Bow Down To Bitcoin (Is It a False God?)

Posted On Dec 8, 2017 By Dave Gonigam

  • Is bitcoin like a new religious movement?
  • And what does that say about the old-time Wall Street religion?
  • How one lapsed Wall Street follower beats the market
  • Government shutdown averted (for now. Hooray?)
  • Obama’s — and Trump’s — burden on future generations
  • Will the real owner of Salvator Mundi please stand up?
  • Another reader attacks Rickards’ “ludicrous” crypto take

“To embrace bitcoin is to embrace a new faith and to reject the established one,” says our old friend and former colleague Eric Fry.

Eric’s in a reflective state of mind these days. We’ve known him for more than 10 years. He left the Agora Financial fold a while back and has since taken on a remarkable project — about which more shortly.

But because bitcoin is on everyone’s mind right now — checking our screens, it’s at $15,230 — we’re keen to hear Eric’s take.

He calls bitcoin a “faith-based” asset.

That’s not a value judgment. Bitcoin “possesses zero intrinsic value,” he says, “which means that it derives all of its value from the faith of its adherents.” Gold is no different in that regard; it just has a longer track record.

“The faith that inspires confidence in bitcoin is not simply faith in a specific technological innovation; it is faith in a revolutionary new technological order,” Eric goes on.

Humans have always had faith in technology, but bitcoin’s followers have undergone a conversion of sorts: “Technology is no longer the means to an end; it is the end itself,” Eric explains. “Bitcoin is not the technological means to money; it is technological money. And by becoming actual money, this technological marvel delivers salvation from the old order of government-sponsored currencies.”

Ah… salvation from the old order.

Eric’s on to something here. And we suspect it’s about more than just government-sponsored currencies.

Bitcoin — or, to be more precise, a 2017 chart of bitcoin — is the ultimate emblem of lost faith in Wall Street.

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We daresay bitcoin is the last refuge of investors who’ve thrown up their hands at conventional asset classes, and even the traditional alternatives.

Stocks? Too many people fear getting burned a third time after 2000 and 2008.

Fixed income? It’s hard to find a decent yield anywhere because the Federal Reserve smashed interest rates to nearly nothing after 2008.

Gold? Still in a slump six years after its $1,900 peak. As we saw here Wednesday, even the Ron Paul faithful on Twitter would rather hold bitcoin than gold over the next 10 years.

Seen in that light, bitcoin’s rise makes total sense.

For some people, buying bitcoin might even be their way of repudiating the old faith — extending an enormous middle finger in the direction of Wall Street’s high priests.

Buying bitcoin for this crowd is an act of spite against the established order. They buy bitcoin this year for the same reason they might have voted for Donald Trump last year, even if they thought he was an imbecile or a vulgarian.

And when an establishment Wall Street figure like JPMorgan Chase CEO Jamie Dimon calls bitcoin a “fraud”… well, that only affirms the wisdom of their decision to buy.

For his part, Eric says he has no idea what the “right” price of bitcoin is… and for that reason, he’s never owned any.

It’s not that he thinks it’s a bad investment; he steers clear “simply because I lack the faith that would enable me to make a confident bet.”

He has far more confidence in other investment strategies that, like bitcoin, flip the proverbial bird in Wall Street’s direction.

You see, Eric spent many years working alongside those high priests of Wall Street. He managed a hedge fund, he published institutional research, he ran his own firm across the street from Goldman Sachs.

But almost from the start, he was a heretic — questioning Wall Street’s doctrines. “With few exceptions,” he recalls, “there are no independent thinkers on Wall Street. You’ve got a thousand guys buying the same stocks at the same time. They win a little. They lose a little. And over time, once you deduct fees, almost all of them underperform the market.”

Eric finally fell away from the high-pressure temple of Wall Street in 2006 — he sold his home in Westchester County at the peak of the housing bubble — and took up a more laid-back existence in his native Southern California.

Recently he got wind of a prestigious one-of-a-kind trading challenge — in which he could go head-to-head with 650 of Wall Street’s best and brightest. We’re talking legends like David Einhorn, Joel Greenblatt and David Tepper.

Eric felt as if he had something to prove… so he entered the competition.

With the help of the independent thinking so lacking on Wall Street… he came out on top. Not by a little, either. His portfolio returned 150% in a year — crushing the stock market 12-fold.

“I wanted everyday investors to see that you don’t have to be a billionaire hedge fund manager to make huge returns,” he says. “You don’t have to use derivatives or any other exotic investment. Just a simple but tactical stock-buying strategy.”

How did he do it? More important, how can you do it? Eric recently sat down for an eye-opening interview. What he said might change the way you think about the market, forever. We encourage you to follow this link and give it a look.

While bitcoin’s price is consolidating after yesterday’s record, the major U.S. stock indexes are all in the green, the Dow up a third of a percent at 24,287.

Gold has lost a little more ground, now $1,248.

The November job numbers are out this morning. The wonks at the Bureau of Labor Statistics conjured 228,000 new jobs for the month; the official unemployment rate remains steady at 4.1%.

Moments ago the president signed a stopgap budget bill passed by Congress last night; a “partial government shutdown” has been forestalled another two weeks. With that uncertainty out of the way — if only for a moment — the path is clear for the Federal Reserve to bump up its benchmark fed funds rate next Wednesday.

Come 2019, Donald Trump will equal Barack Obama’s stupendous achievement of a $1 trillion annual budget deficit.

That’s according to the folks at the Committee for a Responsible Federal Budget. “By our estimate,” says a report issued yesterday, “a combination of tax cuts, sequester relief and other changes would increase deficits to $1.05 trillion by 2019 and $1.1 trillion by 2020.

Says the organization’s president Maya MacGuineas, “As we wrap up 2017, the last thing we need is for Congress to go on a tax cutting and spending spree with the national credit card. It’s like Santa Claus in reverse — parents and grandparents spending on themselves and handing the bill to their children and grandchildren.”

This is the problem with tax cuts that aren’t matched by spending cuts — the deficit balloons and the costs are sloughed off onto future generations.

Agora Financial’s fearless leader Addison Wiggin made a whole documentary raising this alarm in 2008 called I.O.U.S.A. On the day of its release, the national debt totaled $9.6 trillion. Today it’s $20.5 trillion.

[Heavy sigh…]

“Like so much about this painting, it’s hard to tell the truth from fiction and marketing,” says the art website Hyperallergic.

The Louvre Abu Dhabi — a joint venture of the Abu Dhabi and French governments — says it now owns the painting that fetched a record auction bid of $450.3 million.

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As you might recall when we mentioned the story last month, experts disagree on whether the painting is a real da Vinci.

And now reporters can’t agree who owns it. The New York Times said it was purchased by a nobody Saudi Arabian prince. The Wall Street Journal then said the nobody prince was buying it on behalf of Crown Prince Mohammed bin Salman — “MBS” to those in the know — the impulsive 32-year-old heir apparent to the throne. And now this tweet from the museum?

Hmmm… artnet News points out that it looks bad for MBS if he were the buyer. Supposedly he’s in the middle of an “anti-corruption” drive, rounding up a bunch of his fellow princes and putting them under house arrest. Now he drops $450 mil on an artwork of dubious provenance? The “optics” aren’t good.

“The language of the Louvre Abu Dhabi’s latest tweet leaves open the possibility that the work could have been donated to the Abu Dhabi’s Department of Culture and Tourism, perhaps by the crown prince,” artnet speculates.

Let’s hope it doesn’t meet the fate of MBS’ last major purchase — a $550 million yacht that ran aground in the Red Sea.

“I really just want to know who is paying and/or influencing Jim Rickards to say such ludicrous things,” a reader writes after Jim’s bitcoin criticisms here on Wednesday.

“The articles he referenced were so weak; they were more about the shock value of the main heading. I would expect more from Rickards. He truly seems to be tainted in this realm. His rationale is not sound and grounded per usual. He sounds more like Jamie Dimon, with a clear agenda.

“Bitcoin is backed by the full faith and credit of people and cryptography. Fiat currencies are backed by nothing. This much we know for sure.

“In the early stages of adoption Jim rolls out some formularies about how this could mimic a Ponzi scheme and XYZ. Really? Has he read the code or does he have any deeper understanding of what he is talking about? Tell him to throw some chips in the game so he doesn’t miss out on the next big push after the derivatives market goes crazy. Might even stabilize — lower bitcoin prices for a while?

“You still have a finite currency in most all cryptos, and he complains about not being able to expand the monetary supply. Isn’t that the greatest problem with fiat currencies? To print at will. Inflate your dollars away. I find this to be the perfect solution to that problem. Thereby inherently creating scarcity with time.

“I lost a lot of professional respect for Rickards based on assessment, referenced articles and underlying spin. It’s not like him. I believe a government wingnut got to him. Likely Greenspan, as he covets that friendship? I have several of his subscriptions and enjoy reading his geopolitical analysis. However, he has drunk somebody’s Kool-Aid. Sad to see.

“I’m not saying cryptos are not in some type of bubble or that part of his assessment is not correct. It’s the entire tone he takes toward cryptos that just screams government interventionist. We shall soon find out.

“Keep up the good work.”

The 5: Your editor maintains a strict agnosticism with this Great Bitcoin Debate… but I’ll point out on Jim’s behalf that you don’t have to be an establishment shill to make the case he makes.

If the power elite really has it in for bitcoin, then it only makes sense to “follow the money,” see where it leads and act accordingly. We’ll leave it at that for the week…

Have a good weekend,

Dave Gonigam

Dave Gonigam
The 5 Min. Forecast

Below we share Eric Fry’s full meditation on bitcoin as a “faith-based” asset. Indeed, he finds many similarities between bitcoin and a certain tech stock that inspires equal passion among its adherents…

Faith-Based Investing

By Eric Fry

Today’s topic is faith — the kind that moves mountains… Or at least the kind that moves mountains of capital into profitless companies like Tesla and intangible cryptocurrencies like bitcoin.

Neither of these assets even existed 15 years ago. Neither one produces a nickel of profit. And yet, together, they have obtained a market value of more than $300 billion!

That’s faith! Perhaps not enough to walk on water, but more than enough to float on air.

In round numbers, all the bitcoin in existence are now worth about $280 billion; Tesla’s market value is a little more than $50 billion.

Perhaps these lavish valuations are exactly as they should be. Or perhaps they should be even more lavish. I have no idea. That’s the market’s job.

I’ve never owned a single share of Tesla or a single bitcoin — not because I believe them to be bad investments but simply because I lack the faith that would enable me to make a confident bet on either one of them.

In my congregation, we put very little faith in mere faith. We don’t commit capital to “things hoped for” or “things not seen”; we commit it to things known and seen… like earnings, for example.

And when it comes to money and other stores of value, we place our trust in things we can touch, like real estate and precious metals.

Bitcoin is not a tangible thing; it is a formula, an algorithm. It doesn’t glitter in the sunlight; it doesn’t make a clinging sound when you drop it on a table… and it doesn’t possess a multimillennian history as money.

It possesses zero intrinsic value, which means that it derives all of its value from the faith of its adherents. Of course, the same could be said of gold. In fact, the same has been said of gold… over and over and over again.

“Gold will never produce anything,” Warren Buffett once declared. “Gold has two significant shortcomings, being neither of much use nor procreative…

“This type of investment,” says Buffett, “requires an expanding pool of buyers who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future.”

Gold, like bitcoin, is a monetary asset whose value relies on faith. But the main thing gold always had going for it was its long history as money. Perhaps this history is what gold now has going against it. Gold has become “your grandfather’s store of value.” It is money for Luddites.

Bitcoin is not gold. That’s very clear. This techno Johnny-come-lately, according to its fervent apologists, is not only better than the U.S. dollar, but it is also superior to every other currency known to man, including the money known as gold.

And the financial markets seem to agree. At the current price of $16,700 per bitcoin, this sexy new algorithm is 13 times more valuable than an ounce of gold. And if you were to add up all the bitcoin in existence, their total value would be a whopping $280 billion — roughly equal to the annual GDP of Ireland.

The faith that inspires confidence in bitcoin is not simply faith in a specific technological innovation; it is faith in a revolutionary new technological order.

Throughout the millennia, humans have always placed a certain amount of faith in technology. They have always believed that technological innovation could enhance their quality of life.

But this new faith in technology that is powering bitcoin is different. Technology is no longer the means to an end; it is the end itself.

Bitcoin is not the technological means to money; it is technological money. And by becoming actual money, this technological marvel delivers salvation from the old order of government-sponsored currencies.

In other words, to embrace bitcoin is to embrace a new faith and to reject the established one.

Technologically, Tesla is perhaps less revolutionary than bitcoin. On the other hand, the faith in technology that inspires individuals to buy Tesla shares is not so different from the faith that inspires a purchase of bitcoin.

To Tesla’s naysayers, the company is simply a money-losing auto manufacturer with big dreams. But to the faithful, Tesla is a technological revolutionary dressed in the modest garb of a car company.

Yes, it loses billions of dollars every year — if you care about that sort of thing — but Rome wasn’t built in a day… and neither will Planet Earth’s climate be rescued in a day.

According to the buzz and mythology that has become the Tesla narrative, the company’s cutting-edge electric vehicles are not simply a new way to get around town. They are the first enlistees in the war against climate change. Tesla’s current and future clean-energy technologies are going to save the planet.

So what price does one put on the “Tesla Revolution”? The mark-to-market answer to that question is $53 billion.

To be clear: I am not suggesting that Tesla deserves a lower valuation, or that it deserves a higher valuation. I have no idea. Nor do I have any idea what the price of one bitcoin ought to be. I am merely pointing out that both bitcoin and Tesla seem to derive their vitality from a similar strain of faith-based investment.

Certainly, faith can be a powerful positive force, but it can also be a very unpredictable and unreliable one. Nothing tests faith in a financial asset like a great big selloff.

Tesla and bitcoin both represent the cutting edge of technological upheaval — an overhaul of the established order. They are both messengers of creative destruction.

That means that the road ahead for both of these world-altering assets is sure to be a fascinating one, but it is also sure to be a rocky and volatile one.

Once the powers of creative destruction are unleashed, there’s no telling exactly how and where the creativity will flourish… or exactly how and where the destruction will leave its mark.

Good investing,

Eric Fry,

for The 5 Min. Forecast

[Dave’s note: As mentioned earlier in today’s 5, Eric has won the distinction of being America’s “No. 1 trader” — outperforming Gabelli, Einhorn, Greenblatt, Tepper and more than 600 others to take first place in Wall Street’s most prestigious competition.

Click here to see what he says to do with your money — today.]


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New Daily Issue Posted 18 Hours Ago By Dave Gonigam

While the market sorts out the latest presidential pronouncements, we’re going to spend most of today exploring some random items that crossed our desk this week. They’re all related somehow to business or finance or commerce… and they all come under a category we’ll call “You Are Not Free.”

Read This Daily Issue