Archive for the ‘BitCoin’ Category

Bitcoin Bubble Warning Follow-Up

Friday, December 22nd, 2017

We wrote to you on the December 12th warning to stay away from Bitcoin.

We posted that comment on our blog and received some outraged comments from Bitcoin “fanboys”. That is the price of skepticism expressed about any bubble.

We said we can’t be involved in Bitcoin as fiduciaries, and have been recommending to clients that they not become involved on their own.

As Bitcoin went from less than $500 to more than $18,700, our concern was increased, while some people felt we should not have missed the boat.

We are in good company with those who warn about involving in Bitcoin, including the CEO of  JP Morgan; the CEO of the largest hedge fund in the world; the CEO of the largest pure short-only hedge fund, the founder and former CEO of Vanguard; the former CIO of Harvard Endowment, the CEO of the largest money manager in the world, a Nobel Laureate in Economics, and Warren Buffet.

Bitcoin may bounce back to new highs, but it is simply not investable. It may be better than roulette as a fun thing to play, but is not an investable asset.

Maybe just dumb luck, but we did call at least an intermediate top on December 12th. We continue to believe it is not a good idea to own Bitcoin, and advise clients not to see the current decline as a buying opportunity.

Prices that go up vertically (an unsustainable pace) almost always turnaround and go down vertically until the speculative element is washed out.  That appears to be happening now with Bitcoin.

Futures may amplify that process, because now there is a way to be short, whereas before one could only be long.

Our warning post “Clients Ask, Should I Own Bitcoin?” can be found here.

Here is the chart of Bitcoin price on December 12th.

(click images to enlarge)

Here is the chart of Bitcoin today, December 22nd

Clients Ask, Should I Own Bitcoin?

Tuesday, December 12th, 2017
  • Bubble, but not systematic risk
  • Regulated , cleared futures contract key step toward mainstream asset
  • Distributed technology limits scale potential
  • Get rich or get busted — no thanks — I’m just a watcher

The media is atwitter (no pun intended) about Bitcoin, which is up like a rocket, and just became available in futures contracts.  I am not onboard with this asset at this time, but with all the publicity and a smattering of inquiries from clients, I need to provide some background information.

First a regret (I suppose) to one client who a few years ago suggested a little taste of Bitcoin; but I told him I did not see it as real — didn’t know how to safely get involved — and passed on it.  Well, $1,000 in Bitcoin at that time, which would have been a round-off number him, would be worth around $1.7 million today (unless, of course, the platform we used was one of those early platforms that  failed, where all investor funds simply went “poof”).

In hindsight, I wish I had made that tiny investment for him and for me — the “poof” would not have hurt either of us — although I probably would have lost my client for reckless behavior.

I know I made a reasonable decision at the time, based on what was known at the time.  I did the right thing as a fiduciary — just feel envious now of those with a love of casinos who took a shot.  I could always use an extra $1.7 million.

A friend of mine bought some Bitcoin, because her son bought some.  So far she is very happy to have done so.  I bought some Canadian marijuana penny stocks, because my son bought some.  So far I am very happy to have done so as well — just not nearly as happy as she is.

Your children may talk to you about Bitcoin; or you may find Bitcoin to be topic of discussion among enthusiasts at a cocktail party.   This article may help you hold up your end of the conversation.

(click images to enlarge)


In August 2015, PwC published are report on cryptocurrency titled: “Money is no object: Understanding the evolving cryptocurrency market “. It said,

“Cryptocurrency: media sensation and investment fad? The issue is no longer whether cryptocurrency will survive, but rather how it will evolve. Each of the five key market participants— merchants and consumers, tech developers, investors, financial institutions, and regulators—will play a critical role in this process.

… It has been called one of the “greatest technological breakthroughs since the Internet.” It also has been called “a black hole” into which a consumer’s money could just disappear. The subject at hand is cryptocurrency—a medium of exchange created and stored electronically, and using encryption techniques to control the creation of monetary units and to verify the transfer of funds”


Schwab posted an article about the price behavior or bubbles and their risk to the financial system.  They suggested that asset categories that rise 10 fold over 10 years without fundamental underpinnings tend to be in bubbles that pose systematic risk.

The importance of 10 years is to have given the asset time to be widely held and embedded in portfolios across the breath of investors.

In this chart, they show the price pattern in the 10-years prior to the bubble peak for the NASDAQ (dotcom era), Homebuilders, Oil and Silver bubbles.  When those broke they had systematic impact.

The chart also shows the short-term meteoric rise of Bitcoin, which any technical analysis would say is in a massive bubble — however, the bubble has inflated so fast that it has not become widely held or embedded in a broad spectrum of portfolios.  The implication is that if it crashes, it will not have systematic impact.  That means we will not become concerned about our stock and bond positions if Bitcoin speculators get wiped out.



This chart of the NYSE Bitcoin index (in black), and the only Bitcoin ETF (GBTC, in gold), and the daily price changes as a percent (in red), shows that the ETF had some devastating drawdowns that would have flushed out most people who had anything more than lunch money at risk.

It also shows that nearly 60% of the gain occurred in the last month.

Projectiles fired straight up into the air almost always come back down just as straight.  Could happen here.  Maybe not, but my stomach isn’t fit for that much excitement, and none of my clients are either when it comes to their retirement portfolio.

Clients are welcome to experiment with the ETF on their own, but not through me as a fiduciary.

Here are a few data points about the ETF:

This table shows the 1-mo, 3-mo, 6-mo and 12-mo returns of the Bitcoin ETF versus the ETFs for Total World stocks, S&P 500 stocks, non-US Developed market stocks, Emerging market stocks and US Aggregate bonds.  No contest, of course, but thought you might like to know.

Here is the discount or premium above the underlying asset value for the Bitcoin ETF and the other ETFs in the list.

You can see that while the premium for GBTC is high at over 20%; it is way down from the 130% 1-year high premium, and the 56% 12-month average premium.

That is a small good sign, in an otherwise boiling hot bubble.  Or maybe it shows the bubble is losing some followers.


Here are the expenses of the funds.

At 2%, the management fee of GBTC is very high as ETFs go: but not of any consequence under bubble conditions. Total expenses are not yet known, but they couldn’t compare to the price appreciation.


GBTC is the ticker symbol for The Bitcoin Investment Trust, a trust run by Grayscale that holds Bitcoins. You can buy it at your broker, but it is not “listed”.

They say this on their website:

“Eligible Bitcoin Investment Trust shares are publicly quoted on OTCQX [under the Alternative Reporting Standards] under the symbol: GBTC. Investors can buy and sell unregistered but freely tradeable Bitcoin Investment Trust shares through their personal brokerage account in the same manner as they would other unregistered OTC securities.”

Note: Alternative Reporting Standards means they are not held to the same standards as other funds you find registered with the SEC and listed NYSE or NASDAQ. That is a buyer beware fact.


Attorney Kathleen Moriarty,  a partner at Chapman and Cutler LLP, advised on the creation of SPY, GLD and leveraged ETFs for ProShares. She attempted to obtain SEC approval for an ETF to hold Bitcoins on behalf of the Winklevoss brothers, but was rejected. She said,

“In turning down the listing rule for the Winklevoss ETF, the SEC said, in effect, the market’s too young and too unregulated.  Normally, when you apply for a listing rule, you have to show the underlying things you’re buying are subject to some kind of regulatory control. … There isn’t any regulator to speak of, and there aren’t any real regulated exchanges. It’s just like the Wild West, and they felt it was too soon to go ahead and promote the product when all the underlying stuff was completely in the air. … The whole idea of a bitcoin ETF was already a strange idea, in that you were creating something highly regulated out of something unregulated. … But then, look at the futures; you’ve got bitcoin futures … and they’ll be regulated by CFTC. There is beginning to be regulatory overview.”

The SEC statement on their rejection of the application to list a Bitcoin ETF said:

“the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”


The facilitation of criminal activity with Bitcoin is a major concern of law enforcement.

CNN Money reported North Korea is hacking and stealing Bitcoin, because Bitcoin is untraceable and enables them to get around sanctions. Remember, when it’s gone, it’s gone — no recovery process or government protections — no guarantee funds — no solutions.

The article included this “It is a fact that North Korea has been attacking virtual currency exchanges,” said Lee Donggeun, a director with South Korea’s state-run Korea Internet and Security Agency. “We don’t know how much North Korea has stolen so far, but we do know that the police have confirmed the regime’s hacking attempts.”

The untraceable feature is also attractive to the hackers who take over your computer and demand ransom to release it back to you. Jim Cramer reported that hackers seeking ransom demand payment in Bitcoin, and even advise victims on how to set up Bitcoin accounts to be able to pay the ransom.


All holders of Bitcoin must record and account for capital gains.  The IRS determined in 2014 that Bitcoin is property, and thus is subject to capital gains taxes.

You, as the investor, are required to keep detailed records, including purchase date, purchase price and sale date and sale price. Although you may not receive a Form 1099 from whatever exchange you trade on, you remain responsible for paying taxes on gains.

For those paying bills or purchasing items with Bitcoin, or converting Bitcoin to make purchases, you have to record all those transactions and determine the intra-day price of Bitcoin at the time you made the transaction. With the wild swings in price during the day, the task is formidable, and thoroughly impractical.

Presumably, compliance is low and reporting by the exchanges isn’t there yet (that’s why criminals like to transact in Bitcoin). But governments are moving to capture more violators. Like with offshore accounts, the US government is using its muscle to find who owes taxes  to get their share of the pie.

For example, a U.S. District Court judge in California ordered Coinbase, a popular platform for buying and selling bitcoin and other cryptocurrencies, to turn over identifying information on accounts worth at least $20,000 during 2013 to 2015. It’s unclear whether the exchange will comply or contest the ruling.

I don’t know about you, but I already spend to0 much of my life keeping records for the IRS without adding this headache.  I would never consider using Bitcoin as a medium of exchange, unless the exchange or bank keeps the records and provides me with a Form 1099.


[from a Price Waterhouse Coopers 2015 report] “What is cryptocurrency? A cryptocurrency is a medium of exchange such as the US dollar.

Bitcoin, the first cryptocurrency, appeared in January 2009 and was the creation of a computer programmer using the pseudonym Satoshi Nakamoto.

Like the US dollar, cryptocurrency has no intrinsic value in that it is not redeemable for another commodity, such as gold. Unlike the US dollar, however, cryptocurrency has no physical form, is not legal tender, and is not currently backed by any government or legal entity. In addition, its supply is not determined by a central bank and the network is completely decentralized, with all transactions performed by the users of the system.

The term cryptocurrency is used because the technology is based on public-key cryptography, meaning that the communication is secure from third parties. This is a well-known technology used in both payments and communication systems.”


[from a Price Waterhouse Coopers 2015 report]  “The blockchain is a ledger, or list, of all transactions, and is the technology underlying Bitcoin and other cryptocurrencies. This decentralized public ledger keeps a record of all transactions that take place across the peer-to-peer network.

This technology allows market participants to transfer assets across the Internet without the need for a central third party. Specifically, the buyer and seller interact directly with each other and there is no need for verification by a trusted third-party intermediary. Identifying information is encrypted, and no personal information is shared. However, a transaction record is created. For this reason, transactions are considered pseudonymous, not anonymous.

The blockchain public ledger technology has the potential to disrupt a wide variety of transactions, in addition to the traditional payments system. These include stocks, bonds, and other financial assets for which records are stored digitally and for which currently there is a need for a trusted third party to provide verification of the transaction.”


Wired magazine published a 12/12/2017  article about technology limitations for Bitcoin titled, “Bitcoin Is Soaring, Here’s Why It’s Not Ready For the Big Time”.  Here are extracted portions of that article:

Bitcoin creator, pseudonym Satoshi Nakamoto, publish a 2008 white paper launching the cryptocurrency movement by describing employment of a peer-to-peer network backed by unbreakable math to verify transactions, removing the need for centralized institutions.

Participants in Bitcoin transactions pay fees to assure that the global network of computers that manage the currency will process the transaction. Tuesday afternoon [12/12/17], Eastern time, it cost around $19 to have a transaction processed in 10 minutes. By one estimate, paying a smaller fee of $3 would leave your transaction taking an estimated 24 hours.

Bitcoin’s transaction fees are so high because the peer-to-peer network that powers the currency has very limited capacity by the standards of modern digital infrastructure. Emin Gun Sirer, a Cornell professor who has studied Bitcoin’s design, estimates that at best the Bitcoin network could process seven transactions per second, but typically achieves 3.3. Visa reports processing 29.2 billion transactions in the three months through September, a rate of 317 million a day, or 3,674 a second.

Blockchain entrepreneur Preethi Kasireddy, who previously worked at Goldman Sachs and VC firm Andreessen Horowitz, recently wrote a detailed post cautioning of the technical limitations of Bitcoin and related systems. She says the underlying technology of what are dubbed blockchains is wholly unready for widespread use. “To make anything mainstream you have to make it scalable,” she says. Bitcoin transactions are powered by people who set up shop as “miners,” running software originally designed by Nakamoto that creates the network that does the work of processing transactions.

Kasireddy cautions that there are no technically proven options implemented at scale. Even if there were, Bitcoin lacks a clear mechanism for implementing upgrades, thanks to Nakamoto’s decentralized design. “There’s no real governance process,” she says. There’s a lot more to bitcoin than just the price.


Because the code to create Bitcoins is open source, different developers have modified the code to create hundreds of other cryptocurrencies; but BitCoin was first; is the dominant cryptocurrency; is the only one with a fund; and now is institutionalized with regulated and cleared futures contracts.

Here are the names of the 10 other cryptocurrenices (called “Altcoins”):

  • Ethereum
  • Ripple
  • Litecoin
  • Dash
  • NEM
  • Ethereum Classic
  • Monero
  • Zcash
  • Decred
  • PIVX


To purchase Bitcoins with Dollars, or heaven forbid, sell Bitcoins for Dollars, you have to go through an exchange.  In the past, a few have imploded, devastating investors.

The largest exchange is CoinBase.  To work with the platform you have to associate your bank account with the exchange.

I remember when hardly anybody thought online banking would be safe, and one bank CEO (I think he was of Chase or Citi) said his bank would go online over his dead body because of the risks.  I think he may actually be dead at this time.  He was wrong.  And now we can even deposit checks to our banks by taking pictures of them with our mobile phones.

That said, I am still in the “over my dead body” state of mind about hooking my bank account up to an unregulated virtual Bitcoin exchange.  No, not me.

Here is a screen shot from the CoinBase site about setting up an account:

They are still evolving, but there are over 1600 Bitcoin ATMS, where you can put in cash and own Bitcoins out there in digital space; and there are  some where you can sell your Bitcoins and get paper Dollars out of the machine — just in case your next purchase requires paper fiat money to get your stuff.


The really big development toward making Bitcoin a mainstream asset is the initiation of regulated and cleared futures contracts.

The CBOE launched one this week (symbol XBT), and the expectation is that the CME will do the same next week.

Here is a description of the CBOE contract (contract size is 1 coin):

Not too much has traded yet, but it will grow.

Here are the prices, price change, volumes and open interest so far for the three contracts initially available:

What is really important to notice is that there are no open positions. An open position is holding a contract after the close of the market for the day. That means people bought and sold, or went short and covered intra-day; but nobody had the conviction to be long or short overnight — it’s just been too volatile.

And, here is price chart for the first three days of trading — not exciting so far


The margin requirement for most futures is in the 10% range. The current margin requirements for Bitcoin futures is 44%. Your money could double or go to zero overnight.  It tends toward being an overnight binary outcome — enriched or busted.

It will be fun to watch; and that is all I am for now — a watcher.


There are very many quotes from all sorts of people making positive statements about owning Bitcoin.  I won’t add to the hype by repeating them, but I will supply a few cautionary quotes from very prominent individuals whose opinions should not be discounted

Summary of comments below: Most people aren’t buying into the value of the technology, they’re buying into the hype. This is gambling, not investing.

BlackRock CEO, Larry Fink
“Bitcoin just shows you how much demand for money laundering there is in the world … That’s all it is.”

JP Morgan CEO, Jamie Dimon
“I could care less what bitcoin trades for, how it trades, why it trades, who trades it. If you’re stupid enough to buy it, you’ll pay the price for it one day. I’ve also told people that it can trade at $100,000 before it trades to zero. Tulip bulbs traded for $75,000 or something like that.

“The only value of bitcoin is what the other guy’ll pay for it. Honestly I think there’s a good chance a lot of the buyers out there are out there jazzing it up every day so that maybe you’ll buy it too, and take them out.

…. governments are going to crush it one day. Governments like to know where the money is, … governments like to control their currency, like to control their own economy. So China’s already put curbs on it.

So there is a use case for bitcoin. If you live in Venezuela, North Korea, if you’re a criminal, great product.”

Vanguard Founder, Jack Bogle
“Avoid bitcoin like the plague. Did I make myself clear? … Bitcoin has no underlying rate of return, …You know bonds have an interest coupon, stocks have earnings and dividends … There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it.”

Goldman Sachs Research Note
“Cryptocurrencies are not the ‘new gold’ despite their recent popularity … The use of precious metals is not a historical accident – they are still the best long-term store of value out of the known elements,” [gold] “is clearly better at holding its purchasing power, and has much lower daily volatility.” Goldman further said that Bitcoin’s volatility averaged almost seven times that of gold in 2017; and that gold is not subject to competition from alternatives. Bitcoin has rival virtual currencies. There are over 1,000 cryptocurrencies in existence.

Ray Dalio, CEO, Bridgewater Associates ($160 Billion hedge fund)

Jim Chanos, founder of Kynikos Associates (a major short seller)
“It’s a speculative mania. .… The allure of Bitcoin is to use it in Black Markets ..or currency flight .. by almost definition it has the regulators and law enforcement arrayed against it, due to its very nature. That’s one of the problems.”

Paul Donovan, UBS WM Global Chief Strategist
Bloomberg’s Tom Keene asks whether the CBOE and CME futures markets legitimize Bitcoin. Donavan answers, “No, I don’t think they do. … in 1636 the City of Amsterdam created a cash based futures market for Tulip bulbs, that doesn’t mean Tulip bulbs were a good investment, as was discovered in 1637. … I don’t think this legitimizes it. It gives you a way to have exposure, but it’s a bubble, and a bubble is a bubble, now matter how you look at it.”

Robert Shiller, Yale (Nobel Price in Economics)
“I think that the thing that’s driving bitcoin at the moment, like other examples of bubbles, is a story. And it’s the quality of the story that’s attracting all this interest, and it’s not necessarily sustainable. … I keep thinking there’ll be other currencies, other ideas that will come up and will eclipse this one. So it’s risky.”

Warren Buffet
“You can’t value bitcoin, because it’s not a value-producing asset. … a real bubble in that sort of thing. … Stay away from it …It’s a mirage, basically …the idea that Bitcoin has some huge intrinsic value is just a joke, in my view.”