporate tax cuts will be financed largely by higher public borrowing which, although it may certainly stimulate growth, will create bigger budget deficits.

The Paris-based Organisation for Economic Cooperation and Development believe GDP growth is likely to be greater under Trump than it was under Obama, with predicted figures currently standing at 2.3% in 2017 and 3% in 2018. This compares to growth of just 1.5% this year and the 2.2% average annual rate during the current president’s second term.

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Trump’s pledge to dedicate $550bn to rebuilding crumbling infrastructure across the country is likely to push the US towards full employment. Coupled with deregulation and banks being encouraged to loosen lending standards, this growth is bound to push inflation higher as time goes on.

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One thing which remains to be seen is what effect Trump’s presidency will have on the global economy. With a general move away from free trade and globalisation – including policies such as amnesty for multinationals who repatriate foreign profits – at a time where the global economy is less than strong, the US could end up endangering a number of emerging global economies.

One country at least seems to be pleased with the election results. Trump’s views surrounding climate change and global warming has translated into promises to cut red tape for the fossil fuel industry – a move which could prove very useful for Saudi Arabia. The Saudi energy minister Khalid al-Falih believes that US oil consumption will recover in 2017 leading to a stabilisation of oil prices, though it was not explicitly stated that this would come as a result of Trump’s election and potential return to a 3% rate of growth in the United States GDP.

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