Bitcoins are forever

This is a story of mania, panic, and crash. It’s not new. 

Today’s market cap is roughly $150 billion. Averaged over, say, 3 million holders, that’s $50,000 each. Peanuts, if you belong to the 1%.

The trick is to kite the price to anywhere from 5 to 20 times the current level of $4,000.

The sales are essentially wash sales, as coins just go round and round. That’s why they’re coins, see.

Spectators – the victims – then want in, and the insiders pump and dump swimmingly, until the 3 million can get out with huge profits, at the expense of the latecomers.

The end is a classic Minsky Moment, when the latecomers try to sell. The algorithms in the trading platforms would ask: ‘To whom?’ And the price spirals to nothing.

Question for economists: Can the end trigger a financial or economic crisis? A dire scenario is that the latecomers’ loss results in bankruptcies and loan defaults, a retrenchment in purchases of housing and consumer durables, or in a general malaise in business and consumer confidence. Banks may fail if they finance bitcoin purchases.

With the benefit of foresight, monetary authorities will likely institute safeguards. Trading platforms are like banks, and will need adequate capital in case of an epidemic of ‘fails,’ which can happen if traders engage in short sales, or in margin trading. The Know Your Customer rule will have to be integrated into the block chain data base, and imposed by banks on customers operating trading platforms. 

Of course, theoretically, since virtual currencies can function as money, all trading can take place outside the banking system. If that were the case, the ponzi won’t work: How would the victims’ money enter into the bitcoin system? The price would go up and down forever, but that’s all. It’s funny money after all.

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Bitcoin as money

BITCOIN Screen Shot 2016-01-29 at 10.04.16 AM

The following is a note found on Facebook.

Random ideas on what makes money money
by Kermit Kefafel,  Friday, January 29, 2016

Is money a public or private good? It is a private good imbued with public interest. The public goods that attach to money are the safety of the banking system and price stability, as conventionally promised by a central bank.

What are cryptocurrencies? They act as substitutes for the use of cash in untraceable transactions, the idea of Bitcoin. You can even buy bitcoins at your local 7-Eleven.

The market for Bitcoin has lately been shaken with the arrest of one of its principals; there is talk that it could collapse. Will other cryptocurrencies have the same problems?

I suspect that for a cryptocurrency to become viable, it must hurdle the trust problem — its users and holders must be assured that its supply and valuation are, in some sense, sacrosanct. That its price could bubble up and down like a financial asset is a negative. Even fiat-currency central banks pay some kind of lip service to exchange stability under the current system of floating exchange rates.

Because of the public-goods aspect of money, a stateless currency requires an enforcement mechanism that is private but viable. Does such an enforcement mechanism exist?

Or, are cryptocurrencies just another Ponzi scheme?

*******

For reference, see Lawrence White’s article in the Cato Journal.

The central bank (Bangko Sentral ng Pilipinas) has issued an advisory regarding the lack of regulation on virtual currencies.

A recent assessment predicts continued growth of Bitcoin in the Philippines.

 

 

Capitalism, Blood, and Gore

Is there such a thing as “sustainable” capitalism?

Long ago, Keynes warned that laissez faire capitalism was doomed, not in the sense set out by Karl Marx, but because of Marx: Supposedly labor unions got to be strong enough to ‘fix’ wages, and then was born the basic Keynesian ‘inadequate’ aggregate demand explanation of recession, which meant that capitalism was inherently unstable. Keynes response was for governments to fill the gap, and so here we are, still wondering what hit us in 2008. 

Continue reading “Capitalism, Blood, and Gore”

Clipping Groupon

Robert Shiller once proposed that well-meaning economists should point out instances of irrational exuberance.

I could go one step more.  When you see a Ponzi-IPO, not in the criminal sense, but in the Minsky one, it’s time to point it out.  Or, if you have the guts, go short soon after the IPO.

Where is this headed?  One word: Groupon.  And a descriptor: Flawed business model.

The IPO has a tell-tale tell:”The company has used 85 percent of the $1.11 billion it has raised from venture capitalists and other investors to buy equity from early investors eager for a return, instead of funding growth…”

Amazing!  The early birds have cashed out more than $943M gross (not sure how much they had put in, but presumably they came out more than whole).  An unwitting IPO buyer is being asked to come in as a “middle bird.”

The saying goes:  Better to be safe than sorry.  Another: Caveat emptor.

Efficiency and rationality of stock markets

Can an efficient market exhibit irrational pricing?

The answer is Yes. The answer given here is based on a re-reading of Robert Shiller’s 2005 book, Irrational Exuberance

Let us first define terms.  An efficient market is one where all profitable trades have been exploited; in the textbook sense, it is one where the price observed is the market-clearing price, or where the demand and supply curves intersect.  Irrationality is a defect in the perceptions of market participants; they may be subject to excesses of optimism or pessimism, which may cause them to buy more or less than they would if they had been rational.

Continue reading “Efficiency and rationality of stock markets”