Bitcoin is sub-prime currency

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The pyramid scheme can always collapse very easily because it relies exclusively upon finding ever greater numbers of fools to keep it rising in price. Usually that’s represented as a pyramid with ever greater numbers required at the base as it grows.

But, in truth, it should be represented as in inverted pyramid with ever greater numbers piling in at the top increasingly exposed to the tiny and hyper-concentrated mavens at the pointy little base. To wit, via Bloomberg:

On Nov. 12, someone moved almost 25,000 bitcoins, worth about $159 million at the time, to an online exchange. The news soon rippled through online forums, with bitcoin traders arguing about whether it meant the owner was about to sell the digital currency.

Holders of large amounts of bitcoin are often known as whales. And they’re becoming a worry for investors. They can send prices plummeting by selling even a portion of their holdings. And those sales are more probable now that the cryptocurrency is up nearly twelvefold from the beginning of the year.

About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.

“I think there are a few hundred guys,” says Kyle Samani, managing partner at Multicoin Capital. “They all probably can call each other, and they probably have.” One reason to think so: At least some kinds of information sharing are legal, says Gary Ross, a securities lawyer at Ross & Shulga. Because bitcoin is a digital currency and not a security, he says, there’s no prohibition against a trade in which a group agrees to buy enough to push the price up and then cashes out in minutes.

What an extraordinary scam this is. The greatest pyramid scheme and bubble in the history of the world. Just a few years after the last one in US sub-prime mortgages, based upon considerably less substantial collateral: the willingness of the fool that bought before you to hold on, and the ethics of the dodgy bastard at the bottom that founded it.

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Meanwhile, global greed is in complete control. Via NZ Herald:

An Auckland man sold his house and spent all the proceeds on trying to make his fortune through virtual currencies.

The 30-year-old IT professional, who didn’t want to reveal his identity, has created a “virtual-currency mine” at a secret west Auckland location; a small room filled with incredibly powerful computer hardware that trawls through millions of transactions a second.

The man first became interested in the monetary phenomenon in 2013 when the price of a bitcoin was about $1. Earlier today, bitcoin was worth in excess of US$18,000.

Despite an unremarkable start to his venture, a friend suggested he purchase more equipment to increase his returns.

“Then we got talking: What if we put $5000 into it? What if we put $10,000 into it? What if we sold the house and put it into all of these?

“That’s literally what I did: Sold the house in Hamilton and here we are today.”

With the $60,000 equity he received from the $300,000 sale, he purchased the expensive, high-powered computer equipment necessary for a lucrative virtual-currency mine and spent over 400 hours researching how to set it up and find pay dirt.

Fans whir constantly in the 35C heat so his expensive equipment doesn’t crash, but other than a $1500 a month power bill, the digi-miner doesn’t have to lift a finger other than to flick through his smartphone and watch his virtual money rise and fall in value.

And so far it’s mostly been rising – at an astounding rate. In just three months the man has funded his $30,000 wedding and honeymoon, as well as a trip to Fiji.

Being a virtual currency miner doesn’t actually involve purchasing bitcoin or its hundreds of equivalents. They are essentially auditors who are paid a tiny fraction of the cost of digital transactions for assuring that a currency is genuine and available.

“I get rewarded for validating and verifying that people have the cryptocurrency … [and] that if they try and send it to somebody else they’re not trying to be fraudulent,” he said.

Despite the exorbitant power bill, he said he’d already recouped the money he’d spent from the sale of his house.

Anyone with a half-decent computer could become a virtual currency miner, just on a far smaller scale.

“A normal computer could make you $2, $3, $5 a day just by mining these virtual currencies,” he said.

“And that’s the thing, what you mined yesterday could be worth $10 tomorrow or could be worth $100.”

The Aucklander doesn’t actually deal directly in bitcoin. His focus is on other, less well-known virtual currencies like DigiByte and Zcash. He then trades these for bitcoin and, in turn, sells that for traditional money.

Should the bitcoin bubble burst, as has been predicted by many commentators, the man hopes the value of his minor virtual currencies will soar.

However, bitcoin remained “the Greenback” against which all other virtual currencies were measured, he said.

“If you were to take $100,000 and put it into a term deposit you’d get back, what, 5 per cent over five years, 10 years? I mine more than that overnight,” he said.

“I’ve woken up some mornings and I’ve lost $2000 overnight due to the price fluctuations. [But] the good mornings outweigh the bad mornings and unless you’re in a hurry there’s nothing wrong with sitting on it for six months or 12 months.”

He was under no illusions that it was still uncertain territory and that virtual currencies could crash and burn. On the other hand, he still had visions of an early retirement, sipping cocktails on a Pacific Island.

“That’s why I bet the house on it.”

And, at the AFR:

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Cameron Winklevoss, thought to be one of the largest holders of bitcoin, thinks the cryptocurrency’s blazing gains this year are just the start. He predicts it will rise as much as 20-fold as investors come to view it as an upgrade to gold.

…Winklevoss bases his price projection on the market value of gold, which he pegged at about $US6 trillion ($8 trillion) and others calculate at closer to $US7.5 trillion. Investors are beginning to embrace the idea that bitcoin, “mined” by computers performing complex calculations, is more portable and divisible than the precious metal, he said.

“We think that bitcoin is a gold disruptor,” Winklevoss said in a telephone interview on Friday, predicting it may yet appreciate by 10 to 20 times its current value. “We think it’s just the beginning. We are definitely holders.”

BTC as a safe haven with unlimited crypto issuance, crazy volatility and implicit threat to government?

Just get out before the fool before you.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.