Seeking Alpha

Robert Wagner's  Instablog

Robert Wagner
Send Message
Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions of economics, finance, writing and education, and... More
View Robert Wagner's Instablogs on:
  • Bitcoin ATM Is A Bad, Very Bad Idea

    This article is a bit premature, and is a preemptive article about the likely IPO of a Bitcoin ATM maker in the future. As far as I can tell, no Bitcoin ATM maker has gone public, but one will almost certainly file for an IPO in the future.

    It never ceases to amaze me how many bad ideas can come from the Bitcoin. Never have I seen so many people rush into something without clearly thinking it through, or having a thorough understanding of the risks involved. Putting all your Bitcoins in the most "established Bitcoin exchange," Mt Gox, was supposed to be a safe way to deal with the Bitcoin. Then there is the very foundation that an inelastic cryptocurrency designed to form bubbles will somehow function some day as a currency. While I'm a big fan of the technology and concept of bringing banking into the 21st Century, reducing transaction costs, increasing efficiency, ease of use and accessibility to commerce, the Bitcoin's design precludes it from ever accomplishing those goals. The Bitcoin's volatility simply makes its risks outweigh its benefits. To most consumers and merchants, the Bitcoin simply doesn't solve their problems.

    Almost every idea I've seen about the Bitcoin sounds great on the surface, until you actually dig deeper. The Bitcoin bad idea du jour is the Bitcoin ATM. When I first saw an interview about this new device I thought, that has the potential to really help Bitcoin gain acceptance, but then I looked into it. The title of the above linked video proves just how out of touch Bitcoin enthusiasts truly are.

    Robocoin CEO: Bitcoin exciting way to 'store wealth'

    The Bitcoin is many things, but a "store of wealth" it isn't. The Bitcoin is a store of volatility, and the wealth part is determined if you bought it on the upswing or the downswing. That is what makes the Bitcoin ATM such an awful idea. The Bitcoin ATM must be stocked with Bitcoins. Imagine being a poor farmer in India who invested in a $15,000 Bitcoin ATM and stocked it with $20,000 worth of Bitcoins at the peak of $1,150/Bitcoin. The poor farmer would have just lost over 50% of the values of his Bitcoins. People are far more likely to use Bitcoin ATMs to buy Bitcoins when they are cheap then when they are expensive. Simple supply and demand, quantity demanded increases when the price falls. Common sense and basic economics pretty much guarantees that the Bitcoin ATM will fail. Had a person bought a Bitcoin ATM the day this video was published and stocked it, each Bitcoin would be worth $100 less today. Any ATM that dispenses more money than it takes in is certain to fail.

    More importantly, there is a far better solution. The problem with the Bitcoin ATM is that it has to hold highly volatile Bitcoins. Bitcoins are difficult to transfer and exchange. What the Bitcoin needs isn't an ATM it needs a P2P mini-exchange, where 2 people agree to exchange Bitcoins for cash. The Bitcoin seller deposits Bitcoins at the Bid price, and the Bitcoin buyer deposits the Ask price in US dollars. The ATM like mini-exchange then transfers the Bitcoin's ownership and dispenses the Bid price amount of US dollars. The mini-exchange keeps the Bid/Ask spread. The mini-exchange could also connect to the cloud to allow people with existing accounts to buy and sell Bitcoins among themselves. Merchants that "accept" Bitcoins would then have a risk free way to accept Bitcoins, attract Bitcoin users and make money on the exchange. A person that wants to buy a mocha latte with their Bitcoins would simply be directed to the mini-exchange where they could convert the Bitcoin for US dollars that could then be handed over to the merchant. Its a win win win solution. The Bitcoin ATM is a roll of the dice for the merchant.

    In my opinon, the Bitcoin ATM will only work with a virtual currency like the stable value Bitchip that I described in another article. That way the owner of the ATM wouldn't have to worry about losing money on the inventory.

    The other obvious Bitcoin product that doesn't exist yet, but likely will, is an inter-exchange trading platform. Right now there are astronomical arbitrage opportunities existing in the Bitcoin market. The price difference between a Bitcoin trading on the BitstampUSD exchange and the LocalbtcUSD exchange is a whopping $50. If there was a way to simultaneously trade a Bitcoin on each exchange, it would be like printing money. All you would do is buy a Bitcoin on Bitstamp and simultaneously sell it on Localbtc for a $50 relatively risk-free profit.

    (click to enlarge)

    Investors interested in the Bitcoin should understand that the Bitcoin is basically a beta test, and isn't likely to be the final virtual currency. Right now the Bitcoin is an attempt by Libertarians to prove they have a better alternative to the US dollar. They don't, they aren't even close. The Bitcoin is the realization of a very bad political theory, and there is a reason why Liberatarians don't win many elections, and they won't win with the Bitcoin. The eventual virtual currency won't be Libertarian politics/Austrian School of Economics centric, it will be consumer and merchant centric. Because of that fundamental flaw, investors should be Leery of any early Bitcoin IPOs, they simply will be designed to accommodate a virtual currency that most likely will fail. The Bitcoin 2.0 IOPs will likely focus on a consumer/merchant centric virtual currency, and those are the IOPs that will likely have a longer-term life expectancy.

    Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: forex
    Mar 28 10:41 AM | Link | 4 Comments
  • US Can Harm Russia Far More Than Russia Can Harm The US In An Economic Tit For Tat.

    I recently wrote an article addressing the Russian threat of dumping US T-Bonds in an effort to harm the US economy. The threat is basically a joke. Selling $100 or even $200 billion most likely won't even register on the scale. Vladmir Putin would only prove himself to be impotent if he were every to attempt such a fool-hearted effort. Russia simply isn't an economic powerhouse. In 2013 Russia was the 8th largest country in the world, with a GDP of barely over $2 trillion. Russia is dwarfed by its quazi-communist/state capitalist cousin China's $8 trillion, and much bigger brother US's $16 trillion. Given the vast resources, educated workforce and population Russia's embarrassingly small GDP is a testament to its complete and utter failure as a political/economic system. Russia has the largest land mass of any Nation on earth, it is rich in natural resources, and the best it can do is rank 8th. That is pathetic. A country blessed with so many advantages should dominate the world, but because of its opposition to freedom and free markets they barely make the top 10.

    It is because of the inherent inefficiencies of the "central planners" of a totalitarian command and control quazi-communist government that Russia will always lag the world. Ronald Reagan understood that, and that is how he won the Cold War without firing a shot. He simply drove down the price of oil robbing Russia of badly needed capital and increased US spending of the military. Highly efficient free market capitalist systems simply can easily outspend inefficient communist system. The US economy made a military war unnecessary, the US simply beat the Russians at the grocery store and gas station.

    Because of that history, Russia is foolish for threatening the US. The US spends over 1/4 the Russian GDP on its military, and US citizens spend more that 1/10th the Russian GDP just on entertainment.

    Military

    Excluding war costs, the budget contains $549 billion for military programs, a more than 5 percent increase relative to 2014. That includes $28 billion for the "Opportunity, Growth, and Security Initiative." The president said this fund would allow the Pentagon to "accelerate the schedules for developing and buying new or upgraded systems."

    Russia stores a lot of its wealth in gold, and is the 4th largest producer of gold in the world. The most recent report I can find shows the Russian government holding 1,000 tons of gold, or 8% of its reserves.

    7. Russia

    Russia holds 1,034.7 tonnes of gold, which represents 8.3% of its reserves. Russia has more than doubled its gold reserves in recent years and is likely to keep buying. In 2011, Russian Prime Minister Vladimir Putin claimed the United States was "like a parasite" on the global economy and said the dominance of the dollar as a world reserve currency is a threat to the financial system. In 2013, Russia's central bank added 77 tonnes of gold to its official reserves.

    While Russia has substantial holdings in gold, it isn't enough to shoot your mouth off about. Russia can talk big, but it is a bluff. The US dwarfs the Russian gold reserves. Selling just a small fraction of its vast gold holdings would almost certainly cost Russia a small fortune. Just mentioning the possibility would likely send gold tumbling. Bully Vlad has simply brought a knife to a gun fight.

    1. United States

    Despite ending the gold standard in 1971, the world's largest economy holds 8,133.5 tonnes of gold, representing 71% of reserves.

    The other real threat the US has in energy. With friends like Vlad, Russia doesn't need enemies. The political environmentalist left has been highly effective in the US at preventing an aggressive move towards fracking, drilling, building pipelines, mining coal and building out the liquefied natural gas or LNG infrastructure. Now that the EU has been rudely awakened to the fact that wind farms and solar panels are no protection against Soviet diesel powered tanks, the focus is almost certainly going to be shifting towards how the EU can break its addiction/dependency on Russian oil and gas. The EU simply can't afford to be blackmailed by bully Putin.

    The financial media has been quick to pick up on this theme, and the response has been ruthless. I wouldn't want to be running for office in the US opposing energy production and LNG facilities if this is the kind of press the issue is generating. Just watch these videos, the coverage is devastating. Bully Vlad may be just the catalyst needed to motivate the US to embrace a serious effort towards becoming energy independent and a net exporter of fuel. If Vlad triggers the next cold war, it will be up to US natural gas to keep the EU warm.

    Video #1: Obama needs to take a stance on nat gas: Pro

    Video #2: USA's superpower status in focus as Russia makes power play

    Video #3: Playing potential EU nat gas plan

    Video #4: Could US LNG exports actually scare Russia?

    Video #5: Time to put climate change agenda on ice?

    The obvious winners of another energy driven Cold War would be the companies related to fracking. I recently wrote an article that included many possible winners. Defense contractors may also be potential winners. Gas-to-liquids and coal-to-liquids could also be technologies that have finally come of age.

    The losers of another Cold War would be the green economy. Countries have already begun to abandon their "green" agendas, and public support has been on the wane here in the US. The EU's inability to reach energy self sufficiency following the environmentalist's agenda even after extreme and expensive efforts has left them vulnerable, and fear is a highly effective emotion to drive voters to act. Pursuit of a "green utopia" is a luxury, and will be the first thing to go when lives are on the line. Wind and solar barely even register as energy sources when compared to the entire energy consumption of the EU. Wind and solar don't really register here in the US either, yet they have gotten a disproportionate about of attention. Sure "Big Oil" got subsidies too, but "Big Oil" provided affordable and reliable energy for those subsidies, wind and solar can't make those claims. When push comes to shove society will turn to proven, reliable, conventional, abundant and affordable energy, the energy provided by our coal miners, frack drillers and good old "Big Oil." Continued pursuit of the "green economy" is a luxury the EU and US won't be able to afford if bully Vlad insists on reminding society just how dangerous a path that is they have chosen. I would imagine continued Russian aggression will signal the end of the "green revolution."

    Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 24 6:07 PM | Link | 3 Comments
  • Many Bitcoins Are Now Stolen Property With A Public Ledger

    Executive summary

    • 1 out of every 14 Bitcoins are now considered "stolen property."
    • Merchants that accept and people that transfer stolen Bitcoins may be at risk of criminal and civil penalties.
    • The Bitcoin is a financial iceberg with many many risks that are "unknown unknowns."

    ________________________________

    The Bitcoin story just keeps getting better and better. I've written many articles about how the Bitcoin was designed to be a volatile nightmare, had fundamental flaws in its conceptual basis and was at best a beta test with real money. Bitcoin was a class room experiment that a group of libertarian computer scientists decided to release upon the real world to prove to everyone just how little they truly knew, and how much they didn't know. Bitcoin is an experiment in unintended consequences that makes the North Korean government look efficient. As Donald Rumsfeld outlined, there are known knowns, known unknowns and unknown unknowns, and it is the unknown unknowns that are the real dangers. The Bitcoin is nothing but unknown unknowns. It is a trial and error beta test of a cryptocurrency preferred by criminals.

    I recently wrote an article about how Bitcoin was a "financial iceberg." The meaning being that there are so many hidden risks involved with the Bitcoin that the markets have no clue even exist. I highlighted how Overstock (NASDAQ:OSTK) dodged a bullet by not having a large inventory of Bitcoins on their balance sheet when the Mt Gox crisis hit, and even more lucky that they didn't have their Bitcoins custodied at Mt Gox.

    Now comes the Mt Gox bankruptcy. Contrary to what delusional Bitcoin enthusiasts would have you believe, the Bitcoin isn't a currency. Bitcoin enthusiasts can talk until they are blue in the face arguing that point, but they are 100% completely, thoroughly, utterly and undeniably wrong. Bitcoin enthusiasts are simply willfully deceiving themselves or self deluded, they want to believe something so badly that they convince themselves that the unreal is real. The problem is, they are wrong, they are wrong on an epic scale. Have I made my point that they are wrong, very very very wrong. How do I know? Not because Mt Gox filed for bankruptcy, but because of why Mt Gox filed for bankruptcy.

    Mt Gox filed for bankruptcy because of theft. 850,000 Bitcoins/$475 million dollars worth of Bitcoins/7% of all Bitcoins are now stolen property. 1 out of every 14 Bitcoins is now stolen property, and there are plenty of laws governing stolen property. The reason Bitcoin was trading at such a discount on the Mt Gox exchange during the shut down was because people were willing to take a 75% haircut so that they could have their accounts valued in US dollars when it goes to bankruptcy court. The bankruptcy Judge knows what a US dollar is, and he/she knows what a currency is, and a Bitcoin isn't a currency in the eyes of the law. Ironically, the Bitcoin was designed to avoid these pesky laws. Can't say I didn't try to warn people about that foolish concept. Depositors at Mt Gox now understand why the FDIC and Federal Reserve are critical to support a modern financial system. Unfortunalty some lessons just have to be learned the hard way by some people.

    The other problem the Bitcoin enthusiasts haven't thought through yet is that Bitcoin has a public ledger. There are now 850,000 stolen pieces of property functioning as a speculative investment and/or "currency." Those Bitcoins have a "paper" or crypto trail that should be easy for law enforcement to identify the stolen Bitcoins if they ever get dragged into court. Transferring or accepting stolen property is a crime.

    Receiving Stolen Property

    The offense of acquiring goods with the knowledge that they have been stolen, extorted, embezzled, or unlawfully taken in any manner.

    The earliest statute that made receiving stolen property a crime was enacted in England in 1692. It provided that the receiver-the person who accepts the property-should be deemed an Accessory after the fact to the theft. The crime became a separate substantive offense in 1827, and it has been similarly treated in a majority of U.S. jurisdictions.

    Elements

    Receiving stolen property is defined by statute in most states. Generally it consists of four elements: (1) the property must be received; (2) it must have been previously stolen; (3) the person receiving the property must know it was stolen; and (4) the receiver must intend to deprive the owner of his or her property.

    In many jurisdictions a belief that the property is stolen satisfies the knowledge element. It has been held that a mere suspicion does not constitute knowledge. Some statutes provide that a person has knowledge if he knows, or has reason to know, that goods are stolen. Another test is whether a reasonable person would suspect that the property was stolen. Knowledge is commonly proved by the circumstances surrounding the receipt of the property. For example, unexplained possession of goods that were recently stolen raises a presumption that the possessor received them illegally.

    With 1 out of every 14 Bitcoins stolen property, it won't take a slick lawyer to make the case that anyone accepting a Bitcoin should have had suspicion that it was stolen.

    To make matters worse, accepting stolen property is a Federal crime. Bitcoin enthusiasts can fight the law, but the law will win. I can't imagine a Judge sworn to uphold the law is going to give users of a currency designed to skirt the laws a break.

    Federal Law

    Receiving stolen property is proscribed by federal statute (18 U.S.C.A. § 662) when it occurs within the maritime or territorial jurisdiction of the United States or when such property has moved in interstate commerce.

    Even if the person found to be in possession of stolen property is found not guilty of knowingly accepting stolen property, they still are at risk have having to return the stolen property to the owner without any compensation. Many pawn shops have to return stolen items to the owner.

    Civil Remedies

    In a majority of states, the person whose property was stolen may bring a conversion action against the receiver of stolen property. If the accused is found to have converted the property, the victim has a choice of remedies. The victim may demand that the accused return the stolen property or may require the accused to pay the full value of the property at the time it was converted.

    Because there are no past court cases to set a precedent, people that accept Bitcoins and/or spend going Bitcoins going forward are risking becoming court case guinea pigs. Unlike most items that get stolen, even cash, Bitcoin has a public ledger to help track down the stolen Bitcoins.

    The problem I have with the Bitcoin isn't its good intentions, it is that the Bitcoin enthusiasts deliberately downplay and misrepresent its risks and potential of being a currency. Bitcoin is based on a foundation of sand, and the enthusiasts market it like it is something that it isn't. Bitcoin is simply a high risk speculative investment that has zero chance of ever becoming a widely accepted currency. There than OSTK, almost all companies that accept Bitcoin attempt to immediately convert it to local currency and they do that for good reason. That reasons should not be downplayed and need to be understood by anyone dealing with the Bitcoin.

    That being said, I do see a new product or idea that may benefit the Bitcoin ecosystem. Right now most Bitcoins require an exchange to buy and sell Bitcoins. It is a hassle for merchants to convert their Bitcoins to local currency and it is a hassle for consumers to purchase Bitcoins. Merchants that accept Bitcoin are places where Bitcoin enthusiasts congregate. Every merchant that accepts Bitcoins is potentially a mini Bid/Ask Bitcoin exchange. When a merchant accepts a Bitcoin they could immediately turn around and sell the Bitcoin to another customer wanting to buy a Bitcoin. The merchant would keep the Bid/Ask spread.

    A Bitcoin ATM type machine could also do the same thing. The seller of the Bitcoin would deposit the Bitcoin into the ATM, and the buyer would deposit US dollars. The ATM would transfer the Bitcoin from one "wallet" to another, and the ATM would then dispense the US dollars less a conversion fee.

    Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 03 11:31 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.