Obviously, China has dominated the news this week. There has been rampant speculation regarding the, “first roach” philosophy which suggests there’s much more to come in the way of Chinese Yuan/Renmimbi devaluation. I’m not very good at projecting political developments along an investment front. However, I do know enough to hunt down the information no one is talking about amid the hyperbole. What follows are a few actionable ideas based on the historical context of recent US economic developments and the transference of these principles to the Chinese economy’s cyclicality.
Five years ago the financial world was coming to an end. The stock market tanked and interest rates went negative due to the unsurpassed flight to safety in U.S. Treasuries. Most of this was due to greedy lending practices that claimed to be championing President Clinton’s thesis that everyone in America should be able to own a home. Lax lending requirements that were intended to get lower income earners into their own homes travelled up market and allowed upper middle and upper tier earners to refinance their houses at artificially low rates to buy second homes and Harley’s. Once again, misguided bureaucratic endeavors have been perverted by greed. The roaches in China are beginning to surface and the banking system stress tests in Europe are uncovering the depth of this five-year-old issue and once again, the primary beneficiary of these actions will be the U.S. Dollar.
The true measure of strength in any currency is the faith
its users place in it. This is the definition of a fiat currency – a currency
that is backed by faith, rather than hard assets. These include the Euro, the Dollar,
Yuan, Canadian Dollar, British Pound, etc. A loss of faith in any of these
countries’ ability to pay their debts results in devaluation of that country’s
currency. The same is true if they decide to print more money to meet current
needs or even if the world simply thinks their country is being run poorly.
What if I told you there’s an international currency
unencumbered by entitlement programs and liabilities. This currency is not
subject to governmental manipulation and the money supply is always a live
public statistic. This currency neither buys nor sells any debt. Would it surprise
you, given this set of circumstances that this is the single strongest currency
in the world over the last year?
The currency I’m referring to is called, Bitcoin. Bitcoin is
an internet currency that is traded globally for goods and services and can be cashed
out in the currency of your choice. It is, “mined” on individual computers that
are placed, by anyone, on the network. The mining is basically using your
computer to solve an equation. The equations get harder and harder through
time. This ensures that the supply of Bitcoins grows at a stable rate. The
publicly validated equations place more Bitcoins into circulation by the people
who’ve mined them. The number of Bitcoins, currently stands at 6.6 million. The
next equation and number of coins in circulation are all publicly available in
The value of Bitcoins is tracked on trading sites that look
just like foreign exchange trading sites. There are quotes in Dollars, Pounds,
Euros, Francs, Rubles and most any other denomination. There are bids and
offers to buy and sell as well as the amount that is up for trading. Bitcoins
can be actively traded across currencies just like any other currency.
Currently, one Bitcoin is worth approximately $14. This equals a U.S. market
value of more than $90 million dollars.
Without getting too technical, faith is being placed in the
mathematical equations that regulate the supply. The supply can be verified,
from the equation through circulation by anyone on the network. While the
equations require lots of computing power to solve, they can be checked very
easily, just like any math problem.
The demand is built up due to the freedoms and low cost of
use. Bitcoins have no transaction fees. There are no middlemen. There are no
PayPal, Western Union, wire or, credit card processing fees. The coins can be
spent online anywhere that accepts them, including, Ebay, Amazon and other
merchants as well as online poker sites and other places your credit card
company won’t let you spend your money. Bitcoin is gaining traction and now
processes more than 10,000 transactions per day. A survey of Cragslist even
turns up business opportunities including one with a Stanford PhD looking for a
technical lead developer in Bitcoin mining.
I am not promoting Bitcoin and I haven’t used it.
Personally, I think it may be the most forward thinking and libertarian store
of value yet developed. The idea that the fundamental supply is always known
and that it isn’t subject to government budgets and political elections
combined with the fact that it is stored with each individual participant
rather than any banking system makes Bitcoin a revolutionary endeavor of the
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.