Bitcoin

Silver prices are up over 1.5% this morning and gold +0.6% as the PMs play catch-up to Friday's post-NFP 'goldilocks' performance in stocks. Whether this is also fallout from Baidu's Bitcoin decision is unclear but gold did spike in early Asia trading.

Having discussed the advantages and disadvantages of the crypto-currency and noted the extreme volatility of the last few weeks, it seemed only a matter of time before some ambitious entrepreneur tried to monetize the volatility. What better way to "manage the risk" of your virtual currency horde than buying (or selling) options (in a more levered way). Predictious, the Dublin-based prediction market, this week unveiled Bitcoin Option Spreads enabling both long- and short-positions to be constructed on the already extremely volatile 'asset'. Regulatory clamp-down in 3..2..1...

It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the peanut gallery vocally flipflopping on the currency after hating it at $200 only to love it at $1200 that Bitcoin... would promptly crash. And crash it did: overnight, following previously reported news that China's Baidu woild follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined "half-off" touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on "get rich quick" hopes and dreams, only to see massive losses in their P&Ls. Which incidentally, like gold, is to be expected when one treats what is explicitly a currency, instead as an asset, with delusions of grandure that some greater fool will pay more for it tomorrow than it is worth today.

Bitcoin is being sold aggressively on heavy volume as this headline hits:

*BAIDU SUSPENDS BITCOIN PAYMENT ACCEPTANCE ON VALUE FLUCTUATION

This is one of the reasons Citi and BofAML noted as 'disadvantages' and it seems Baidu agrees (for now). Remember when Baidu "accepted" Bitcoin in Oct it was trading at USD150 - it has rallied 8x since then...

Along with the USD and JPY, Bitcoin is having a bad day. For the second time, following a 'touch' of the Gold, Bitcoin has fallen dramatically in the day after. Volume is also relatively heavy. It would seem that this drop in USD BTC has compressed the "arb" against China BTC to zero (from over $100 earlier in the week). USD BTC $940, China BTC 5771 (USD equiv. $946)

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The world has changed immensely and there were once things that were sacrilegiously respected. But, that’s no longer the case.

Bitcoin and other Internet currencies are viewed by some as a Beanie baby fad and, as Citi's Steve Englander notes, by others as revolutionizing the financial system. Market acceptance of alternative currencies now looks to be growing a lot faster than the pace at which the supply of Bitcoin and Bitcoin wannabees is expanding the Internet money supply. The responses fell into five categories which we feel are well worth considering before trading or utilizing the digital currency (including Bitcoin's role in reserves management - Bitcoin with its inelastic supply and deflationary bias would look attractive to reserve managers as a complement to gold, and in contrast to fiat currencies in unlimited supply.). Among skeptics, a minority think that security is a much bigger issue than proponents admit. However correct the longer-term concerns, there is nothing obvious to derail the expansion of Internet currencies in the near-term, as they are meeting both legitimate and illicit economic and social needs.

"Lamborghini Newport Beach in California is proud to announce that we are fully capable of accepting Bitcoin as payment for vehicles.  

We are excited to be opening the door to this new currency.

We just sold our very first vehicle with Bitcoin as legal tender! "

David Woo's earlier discussion of the 'maximum' fair value for Bitcoin, we thought his colleague Ian Gordon's view on the advantages and disadvantages of the virtual currency were worth noting. Woo believes Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, Bitcoin has clear potential for growth, in his view, but its high volatility, a result of speculative activities, is hindering its general acceptance as a means of payments for on-line commerce...

In every organization, including the Chinese Communist Party, there are forces of movement and forces of order.  The forces of movement have moved into ascendancy in China and this was signaled by establishment of the special economic zone in Shanghai and the program emerging from recent Third Plenary Session.  However, the uncertainty over implementation kept domestic and foreign investors cautious.

Bitcoin could become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers, BofAML notes in a report today, adding that as a medium of exchange, Bitcoin has clear potential for growth, in our view. Despite Greenspan's inability to find "value", BofAML prefers not to call the crypto currency a bubble, and assigns a maximum fair-value of $1,300, but does warn that the 100 fold increase in Bitcoin prices this year is at risk of running ahead of its fundamentals.

The better-than-expected data in the US had the requisiste good-news-is-bad-news reaction as stocks dumped (giving back all the EURJPY-driven gains), Treasury yields jumped, and gold and silver tumbled (in a deja vu of the last time Bitcoin and gold reached parity). At the same time, Draghi cut inflation forecasts, raised downside risks, hinted at less likelihood of another LTRO and noted negative rate discussions but did nothing and that sent EUR higher and implicitly USD broke lower. European stocks are also in trouble once again (even as European sovereign bond spreads are holding steady in their illiquid way). With EURJPY pausing (on Draghi's comments), we look to USDJPY to provide the requisite lift at the cash open in the US...

As we said back in March, when Bitcoin's parabolic rise first started, it was only a matter of time before first one, then all central banks take on Bitcoin for the simple fact that it present too great a threat to the fiat system. Sure enough, on the chart below of BTC China it is quite clear just at what point overnight the People's Bank of China announced that Bitcoin is simply a virtual commodity and "isn't a currency with any real meaning" (paraphrasing Alan Greenspan), and that it officially bans financial companies from Bitcoin transactions.

You know that game involving word association at the psychotherapists? The one where you have to say the first word that springs to mind.