Why Bitcoin Won't Replace Cash

Get ready for more stupidity on Capitol Hill... What you should know about Facebook's new cryptocurrency... 'Digital gold' vs. 'digital cash'... Why bitcoin won't replace cash... But libra might...

Mr. 'Big Bank,' what are you doing to help?

Congresswoman Maxine Waters glared at the lineup of bank executives...

Waters, who is in her 15th term representing California, serves as the chairwoman of the U.S. House Financial Services Committee. And this past April, she "grilled" the CEOs of the largest U.S. banks at a congressional hearing.

Waters implied that the banks had contributed to the current student-loan crisis. Today, Americans carry about $1.6 trillion in outstanding student debt, and defaults are mounting. During the hearing, Waters asked the CEOs...

What are you guys doing to help us with this student-loan debt? Who would like to answer first? Mr. Moynihan, big bank.

Brian Moynihan, the CEO of Bank of America (BAC), answered that his bank had stopped making student loans around 2007...

Michael Corbat, the CEO of Citigroup (C), said his bank exited student lending in 2009...

Then, Jamie Dimon, the CEO of JPMorgan Chase (JPM), explained to Waters that the government had essentially taken over the student-loan market in 2010 when it cut banks out of the process.

In other words, for the past nine years, the government has been solely responsible for extending loans to students...

These are loans that, in many cases, they cannot hope to repay.

And yet, Waters was unaware that the banks under her purview don't offer loans to students anymore.

Quickly realizing her question was dumb, Waters abruptly changed the topic. "Thank you," she said. "What about small business?"

I (Alan Gula) can't help but wonder... If the chairwoman of the House Financial Services Committee is this clueless about banking, how lost will she be with cryptocurrencies?

Facebook (FB) executives will soon find out...

On July 16, they will testify before the U.S. Senate. The following day, they'll have a hearing with Waters and the House Financial Services Committee.

These meetings will take place because lawmakers are concerned about Facebook's recently announced plans for libra, a new cryptocurrency.

Waters has already demanded that Facebook halt development of libra until the government can get a better handle on what it is. As she said on CNBC a couple of weeks ago...

We just can't allow [Facebook] to go to Switzerland with all of its associates and begin to compete with the dollar.

What Waters is saying is complete nonsense. And it confirms that she hasn't done any research on libra.

I've read Facebook's 'white papers' on libra...

And I have to admit, I'm intrigued.

The creators of libra (which include many other firms in addition to Facebook) want to make it as widely accepted as possible. It's intended to be a stable, secure, and global currency.

That's a description we wouldn't associate with bitcoin – the first and most popular cryptocurrency. But again, this is by design.

Whereas bitcoin is like "digital gold," libra promises to be the closest thing yet to "digital cash."

Let me explain...

To start, let's quickly review what makes bitcoin so unique as an asset...

First, bitcoin is "trustless"...

Fiat currencies – like the U.S. dollar, euro, and Japanese yen – are issued and controlled by the government. As a result, you have to trust the government not to debase the currency and cause inflation. (In many emerging markets, like Venezuela, that risk has proven real.)

Put your fiat currency in a commercial bank and you have to trust that bank not to fail. (Savers who held money in Cypriot banks had a "haircut" on their bank deposits in 2013.)

Bitcoin, on the other hand, involves no such trust...

At its heart, bitcoin is a computer protocol. It's a set of rules in computer code that allow for unrestricted value transfers. And it was designed so that no one has to trust anyone else for it to function.

With bitcoin, you don't need to have faith in fiat currencies or the banking system... You just have to trust the technology.

Second, bitcoin is scarce...

In a Digest last November, I explained how a blockchain is just an inefficient database. And there are many blockchains out there.

The bitcoin blockchain keeps track of how much bitcoin each "address" holds. Therefore, the blockchain technology allows for scarcity in the digital realm. You can't duplicate or double-spend bitcoin.

There are currently around 17.8 million bitcoin in existence. All bitcoin are the same (or "fungible"). The supply of bitcoin increases gradually, but there will only ever be a maximum of 21 million bitcoin in existence (according to the protocol).

Finally, bitcoin is incredibly volatile...

Its value fluctuates wildly. But that's also part of its allure.

Back in November, I said that I was bullish on bitcoin over the long term. At the time, bitcoin was trading around $3,700. It rose to nearly $14,000 by the end of last month. And it has since pulled back to around $10,000. These are wild trends and swings.

But this extreme volatility makes it a poor "medium of exchange." Merchants are reticent (rightly) to accept it as payment if its value can suddenly plummet.

You may recognize these as some of the defining characteristics of gold...

Like bitcoin, gold is trustless. Gold isn't any entity's liability. And you don't have to trust central bankers or the banking system to hold gold... quite the contrary.

Gold is also scarce. There's a limited amount of it in the Earth's crust... even though more of it is mined each year.

Furthermore, gold's price is volatile (although not nearly as volatile as bitcoin's). And as Porter explained in last Friday's Digest, gold is poised for a big rally.

Neither bitcoin nor gold is an ideal medium of exchange. Not many stores or websites accept either as payment for goods or services.

With all of these similarities, it's no wonder why bitcoin can be thought of as "digital gold."

Libra, on the other hand, doesn't share many characteristics with either gold or bitcoin. It will be neither trustless nor scarce. But these are features, not "bugs"...

As I mentioned, Facebook isn't the only company working on the libra project...

The Libra Association governs libra. The association is an independent, not-for-profit membership organization based in Switzerland.

Facebook is just one of the 28 founding members of the Libra Association...

The group includes an impressive list of companies, like payment-service providers Visa (V) and PayPal (PYPL)... ride-hailing services Lyft (LYFT) and Uber (UBER)... online travel advisor Booking Holdings (BKNG)... and music-streaming platform Spotify (SPOT).

Cryptocurrency broker/exchange Coinbase is also a founding member, as is venture capital firm Andreessen Horowitz.

Facebook has said it hopes the association will grow to 100 members before the official libra launch in 2020.

You have to trust the Libra Association (and the representatives on the Libra Association Council) to have faith in libra.

Unlike bitcoin, Libra will operate on top of the monetary and banking system...

Libra will be fully backed by a "reserve" – a basket of fiat currencies held in the form of bank deposits and short-term government debt. This will give libra intrinsic value.

The reserve will also make libra's value relatively stable... although its value won't perfectly track any one currency.

Even if libra starts with a one-to-one exchange rate with the dollar, it won't stay there for long. The other currencies in the basket will fluctuate with the dollar.

In turn, libra's value relative to the dollar will change.

Finally, libra 'coins' won't be scarce, nor will they pay interest...

The Libra Association can create or destroy as much libra as necessary, depending on supply and demand from users.

Let's say a user purchases libra with fiat currency from an authorized dealer. The fiat goes into the reserve and the association "mints" new libra.

The Libra Association receives the interest income from the reserve. Some of that will compensate it for the costs of running the libra network. But the Libra Association won't pass any excess income on to the holders of libra.

So the association has an incentive to grow the reserve (as long as interest rates are positive for most of the currency in the reserve).

A lack of interest income isn't a flaw with libra...

There's an argument to be made that a good medium of exchange shouldn't pay interest.

You wouldn't want to hoard cash under your mattress... because those dollar bills don't pay interest.

The Libra Association's members don't want people hoarding libra, either. They want you to spend it.

It's worth pointing out that there are no commercial banks in the Libra Association...

That may change. But it seems to me that widespread libra adoption could be negative for the banks... and that could explain their absence.

Let's say you purchase a $500 hotel stay on Booking Holdings' booking.com. To pay, you use your Chase credit card issued by JPMorgan.

There are fees involved. And the interchange fee that goes to the card-issuing bank can be around 2%. In this case, that's $10 that the merchant – Booking Holdings – effectively has to pay.

Now, let's say you pay Booking Holdings with $500 worth of libra instead. Booking Holdings doesn't have to pay the interchange fee to JPMorgan. In turn, Booking Holdings could give you a discount...

Pay with a credit card and it'll cost you $500. Pay with libra and it'll cost the libra equivalent of $495.

Of course, you'll still have to pay fees to convert your dollars to libra.

This previous example is just hypothetical... But if enough merchants accept libra and enough consumers pay with it, it could reduce the fee income going to card-issuing banks.

All of this suggests Libra could be a promising 'digital cash'...

Because its value will be stable (unlike bitcoin), libra could become a medium of exchange for hundreds of millions of people around the world.

And libra could be useful for sending money overseas (or "cross-border remittances").

It could prove especially useful for people living in emerging markets, where fiat currencies often suffer from high inflation rates.

But I don't expect to hear much about any of this at the congressional hearings later this month...

Instead, I suspect politicians will ask two specific questions...

The first will center on money laundering. Facebook executives will explain that all of the authorized dealers (or "on-ramps" to libra) will have anti-money-laundering protections. And once you convert your currency to libra, your activity can be tracked. That's not the case with paper bills. Criminals will still be better off with cash.

The other question will surely pertain to data privacy. Facebook has already confirmed that it won't use any payment data derived from libra for ad targeting.

Besides that, I hope the politicians (and Waters, in particular) don't embarrass themselves once again. If we're lucky, they'll throw in at least one or two smart questions.

Regardless, if the impressive list of companies in the Libra Association is any indication, libra has the potential to finally take cryptocurrencies mainstream.

The American Jubilee Watch

The student debt crisis is growing...

And now, it's beginning to weigh on even the oldest Americans.

In fact, according to a 2018 report by the Federal Reserve Bank of New York, folks aged 60 and older are the fastest-growing group of student-loan borrowers...

Most people hear "student debt" and think of twenty-somethings who owe tens of thousands of dollars (or more) in loans.

But the reality is that millions of folks in their 40s, 50s, 60s, and even older – many of whom are already struggling to reach their retirement goals – are increasingly shouldering this burden, too. And these folks have long held tremendous influence in U.S. elections.

Make no mistake... the political pressure to "do something" about these massive debt burdens could soon be unstoppable.

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The feedback on Porter's must-read Friday Digest continues to roll in. As always, send your comments and questions to feedback@stansberryresearch.com.

"Great letter! I had come to the same conclusions about the need to hedge against paper currencies, and I also understand and follow technology. So late last year and early this year moved 15% of my (modest) resources into bitcoin (already up nearly 3x) and have been readying myself to up my gold and gold stock allocation to 15%. (Thanks for the useful nudge, will move). The rest is positioned to benefit from the 'Melt Up,' but with a plan to go to cash (or bitcoin or gold) when it is time. I have also insisted my son read your letter, and have opened a bitcoin account for my daughter. Thanks again for your insights, stewardship, and passion." – Paid-up subscriber Al H.

"Yes to all (your questions at the end). My only wisdom is knowing that I can trust your insights and your commitment to us. Interesting times are coming." – Paid-up subscriber George M.

"Porter, other than 'THANK YOU,' I'll say your Friday Digests are never too long. Anything more would just be repeating the positive comments of others." – Paid-up Stansberry Alliance member Steve V.

"Hello Porter, I've been following you & Steve on & off for nearly 19 years. In the last 2 years I finally found the time & resources to sign up to several newsletters. You are a great writer & I love your teachings. The world IS going to Hell in a hand cart! Richard Nixon has a lot to answer for.

"I currently have modest positions in several gold related stocks... I also own bitcoin. I started buying in 2018 (not the best timing) & recently added in March, so have seen good gains there. I believe in its future. I will definitely be listening to George Gilder. After reading this Digest I think you have finally convinced me it is time to buy physical gold & silver. Thanks again for all your advice." – Paid-up subscriber Greg S.

"Hey guys, great timing picking up John Doody's research for your Alliance members like me. I have been buying gold since it was in the $300 range and have yet to sell an ounce. Our savings account we hope to give to our children, but it's there if we need it.

"With gold consolidating for so long, many have given up. But they do not see gold in its true light. It has just broken out. Good work on your part, but I expected no less from Stansberry. You guys are great!" – Paid-up Stansberry Alliance member Peter H.

"Dear Porter, I have read almost everything you have written to us, and by far, this was the best. Thank you so much for this very enlightening article. I am happy to say that I have invested in all of the recommendations in Stansberry Gold & Silver Investor, most of Steve's True Wealth and True Wealth Systems recommendations, and both of Doc's option services. You will also be amused that I am a lifetime member of John Doody's Gold Stock Analyst. I have been buying his recommendations for years. This is truly an awesome acquisition for Stansberry Research. Thank you again for all of the 'teaching' that you do!" – Paid-up Stansberry Alliance member Allen C.

"Porter, I continue to be amazed at the incredible value that being an Alliance member has proven to be. It was a big bite for me at the time but is some of the best money I have ever spent.

"Re: Precious metals. I already have about 15% in that sector and am thinking of getting in further than that over the coming days. Re: Bitcoin. Don't feel like the lone cowboy on missing that boat. I was pressed to get in at below a dollar AND DIDN'T. I'm looking forward to the Gilder presentation to educate myself, but I still can't help but think of bitcoin, not as a tulip, but as a glorified Ponzi that governments will find their way into harvesting once it becomes big enough for them to go after.

"Looking forward to the learning. Great Digest Friday. Length is quite okay if there is depth of content to go with it." – Paid-up Stansberry Alliance member Robert H.

"I have only been a subscriber since October 2018, but I want to let you know how much I appreciate all the work done at Stansberry. I started with one subscription to Stansberry's Investment Advisory. I quickly became a Stansberry fan, and one subscription quickly grew to 8 subscriptions. My husband was a bit more skeptical of Stansberry, and often questioned why I kept signing up for more services. As time has gone by, he is slowly realizing the value Stansberry provides. In addition to the subscriptions, I appreciate and rely upon the insight offered in the Stansberry Digest and NewsWire to guide me through investment decisions on a daily basis.

"I especially want you to know that this past Friday's Digest from Porter was a highlight and very much appreciated. I reread it several times to make sure I understood everything. I intend to quickly put his suggestions to use, namely, making sure we have enough allocated to gold & silver both in stocks & physical commodities, buying Bitcoin (I've already signed up for Mr. Gilder's service), and ensuring I have the correct allocation in place for the 'Melt Up.'

"Thank you for being so straightforward and honest when guiding your subscribers through these volatile times. I really feel that you are protecting us from possible future mistakes and helping us prepare by being proactive now. Please know your efforts are very much appreciated." – Paid-up subscriber Kami B.

Regards,

Alan Gula
Baltimore, Maryland
July 2, 2019