Bitcoin Forked, and Gold and Silver Report 6 August 2017

Monetary Metals's picture

So bitcoin forked. You did not know this.

Well, if you’re saving in gold perhaps not. If you’re betting in the crypto coin casino, you knew it, bet on it, and now we assume happily diving into your greater quantity of dollars after the fork. You don’t have a greater quantity of bitcoins; bitcoin has no yield. Bitcoin simply sells for a greater quantity of dollars now than it did before. But who wants to sell? Bitcoin’s going to a million bucks—at least.

So bitcoin, whatever it is, forked. Whatever forking is.

To understand these two concepts, let’s consider an analogy.

Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!

Is this just the sort of evil thing a greedy bankster would do? Do we need regulation to keep them from doing it (is it even illegal currently)? No, it’s actually impossible. The problem is that Wile E Bank doesn’t have the assets. It does not have the bills and bonds and loans payable to Acme. So it would be suicide to take on the liabilities. It would be nothing more than offering free money to people.

Of course, no one would to do that. It would not be a crime, but an act of altruism. Or perhaps an act of “Wile E Coyote, Super Genius.”

Yet, this is what happened with bitcoin. Bitcoin cash set up across the street (so to speak). Anyone who had a bitcoin balance as of the moment of the fork—when the Coyote and his posse set up shop—has the same bitcoin cash balance now.

To understand how this could be possible, we have to drill down into what makes a currency, a currency. Most in the gold and bitcoin communities would agree on one thing. The dollar is a fiat currency. People use it, because the government has various ways to force them (including especially a monopoly in schools).

The bitcoin people will tell you that bitcoin is not a fiat currency. And they are right. It’s true, no government forces anyone to use bitcoin (if anything, it’s the opposite).

This does not give us enough resolution to see the issue clearly, so let’s keep going deeper. The dollar is not only fiat, but also irredeemable. That means the issuer of the currency will not redeem it for a fixed amount of money. And let’s explain that statement, which may seem rather cryptic (OK, pun intended).

At the time America was founded, there was no question that money meant gold and silver. And when you deposited money in the bank, there was no question that you were entitled to get back the same amount. The dollar was merely a way of standardizing the size of the deposit, so that it was consistent from bank to bank and therefore anyone could read any bank’s or any company’s financial statements. It’s better if everyone agrees on how long a foot is, how much weight is in a pound, how much time is in a second. And how much gold is in a dollar.

By a slow process of erosion, in many incremental steps over two centuries, the government severed any link between the dollar and gold. After 1933, the dollar was not redeemable in gold by the American people. After 1971, it was no longer redeemable even by central banks.

You can exchange the dollar for anything else, including gold. But there is no contractual obligation of the issue to redeem for a fixed amount of gold or else be declared bankrupt. And we see that the terms of exchange, including price, are constantly changing. And the change is generally adversely to those who hold dollars.

Bitcoin, like the dollar, is irredeemable. It can be exchanged for most things, including gold. But there is no issuer per se, much less no contractual obligation by any issuer to redeem for an agreed amount of gold.

However, there is another key concept which differentiates the dollar and bitcoin. That concept is backing. The dollar is a liability, backed by an asset. Yes, it’s true that the backing is debt (government and corporate bonds primarily), and this debt is payable in dollars. Which is backed by this debt. It’s circular, and would surely be a criminal activity of done by private, for-profit actors.

However, for every single dollar you or anyone may have, there is a debtor who is working to pay—or at least service—his debts. Every debtor must sell goods or services of some kind in exchange for dollars, to pay the monthly vig. Or else.

Or else what? If he doesn’t pay, that is called default. And in defaulting, he will lose his home, car, business, etc. The threat of taking away someone’s business or home makes them quite highly motivated to sell whatever they have to, to raise enough cash to keep servicing the debt.

This explains why the dollar has retained so much value, why its value is as stable as it is, and why manufacturers are more and more aggressive to sell better and better stuff.

It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt.

Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by Satoshi’s design.

It is possible for bitcoin to fork, because it is not backed by any asset.

The blockchain is an important new technology. It’s a public ledger that can record anything, with each record indelibly stamped with the date and the recording party. This is useful to record assets. It could revolutionize supply chain management, for example making it possible to track food from farm to table.

But something must be emphasized here. A ledger is useful for recording something, but bitcoin is a recording only of itself.

So in this light, it should be clear why a new bank can’t just offer free dollar (or gold) accounts. The old bank has a bunch of assets, say $1.1 million. And a bunch of liabilities, say $1 million. The new bank would declare $1 million in new liabilities but it would have no assets at all.

For 46 years, the dollar has been perfectly irredeemable. However, it is backed by bonds. Bitcoin is not only irredeemable, but also unbacked. That is a big difference—in favor of the dollar.

We have heard bitcoin proponents defend this by saying this is better because there is no risk of loss of the assets. This is akin to saying that being dead is better than being alive, because there is no risk of death.

Being unbacked and irredeemable, bitcoin is just a number in a ledger. Well, now two numbers in two ledgers. Bitcoin and bitcoin cash forked, remember?

We are not here to prognosticate on the bitcoin price. It may or may not be a good speculation today. However, we want to observe one thing. There are small unsound structures, such as a Jenga tower just before someone pulls the last stick. There are big unsound vehicles, such as the RMS Titanic sailing in the iceberg-infested waters of the North Atlantic Ocean. And there are the… pugnacious… systems such as bitcoin. The boldness of bitcoin’s promoters is matched by the unsoundness of bitcoin’s monetary design (as opposed to the technological soundness of the blockchain). This combination will result in devastating losses to whomever is left holding the bag at the end.

Usually, there is no opportunity to call out these things. Or else, one looks at the crowd of believers, and decides discretion is the better part of valor. But this week, bitcoin forked. This is now the time to say that forking is proof that bitcoin as presently constituted is unsound. The crypto emperor is naked.

We want to clarify one thing. We are not saying that anyone involved in bitcoin, is a dishonest person. The principles of monetary economics are not obvious, and we do not fault anyone for participating in the bitcoin market or for thinking that bitcoin is money.


The prices of the metals came down this week, especially silver on Friday, which was -2.7%. Was it manipulation? We doubt it. The manipulators were away from the metals markets this week… something about a fork in another money market which we’ve been told is a bigger threat to the hegemony of the Federal Reserve.

Was is speculators taking profits and getting out of their silver positions? Was it softness in the market for actual metal? Below, is a graph of the silver action on Friday. And also graphs of the true measure of the fundamentals.

But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved up this week, especially on Friday. We find it interesting that the ratio did not fall farther.

In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

The dollar rose a bit this week (the mirror image of the falling price of gold). As the dollar rose, the cobasis increased. Gold became a bit scarcer.

Our calculated gold fundamental price fell about $20 (chart here).

Now let’s look at silver.

In silver, the move up in the cobasis is greater. Keep in mind that we are approaching the expiry of the September silver contract, which has been in temporary backwardation for over a month.

The continuous basis in silver moved up, but not so much (chart here).

Our calculated silver fundamental fell a few pennies (chart here).

Here is a graph of the September silver basis overlaid with price for Friday, showing the drop from around $16.70 to below $16.30.

Notice how the event began. At 12:30 (GMT), the price began dropping. But basis is not really responding. This is an even selling of both metal and futures. Slowly at first, the basis moves down, and continues even after the price stabilizes and begins a slow rising trend a little after 14:00. This is the speculators selling getting with the program, and selling. No one wants to hold an asset that’s going down! This is a relatively big move in the basis, around 70bps.

So is the silver selloff over? It’s hard to tell. The fundamentals were firming this week—the fundamental price did not move down much during the move. -$0.09 from Thursday to Friday. On the other hand, speculators may be putting in sell orders over the weekend and may decide to bail out on Monday. Momentum can be self-fulfilling.

 

© 2017 Monetary Metals

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Itsallgoodstuff's picture

Have you try to get into a plane lately with a suitcase full of gold or dollars, just for that feature Bitcoin is insanely valuable. The fact that the government cannot put its hand on your life saving, Thank to Satoshi the genius.

quadraspleen's picture

christ I'm fucking bored of reading about cryptos and how great/shit they are

Own them.

Or don't. 

The end.

DC Beastie Boy's picture

I've left a few BTC on Coinbase and just went through a bunch of bullshit trying to get them sent to my wallet so I could then buy at JM Bullion.

Everyone of these exchanges and pm sites (including JMB) have limits on transactions now.

The capital controls will only get worse.

The Divided Stoopids of DuhMerica's picture

First of all... Coinbase SUCKS!!!

Secondly... Why on earth would you leave "a few" BTC on an exchange and not on a hard wallet???

Thirdly... Are ALL of the big bullion dealers that accept BTC now imposing limits? That seems strange, since they all know that crypto is the way of the future and that BTC will continue to become more valuable in time. If what you're saying is true...Then I'm glad I traded some BTC for almost 200 OZ of AU when I had the chance!

*EDIT*... Sorry, just noticed that you were trying to move them to your hard wallet lol

London..unfortunately's picture

I've noticed this too. Have you seen the Bitcoin Debit cards? - it's another way of converting to fiat.

DC Beastie Boy's picture

Yes, I've seen a few, but they usually run through a bank or merchant processor and they have daily limits on withdrawals.

The Divided Stoopids of DuhMerica's picture

An Automobile??? What the fuck you need one o those contraptions for?... You already got a good horse! Beside, there ain't hardly no roads  where you can use one o those damn things. Stick with your horse... They been around for thousands of years!!! Ain't no one gunna be using those damn automobiles! 

Dragon HAwk's picture

Somebody go down to Venezuela and ask them if they are interested in buying a Bitcoin or Gold ETF. and get back to me would yah.

JRev's picture

I sold an altcoin mining GPU to a Venezuelan a few weeks back, so the demand is definitely there. No such interest in my silver dimes. Your point? 

Farqued Up's picture

Most of us would like nothing more than Gov to be slapped away from their demonic authoritarian stranglehold on individual freedoms. They are totally committed to enslaving us. Their fiat debt system is the ultimate single tool to accomplish that ever since man put down his spears and picked up his repeating high velocity rifles with night scopes.

How many of us thinks for a nanosecond that those evil bastards won't go to the ends of the universe to kill cryptos (or any other system not yet dreampt up) that will threaten their system of slavery? They are already scared shitless due to overplaying their greedy Fabian socialism to the point of collapse. The parasites are stupid but they will eventually wake and see their gilded existence is mortally threatened and the SWHTF. Some people will lose a bunch of money unless they can escape, for the threats will come.

Farqued Up's picture

Until someone addresses Shareholder's Equity, Fork = Farq = Fucked.

Who has the initial seed money? Hookers and Blow dealers?

The author's main point to my uneducated dumbass is that there is nothing hovering over the system even threatening thus limiting any kind of criminal activity charges, no incentive for any holder to worry about any bankruptcy threat, no fucking nothing. In my mind I have to figure out which is the bigger threat, the evil Gov or the crooks I would be dealing with in cryptos. Nobody will ever convince me that a fool proof better mousetrap will work throughout perpetuity or that mankind will stop his criminal activities.

I absolutely worship the concept of privacy that it supposedly provides, however,  I can't believe anyone could be clever enough to escape any and all surveilance by the Deep State. The password would have to be memorized and must be absolutely unbreakable and I don't believe that is a permanent given yet.

I wish some of you smart people would educate us on this ongoing gold to silver ratio of 75-80 to 1 when the fundamentals say that it should be half that. Some are touting that silver remaing in nature is much less in tons than gold, gold is useful as condensed high value store of value, plus bling to secure hot Booger in the meat markets. Silver will be the beat-all for futuristic electronics when physically altered and will be better than fiber optics, or so some bright people proclaim. That's some heavy shit right there. If anyone knows, chances are some are ZHers. So, if you know, step out here like you have a pair. That requires my immediate attention while I shiver over a decision on wading in on cryptos. More gold vs more silver for my meager fiat is the question. TIA.

Sophist Economicus's picture

Cryptos aren't really all that anonymous...

 

The block-chain actually has all transaction information in it...Far more anonymous to hand someone a pile of cash for a transaction than a crypto-currency

JRev's picture

ZCash, Monero, DASH, CloakCoin, and a number of other anonymous cryptos beg to differ...

DosZap's picture

This why I see the ACCEPTANCE of BTC, as .gov instigated,they have records of every tap of all keyboards,otherwise they would have shut this down since it is not THE so called money of their realm(fiat/control),just IMO.

No doubt many have made serious cash getting in early,how long it lasts IMO is still based on HOW long .gov allows it's use as accepted pmts.

I applaud those that have made a killing,and admire your foresight,kudos to you all!.But I see BTC as like any item .gov accepts allows as ultimately in/under their control or they would never allow it's use.

Oyster's picture

Like the author, I was anti-crypto until I bothered to spend some time educating myself about it. I started with the Satoshi White Paper, which was fascinating and partly indecipherable. The more I read about the technology and familiarized myself with the potential, the more it began to appear inevitable that it will eventually be widely utilized across the globe. It's a revolution. Most people are affraid of new tech because it makes them feel stupid. I've been converted from a skeptic to an enthusiast after educating myself. I now own Bitcoin and Ethereum. Such a small percentage of internet users are currently in crytocurencies that talk of a bubble is silly. I don't know one person in the flesh (friends, relatives, colleagues) who own Bitcoin. Most don't even really understand what it is. It may seem ridiculously expensive at the moment, but the current price is a bargain when you start crunching the numbers. I'll be buying more when I have available funds, regardless of price. No need to abandon the metals for Bitcoin; both can exist happily in a portfolio. When Bitcoin can be used as collateral in financial contracts is when the naysayers will start jumping on board.

disagreeableness's picture

Thoughtfully put, and well said. I've not put in a dime that I couldn't afford to lose....... not that I'd enjoy losing, but the train would keep rolling right along. I've done a damn site better than my wildest expectation. 

 

Also, by the end of this month there will be a lender using Bitcoin as collateral: https://www.saltlending.com

Yellow_Snow's picture

Yes, same here, I know no one other-than-myself, who is buying crypto's.  The more I educated myself on the technology behind the blockchain the more of a believer I have become.  It is revolutionary.   I think the author misses a huge point... There is a value in the massive infrastructure involved with Bitcoin.  There are billions of dollars involved here, like mining it.  Checkout Genesis Mining in Iceland for example of this money, which is only one facility of thousands throughout the world.  The main difference is that no one centralized Corporation owns all this infrastructure, it is decentralized and that is it's great strength.  And the miners of Bitcoin are often misunderstood as 'wasters of electricity'.  The miners are the processors of the transactions announced on the blockchain.

Hikikomori's picture

Wah!  wah!  wah!  My gold has gone down, bitcoin, which I haven't a clue about, has gone way up - so everyone who owns bitcoin is an idiot!

Sophist Economicus's picture

I don't think he said any of those things.

One has to also unbundle the block-chain technology from the actual 'bitcoin'.     The author maintains that 'bitcoin' and all other cryptos are at best like other fiat currencies and, in a worse case scenario, in a speculative bubble that can end badly.    

 

 

 

EcoJoker's picture

First, you can't just "fork" without approval.   It required at least 80% of miners to agree to the fork or you basically have a disaster where there are two shitty coins where there was one.   Something like 90% agreed to the fork.

The remnants of the old chain are in the Bitcoin Cash coin and that is a slow bleed to no value.  No problem. 

You bitches complain about the fed and here is a bonafide way of avoiding the feds dilution of the dollar and you're still bitching that something MIGHT happen, MIGHT.  Chicken Little..   

 

thedespised's picture

The very fact that you admit at the beginning you don't even understand the tech invalidates your opinion immediately. next.

DosZap's picture

BTC in my opinion is a disaster waiting to happen,HOW the hell do you make something of value(non tangible), out of 0's and 1's?.

It's only value is vapor, and a simple internet OFF switch,POOF gone.

flyingcaveman's picture

You have to prove you wasted some energy.  That's where the value come from.

U4 eee aaa's picture

how do you make amazon gift cards of value?

Kafir Goyim's picture

HOW the hell do you make something of value(non tangible), out of 0's and 1's?

That was the genius of the original bitcoin.  Before that, it was impossible for me to transfer something digitally to you and have you trust that I had not clandestinely kept a copy or transferred it to 1000 other people also.  That breakthrough is what is so exciting about cryptocurrency.  Every altcoin after that (with the exception of MAID) is just a clone of that orginal breakthrough concept, with some small tweak.  Those coins, however, do not have bitcoins network effect and will never be able to achieve it's decentralization of control.  

One of the reasons that bitcoin is special is that there is no "one guy" or "group of guys" that can arbitrarily change it.  Satoshi Nakamoto   is a ghost.  Any altcoin that attempted to duplicate that and say it was written by an anonymous ghost would be ridiculed as a shitcoin and never gain users.  So all other altcoins are forced to ride on the credibility of the "one guy" or "small group of guys" that are it's proponents.  That reliance on such a small group of people becomes that altcoins achilles heal, as you can never trust those men not to change the code in significant ways, should that become convenient.  Bitcoin, however, can never be changed except by consensus of the community, which is an exceedingly painful and slow process, as the latest fork has just demonstrated.


anarchitect's picture

BTC has value because some sellers accept it directly, but ultimately it has value because it can be reconverted to fiat.  The question is what its value would be if this were no longer possible.

1.21 jigawatts's picture

Sounds about as informed as someone in the 90's pooh-poohing internet. 

Hey, maybe the Joos will allow silver to hit a whole $22 before printing up more paperweight ETFs. 

PM bugs can be all proud of themselves for a week or 2.  Its gonna be awesome.

DisorderlyConduct's picture

In what way is the author wrong in their analysis? I've asked this in another article and got downvoted, but no explanation.

U4 eee aaa's picture

For one reason, it took 80% of the network in order to split the BTC. That is not some frivolous number. That is like asking 80% of Americans if they want to double their currency due to liquidity of payments issues. At this point you only need the permission of the Fed board to double the currency as many times as they want. The split had to take place for good reason and practically the entire network needed to agree on it. BTC is more like the constitution in that what was in it, the Fed or the Federal government(to be more accurate) doesn't just decide to amend it or open a constitutional convention tomorrow to change it. They need the consensus of the user to change the BTC. Those that don't agree have plenty of forewarning to leave if they so choose. The fed can quadruple the currency over night

Secondly, backing? Is he serious? He is trying to tell us that if the US defaulted on their currency they would pay debts off by selling goods to cover it? No, they would say we have this huge nuclear arsenal. If you want your money, come and get it

Automatic Choke's picture

When Bitcoin arrived and started to mature, I remember many articles, all talking about "bitcoin as currency".   Folks wrote about bitcoin vending machines.  Folks wrote about travelling around the world using only bitcoin for food and lodging.  It wasn't just for the criminals and dark-world transactions, it was modern currency for all.

For the last six months or so, the ONLY articles I see are about buying bitcoin at today's price because it will be trading for more tomorrow.  Does anybody else besides me see this as ominous?

 

bonin006's picture

I see it as a sad commentary on human nature. bitcoin, houses, stocks, artwork ... whatever, people bid them up to unreasonable "valuations". It seems like people can't help turning anything they touch into a ponzi scheme.

OverTheHedge's picture

I have decided that I will embrace bitcoin when it settles down and stops being so volatile. Until then, I will leave it to.the wide-boys and chancers.

Kafir Goyim's picture

The fork did not result in two equally valuable collections of digital assets.  It is expected that one will wither and die.  The people who advocated for the fork felt that their scaling solution would make them the winner, causing original bitcoin to wither and die.  If they were wrong, then it is their fork that will wither and die.

There are many alt-coins that do not enjoy the network effects that bitcoin, as the original cryptocurrency, enjoys.  This means that those alt-coins do not threaten bitcoin, just as the social network that you could go home and write this weekend, does not threaten facebook.  Bitcoin is not just an algorithm.  It is a network of miners, wallets, exchanges, businesses, and users.  That network is the value, just as facebook's user are it's value, rather than just some PHP code written by a geek.

When somebody makes the argument that duplication of code (creation of alt-coins) is the proof that cryptocurrencies are unviable, they start with a flawed premise.

thedespised's picture

For starters, he opens 'Whatever a fork is' directly admitting he understands NOTHING about tech, making his opinion irrelevant.