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Bitcoin Has No Intrinsic Value? Neither Does the Dollar, According to St. Louis Fed

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Bitcoin has seen its fair share of criticism from central bankers, but for two analysts at the St. Louis Fed, cryptoassets could be the wave of the future.

In a recently published paper, Aleksander Berentsen and Fabian Schar of the St. Louis Federal Reserve argue that cryptocurrencies are “well suited to become an important asset class.”  As one might expect, this way of thinking is not common within institutional circles or even government.

The paper is intended as a primer on cryptocurrencies, delving into the technical details of transactions and mining. In the Outlook section, the authors maintain that bitcoin’s most apparent application is holding value as an asset. In time, bitcoin can emerge as its own asset class, giving investors broad diversification benefits.

Interestingly, Berentsen and Schar argue that bitcoin itself “could over time assume a similar role as gold.” This argument has been posed before by those who view bitcoin as a long-term store of value. Investment adviser Ark Invest has explained that bitcoin could store $25 billion worth of value if it usurped only 1% of gold’s role as a private investment.

Bitcoin and gold have diverged sharply in recent weeks, as the cryptocurrency’s nouveau riche sought refuge in bullion following an unprecedented decline in the crypto market. Gold prices clocked in at four-month highs recently, while bitcoin plunged 50% from last month’s record levels.

Bitcoin Has No Intrinsic Value? Neither Does the Dollar

One of the chief criticisms levied at bitcoin and other cryptocurrencies is their lack of intrinsic value. According to the authors, the same criticism can also be directed at fiat money like the dollar.

“… Bitcoin is not the only currency that has no intrinsic value,” they argue. “State monopoly  currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system.”

It goes virtually without saying that the views expressed by Berensten and Schar are rarely uttered in the world of central banking. After all, these are the very institutions in charge of monetary policy (a fancy word for the size and growth rate of the money supply).

The Federal Reserve has expressed keen interest in bitcoin, and has confirmed that it too is thinking about creating its own digital currency. Like other central banks, the Fed is also interested in distributed ledger technology to facilitate payments, clearing and settlement.

It has been tough to ignore bitcoin’s growing sphere of influence. The cryptocurrency, which started off as an obscure and esoteric entity, has spawned a multi-billion-dollar economy that connects startups, investors and consumers. At its height, the cryptocurrency market reached $830 billion. That was a mere 12 days ago. Even after the latest drop, the market cap for all 1,400+ coins is in excees of $564 billion, according to CoinMarketCap.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 664 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Altcoins

Bitcoin Cash Price Analysis: BCH/USD May Have to Return to $400, Before Big Bull Buying

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  • BCH/USD price action did form a potential double top formation, subject to a move back towards the neckline.
  • The RSI indicates price is oversold via the 4-hour chart view, after bouncing in early hours of Monday.

The Bitcoin Cash price remains firmly on the back foot. As a result, of a top area being produced within a heavy touted supply zone. This can be seen within the $650 price region, which as a result has caused BCH/USD bulls to falter in their tracks north. Back in the very early part of September and most recently on 7th November has seen the sellers pile in at this area.

BCH/USD daily chart

Given the current price behavior it would suggest technically, the bears are looking to force a retreat, Eyes would be towards the neckline of the set up. This would see BCH/USD returning to $410, as demonstrated during the selling pressure back in early September. A likely area to attract buyers back in, a failure however to see this area of support hold, could be very punishing indeed.

Possible Neckline Breach

BCH/USD Neckline

Should a breakout to the downside from the $410 area support occur, heavy selling pressure may be seen. Eyes would then be on for a potential steep fall, down towards $285, the next major level of support. BCH/USD last traded down here on 13th October 2017, after seeing a chunky breach through the above-mentioned neckline.

4-hour Chart View

BCH/USD 4-hour chart

Looking via the 4-hour chart view, BCH/USD price action is moving within a descending channel formation. This is very much subject to a potential breakout to the upside; however, as described above, the price may need to retreat towards $410. Near-term resistance can be immediately seen at $530, which is the upper part of the channel.

The resistance above trend line of the detailed technical set up should this continue to hold; it raises the case to the top formation play out. A breakout to the upside now could send BCH/USD flying back for a retest of the $650 region supply. To the downside, support should be noted around the psychological $500 level.

As detailed above with the descending channel, this could also be perceived as a text book bull flag pattern. Such a move coming into play after a decent run higher, to then cool, ahead of another burst to the north. Looking via the RSI, it did hit a bottom, running into oversold territory. This occured in early hours of today – Monday 12th November.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 50 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Altcoins

The New Frontier Created By Security Tokens

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It is common to hear that cryptocurrencies and blockchain technology are going to revolutionize the way nearly every industry does business, but many have been left asking what a bunch of pump n’ dump ICOs have to do with a seismic shift in the way the global economy is organized.

Security tokens are now presenting a unique solution, or “take”, on investing in illiquid assets, and it creates an opportunity for everyone.

The Illiquidity Problem

If you are out shopping, you can buy a product, like it, and then decide to buy shares in the company that makes it. Then, if you decide you no longer believe that company has a bright future, you can easily sell those shares in minutes. However, if you see an apartment building or house in your neighborhood that you think deserves to be priced higher, you can hardly just buy it that day. And you definitely can’t sell it within minutes.

Illiquid investments like this have a disadvantage to assets that are traded on exchanges. The longer holding period brings in more risk, which in turn creates a higher required rate of return. As a result, it is common to see lower prices due to this lack of liquidity.

Security tokens propose a solution where you securitize these assets and make it possible to trade them just like a regular equity. They are essentially a digital representation of your ownership (or share of ownership) of a certain asset.  The beauty of security tokens is they make it possible to trade equity in any asset, even the ones which were previously too illiquid for this to be possible.

The Wider Effect

Real estate isn’t the only type of asset that can be helped by security tokens. Small businesses would also be able to raise funds without having to do a complicated equity raise. You also have the route of securitizing artwork and other unique assets. Basically, security tokens have the potential to change the entire finance and investing world.

There are a few effects these tokens may have on the economy. First, they free up funds and make us cash richer in a sense. This allows for money to flow more efficiently, because investors are less “locked in” to investments.

Management of these tokens would still have to have restrictions that are in line with the regulations currently in place. There would still be barriers to access, but the facilitation would be much easier than having to get all the necessary personal connections required to invest in these types of illiquid assets. Instead, you would probably be joining a white list of people who are accredited investors and have the proper residency status.

An Early Opportunity

There are two reasons you should consider expanding your investment portfolio into security tokens. First, it allows you to get exposure to many tangible assets, and that acts as a good hedge against all the high-volatility crypto-assets.

But second, security assets make more sense to the layman, and may end up serving as a gateway drug of sorts. As we saw many new investors pile into Bitcoin in late 2017, we may see even more start to test the water with crypto-assets, and begin with security tokens.

Security tokens are still in their early adaptation phase, but you can purchase them on exchanges like tZero, Blocktrade, and Open Finance. The innovation of being able to lock in funds without locking in investors creates a win-win situation for both parties.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Bitcoin

Should Asset Managers Be Scooping Up Bitcoin?

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Back in the days of the first tech boom, a wild phenomenon occurred. The heads of all the biggest funds would watch their competitors put money into a company and would do the exact same, purely out of the fear of missing out. They couldn’t handle the fact that if they didn’t put their money in and that stock went to the moon, they might end up out of a job.

As we have gone through the first big wave of the crypto and blockchain boom, one has to ask: how are asset managers going to handle things this time? Will it be the same mistake, or have the mechanism evolved to the point that will save these investors from themselves?

The Asset Manager’s Goal

From the outside, every asset manager’s goal looks the same: make lots of money. They are tasked with taking some money and turning it into more money. Pretty simple, right? But in reality, the business is much more complicated than that.

The first thing asset managers seek is “alpha”, which is a premium return above the market. They need to beat the market to prove they are adding value to their investors’ portfolio, otherwise those investors could just index into the market.

But alpha is hard to find. So a secondary goal pops up: “beta”. Beta is the level of correlation with the market. The higher the beta, the more it reacts in line with changes in the market as a whole. The lower beta investments are the ones whose stocks move in an almost completely unrelated manner to what the market is doing. One example of a low beta investment is gold. It almost moves counter to the market, since it is viewed as a hedge to the economy as a whole.

What is Bitcoin to An Asset Manager?

Asset managers can look at Bitcoin and see one of two things. They can view it as a potential source of alpha, or they can see it as having extremely low beta. It really depends on the manager, but unless they have a very high understanding of the crypto space, they won’t invest in it for alpha alone. Crypto hedge funds are the ones more likely to try and gain specific knowledge and make money focusing on certain coins within the industry.

A more broad-minded asset manager would view crypto as a hedge to the overall market, just in case something happens. This doesn’t just mean Bitcoin is a bet against gold, the Fed, or the USD. It is more of an “insurance policy” in case something like that were to ever happen.

The Big Difference

The fact is that VC’s and angels roll in very different circles from hedge funds because of the knowledge required to get “alpha”. Investing may require some hubris and risk-taking, but you lose your shirt in the long-run if you don’t defer to experts in certain fields. The amount of a time investment it would take for an asset manager to be comfortable choosing individual coins isn’t justified by the small amount of money they would make on it. Crypto, after all, would always remain a tiny proportion of their portfolio. This is exactly why you won’t see any big hedge funds getting into crypto investing in a huge way any time soon.

The heads of these funds have a massive amount of power. They can move a lot of money and change the fates of companies (and maybe industries) based on the way they invest. Yet they are never confused about the fact they are dealing with other people’s money and must protect and manage this money with extreme prudence. The money is a liability as well as an asset. The more money they get given by investors, they are expected to deliver even more back.

As a result, this generally leads to a few “needs” in terms of an investment. First of all, hedge funds end up much less likely to deal with companies which may face a solvency crisis. Any company that could disappear has to large a potential loss and isn’t worth the risk. There is also the factor of retaining full control over an asset, being able to sell it when needed, and not getting sued by their investors.

What is Holding Them Back?

Bitcoin comes in pretty weak on all those fronts. As the oldest of the cryptocurrencies, it has the most likelihood of staying around longer, but there are still limited chances on that. It isn’t hard to imagine how skeptical this would leave an asset manager.

You might be asking yourself what could possibly be stopping these asset managers from investing in cryptocurrencies in the same way that you are. And the answer is simple: it is a lot easier to buy $100 of Bitcoin than $1,000,000 of Bitcoin. Institutions generally love vehicles like ETFs for putting their money in, but all of the current options, such as Grayscale’s Bitcoin Investment Trust, are open-ended funds that trade at a massive (50-100%) premium to net asset value. This creates a massive disconnect that makes it infeasible for investors to currently invest in the market.

Once an ETF is approved by the SEC, this premium is likely to disappear. You can do two things with that. First, you can short any existing ETFs in any way possible, or you can go long Bitcoin in preparation for an eventual spike in the price when an ETF reaches approval. The real question is: when will an ETF finally be approved for trading?

Other Bitcoin Issues

Custody is a key issue, because these funds would almost have to develop their own wallet solution in order to store the crypto. The alternatives are all too risky. Liquidity is also fairly limited on the scope a fund would require. Bitcoin trades the most on a daily basis, yet it would be unlikely you could move even $1MM of Bitcoin without manipulating the market.

Not all investors are comfortable with Bitcoin, and they always have the option of suing for fraud if Bitcoin drops a ton, since it isn’t recognized as an unregistered security. Although it was recently ruled that Bitcoin was a commodity, this is a huge potential risk.

Most of all, there are no currently no optimal solutions for institutions that would like to put their money in crypto. Coinbase and Gemini are hardly a great option, due to the opacity of their vertical integration, and over-the-counter trading costs are high (2-5%). Additionally, many investors are worried about dealing with “tainted coins” that have used in money laundering and may be difficult to sell in the future. For all of these reasons, asset managers are less likely to put money in Bitcoin right now.

For all of these reasons, it doesn’t yet make sense for hedge funds to buy much crypto. Their bets need to be larger to move the needle, and the liquidity, custody and legal requirements exclude Bitcoin quite easily. In the end, this creates a great opportunity for retail investors, since right now the scale doesn’t make sense unless you’re a dedicated crypto fund. One day the aforementioned problems will be solved, and the asset managers will join, and retail investors may look forward to a large bump then.

The Current Thesis

We have been in a period of relative peace for the last several decades, and as a result, capital preservation has become a larger focus for investors. Fortunes have been made, and now it is time to make safe haven bets such as gold or offshore banking. Bitcoin represents a new way of investing in a safe haven.

So even though some pundits will say Bitcoin is a “moonshot” and people are throwing their money away investing in it, you will often find the richest investors putting a small percentage of their money in crypto… just in case. Perhaps this will offer you an alternative pitch when discussing your crypto hypotheses with friends and family.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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