Bitcoin, as explained to a 94-year-old...
In today's Digest, we discuss currencies...
In particular, we discuss the new digital currency, Bitcoin, that has stolen headlines lately... and has made a host of speculators rich.
We're not experts on the topic. We're intrigued by any idea that threatens to take power from the government and return it to individuals.
Before we begin, a short definition of what Bitcoin is. (Digest Premium subscribers will read more about Agora founder Bill Bonner's take on Bitcoin today.)
Bitcoin is a digital currency that allows two individuals to transact without an intermediary – so-called "peer-to-peer technology." Satoshi Nakamoto first introduced the concept of a digital currency in 2009. And since then, Bitcoin has soared...
Bitcoin's value has surged more than 400% in the last 30 days. The digital currency has increased in value from $13 a year ago to more than $1,000 today... a 7,500%-plus return in just one year.
The Bitcoin market is tiny compared with other currencies. The value of all physical U.S. currency in circulation is $1.2 trillion... though that amount is growing every month. The foreign-exchange market – the largest and most liquid market in the world – sees $4 trillion in transactions daily. Even after its staggering run up... the combined value of all the Bitcoins in circulation is worth less than $9 billion.
Bitcoins are appealing for a few key reasons. It doesn't have a central bank to set market rates... The market decides the value.
When you want to buy, the seller charges you a price and takes an equivalent number of Bitcoins for the transaction. Those Bitcoins are his and only his.
Imagine what money would be like if there was no Federal Reserve. Remember, the Fed currently creates $85 billion every month... It has the power to create an unlimited amount of currency and buy whatever asset it chooses – government debt, mortgages, stocks, etc. It also sets key rates, namely the federal-funds rate (the rate banks lend to each other overnight), to manipulate a currency. That isn't possible with Bitcoins...
Bitcoin proponents argue that unlike dollars, you can't create Bitcoins at will... It takes time to "mine" new Bitcoins. Just like mining for gold, the process is challenging, time consuming, and requires capital.
The details can get technical, but in essence, every Bitcoin carries a unique numerical identifier... and it can't be just any string of numbers. That identifier must conform to a specific and complex pattern.
In order to create more Bitcoins, you have to use a computer, or a bank of computers, to search for a sequence of data that will produce a certain pattern when the Bitcoin algorithm is applied to it.
Bitcoin users can create only as many credits as the computers spit out numerical identifiers. It sounds complicated. And in practice, it is. But think of it in terms of prime numbers...
Starting out, it's easy to come up with prime numbers... 3, 5, 7, 11, etc... But as you go further and further out, it becomes more and more difficult to find the data you seek.
There are some clear similarities to mining. And it's no coincidence... The creators of Bitcoin – who remain largely anonymous – wanted the currency to emulate gold.
In a gold mine, the easiest ore to access is removed first. The first "block" of Bitcoin-sequenced data was easy to discover. Now, Bitcoin miners need banks of computers to discover more complex, new, authentic data.
After rapid expansion, the number of Bitcoins in circulation is starting to sputter.
To be clear, the amount of Bitcoin is technically infinite. It's only limited by the miners' ability to process greater and greater amounts of data.
It's similar to the "Peak Oil" argument... People thought global oil production was on a permanent decline until we discovered hydraulic fracturing (aka "fracking") and tapped massive, previously inaccessible reserves deep underground.
Some Bitcoin detractors, including Stansberry's Investment Advisory research analyst David Lashmet, believe quantum computing will render Bitcoin obsolete. Bitcoin backers acknowledge that risk, but counter that quantum computing is not yet reality and the Bitcoin protocol could adapt in response. You can be sure that if the opportunity to profit exists, people will discover a way to create more Bitcoins... It's basic economics.
So... is Bitcoin a fad or bubble?
The rush into Bitcoin started en masse last April... the same time the Mediterranean island nation of Cyprus was collapsing financially.
Cyprus – a banking haven for wealthy Europeans – needed a bailout because the politicians ran up more debt than it could handle. The bankers pressured the politicians, who turned to the citizens of Cyprus for the cash they needed. They seized a large percentage of personal bank accounts. For more on the situation in Cyprus, you can reread the March 18 Digest.
Cypriots and other wealthy Europeans stood by as the government confiscated their funds. In the face of outright, government-mandated theft, they started looking for another way to protect their wealth. Bitcoin was one option.
Of course, Cyprus is just a microcosm of the entire global economy – which is awash in cash, burdened with an unsustainable debt load, and grasping for solutions. The U.S. hasn't turned to robbing bank-account holders just yet...
Proponents argue the government can't manipulate this digital currency. The market decides its value. And you could carry out transactions securely and anonymously. The trade-off was the limited number of vendors willing to accept Bitcoin as a currency.
You may have heard of one of the largest Bitcoin marketplaces... Silk Road, the giant online drug marketplace. The government shut the website down and arrested its founder (who held around $80 million in Bitcoin). While the government successfully froze his account, it's not able to recoup the digital money. Regardless, this connection undoubtedly soiled Bitcoin's reputation.
But that's starting to change... Today, Bitcoin ATMs are popping up around the world. And more and more vendors are accepting the digital currency in lieu of fiat money.
So the rush into Bitcoin may be less about Bitcoin itself and more about people distrusting government-issued paper money.
And it's gaining traction... even with the least likely of groups: the Federal Reserve...
In a recent letter to the Senate Committee on Homeland Security, outgoing Fed Chairman Ben Bernanke said digital currencies encourage money-laundering and other risks. But he added, "There are also areas where they may hold long-term promise." His comments drove Bitcoin prices 35% higher in one day.
The currency is also gaining traction in China... BTCChina is the world's largest Bitcoin exchange, with around $60 million in daily transactions – nearly one-third of the global market. The company was officially registered in June.
Strong Chinese demand has also driven Bitcoin's rise... "If you look at Bitcoin from a technology perspective, you realize it cannot be boxed. And Chinese people love that," Bobby Lee, chief executive of BTCChina, told the Financial Times.
Bitcoin supporters compare the currency to gold... And people are talking about it at cocktail parties. Today, a friend asked me if he should buy it. And on my flight home to Georgia yesterday, two people asked me about it.
We're not so convinced. As far as we're concerned, Bitcoin is still a currency backed by nothing. The dollar is backed by the full faith and credit of a lying, cheating profligate government – one that (for now) remains the most powerful in the world.
Bitcoin is perpetuated by some anonymous computer geeks... and backed by no one. And for now, they're still priced in dollars. Remember... our fundamental belief is that real money is backed by something tangible... something you can hold in your hand. Computer-generated numbers don't solve that problem. What's to stop people from gaming the system or changing the rules?
Still, we think the popularity of Bitcoin reflects increasing skepticism with conventional, government-created money. People have seen how the government's shenanigans can wreck paper money... and they want an alternative. They're not wrong. But most people don't really understand money... so they're running to the next big idea.
We can't predict the future of digital currency. But we doubt the antidote to fiat currency is paperless digital credits... For now, we continue to urge you to put your faith in real, hold-in-your-hand money – and that means gold and silver bullion.
Meanwhile, there's still major capitulation in stocks...
Hugh Hendry, hedge-fund manager of Eclectica Management, was a long-term market bear... When I saw him speak at the Grant's Interest Rate Observer conference in New York City in April 2012, he was bearish. In particular, he was bearish on Japan.
That was before Prime Minister Shinzo Abe vowed to inflate the Japanese economy by printing unlimited amounts of money – a move Steve Sjuggerud dubbed "Abe's Revenge."
Last Friday, speaking at the Harrington Cooper investment conference, Hendry told the audience...
|
Bull markets climb a "wall of worry"... Eventually, a rising market attracts all naysayers. And this has been the case today. Hendry recognizes the fact...
|
Today, the trend remains up. And we're riding the market to new highs... But we're remaining cautious. As Porter wrote in the November 22 Digest Premium...
|
One bit of housekeeping: We will not be publishing a Digest tomorrow in observance of Thanksgiving. We hope you have a wonderful holiday.
New 52-week highs (as of 11/26/13): Automatic Data Processing (ADP), Chubb (CB), EnerSys (ENS), iShares Germany Fund (EWG), iShares Insurance Fund (IAK), iShares Biotechnology Fund (IBB), Kohlberg Kravis Roberts (KKR), ProShares Ultra KBW Regional Banking Fund (KRU), 3M (MMM), Navigators (NAVG), PowerShares Buyback Achievers Fund (PKW), Constellation Brands (STZ), and Wal-Mart (WMT).
Quiet day in the mailbag today... Mostly customer service requests. Friendly reminder – please send all customer service requests to info@stansberryresearch.com. They will be handled swiftly.
Regards,
Sean Goldsmith
Miami Beach, Florida
November 27, 2013
Editor's note: Today's Digest Premium is excerpted from the November 21 edition of Diary of a Rogue Economist. In it, Bill Bonner – founder of our corporate affiliate, Agora Inc. – shares a conversation he had with his 94-year-old mother explaining how Bitcoin works. The simplicity is enlightening. Like us, Bill is skeptical of Bitcoin. He likes physical, hold-in-your-hand gold more... But he likes that Bitcoin isn't controlled by the U.S. government.
Also, please note that we are running a special three-part Digest Masters Series over the weekend. Please look for your next Digest Premium on Monday.
We live in new era of experimental money. The supply of cash and credit can be expanded easily and almost infinitely – making it possible for the feds to do this kind of thing.
But here's the really remarkable story: The experimental money of the 1971-2013 period is now threatened by another monetary experiment.
We explained it to our 94-year-old mother:
"What is Bitcoin?" she asked.
"It's a new virtual currency. You know, it was created by some computer whiz. You can use it to buy things," I said.
"Who was this whiz?"
"Nobody knows. He is said to have been a Japanese programmer... or group of programmers."
"Do you have a Bitcoin? Could I see it?"
"No, it only exists in cyberspace."
"Where does it come from?"
"You have to find it in cyberspace, using computers plugged into the Internet."
"Oh. Well, I guess everyone with a computer is looking for them. How much is the new money worth?"
"It depends. It trades freely in cyberspace."
"But what makes it valuable?"
"Nothing... except that people are using it. And its supply is limited. We're going to begin using it in our business."
"But why would a merchant trade his valuable merchandise for something that has no value?"
"Well... that's what we do with the dollar."
"But the government guarantees the value of the dollar. They may not always do a good job of it. But at least they stand behind it. Who's guaranteeing the value of the Bitcoin?"
"Nobody. It's just the way the system has been set up. But remember, the supply of Bitcoins is limited, unlike the supply of dollars or euro or yen."
"You mean... nobody knows where it came from. Nobody has ever seen it. Nobody knows what it is worth. Nobody knows where to find it. And nobody stands behind it. Seems crazy to me."
Yes, dear reader, amazing things are beginning to happen.
When Bitcoin first came along, we didn't know what to make of it. We dismissed it as a silly fantasy perpetrated by techie dreamers.
Money you can't see? Money you can't hold in your hand or put in your safe? Money with no precious-metal backing... that no one stands behind? It sounded crazy.
At least the paper U.S. dollar has the full faith and credit of the United States of America backing it – for whatever that's worth.
The euro has the European Central Bank, Brussels, and Berlin (more or less) behind it.
Sterling has the Bank of England, the British Parliament, and the crown.
What has Bitcoin got? Nothing.
And yet, what currency has outperformed all others?
Bitcoin!
Hmmm... what to make of it?
We're not bullish on the new money... we're buggish. We like Bitcoin like we like gold. Only less.
Will it go up in price? We don't know.
But what we like about Bitcoin is the same thing the feds don't like about it. They can't control it. So they can't use it to steal from people. And they can't use it to bail out their friends... support zombies... or finance pointless wars.
Nor can they use Bitcoin to cover their deficits or to manipulate the economy.
But wait...
Why can't the feds put their enormous computing power to work mining for Bitcoin? That way, if Bitcoin becomes the coin of the realm, they could still control it... with a huge reserve of their own.
Are they too busy spying on people?
Are they too thick to see the potential?
Are we missing something?
– Bill Bonner
Editor's note: In Bill's newest project, he's revealing a way to create and pass millions of dollars – tax-free – to your children and grandchildren. To learn more about this opportunity, click here.
Bitcoin, as explained to a 94-year-old...
We continue our discussion of Bitcoin in today's Digest Premium. In this piece, Agora founder Bill Bonner explains Bitcoin to his 94-year-old mother. And he expresses his skepticism of the virtual currency...
To continue reading, scroll down or click here.
Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)
As of 11/26/2013
| Stock | Symbol | Buy Date | Return | Publication | Editor |
| Rite Aid 8.5% | 767754BU7 | 02/06/09 | 683.6% | True Income | Williams |
| Prestige Brands | PBH | 05/13/09 | 455.7% | Extreme Value | Ferris |
| Enterprise | EPD | 10/15/08 | 243.0% | The 12% Letter | Dyson |
| Constellation Brands | STZ | 06/02/11 | 231.9% | Extreme Value | Ferris |
| Ultra Health Care | RXL | 03/17/11 | 202.3% | True Wealth | Sjuggerud |
| Altria | MO | 11/19/08 | 178.4% | The 12% Letter | Dyson |
| McDonald's | MCD | 11/28/06 | 173.8% | The 12% Letter | Dyson |
| Ultra Health Care | RXL | 01/04/12 | 164.0% | True Wealth Sys | Sjuggerud |
| Hershey | HSY | 12/06/07 | 159.8% | SIA | Stansberry |
| Automatic Data Proc | ADP | 10/09/08 | 152.2% | Extreme Value | Ferris |
Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.
| Top 10 Totals |
| 1 | True Income | Williams |
| 3 | Extreme Value | Ferris |
| 3 | The 12% Letter | Dyson |
| 1 | True Wealth | Sjuggerud |
| 1 | True Wealth Sys | Sjuggerud |
| 1 | SIA | Stansberry |
Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)
| Investment | Sym | Holding Period | Gain | Publication | Editor |
| Seabridge Gold | SA | 4 years, 73 days | 995% | Sjug Conf. | Sjuggerud |
| ATAC Resources | ATC | 313 days | 597% | Phase 1 | Badiali |
| JDS Uniphase | JDSU | 1 year, 266 days | 592% | SIA | Stansberry |
| Silver Wheaton | SLW | 1 year, 185 days | 345% | Resource Rpt | Badiali |
| Jinshan Gold Mines | JIN | 290 days | 339% | Resource Rpt | Badiali |
| Medis Tech | MDTL | 4 years, 110 days | 333% | Diligence | Ferris |
| ID Biomedical | IDBE | 5 years, 38 days | 331% | Diligence | Lashmet |
| Northern Dynasty | NAK | 1 year, 343 days | 322% | Resource Rpt | Badiali |
| Texas Instr. | TXN | 270 days | 301% | SIA | Stansberry |
| MS63 Saint-Gaudens | 5 years, 242 days | 273% | True Wealth | Sjuggerud |
Bitcoin, as explained to a 94-year-old...
We continue our discussion of Bitcoin in today's Digest Premium. In this piece, Agora founder Bill Bonner explains Bitcoin to his 94-year-old mother. And he expresses his skepticism of the virtual currency...
To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.
Our take on Bitcoin... Bernanke sees the value... The last bull?... 'A simple matter of following my trailing stops'... Where to send customer service requests...
In today's Digest, we discuss currencies...
In particular, we discuss the new digital currency, Bitcoin, that has stolen headlines lately... and has made a host of speculators rich.
We're not experts on the topic. We're intrigued by any idea that threatens to take power from the government and return it to individuals.
Before we begin, a short definition of what Bitcoin is. (Digest Premium subscribers will read more about Agora founder Bill Bonner's take on Bitcoin today.)
Bitcoin is a digital currency that allows two individuals to transact without an intermediary – so-called "peer-to-peer technology." Satoshi Nakamoto first introduced the concept of a digital currency in 2009. And since then, Bitcoin has soared...
Bitcoin's value has surged more than 400% in the last 30 days. The digital currency has increased in value from $13 a year ago to more than $1,000 today... a 7,500%-plus return in just one year.
The Bitcoin market is tiny compared with other currencies. The value of all physical U.S. currency in circulation is $1.2 trillion... though that amount is growing every month. The foreign-exchange market – the largest and most liquid market in the world – sees $4 trillion in transactions daily. Even after its staggering run up... the combined value of all the Bitcoins in circulation is worth less than $9 billion.
Bitcoins are appealing for a few key reasons. It doesn't have a central bank to set market rates... The market decides the value.
When you want to buy, the seller charges you a price and takes an equivalent number of Bitcoins for the transaction. Those Bitcoins are his and only his.
Imagine what money would be like if there was no Federal Reserve. Remember, the Fed currently creates $85 billion every month... It has the power to create an unlimited amount of currency and buy whatever asset it chooses – government debt, mortgages, stocks, etc. It also sets key rates, namely the federal-funds rate (the rate banks lend to each other overnight), to manipulate a currency. That isn't possible with Bitcoins...
Bitcoin proponents argue that unlike dollars, you can't create Bitcoins at will... It takes time to "mine" new Bitcoins. Just like mining for gold, the process is challenging, time consuming, and requires capital.
The details can get technical, but in essence, every Bitcoin carries a unique numerical identifier... and it can't be just any string of numbers. That identifier must conform to a specific and complex pattern.
In order to create more Bitcoins, you have to use a computer, or a bank of computers, to search for a sequence of data that will produce a certain pattern when the Bitcoin algorithm is applied to it.
Bitcoin users can create only as many credits as the computers spit out numerical identifiers. It sounds complicated. And in practice, it is. But think of it in terms of prime numbers...
Starting out, it's easy to come up with prime numbers... 3, 5, 7, 11, etc... But as you go further and further out, it becomes more and more difficult to find the data you seek.
There are some clear similarities to mining. And it's no coincidence... The creators of Bitcoin – who remain largely anonymous – wanted the currency to emulate gold.
In a gold mine, the easiest ore to access is removed first. The first "block" of Bitcoin-sequenced data was easy to discover. Now, Bitcoin miners need banks of computers to discover more complex, new, authentic data.
After rapid expansion, the number of Bitcoins in circulation is starting to sputter.
To be clear, the amount of Bitcoin is technically infinite. It's only limited by the miners' ability to process greater and greater amounts of data.
It's similar to the "Peak Oil" argument... People thought global oil production was on a permanent decline until we discovered hydraulic fracturing (aka "fracking") and tapped massive, previously inaccessible reserves deep underground.
Some Bitcoin detractors, including Stansberry's Investment Advisory research analyst David Lashmet, believe quantum computing will render Bitcoin obsolete. Bitcoin backers acknowledge that risk, but counter that quantum computing is not yet reality and the Bitcoin protocol could adapt in response. You can be sure that if the opportunity to profit exists, people will discover a way to create more Bitcoins... It's basic economics.
So... is Bitcoin a fad or bubble?
The rush into Bitcoin started en masse last April... the same time the Mediterranean island nation of Cyprus was collapsing financially.
Cyprus – a banking haven for wealthy Europeans – needed a bailout because the politicians ran up more debt than it could handle. The bankers pressured the politicians, who turned to the citizens of Cyprus for the cash they needed. They seized a large percentage of personal bank accounts. For more on the situation in Cyprus, you can reread the March 18 Digest.
Cypriots and other wealthy Europeans stood by as the government confiscated their funds. In the face of outright, government-mandated theft, they started looking for another way to protect their wealth. Bitcoin was one option.
Of course, Cyprus is just a microcosm of the entire global economy – which is awash in cash, burdened with an unsustainable debt load, and grasping for solutions. The U.S. hasn't turned to robbing bank-account holders just yet...
Proponents argue the government can't manipulate this digital currency. The market decides its value. And you could carry out transactions securely and anonymously. The trade-off was the limited number of vendors willing to accept Bitcoin as a currency.
You may have heard of one of the largest Bitcoin marketplaces... Silk Road, the giant online drug marketplace. The government shut the website down and arrested its founder (who held around $80 million in Bitcoin). While the government successfully froze his account, it's not able to recoup the digital money. Regardless, this connection undoubtedly soiled Bitcoin's reputation.
But that's starting to change... Today, Bitcoin ATMs are popping up around the world. And more and more vendors are accepting the digital currency in lieu of fiat money.
So the rush into Bitcoin may be less about Bitcoin itself and more about people distrusting government-issued paper money.
And it's gaining traction... even with the least likely of groups: the Federal Reserve...
In a recent letter to the Senate Committee on Homeland Security, outgoing Fed Chairman Ben Bernanke said digital currencies encourage money-laundering and other risks. But he added, "There are also areas where they may hold long-term promise." His comments drove Bitcoin prices 35% higher in one day.
The currency is also gaining traction in China... BTCChina is the world's largest Bitcoin exchange, with around $60 million in daily transactions – nearly one-third of the global market. The company was officially registered in June.
Strong Chinese demand has also driven Bitcoin's rise... "If you look at Bitcoin from a technology perspective, you realize it cannot be boxed. And Chinese people love that," Bobby Lee, chief executive of BTCChina, told the Financial Times.
Bitcoin supporters compare the currency to gold... And people are talking about it at cocktail parties. Today, a friend asked me if he should buy it. And on my flight home to Georgia yesterday, two people asked me about it.
We're not so convinced. As far as we're concerned, Bitcoin is still a currency backed by nothing. The dollar is backed by the full faith and credit of a lying, cheating profligate government – one that (for now) remains the most powerful in the world.
Bitcoin is perpetuated by some anonymous computer geeks... and backed by no one. And for now, they're still priced in dollars. Remember... our fundamental belief is that real money is backed by something tangible... something you can hold in your hand. Computer-generated numbers don't solve that problem. What's to stop people from gaming the system or changing the rules?
Still, we think the popularity of Bitcoin reflects increasing skepticism with conventional, government-created money. People have seen how the government's shenanigans can wreck paper money... and they want an alternative. They're not wrong. But most people don't really understand money... so they're running to the next big idea.
We can't predict the future of digital currency. But we doubt the antidote to fiat currency is paperless digital credits... For now, we continue to urge you to put your faith in real, hold-in-your-hand money – and that means gold and silver bullion.
Meanwhile, there's still major capitulation in stocks...
Hugh Hendry, hedge-fund manager of Eclectica Management, was a long-term market bear... When I saw him speak at the Grant's Interest Rate Observer conference in New York City in April 2012, he was bearish. In particular, he was bearish on Japan.
That was before Prime Minister Shinzo Abe vowed to inflate the Japanese economy by printing unlimited amounts of money – a move Steve Sjuggerud dubbed "Abe's Revenge."
Last Friday, speaking at the Harrington Cooper investment conference, Hendry told the audience...
|
Bull markets climb a "wall of worry"... Eventually, a rising market attracts all naysayers. And this has been the case today. Hendry recognizes the fact...
|
Today, the trend remains up. And we're riding the market to new highs... But we're remaining cautious. As Porter wrote in the November 22 Digest Premium...
|
One bit of housekeeping: We will not be publishing a Digest tomorrow in observance of Thanksgiving. We hope you have a wonderful holiday.
New 52-week highs (as of 11/26/13): Automatic Data Processing (ADP), Chubb (CB), EnerSys (ENS), iShares Germany Fund (EWG), iShares Insurance Fund (IAK), iShares Biotechnology Fund (IBB), Kohlberg Kravis Roberts (KKR), ProShares Ultra KBW Regional Banking Fund (KRU), 3M (MMM), Navigators (NAVG), PowerShares Buyback Achievers Fund (PKW), Constellation Brands (STZ), and Wal-Mart (WMT).
Quiet day in the mailbag today... Mostly customer service requests. Friendly reminder – please send all customer service requests to info@stansberryresearch.com. They will be handled swiftly.
Regards,
Sean Goldsmith
Miami Beach, Florida
November 27, 2013