Equal Time: The Case Against Bitcoin

  • Bitcoin or gold? Even the Ron Paul faithful are crazy for crypto
  • Rickards describes the two biggest problems with bitcoin…
  • … and a game-changing second-generation blockchain
  • Profits from a short squeeze in the bombed-out retail sector
  • Congress ad-libs tax bill, misplaces $289 billion
  • Who profited from those pre-Sept. 11 option trades?

Hmmm… Trending on Twitter today…

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Whelp, we know the cash is destined to lose value to one extent or another in 10 years.

The Treasuries have a yield of [checking our screens] 2.32% a year… which might or might not stay ahead of the inflation rate… assuming Uncle Sam doesn’t go broke in the next decade.

That leaves gold and bitcoin. As we write, about three hours remain in which people can vote; bitcoin is on top with 53%… followed by gold at 37%. (Another 8% were OK rolling the dice on Treasuries. And 2% voted for the cash; they’ve gotta be trolls, right?)

We know how our own Jim Rickards would answer the poll question — gold all the way.

In recent months, we’ve given voice to cryptocurrency advocates here in The 5 — often. But as many readers are wont to remind us, Jim’s is a dissenting voice. For today at least, we’ll hear his side of the story.

While Jim allows bitcoin could still soar from today’s price of [checking our screens again] $12,489 to as much as $20,000… “Bitcoin is a bubble that will crash and burn,” he says, “probably finding a bottom around $200 as a utility token for criminals on the dark web.”

Jim takes issue with both of the major claims made by bitcoin advocates — that it’s a superior technology and a superior form of money.

“As for bitcoin’s role as money, it has a fatal flaw,” Jim says. “Bitcoin is not elastic.

“Money supply needs to expand in line with economic growth to support trade, commerce and wealth preservation. This is what economists mean by an ‘elastic’ money supply.”

Even the supply of gold grows a little bit each year as it’s mined from the Earth’s crust. “This is why gold is an ideal form of money,” he says.

In contrast, the total number of bitcoins is destined to max out at 21 million. That’s how “Satoshi Nakamoto” designed the algorithm a decade ago. “In order to be a widely used store of value (part of the standard definition of money), holders need a place to invest the bitcoins,” Jim explains, “such as bitcoin-denominated bonds or bitcoin bank deposits.”

Jim says the likelihood of a bitcoin bond market developing is nil… precisely because the supply of bitcoin is fixed. “Without an elastic supply or a credit market, bitcoin cannot perform the roles of a medium of exchange or store of value beyond a few trivial use cases.

“The other challenge to bitcoin is technological,” Jim says.

At present, bitcoin is backed by two powerful forms of encryption. Breaking them is “almost impossible using the fastest available machines today.”

But what about the “quantum computers” of the near future that can solve problems and deliver results 3,600 times faster than traditional supercomputers? By some estimates, they’ll be capable of breaking a blockchain password in less than 60 seconds. A report from MIT forecasts, “The elliptic curve signature scheme used by bitcoin… could be completely broken by a quantum computer as early as 2027.”

Heh… right at the end of the Twitter poll’s 10-year timeframe.

“This means,” says Jim, “that the entire rationale behind bitcoin — privacy, anonymity, freedom from government control, etc. — will be completely gone by the time most of today’s bitcoin ‘investors’ are ready to retire, if not sooner.

“This will be a worse collapse than tulip mania. At least with tulip mania, you got to keep the tulip. Bitcoin holders will end up with nothing.”

All that said, Jim sees immense potential in second-generation blockchain technology that will move “beyond bitcoin,” as it were.

Solving bitcoin’s problems, Jim says, will entail “a migration from ‘permissionless’ systems to ‘permissioned’ systems.”

Permissionless systems, as the name implies, are open to anyone. If you have the computing power and know-how (and access to cheap electricity), you can do the “proof of work” needed to mine new bitcoins into existence.

“In contrast, a permissioned system is open only to approved counterparties,” Jim goes on. And that’s the nature of second-generation blockchain — the formal name is distributed ledger technology, or DLT. “The DLT ecosystem,” he says, “is still distributed, fast and cheap, but not anyone can play. You need to be admitted to the ecosystem, something like joining a club…

“In effect, the new DLT systems offer the best of both worlds. You combine the efficiencies of blockchain transactions with the efficiencies of trusted counterparties. The result is an ecosystem of digital payments and smart contracts without the clunky proof-of-work.”

This second-generation blockchain figures heavily into one of Jim’s long-term forecasts.

“The ultimate application of permissioned DLT will be world money that will end the U.S. dollar’s role as the benchmark global reserve currency. The International Monetary Fund is developing a permissioned DLT for executing transactions in special drawing rights, SDRs, the only existing form of world money other than gold bullion.”

Once the globe’s governments (and maybe a few mega-corporations) began transacting with each other in SDRs, “the U.S. dollar would be just another local currency like the Mexican peso and the Turkish lira. We would still use dollars to take our friends out to dinner, but the world at large, including central banks, would settle cross-border balances and ultimately hold reserves denominated in SDRs on the IMF hyperledger.

“None of this will happen overnight, but it’s all happening now faster than most realize.”

[Ed. note: If Jim’s remarks today have soured you on bitcoin… but you still long for fast gains of the sort bitcoin has delivered this year… you really should check out his Project Prophesy.

It’s drawn from the predictive financial work Jim did with the CIA more than a decade ago… but only now has it been “declassified” to a point where he can allow access to retail investors. For a deep dive into how the system works, and the profit potential of the trades it generates, just follow this link.]

While bitcoin is busting out to new highs, crude is cratering today… and other asset classes have barely budged.

The major U.S. stock indexes are all within a hair’s breadth of yesterday’s closes… although we see small caps are hurting; the Russell 2000 is down more than 1.25%. Gold is static at $1,263.

But crude is down nearly 2.5% to two-week lows at $56.22 after the weekly inventory numbers from the Energy Department. Jim Rickards’ call last week of a $60 cap on oil is looking spot-on.

If you’ve never been caught in a classic short squeeze, count yourself lucky!” says our income specialist Zach Scheidt.

Looking back on his days as a hedge fund manager, Zach recalls funds dying — and investors losing their shirts — when short sellers got the “squeeze.”

When investors borrow shares of a languishing stock from a broker, sell the stock immediately and cross their fingers in hopes the stock price drops — that’s short selling. If the price dips, investors buy back the stock, return the shares to the broker and bag the difference. “In this scenario,” Zach explains, “the investors make money when the specific stock falls…

“And they lose money when the stock rises.” To complicate matters, Zack says, the short squeeze happens “when too many investors sell a stock short (or make bets that a stock will trade lower).

“As the stock trades higher, more short sellers lose money. These short sellers are forced to buy to protect against further losses and the stock continues to move higher. It’s a vicious circle that can cause some of the most unloved stocks to rip higher.”

Apropos of “unloved” stocks: Brick-and-mortar retail’s been pounded the last couple years.

Investors have lost confidence in traditional retail stocks since — presumably — Amazon’s taken the whole sector to the woodshed. Just look at the following charts:

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Retail stocks have bled out while most of the market’s experienced uninterrupted expansion for five years. “With the unrelenting declines for months and months,” Zach says, “these stocks have been excellent profit areas for short sellers.

“But that trend is starting to change.

“Trading volumes for retail stocks have picked up as short sellers have begun the process of unwinding their positions,” says Zach. “And given the length of time these stocks have been moving lower, the remaining short positions are still massive.”

Zach’s take? “This is an opportunity that is too good for us to pass up.

“I’ve got my eye on a handful of retail stocks that are profitable but have been sold off due to the general weakness in the retail area. As the short squeeze for retail stocks picks up, these quality stocks should advance quickly.”

For Zach’s ideal method to generate instant income from a retail revival, check this out.

The GOP pulled an all-nighter…and crammed for Tax Reform 101 at two in the morning. What could go wrong?

Working from scribbled notes jotted on the margins of the proposed tax bill (as seen in yesterday’s 5), Mitch McConnell and company toiled at fever pitch through lunch last Friday and into the wee hours. No surprise then the final draft has some serious “goofs” — including a $289 billion mistake that kills the darlings of some wealthy GOP donors. Oops.

On the chopping block are corporate tax deductions some U.S. businesses live and die by — literally. In the GOP’s efforts to keep some semblance of a lid on the deficit, senators added the corporate alternative minimum tax (AMT) back to the bill… oh, and then forgot to lower it while they were at it.

“This is a big problem. The Senate bill brings the normal corporate rate down to 20% — while leaving the alternative minimum rate at … 20%,” says an article at New York Magazine. “The legislation would still allow corporations to claim a wide variety of tax credits and deductions — it just renders all of them completely worthless. Companies can either take no deductions, and pay a 20% rate — or take lots of deductions … and pay a 20% rate.”

The bleary-eyed senators should have read through their paper… before turning it in. Or, as some of us did in college, ask for an extension. And Mom and Dad were right: “Nothing good happens after 2 a.m.”

By the way, the White House and Capitol Hill are still staring down a “partial government shutdown” in less than 72 hours.

The deadline is midnight Friday night. Assuming lawmakers pass an honest-to-God budget (instead of a two-week extension to buy time), we’re sure that bill will also be a Gumpian box o’ chocolates.

After yesterday’s episode, a reader writes: “Please ask Jim Rickards the obvious question of whether they were able to identify anyone that substantially gained from those pre-Sept. 11 trades. I assume it would be easy to do that.”

The 5: The 9/11 Commission concluded that while the short bets on United and American Airlines looked “highly suspicious… each such trade proved to have an innocuous explanation.”

Jim doesn’t buy that, for reasons that would take longer to flesh out than our 5 Mins. allow. Many of the trades were indeed innocent, but that’s the “signal amplification” effect: The initial trade by someone with foreknowledge of the attack encouraged others who had no such knowledge to pile on. If you’re really interested, Jim lays it all out in Chapter 1 of his 2014 book The Death of Money.

Since that book was published, the feds finally released the infamous “28 pages” of a separate Sept. 11 inquiry by Congress. At the risk of oversimplifying, those pages trace a relatively direct money trail from the San Diego cell of hijackers who crashed into the Pentagon… to Prince Bandar, Saudi Arabia’s longtime ambassador to the United States.

Given the decades-long closeness of the U.S. and Saudi Arabian governments — two days after the attacks, Prince Bandar was smoking cigars with President Bush on the Truman Balcony of the White House — it’s perhaps understandable no one investigating the trades wanted to rock the boat by digging too deep.

(And no, Prince Bandar is not among the princes who were rounded up and put under house arrest last month during the purge engineered by Crown Prince Mohammed bin Salman. MBS’ so-called “reforms” are a chimera, fawning profiles by Tom Friedman in The New York Times notwithstanding.)

“Jim vs. James!” a reader enthuses — “just thought I would add a little hype to a potential debate on bitcoin.

“My prediction is that this debate will be similar to the debate that gold has had within its own community for a long time.

“Central banks/Wall Street will tell you ‘it’s only held for tradition.’ ‘You dig it out of one hole and then put it in another and pay to guard it.’ ‘It doesn’t even pay a dividend.’ And other such snarky bumper sticker comments the proles can remember and then mindlessly perpetuate.

“The Austrian/Hayek side argues it is the only true money that has been accepted for millennia. It meets all of the characteristics of a ‘sound money’ first enumerated by Aristotle. Gold itself can’t be manipulated. Gold is gold and that’s all it will ever be.

“My bumper sticker is, ‘Bitcoin is a crazy-wild fun date, but I wouldn’t marry it.’

“Blockchain is a different matter.

“Love The 5.

The 5: It’s hard to keep up with his schedule, but we understand Jim Rickards went head-to-head recently on stage with some crypto enthusiasts not named James Altucher. We’ll see if we can dig up some highlights for you…

Dave Gonigam
The 5 Min. Forecast

P.S. Meanwhile, as mentioned above, bitcoin has now surpassed the $12,000 mark — as we anticipated here on Monday.

For the most compelling pro-bitcoin case that James Altucher can muster, give this a look.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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