Tickerguy on F.A.C.E.....
The Market Ticker ® - Commentary on The Capital Markets
2017-12-04 13:41 by Karl Denninger
in Interviews , 179 references Ignore this thread
Tickerguy on F.A.C.E.....
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Come and get it!  Interview this morning....

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User Info Tickerguy on F.A.C.E..... in forum [Market-Ticker]
Posts: 56
Incept: 2011-05-11

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Wish you did more of those, Karl. You are very humble and you perform a tremendous public service by breaking down complex issues into understandable pieces that the rest of us can understand. I have said it before and I will say it again, thank you.

Reason: Doing this in IOS—doesn’t take punctuation.....
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I can tell you're growing weary. You didn't use the word squick even once.
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Incept: 2008-11-14

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Nice job Karl. My wife asked me about bitcoin yesterday and I told her about what you said. I wish you would have had more time to drive home the health care crisis which will break the bank.

IT'S THE SPENDING STUPID The US must become less a government of men, and more a government of LAW.When people lose everything and have nothing left to lose they lose it -Gerald Celente
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I am suspicious of Bitcoin myself, as anyone should be of anything that appreciates 900% in a year. But I have been thinking about it, and for many of the reasons you think it a Ponzi scheme, I think that there might be more to it.

I'm going to quote Greenspan, from an article he wrote in his gold bug days. I know you don't like the gold standard, but you must admit that the nonsense we have been dealing with over the past 30 years would have been much less under it.

The article is here: http://www.constitution.org/mon/greenspa....

"Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving."

* "the medium of exchange must be a durable commodity, usually a metal"
* " A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity."
* "Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron."

OK, so Bitcoin isn't physical, like we would think of a commodity. But most
commodities are earned in some way; gold and silver are mined, wheat and frozen concentrated orange juice are grown. Cigarettes are made. Bitcoin, while not a physical good in the traditional sense, they (a) require capital and (2) require energy. So in a way, Bitcoin is earned.

Regarding #2, bitcoin is divisible to the 8th decimal place.

Regarding #3, it doesn't weigh anything. It can also be exchanged at essentially zero cost; it knows no borders, so it is easy to transport; in fact, much more so than gold.

Let's think about gold. The supply of gold is finite. It grows more expensive to mine. Exponentially, like Bitcoin? I don't know. Bitcoin is finite. The miners of gold are the first to benefit; when gold is money, an addition to the gold stock is inflationary. The benefits accrue the same way as bitcoin. Where you see Ponzi, I see gold.

Right now, Bitcoin is essentially worthless. It is a tulip bulb in Holland during the 1600s. A tulip has a sort of intrinsic value. It looks nice in the garden; perhaps it give pleasure to gardener who cultivates it. The speculation renders the bulbs essentially worthless, because they are not planted, but hoarded because of the price increases.

Think of Bitcoin as a network. Metcalfe's law puts forth that the value of a network increases with the square of its nodes. The example I usually see is that of fax machines. One fax machine is useless, but as more and more are purchased and used, the more the utility and value of the network increases. Now, let us subject the fax machines to the sort of speculation we now see in Bitcoin. The owners of now send no faxes, for fear of damaging the fax machine! They might sell it later for 10x what they paid for it. So the speculation renders the fax machines and their network worthless. Fax machines sending no faxes are just as worthless as no fax machines at all! But when the price of fax machines stabilize, they will again be used, and the network becomes valuable again.

I think we can think of Bitcoin and the blockchain as a network. Because it is subject to this speculations, it is not used in transactions, and it is therefore worthless. The introduction of the futures market creates an interesting situation. We now have a convenient way to short Bitcoin. We now have speculators on the other side of the trade. This puts a lid on the price increases, if nothing else. Like our fax machines sending no faxes, and our tulip bulbs not being planted, Bitcoin becomes used. Because it is being used, it is now valuable. It becomes more valuable the more people use it, and the more people who accept it. It seems to be used in Venezuela and Zimbabwe. The value of the network increases exponentially, and it increases irrespective of its price.

Like all money and currency, these events depend on the perception of the marketplace. All of it depends on the perception of the market. People could decide that they no longer like shiny metals, and the price of gold would decline to whatever price its industrial use justifies. The same could happen with the US Dollar, the Euro, or the South African Rand. So there is no doubt that the value and price of Bitcoin could go to zero. It depends on the fiat of people, and because of that it is impossible to price; the price will be somewhere between zero and God-only-knows what.

I think there is value in cryptos and the blockchain. As there have been competing currencies in the past; something competed with gold in older times, currently we use the USD; right now we have competing cryptos. The public will have to decide; they may decide not to use any, which makes them all zeroes. But if one catches on, the upside is huge.

I think it has the properties of commodity money; I think it has the properties of gold. I'll close with a couple of quotes. One from a Fed official, and one from a Fed official and one from Alan Greenspan.

The Fed's vice-chairman of supervision says: "While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage."

Note he that he concerned about USAGE; he is not concerned about the price.

Greenspan says this: "Human nature is such that if you get something such as Bitcoin, you think there is some value there whether there is or there isnt. But thats the same thing as a Continental, greenbacks in the Civil War, all of these currencies which didnt have any backing."

Greenspan is smart enough to know that the USD is basically a fiat currency, as well. Gold, in a way, is a fiat currency, but it was the fiat of the market, rather than the fiat of the market's betters in government.

It will be interesting to see how it plays out.

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All Ponzi schemes have the same basic structure as I outlined in the interview; that's why they're called Ponzi schemes and why the mathematics make them a fraud.

Whether they survive for a long time or not doesn't change any of that.

Any scheme that gives all persons who take an action a "reward", yet the action increases in cost on an exponential basis as each "reward" is earned, is a ponzi scheme. The reason for that is the FACT that eventually the effort must exceed the value of the reward, at which point the next person to attempt it CANNOT expend effort for a positive return. This is not a matter of psychology, it's a matter of mathematical FACT. In addition the first participants earn "reward" for other people's attempts to earn said identical reward yet they have done exactly NOTHING for those additional "earnings" AND they are wildly out-of-proportion (exponentially so!) to their ORIGINAL effort and value of reward.

Ponzi schemes are illegal due to the mathematical certainty of these relationships but whether the law recognizes them at any given point in time doesn't change their character. Many such schemes go on for years or even DECADES before being recognized, and some escape legal sanction even though they clearly meet the definition of same.

Cryptocurrencies are cleverly designed to funnel your work to the founders of same, while giving you a pittance of that which the founders receive. Of note, and distinct from a founder of a real, legitimate business the founders do exactly nothing after launching said "coin" to obtain that additional value; they steal it from further participants, and the scheme is designed to operate this way.

This doesn't mean "blockchain" doesn't have use -- it means that what has been built on it thus far is, in every example, a scam.

Winding it down.
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I have a slightly different take on what happened with the original Ponzi scheme. Ponzi thought up an arbitrage system, where the International Reply Coupon could be bought cheaply in one country, and sold at a higher price in another. Now, this is an asinine idea in many ways, but in theory the idea does, in fact work.

A IRCs and stamps are credit instruments; you pay today for the delivery of mail some time in the future. There is nothing wrong with this. But there was something that Ponzi didn't realize: there is no limitation on the number of these things that can be sold. No reasonable person would see the need for such a regulation.

The demand for sending mail is at any given point in time is roughly finite, and grows at a slow rate. So we have an infinite supply of IRCs being used to purchase a service with finite demand. So as the supply of these things is unwittingly being hyperinflated by the postal services, their value on the secondary market, on which this arbitrage scheme relies, plummets and plummets fast. The profit disappears.

This is where Ponzi's fraud begins. Lacking the integrity to admit to his investors that he has ****ed up and returning what is left to investors, he pays them off, probably at this point with the motive of not disappointing them. He probably thinks at this point that the market will recover, and all will be made whole. As you know, the problem with lies is that they often require ever bigger lies to cover them up. Same with Ponzi's lie, and it requires ever more money and investors to cover the lie.

You see a similar pattern, at least with the initial lie, with non other than Bernie Madoff. The Ponzi began likely the same way. From what I understand, Madoff started of legitimately. He's showing good returns, but then he has a bad month. Not wanting to disappoint his investors, he fudges the return, believing he'll make it up. The same thing happens. He doesn't recover, and then the Ponzi begins in earnest. The initial idea was not fraudulent, but the lack of integrity to admit failure. You can sort of see this with Madoff: for a man alleged to have stolen 16 billion dollars (or whatever it was), he lived quite modestly. Assuming the 16 billion were fraudulent returns, he himself would have been "entitled" to $3.2 billion of it, assuming he was using the common 2 and 20 system for hedge funds.

Now, let us consider Bitcoin in light of my analysis of the original Ponzi. The supply of the IRC's was infinite, but the demand was finite. In Bitcoin's case, the supply of Bitcoin is finite, but if the market accepts it as money, the demand becomes infinite.

Consider also how Bitcoin came to be. It's founder created it, mined a million for himself, and announced to the market "here is this thing I have created, let us see what happens to it". Ethereum, which I believe to be the second crypto created, started differently. They crowdfunded approximately $16 million dollars to start. Now, explain to me how creating something that mimics something created by a dude, or a group of dudes, needs 16 million at the outset? At this point, I think you have fraud. This is the work of greedy people, taking advantage of a gullible and greedy public. The ICOs that have happened since, have taken ever more Bitcoin (apparently in few cases, cash) to start off.

No doubt the creator of Bitcoin has sold some off, and is likely very wealthy. But he did not collect money at the outset; he started off knowing that he could become either very wealthy, or that he may make nothing at all. His motive, in a way, was curiosity. I think greed was only a secondary factor.

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Sorry, but math is math.

Read the top Ticker from today.

Winding it down.
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