Hedge Fund CIO: "Why The Future Of Cryptocurrency Is Not As It Seems"

In a day in which everyone, including the BIS, appears to be talking about cryptocurrencies after last week's China-induced crash, here is one of the more insightful takes on the future of cryptocurrencies, and how thay fit into the existing/legacy fiat system, courtesy of the latest Sunday note by One River Asset Management's Eric Peters.

Anecdote

 

“Any other thoughts on the matter?” he asked. We’d spent quite some time discussing Bitcoin, Ethereum, and copycat cryptocurrencies popping up faster than North Korean nukes.

I mostly listened, he knew far more about the subject; blockchain, distributed ledgers, mining, halving, hash rates.

 

Unlike the S&P 500 realized volatility’s collapse to 8%, these new creations are realizing at 90%. Which makes them attractive to day-traders, adrenaline junkies, who launched 100 crypto hedge funds just last month.

 

It’s the millennial’s wild west. Like all generations, they’ve discovered a new frontier, with few rules, seedy saloons, gunfights, corpses.

 

As our earthly unknowns disappear, we find new ones in the ether. Which is where money belongs; it’s not real, it’s an abstraction, an age-old illusion.

 

As a golden myth captured mankind’s imagination, we built our societies upon a rare yellow metal. For 2,500 years we fought, killed, conquered. Until governments tired of the arbitrary spending constraints imposed upon them by a scarce element. So they invented today’s fiction, a printed promise, fiat currency.

 

Seigniorage is the difference between that currency’s market value and its cost of production – that spread is a source of vast wealth and power. And in all human history, not a single government has willingly forfeited such a thing. Nor will one ever. Only after a hyperinflationary depression, confronted with revolution, do governments sometimes relinquish their power to print (Zimbabwe most recently).

 

Consequently, the future of cryptocurrency is not as it seems. Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation.

 

They’ll track every transaction. Imposing negative interest rates in an instant. There will be no hiding, no mattresses. And in a deflationary panic, they’ll instantaneously add an extra zero to every account, their own especially.

As a bonus, here are several additional observations on the "money illusion" in Peters' trademark style:

Wampum:

 

James Marshall discovered gold at Sutter’s Mill on Jan 24, 1848. The California gold rush sparked the largest mass migration in American history; 300k dreamers flocked west between 1848-1855. They toiled to unearth 750,000 pounds of yellow metal in those 7yrs; worth $15.4bln at today’s price. Satoshi Nakamoto invented Bitcoin on Halloween 2008, and released his creation into the ether. $100bln of cryptocurrency has been magically mined in these 9yrs; equivalent to 4,860,000 pounds of gold. And both are at once valuable despite being valueless.

 

The US government holds 8,133 tons of gold reserves, larger than the next three largest nations combined (Germany 3,381 tons, Italy 2,452, France 2,437). Most of ours is held at Fort Knox, the most secure safe on earth. In today’s dollars, America’s metal mountain is worth $335bln. Which pales in comparison with the $1.2trln of US currency in circulation, and a small fraction of the Fed’s balance sheet, which exceeds $4trln, most of which - like cryptocurrency - was magically mined since 2008. 

 

On Friday September 8th, US Federal debt jumped by $318bln, roughly equal to America’s entire gold reserve. Total Federal debt surpassed $20trln that day. Like our $1.2trln of currency in circulation, it’s backed by nothing but a promise. And in truth, that promise is to repay bondholders with freshly minted promises. Naturally, with such an abundance of circular pledges swirling, it is worth asking what money really is? We quite obviously don’t know. Or perhaps the nature of money is not fixed, but rather, forever evolving.

Comments

HopefulCynical This Might Hurt Sun, 09/17/2017 - 18:47 Permalink

"The US government holds 8,133 tons of gold reserves..."x2000 to get pounds in reserve, x16 to get ounces, x1318 to get current spot price, as of this post: $343,017,408,000$350 billion in .gov gold reserves. Against a federal government debt of $20 trillion, and unfunded liabilities of somewhere between $175 - $215 trillion, depending on how rose colored the pundit's glasses are.So the next time one of your normie friends says the worry about the debt is overblown, show 'em this quick and dirty calculation.That said, if .gov doesn't commandeer crypt0s, a NORK nuke EMP can make it to where you are "transmitting the blockchain in Morse code over a radio" to buy a loaf of bread to feed the kids.Yes indeedy, Ms. McCready. We're so completely fucked it isn't even funny.

In reply to by This Might Hurt

bluez eforce Sun, 09/17/2017 - 19:55 Permalink

NOW LISTEN UP FOLKS!    I will make an exception this time and let you in on the real truth!If my information is correct, Bitcoin is very different than Etherium, because Bitcoin is based solely on a complex yet straightforward data structure. Etherium, on the other hand is reliant upon a PLATFORM. I think that perhaps everyone who uses Etherium needs to have this platform, which is a standardized computer program, on their machine. Probably most computer science professors would tell you that data, as in data structures, eg. text, are fundamentally the same thing as machine instruction files, i.e. programs. They are dead wrong. In order to transform a data structure into a computer program, you must have a large, complex "compiler" program, and yes, compiler programs are very special PLATFORMS.Bitcoin is a giant encrypted data structure, like a vast text file. Any good programmer could write a bespoke program to "read" it. Etherium is itself a vast encrypted program which cannot be "re-written". Therefore every flaw and security hole in it is baked in forever. It is itself a PLATFORM. It can be "patched" if you wish to trust the patch developers. Here are some other platforms: Microsoft Windows; the JAVA Engine, needed to run Java programs; Macromedia Flash Media Player; Chrome web browser, etc. What do they all have in common? They have endless flaws and security holes, and since they are monocultural platforms and everybody has one, if a black hacker, or the GOVERNMENT owns a "zero-day" security hole, THEY OWN YOU.Remember: No one has ever been able to use a plain text file to distribute viruses. Not once. Microsoft Word documents contain embedded computer programs, in the same fashion that non-static web pages contain embedded JavaScript programs. So of course Microsoft Word documents and web pages have been black hacked countless times.BEWARE OF CRYPTO-CURRENCIES THAT ARE BASED ON PLATFORMS!

In reply to by eforce

Gorgeous bluez Tue, 09/19/2017 - 16:34 Permalink

"NOW LISTEN UP FOLKS! I will make an exception this time and let you in on the real truth!"Dang, with that kind of proclamation, I thought your post might have some useful insights.  I suggest you research these technologies more.  To compare Bitcoin to "a vast text file", is pretty far from accurate. 

In reply to by bluez

Theosebes Goodfellow eforce Sun, 09/17/2017 - 23:39 Permalink

~"...it is worth asking what money really is? We quite obviously don’t know. Or perhaps the nature of money is not fixed, but rather, forever evolving."~  What a crock of navel gazing self-indulgence! To this asshat "nothing means anything" and vice versa."Can one ever truly "know" money?"PLLLUUUUUUEEEEEEEAAAAAASSSSSSSEEEEE!!!!!!! Shoot me! Please, put me out of my misery!The #1 reason that cryptos have fared so well is because they promise, at least for now, things that governmental fiat currencies do not. Does the government, all governments. hate competition? You bet your ass they do. But it's going to cost them to subvert them, and the price to do so escalates on a daily basis. Hell, China's tinkering hasn't slowed them for more than a few hours. Will cryptos end well? I don't know, but it sure will be different than this belly-button fuzz examiner's drivel.Sheeesh!

In reply to by eforce

zebra77a tmosley Sun, 09/17/2017 - 22:00 Permalink

6 ads surround my reply1. Start investing in Bitcoin (coinsquare)2. Forget bitcoin these five cryptocurriencies are the future3. Moneypot ICO x 3and 4. Report unlicensed software and get a cash reward (really)Don't worry there will be MANY more bitcoin and crypto articles to come, Tyler's know whose feeding them.As for comandeering crypto good luck it's opensource, all over the world and experiencing geometric expansion in capital flow and coin offering, Central Banks and governments are PANICING because they can try all kinds of apparata - the only way to stop bitcoin and the cryptos is to declare martial law and a full shutdown of the financial system to a total registered tracking purchasing system.They can try to corner and corral $75 Billion in market cap in bitcoin, but the realization is you can't.  That much capital, and 16 million users spread over 200 countries will not be stopped by any one nation.  This is past the zero-point folks. Its like Hurricane Irma in hot warm water for the next 2000 miles. It won't be stopped, it's a financial hurricane sucking fiat at ever increasing geometric rates. The central banks BIS coordinated inflation game is jet fuel for cryptos.  The more they deflate and destroy fiat the more attractive and expensive cryptos will become.  JPMorgan gets it talking trash book then buying it with both fists out of Europe. They get it - they know this cannot be stopped.. Users that can take flight with a keyboard jump borders, evade taxation and tracking, be rolled through untrackable cryptos and back and make purchases equal to a Vancouver home will not be stopped.   Their one option of desperation is to shut down all non-cooperative exchanges (which you are seeing now..)  with $75 billion increasing daily shutting down and tracking one exchange will see 3 pop up off shore...

In reply to by tmosley

BallAndChained tmosley Mon, 09/18/2017 - 00:47 Permalink

Physical tangible objects don't need backing you moron. They are backed by itself.Intangible needs to be backed by something real, else they are worthless by itself. Virtual fantasy tokens are not in the real world.> Only potential scam vehicles, like cheap slips of paper, need backing.Yes scam vehicles like Bitcon and all cryptos need backing.

In reply to by tmosley

tmosley Mr Pink Sun, 09/17/2017 - 18:05 Permalink

Why would anyone want a coin that can be issued arbitrarily? That is why people have turned to cryptos in the first place.As I said below, the only use for such a coin would be bankless ecommerce (but of course pols get money from banks, so they don't want that!) and as a means of getting into the crypto ecosystem without a bottleneck (which eliminates the need for both bankers AND central bankers!). If they do issue such a coin, make it legal tender, and have it freely available to the people, then they will do so out of ignorance for the consequences. Like what happened when they allowed the ownership of gold after closing the gold window. It's price shot up like crazy and they looked like fucking idiots. 

In reply to by Mr Pink

Implied Violins tmosley Sun, 09/17/2017 - 18:15 Permalink

...speaking of BitCoin and cryptocurrencies, even Natural New's Mike Adams has some worthy takes on the subject:

https://www.naturalnews.com/2017-09-17-john-mcafee-accidentally-reveale…

Why any of you motherfuckers who love this crypto shit is beyond me. You are ALL fucking DELUSIONAL.

IT IS ALL A SCAM. And Adams, of all people, lays it out for anyone with a fucking brain to see.

In reply to by tmosley

marysimmons Mr Pink Sun, 09/17/2017 - 21:13 Permalink

Digital currencies using blockchain technology created and managed by a central authority is not much different from the fiat system we now have in place and is radically different from DECENTRALIZED digital currencies like Bitcoin, Ethereum, Litecoin, et al.  Because these currencies are DECENTRALIZED, they cannot be stopped or controlled.  This is why governments and the Jamie Dimons of the world fear them so much.  There are also a limited number of each of these tokens and their quantity cannot be inflated.  Thank about that for a few seconds.  The author of this article is either an idiot or intentionally obfuscating the issue.

In reply to by Mr Pink

TeethVillage88s FreeShitter Sun, 09/17/2017 - 18:10 Permalink

Well they recently did the Red Scare III with Trump & Russian Collusion (there is a Red under the Bed).

And we still got the KKK took my baby away... and is lead by Trump.

And we got Anti-Fa which is communist Nazis as far as I can tell.

- No one discusses failures of Capitalism in 1929-1940 or 1999, 2000, 2002, 2007-2011
- No one blames the lawyers, bankers, lobbyist, politicians, no term limits, no limits on gift giving
- No one Blames FDIC, Treasury, SEC, FINRA, FTC, Federal Reserve or TBTF who are 40% bigger today
- No one blames the Pantheon of Investment Paper out there

hm... let's blame Bitcoin for a while

In reply to by FreeShitter

Collectivism Killz Sun, 09/17/2017 - 17:51 Permalink

Oh yes, the Mark of the Beast currency statement. Not that I haven't heard that before. If .gov really wanted to control everything, they would ban cash and PMs. Even this move is less about control and more about desperation.

monero Sun, 09/17/2017 - 17:55 Permalink

Governments will try to take over cryptocurrencies, they are already beginning to try.  That's why Monero was created.  Untraceable, uncensorable.

tmosley monero Sun, 09/17/2017 - 18:18 Permalink

Don't be a maximalist, and don't use weasel words. It most certainly is private to at least some extent. It looks to me like the main complaint is that many of the masternodes are hosted on the cloud, and that government agencies could gain access to logs via a request to AWS and such.Also>the DASH market cap is 50 million USDThis data is hopelessly out of date. What is this, from 2014? Dash's market cap is $2.3 BILLION!

In reply to by monero