SharperDingaan

"So you should ask yourself, what has changed to cryptos in the span of 12 months to justify such move?" Four major things changed for Bitcoin during 2017: 1) Attained critical mass. Coming together of enough early adopters outside of the IT/developer community, for social media to take it main stream. 12 months ago it was just a 'thing', now everyone wants to know how to buy/sell them. 2) 'Asset' recognition. Individually, we may be positive that Bitcoin is a 'tulip'; but if the folks that matter declare Bitcoin to be an 'asset', our opinion really doesn't matter. 3) It became credible in NA. Bitcoin was the example, that moved business conversation onto the blockchain technology that runs it. 4) It became mainstream. R3 Corda ledger tests were successful, providing the pipes to enable financial regulators/institutions to 'safely' participate in crypto currency investment. The outcome has been derivatives on Bitcoin, that enable institutions to control risk. Given the large quantity of really bad ICO's issued in 2017, & the bad taste they are leaving; most would expect 2018 to see some of the air leave the bubble. The point here is that adoption 'events' are determining the valuation, not the technology itself. SD

These things have a fine line between junkie and investor; and why, in part, we are no longer in them. There is still a lot of money to be made, but we think that today it's largely a bet against the tide going out. Nothing wrong in that; we just prefer not to hold melting ice cubes. SD

Not popular .. but simply learn how to be 'idle'. Only buy when quality is available and cheap, and sit in treasuries when it isn't. You'll always be loading up a little after the cycle has turned up, and selling a little after the cycle has turned down. Worst case you suffer some opportunity loss from late buys & sells, and have to put up with a high cash position through the downturn. SD

Some clarifications ... We would would not mortgage a house paying 'X' % on the mortgage, to buy an investment with a higher cash yield and the possibility of a gain. We raised the point .. because until your mortgage is paid off, this IS what you are doing. If your 10% going to saving is expected to earn less than you're paying on your mortgage - it should be going to debt repayment. With concentrated portfolios, the initial investment in 'XYZ' equity is often > annual income; in these instances the sale point is 3x the value of the house you live in. In most cases it will give the equity significant room to run, and it will force the conversion of 'paper' wealth into 'money in the bank' on a systematic basis. Paper wealth is nice, but it's typically not liquid; partnership interests, and restricted shares being prime examples. $ today (for spending) are worth more than $ tomorrow (for wealth). Family that are house rich but cash poor, aren't going to be producing grand kids or moving forward anytime soon. But use an estate to buy a % of the house for cash that repays the mortgage, tie that equity to grand kid inheritance, and require that 100% of the saving go into additional investment; and it will materially, and permanently, change the equation. You will also optimize the 'opportunities' of wealth, and significantly reduce the current tax bill. Ultimately it comes down to what you see 'wealth' as, and its purpose. Just different strokes for different folks. SD

AUM. There are very real differences between retail/institutional behaviour, and retail that does/does not use a financial adviser. It's also useful to think of a pyramid, where height is a function of financial sophistication, and width is a proxy for % of population 'universe'. For most people the $ invested in savings (equity) competes against a $ invested in either debt repayment, or living costs. Initially we borrow/invest simultaneously, in the hope that our investment upon disposition will have earned more than the total interest paid on the debt. We borrow to go to university to get a 'sheepskin' and a job that pays enough for us to retire our debt. We borrow to buy a house to live in, that we pay off over a 25 year amortization. Per Clason's The Richest Man In Babylon; after-tax cash flow should be allocated to 10% investment, 20% debt repayment, and 70% cost of living. It's pretty hard to justify continued participation in an investment, when the unrealized gain is larger than your mortgage. You could sell tomorrow, pay off that mortgage, and reinvest the net proceeds in a zero risk T-Bill - BOTH earning interest AND saving on the mortgage payment every month. The solution is either 1) a bigger house, & a bigger mortgage (the unrealized gain isn't big enough yet - so stay invested), or 2) reduce the AUM that were available to make the investment (you've ALREADY taken $ off the table to repay your debts). The difference is risk management. Bankers will typically lend up to 3x after-tax income when buying a house. If you've already paid off your debt, this suggests that an equity should start to be sold off when its value exceeds 3x after tax income. Ignoring tax, and simplifying; if portfolio income is 100K/yr, XYZ equity should start selling off when the value of the position exceeds $300K - with the proceeds going to T-Bills. The portfolio continues to grow over time, but T-Bills make up a larger & larger portion of it - reducing portfolio return. The easiest way to raise portfolio return is to remove the T-Bills, & spend the proceeds on something else (new businesses, real estate, etc). Simplifying it means a portfolio has an optimal size, and its biased towards the smaller end. When it's getting too big, you need to return capital. Same as you read in the textbooks. SD

I don't understand what point you're trying to make. I don't think it can be disputed that $1 will buy you far less milk or eggs or bacon or subway rides or movie tickets today than $1 would have bought you 100 years ago. See, e.g., https://www.bls.gov/opub/btn/volume-2/average-food-prices-a-snapshot-of-how-much-has-changed-over-a-century.htm The link illustrates why I think USD is not a good store of value. If you think it's a good store of value, then I suspect we're using "store of value" to mean different things. The store TODAY is the claim on TODAYs tax stream of sovereign X. Tomorrow the value may be lower because there are more claims ($ bills) on the same tax stream, or a lower tax stream;either of which would 'devalue' the claim. Fiat currencies devalue because we increase the money supply (number of claims) every year. Gold devalues as well - by the new amount mined plus the net change in inventory reserves (bullion+jewelry+industry). But as it typically devalues at a slower rate than fiat does, it appears to increase in value over the years. SD

I have to ask what you mean by "store of value". Has fiat really been a good "store of value" over decades? Even the fiats that are seen as generally stable like the dollar have not retained their value in real terms in the 20th century, e.g., look at the change in the nominal price of a gallon of milk or a subway ride in NYC. EDIT: I do note that you didn't say fiats were a "good" store of value. So, to the extent a "store of value" is anything that allows at least some preservation of value over time, then fiats would qualify, even if they're not great at it. Technically a $1 bill is a bearer bond issued by the central bank, backed by the full faith and credit of the sovereign. The credit being supported by the sovereign ability to charge and collect on taxes, rents, etc. The store of value is 'dynamic', rather than a 'static' asset either sitting in a vault, or in the ground. SD

Fiat is a unit of account, medium of exchange, and store of value (guaranteed by the issuing CB); a Bitcoin is exactly the same thing. And you CAN use it to pay your taxes - as is commonly done in Estonia. Crypto as a payment system runs far more effectively and efficiently on a database. Until you do your own DD on how the technology works, no one can help you. SD

A few comments to aid in understanding cryptocurrency ... 1) A currency is simply a unit of account AND a payment system. 2) Every user must decide, per payment, what is MOST important to them; speed OR security (not both). If you're paying for coffee, 5-10 seconds for the machine to process your card is acceptable; 10 minutes+ for a miner to verify your token is not. 3) Every user must decide, per payment, the level of security required. If you're paying via a FI card, the FI stands behind the transaction, and fast processing via a database becomes practical. If you're paying with crypto, NOBODY stands behind the transaction, and slow processing via the miner network on a distributed ledger is a necessity. 4) Every user must decide, per payment, the level of anonymity required. The more it matters, the more you require the total anonymity of Bitcoin. Most of us will never require that level of anonymity, and if so - only very rarely. Hence it should be very clear that for the vast majority of payments, we don't need a crypto running on a distributed ledger; the existing rails of cash and FI cards are more than adequate. With no demand for your product (MR), you cannot cover your costs (MC), and must go out of business. To survive, your payment system must offer something that people will pay for - level of anonymity. Bitcoin is completely functional, anonymous digital cash, that exists entirely outside of the financial system. Records are immutable, it can be exchanged into any fiat currency you want, does everything that a fiat currency does, doesn't cost anything to keep secure, and is always available, at any time, anywhere in the world. It is an incredibly valuable store of value, and it is of most value to the criminal element. Nothing prevents CBs from banding together to create a competing 'Bitcoin' under a non-sovereign organization (UN, World Bank, etc.). The coin could be used to settle global trade payments, removing the need to convert into fiat currency (USD, Euro, etc) to pay bills as they come due. The coin could partially displace current sovereign gold and foreign currency holdings, as an alternative diversifying asset. However, the coin could also support a global fractional reserve banking system - which Bitcoin CANNOT. Throughout history, 'good' money has always chased out 'bad' money; most would expect a global CBDC to do something similar to a Bitcoin. The result is that Bitcoin survives as a valuable niche store of value, offering total anonymity as a unique value proposition, and there is nothing wrong in that. SD

Were were around for the dot.com era, and learned from some of the masters of the time (long employer, short competitor, keep the 'funny' money when it explodes). It's hard to see how token investing doesn't end in tears, but ultimately we think it's the desirable outcome. The money here is in how 'XYZ' business chooses to use the block chain and smart contract technology in their day-to-day business, and helping them to do it. Money earned the 'old fashioned' way. Philosophically we think we're looking at the equivalent of the age of horse and buggy, just as the IC engine of the 'motor carriage' was beginning to displace everything. Anti-fragility, not cash, is king. SD

There isn't much point in switching to government issued digital currencies. I can already pay instantly with Apple Pay. I can pay almost instantly with credit/debit cards and if I pay my balance every month (which I do), not only does it not cost me anything, but they pay me to do it. Why would I care if there was a fedcoin dollar or not? What makes people care about Bitcoin is that it is digital gold and not state/corporate controlled. You don't care because you currently don't see a charge to pay; the recipient paid it for you, in return for your business. A CBDC has zero transaction cost, so recipients have strong incentive to switch receipts to CBDC over accepting credit cards - unless they get a better deal. And if you have to ask to use the credit card .... you must need the 'credit', as you can't afford to pay by either cash, debit, or CBDC? To show your 'status' you'll either use a 'prestige' card (& now pay for it), or pay by CBDC to avoid the debit card transaction fee. You will not use 'fiat cash', as you'll look like someone who has to count their pennies. Social control. Today Bitcoin doesn't have a directly comparable competitor, but it'll change. If you want to use Bitcoin, you must be a criminal because apparently you feel the need to remain anonymous? So why do I want anything to do with you? You may object to state control, but so does the criminal - & just as much. You are guilty by association, and your reasons don't really matter. SD

This is a very good paper. One of the key takeaways is that it is token users who benefit, and not token owners (Bitcoin excepted). This is the same result that occurs when tokens ran on a database versus a distributed ledger. In both cases the 'user' is the organization employing the technology, you or I buying that organizations products or services - are only secondary beneficiaries. Bitcoin itself is exceptionally clever, but its core natural market is also its greatest liability; for many the restraint on widespread adoption is not the technology - it is the possibility of RICO charges by association. Bitcoin 1.1 is very likely to be a central bank version, running on a database, that essentially does all the same things - but runs in the light. Bitcoin 1.1 being used for global trade settlements, versus Bitcoin itself. The 'investable' opportunities are the shares of the application providers, and their clients, versus the token themselves. Consistent with our view that it's primary an investment in 3) and 4) that improves productivity, profitability, and cash flow. Nice to see a confirmation from an independent 3rd party source. Thanks for posting. SD

We aren't. SD

Re 'valuation'. Pre Bitcoin; hard currency, gold, and sex, were the world's primary stores of value. If you had to run, you could use them to bribe your way out, and set up anew elsewhere. The distributed ledger has simply given us additional options (more supply), ranging from currency (Bitcoin), through to digital gold (Bit Gold). The demand for hard currency is now spread over additional supply (Bitcoin). Drug dealer, arms merchant despot, tax avoidance, and bribe demand shifts to Bitcoin as the payment medium, versus hard currency; driving up the price of Bitcoin and lowering the price of hard currency. Computer ransom is charged in Bitcoin for a reason. Demand for physical gold splits over both physical and digital gold, as digital gold is much more portable - and very good at escaping capital controls. A significant supply problem for physical gold, that resembles the supply of Bitcoin; recycling and new mining makes it progressively less scarce - a sudden switch to digital gold floods the physical market with large quantities of supply, abruptly dropping price. It's also a competitive world. Nothing prevents groups of CBs from banding together to create a competing 'wealth' coin - to suck some of the demand away from Bitcoin. Most people would prefer not to be co-investing with the 'undesirables' of the world. The technology is disruptive, and fundamentally changes how we do business. Welcome to some of the changes. SD

If you want to use Coinbase or a similar company than you will need to give all the same info as opening a bank or brokerage account. If you want to do it without that download a bitcoin wallet to your phone (Bread or Jaxx are good), then find a bitcoin ATM (https://coinatmradar.com/), you simply put cash in the machine and scan your QR receive code from your phone and no one knows you own that bitcoin but you. For most of us there are currently three ways to buy a Bitcoin. Directly from source (bitcoin.org) via an ATM machine, indirectly through an exchange (coinbase), or via a derivative. For the most part, all unregulated (Chicago exchanges excepted). For educational purposes, most would invest no more than a token amount in each, and do a buy/sell on all 3. Per the global AML/ATF requirements, everyone will ask for your basic information. Not all will be as diligent about it. Hence a wallet holder has to recognize that the less information they are willing to disclose, the more likely that other users are going to be from the underworld. Lot of pro's/con's to this, but it is to the wallet holder to act responsibly. Retail Bitcoin is estimated to be 30-50% Japanese, a society in which primarily women (Mrs Watanabe) make the investment decision. Outside of Japan, retail Bitcoin is estimated to be 90% male, between the ages of 24-48. The range runs from a few that are very smart, to a very large number that just think they are smart. As at December 31, 2017 there were 1,381 crypto-currencies in the world. All but 28 trade for less than USD 0.01. The top 5 by market cap are Bitcoin, Ripple, Ethereum, Bitcoin Cash, and Cardano. For most people, buying token through an ICO, is not the road to riches. All our family, are well practiced in the use of crypto currency. The very best are the little old ladies, many of whom have led 'colourful' lives in times past. Mrs Watanabe keeps great company. Good luck SD

Came across a truly original way of doing this .... 1) Buy yourself a number of Bitcoin rigs, and a freezer chest. Drill a hole through the chest for the wiring. Seal the gaps with foam insulation. Rigs are faster and more efficient when they are cold, and freezer chests are explicitly designed to remove heat. 2) Install sufficient solar on your roof, and/or a windmill on the homestead. Power up a flywheel/battery storage rig. Draw down on the storage rig to power the Bitcoin rigs and freezer. For the truly gifted .. relocate the freezer compressor in your fresh air intake - as a heat exchange. 3) Claim the carbon credits on your 'green' electricity generation, certify via a block chain, and sell on an exchange. 4) Windy days welcome - they just crank up the RPM on the fly wheel. The electricity is free, you're paid in carbon credits and bitcoin, and your only costs are depreciation and interest carry. Repeat until rich! SD

For the most part, R3 are the prime brokers - and they primarily serve the institutional side of the market. Value proposition drives the market - Tzero either serves markets that others will not, does it at a lower price, or with more 'flexibility'. The market is just starting to learn how 'indirect' CB control works. One side of every Bitcoin F/X exchange is against a fiat currency, coming to/from an account in a FI - controlled by a CB. You're visible, capital controls can be imposed at any time (account freeze), and the private key on your phone/laptop is very hackable. Welcome to the dark side. SD

47% TWR, mid year repatriation of 60% of capital, all family mortgages retired, year end cash at 23%. Hard to complain. Growing our T-Bill position through the 1st half of the year for a June 30 repatriation, saved our arse. It kept our o/g and iron positions lower than they would have been, and forced some trims; reducing our losses and enabling repurchases at generally lower prices. Bitcoin was a lucky break. The 700% 2H increase, on a portfolio 40% of its previous size, really goosed results. For us crypto currency has served its educational purpose, & we’re unlikely to return to it anytime soon. We were lucky. Nothing wrong in that, but its not going to be repeatable for quite some time. SD

No they are doing the same thing - but on their own competing database. Use our database and you don't need many of the staff you currently have, or the space they currently occupy - were they not currently doing an ICO, most folks would never have heard of them. https://www.tzero.com/#home There is nothing wrong with competition. But the gorilla in the room is the R3 Consortium consisting of the biggest FI's in the world (80%+ of the entire global market), its Corda ledger, and its backing by many of the major CB's in the world. Corda, with its CB blessing, is to become the FI portion of the hyper-ledger (internet-of-things). We wish Tzero luck, but it's hard to see how they survive as anything other than a tiny boutique; maybe 2-3 principals running an Oracle, & a bunch of sales people. Ya pays yur money, 'n ya takes ya chances, SD

"Rootstock is just released I believe (www.rsk.co) and I believe it (or something like it) will likely put huge downward pressure (and eventually kill) the perceived value of ethereum." Elegant solution, and inclined to agree as to the eventual outcome. Processing ultimately separates along the spectrum of speed versus security, and at a higher level of scaleability than is currently the case. SD

No - it's ability to raise productivity by keeping output constant, and permanently reducing input. Securities lending is already automated in the R3 Corda ledger, runs on a data base, and most prime brokers are already R3 members. Bigger suppliers already maintain their inventory on in-house ERP systems (data bases) - block chain and smart contracts simply run on top. Outputs stay the same, but most of the related 'admin/back-office' processing gets displaced. SD

Bitcoin has a design cap of 21M token, that is earned by miners at a declining rate. Until the 21M cap is reached, a user’s cost to verify a bitcoin transaction is free. Once the cap is reached the user’s pay the cost out of their digital wallet, in bitcoin, at market rate. The miners are monopolies with the ability to charge more for faster processing; say $25 for a hash in 2 seconds or less, or $5 for a hash in 30-45 minutes. A business that needs fast hash processing either pays up or goes someplace else – if they are able. The disruption makes Bitcoin costly to use, lowering its price, and the tide on which all other crypto currencies float – creating widespread losses, ICO opportunity loss, and a significant loss of ‘faith’ in crypto. Lots of pain. To do it - the mining syndicates simply stop processing, and publicize it. Hash complexity and difficulty automatically drop to restore hash rate, but with no syndicates participating, slow CPU processing, and low payments for hashing - a very large back-up develops. Keep the hash complexity low, pay what the syndicates want, the supercomputers come back on line, and the backup clears in minutes. Rinse and repeat. For an exorbitant extortion fee, all Bitcoin need to do is raise the 21M cap, and the pain goes away. And if there's internal reluctance to charge, the friends in low places apply the baseball bat. Hard cap and a wheelchair, or soft cap and ability to walk – which do you think wins? Munger lived through the 1929 depression, and saw first hand the con-men, grifters and ‘hardmen’ of the era doing their thing. We would suggest that it was great training, and that he's seeing quite a few similarities. SD

As far as I know, Bitcoin doesn't have the ability to perform smart contracts natively, not without layering a third party on top. You might be thinking of Ethereum. Agreed that if you want to pay with Bitcoin and need the smart contract, you must use a 3rd party 'Oracle'. However nothing prevents you from also setting yourself up as the 3rd party Oracle, that transacts in crypto-currency between 1st & 2nd parties; the standard solution. As a quick & dirty reference, the below are a useful reference guide; For a Bitcoin: 1) Yes, 2) Yes, 3) Yes, 4) No For an Ethereum Application: 1) Yes, 2) Yes, 3) Yes, 4) Yes For most block chain applications running on a database (ie: IBM): 1) Yes, 2) No, 3) Yes, 4) Yes SD

It's useful to recognize that Bitcoin is simply one combination of 4 SEPARATE technologies 1) token crypto-currency, 2) distributed ledger, 3) block chain, and the 4) smart contract. It's a very smart combination, and performs its function extremely well, but like everything - it has limitations. Most people see crypto-currency as the investment opportunity. The currency is worth anywhere from 1) what another 'momentum investor' will pay for it, through 2) total $ value of transactions (demand) divided by total supply of token (supply), and even 3) a little more that the paper fiat in your pocket. The smarter developers are trying for 2) and are attempting to both grow their market segment, and their market share within it. Very competitive. The actual investment opportunity is in the services supply chain, as 3) and 4) run on a fully scaleable database; to materially reduce labor, space, and working capital requirements. Productivity rises in a big way, break-even levels plunge, all kinds of previously closed markets open up, and competition returns to value-add versus price. Almost all blue sky, and very little competition. The preferred approach is to take an existing business; and do 3) & 4) to it, to drive up its earnings and CF through productivity gains. The earnings fund acquisitions, the CF pays the interest carry, the back office moves the acquisitions processes onto the existing block chain infrastructure - producing even larger CF savings. Long term, the sleepier the industry the more you make. Brains, vision, block chain expertise, and experience with operating leverage required ;) It is a measure of how young, and inexperienced the industry is; that so many very smart people are all looking in what is essentially the wrong place. May it continue for some time! SD

Damn, this is pretty good! Thanks for posting. SD