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Posted June 10, 2021

Sean Ring

By Sean Ring

The Unavoidable Asset Class

Happy Thursday!

Nearly there, over the hump, and on the downslope to the weekend.

But before we get there: coffee and crypto.

The Demise of Bitcoin Has Been Greatly Exaggerated

After the Bitcoin Bad News Bears had BTC clocking down to $30,000, it made a stunning recovery. BTC now trades in the $37,000 area. Heres a 5-minute chart of its trading activity.

Doesnt look very bearish, does it?

The event that initially sent BTC down was how the FBI reclaimed the ransom from the Colonial Pipeline hackers. The key is the FBI didnt hack the blockchain. That remains impossible.

The FBI traced the series of transactions meant to launder the coins to a single wallet address. The FBI happened to have the private key for that particular wallet. They refused to divulge how they came by that important bit of information. But they were able to recover the funds.

I dont want to give up our tradecraft in case we want to use this again for future endeavors, Elvis Chan, an assistant special agent with the FBIs San Francisco office, said.

Yes, this will send criminals running - and the corresponding trading algorithms as well - but its far from breaking the blockchain itself.

An interesting quote from the story is this:

Because these transnational, organized criminal groups are facilitating these payments in cryptocurrency, and because of the transparency and traceability that cryptocurrency provides, you can actually more effectively follow the money and potentially mitigate and arrest illicit activity within this ecosystem, than you can with traditional finance and fiat currencies and payments, explained Jesse Spiro, Global Head of Policy for Chainalysis.

Next time someone tells you, Crypto is only for criminals, you know how to respond.

Now that everyone is calming down a bit, BTC has recovered nicely. To be sure, its nowhere near its all-time high. But its not cratering anymore; far from it, its looking very strong over the past 24 hours.

The Great Un...banked?

Another bit of important news came from El Salvador, of all places. The Central American country became the first in the world to designate Bitcoin as legal tender.

Before we go crazy, El Salvadors economy is about the size of a smaller Fortune 500 company, with a GDP of $27 billion.

The GDP, or Gross Domestic Product, is the sum of all goods and services produced within a countrys borders. I like to call it Grossly Deceptive Product, as it misses a bunch of things and is more a measure of spending than production. But hey ho, itll do for now.

The designation allows bitcoin to be used to buy goods and pay taxes and bank loans. Businesses would be required to accept bitcoin for payment, with the bitcoin-dollar exchange rate set by the market. (Im not in love with the business requirement, as I think you should be able to trade whatever you like for whatever you like. But this is how theyre doing it.)

Also, converting Bitcoin into other currencies wont be subject to capital gains tax. Nice.

Since 2001, the US dollar has been El Salvadors official currency.

The countrys dollar use provided macroeconomic stability as remittances from Salvadorans abroad grew steadily to reach a high of almost $6 billion last year.

As a percentage of GDP, its now over 20%.

Source: World Bank

The move to Bitcoin stems from the US governments incompetence in dealing with El Salvador and its own crisis.

Dollarization in times of crisis takes away the possibility of using monetary policy to stimulate economic activity, Ricardo Castaeda, senior economist at the Central American Institute for Fiscal Studies. Its like eating Chinese food with just one chopstick.

Indeed. If you surrender your currency, you surrender your country. Its why the UK refused the Euro. (And why George Soros - insane libtard though he is - deserves a knighthood for breaking the Bank of England and knocking the UK out of the Exchange Rate Mechanism in 1992. Make that a dukedom.)

El Salvador President Nayib Bukele said the use of bitcoin would increase financial inclusion, as 70% of Salvadorans dont have access to traditional financial services.

Can the Great Unbanked save El Salvadors economy? I dont know.

But it will be interesting to see how a government deals with not having any control at all over the medium of exchange its citizens deal in.

F.A. Hayek, whose book The Denationalization of Money foresaw this development, smiles from above.

Bitcoins Vol is Insane

Note: vol is short for volatility, not volume.

Just for a goof, I decided to download the last years price data for Bitcoin. Heres what I got:

High: $63,503.46

Low: $9,045.39

Last: $36,879.88

Annualized Vol: 61.22%

Its little wonder why monetary experts reject Bitcoin as a medium of exchange right now. Its value is all over the place.

This is the main objection to Bitcoin, and I completely agree - for now. But I expect this vol will calm down in the coming years.

I came across this website commentary on ospreyfunds.io that I recommend you read in its short entirety, but Ill paraphrase it for you here.

First, this chart was created in January, but were probably not too much farther up the curve.

Source: ospreyfunds.io

This shows how early we are in the adoption of cryptocurrency. Since the liquidity is quite low, youve got to expect large price swings. Thats how illiquid markets work.

But once its quicker and easier to access Bitcoin, I think Bitcoins use will increase markedly. And it just got a whole lot easier...

Ask and You Shall Receive!

I trade options on Interactive Brokers. When one of my clients offered to pay me in crypto, my first thought was, Can I use IB to receive it?

It wouldve been so easy, as I was already set up. As it happens, I couldnt as IB doesnt offer the option.

So I went to Binance. What amazed me was how easy it was to set up and use, compared to only a few years ago. And that ease is leading to new avenues.

Now, according to Bloomberg, IB will also offer cryptocurrency trading.

Customers certainly are asking for it, and we expect to be ready to offer it to them by the end of the summer, Interactive Brokers Chairman Thomas Peterffy said.

This will be big, I think. There are plenty of traders wholl now dip their toes in the water.

And why not? If you can convert back to USD easily and trade stocks and options, surely youre more likely to give it a go. As far as well-diversified portfolios go, this makes it much easier to maintain.

The more participation, the more liquidity. And that may calm down the volatility a bit.

I know you, like my colleague Jim Rickards, love gold. And theres certainly a place in your portfolio for it. But crypto is an unavoidable phenomenon now.

I ask you this: if the Fed loses control and gold shoots to $15,000/oz, are your profits a well-timed and prescient hedge... or a speculative gain?

Now replace gold with Bitcoin and $15,000 with $60,000.

Your conclusion may reveal a blind spot - and save your financial bacon in the process.

Until tomorrow, have a great Thursday!

All the best,

Sean

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