Day 346: Bitcoin's Future


Mother's Little Helper portfolio was UP today +$9,566.39 (+1.16%).

Overall GAIN YTD: +$251,010.99 (+42.99%).

Our benchmark index, the S&P 500 is up +17.78% Year To Date.

http://money.cnn.com/data/markets/sandp/

Bulls read about the future. Bears read history.

When markets crash, bears preach the Dutch tulip mania of 1637,

the Banque Royale of 1719-20, the railway speculation of the 1840s, the great crash of 1929,

Beanie Babies craze in the 1990s;

regardless of whether or not they apply to current conditions.

― Clay Baker

BitCoin

I was walking through Stanford Mall today, my daughters will be happy about that, and every where I went I overheard people talking about bitcoin. One guy mentioned that he bought some, another was wondering if he should, one women said she bought some a month ago and was going to shop with it, but now wants to hold it a little longer so she can have more to spend. The theme was consistent, people buying bitcoin because they think it will go up. On December 1st Bitcoin traded at about $9,861 on the Coinbase exchange. As I'm writing this Bitcoin is trading at $17,090 per coin.

CNBC put a Bitcoin watch widget at the bottom of their screen today, sort of as a joke, but I wonder if it won't become permanent. Why not, tickers for the DOW, NASDAQ, S&P, Gold, Oil and all the buys and sells live at the bottom of every financial news service screen, why not Bitcoin, Etherium and others? With over 1,000 crypto-currencies available, CNBC should probably run a screen wide ticker tape the way they show stocks.

The Future is here

On December 10th the CBOE will launch the first BitCoin Futures market on the largest futures exchange. The CME Group, the world largest derivatives market place has already published the web page for Bitcoin futures in preparation of their market launch on December 18th. A futures market means that investors can now short Bitcoin which is a critical component of any market system to introduce price stability. This will also add a new layer of credibility. The NASDAQ has also announced they will be offering Bitcoin futures contracts. Interactive Brokers CEO Tom Peterffy announced that IB will begin trading futures contracts on Monday but with strict limits and high cash reserve requirements. Peterffy has stated that he sees great risk in Bitcoin but that it could go to $100,000 before crashing to zero. Peterffy's biggest concern is that smaller brokerage firms could go bankrupt if they don't manage the leverage correctly.

Word on the street

I hear a lot of people talking about Bitcoin, professing expert perspective, followed by the disclaimer, "But I don't own any Bitcoin". I think if an analyst is going to go on TV and proclaim to be an expert, you had better at least buy a little bitcoin, hold it for a while and then use it to buy something. Researching the opinions of Bitcoin bulls and bears would also be a good idea. For the record I own some Bitcoin and some Litecoin.

The biggest negative I hear about Bitcoin is that you can't use it to buy anything. Technically I could say the same thing about shares of Google or gold. I can't walk into Nordstrom and buy a suit or one of my favorite shirts, they have great men's shirts, with a share of Google or a bar of gold. Just like my shares of Google I have to convert my Bitcoin to cash. Actually that was bad example because I can buy a suit at Nordstrom with Bitcoin. I can't buy my coffee at Starbucks with shares of Google or Bitcoin; shoot I got that wrong too. You get the idea, I can't buy goods and services with shares of Google or gold bars, I have to convert those to cash, but I can buy goods and services with Bitcoin.

Cash, the dollars in your pocket have value because we all say it does. Hand a stack of Yemeni Rial's to a store clerk in San Francisco and you'll find out how fast this system of faith in currency is communicated. When a government backs a single currency, the currency receives relevance. The stronger the government behind the currency the more value that currency has. If that currency also has a futures market then the currency is even more relevant because now the pricing of the currency stabilizes with investors who buy, sell and short those currencies.

The next argument I hear a lot is that Bitcoin is a bubble, it's a fraud and anyone who buys Bitcoin is disillusion. Is Bitcoin a bubble, yes, of course it is but that doesn't make it a bad thing. Any asset that goes up in price at the rate Bitcoin has is by definition a bubble. When Silicon Valley experienced the boom and bust of the internet bubble during the 1990's several good things were produced. During that time new methods of venture capital investing merged, new business models were tested, new technologies were created and out of the dust emerged Amazon, Cisco, Google and many others. Bubbles are just part of the natural cycle of growth. Is Bitcoin a fraud? Only if the seller doesn't deliver. Are Bitcoin buyers delusional? I can't speak for everyone else, I suppose the people who hold on through a market correction will be the delusional ones. The people who sold at a profit will be the smart ones.

We don't know who created Bitcoin, just some crack pot story about a person or a group named Satoshi Nakamoto. I don't know who wrote the software that my bank uses to track my checking account either, but I trust those people that I've never met. We don't actually know how many Bitcoins were created, we just have to take the word of the 'experts'. I do the same with the US money supply, and no matter what the current Fed Chair says and the Treasury Secretary says about the money supply, they just keep printing more and more dollars. So far Bitcoin has been more reliable on that point than the US Treasury.

I'm a Bull that reads History too

During the American Civil War the Confederate States of America dollar was first issued just before the outbreak of the war by the newly formed Confederacy. It was not backed by hard assets, but simply by a promise to pay the bearer after the war, on the prospect of Southern victory and independence.

Prior to the Civil War there were about 8,000 different currencies in use in the states. These were the original crypto-currencies. Prior to a national currency, local banks printed their own bills and local merchants would accept the bills either at face value or a discount. The only value those currencies had was the faith of individuals and the issuing banks ability to redeem those notes for gold or silver. Outlaws of the wild west actually had a very difficult problem because they might find themselves stealing a currency that was of little value in their get away location.

So what is Bitcoin

Digital currency investor and former Fortress hedge fund manager Michael Novogratz said last

week that cryptocurrencies like bitcoin are "going to be the biggest bubble of our lifetimes." Novogratz also predicted last week that bitcoin could reach $40,000 by the end of next year.

JPMorgan Chase CEO Jamie Dimon has called bitcoin a "fraud." Mark Newton, managing member at Newton Advisors, in a note to clients. "But to think prices are at mania levels where this could suffer a serious crash here… is a bit ridiculous......I truly don't think people are involved on a mass scale yet. We've heard the fraud claims. Now we need people profiting immensely all around us and making forecasts for $1 million, etc., for it to truly have reached a euphoric peak," Newton said. Shark Tanks Kevin O'Leary, who I have called out several times in this blog has now made his statement on Bitcoin, "It's not a currency". Why? because he couldn't figure it out and won't accept risk.

Is it a currency? I think it's a currency that is also a store of value. I put it in this unique class of being two things because the average person isn't trading currencies on a FOREX exchange. But the average person can trade Bitcoin. Is gold a currency? Only if you're a sovereign nation or a criminal who trades non-traceable assets. That's another argument against Bitcoin by the way, that it's used by criminals because it can't be traced. Short of writing your name on a bill and seeing if it comes back to you, please show me how to trace a dollar bill, a bar of gold, or gift cards. Yeah gift cards have become a currency. Addicts are using retail gift cards to buy opioids but that's another story. Maybe gift cards are a fraud and a bubble because people are using them for criminal activity.

As a store of value Bitcoin has a place in an investment portfolio, right along side other high-risk investments. A small place, not a major position. If you decide to buy Bitcoin do so with the understanding that it's extremely volatile, prices swing dramatically. If you're a Bitcoin investor you'll probably just open an account at Coinbase or another large exchange. If you want to easily accept and use Bitcoin to buy things you'll probably want an account at BitPay or another large merchant services provider. With a BitPay account you can

be paid for goods and services in Bitcoin, accept donations on a web site, pay for goods and services with Bitcoin and get yourself a BitPay Visa card to easily transfer Bitcoin to a readily accepted Visa card. Sounds a little like another age old currency, bartering.

Does Bitcoin really keep you anonymous?

No not really. To use Bitcoin the way I've described above, Coinbase and others will ask you to

first create a digital wallet account. You'll be asked for all the same basic information you're asked for when opening a checking account at a bank. Coinbase then verifies that you are you. When your account is approved it comes with limits on how much you can buy or sell. To raise the limits you are required to provide more information that further verifies who you are by uploading your drivers license, attaching a checking account and attaching a credit card. When you buy Bitcoin they don't instantly materialize in your account. The strike price where you made your purchase is guaranteed, but the actual transfer to your account will require several days to complete.

Stay Invested

Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, TBT, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved