Cyptopocalypse: Down Go the Stablecoins

Back in 2018 there was a hullaballoo around Tether: Did Unbacked Tether Creation Manipulate Bitcoin Prices?. I wrote then (lots of details in the post if you're unfamiliar with the claim):

If this is true, it could deal a significant propaganda blow to the cryptocurrency market because one of the selling points is the deflationary, anti-bank qualities of a purely digital fiat currency. The real loser may not be cryptocurrencies however, but the exchanges. The current exchanges are a vulnerability for cryptocurrencies and a step backwards, introducing counter-party and cyber-security risk. ...The greater irony is that if this is all true, what happened to Bitcoin is happening to the entire global economy in real time. The Chinese yuan is to eurodollars as Bitcoin is to Tether.

I daresay BTC would be doomed to a guaranteed drop of 95 to 100 percent if it turns out the price is propped up by credit inflation via stablecoin because the whole rationale behind BTC has become its "digital gold" properties. While those would technically still exist, the fact that the price could be manipulated by credit inflation would make it less attractive than gold. The narrative would be destroyed.

With no central bank or government backing of any import, a stablecoin fiasco would reveal cryptos are not like digital gold, but more like wildcat banking of the 1840s.

Wildcat banking refers to the practices of banks chartered under state law during the periods of non-federally regulated state banking between 1816 and 1863 in the United States, also known as the Free Banking Era. This era, commonly described as an example of free banking, was not a period of true free banking, as banks were free of only federal regulation; banking was regulated by the states. The actual regulation of banking during this period varied from state to state.

According to some sources, the term came from a bank in Michigan that issued private paper currency with the image of a wildcat. After the bank failed, poorly backed bank notes became known as wildcat currency, and the banks that issued them as wildcat banks.[1] However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture.[2] A common conception of the wildcat bank in Westerns and like stories was of a bank that left its safe somewhat ajar for depositors to see, in which the banker would display a barrel full of nails, grain or flour with a thin sprinkling of cash on top, thus fooling depositors into thinking it was a successful bank.

The traditional view of wildcat banks describes them as distributing nearly worthless currency backed by questionable security (such as mortgages and bonds). These actions ended when note circulation by state banks was stopped after the passage of the National Bank Act of 1863. Mark Twain, in his autobiography, refers to the use of such currency in 1853, "The firm paid my wages in wildcat money at its face value".

Coindesk: UST Stablecoin Loses Dollar Peg for Second Time in 48 Hours, LUNA Market Cap Falls Below UST's

TerraUSD (UST) has lost its dollar peg for the second time in three days, falling to as low as $0.65 on Monday, according to the most recent price estimates from CoinMarketCap.

As UST has "depegged," the price of LUNA, its sister token, has dropped over 44% to $35 in the past 24 hours according to CoinMarketCap.

UST, a so-called algorithmic stablecoin, works with LUNA to maintain a price of $1 using a set of on-chain mint and burn mechanics. In theory, these mechanics work to ensure traders can always swap $1 worth of UST for $1 worth of Luna, which has a floating price and is meant to serve as a kind of shock absorber for UST's price.

Luna's price decline puts its market cap below that of UST's. That potentially throws the foundation of UST's entire stabilizing mechanism into jeopardy, because it means a Terra bank run could lead to some users no longer being able to redeem their $1 of UST for $1 of LUNA.

...Today’s depeg comes after the Luna Foundation Guard (LFG) announced Sunday night that $1.5 billion of its massive bitcoin reserves would be “loaned” out to professional market makers to proactively defend UST’s dollar peg.

My gut tells me this is all a giant Ponzi at worst and a giant case of fractional reserve lending at best. Money market funds "broke the buck" in 2008 and the financial system almost crashed. This is like the dark days of September 2008. If you forget what was going on at the time: I do believe 2008 was hyped as a crisis, as are all crises, but the question for crypto is, why wouldn't the government hype this too? Why would they stop a run on the crypto exchanges and stablecoins? I think they'd fan the flames to burn the competition to the ground.

How much of the system is backed by BTC that can itself collapse? I'm not worried about a single stablecoin going down, I'm worried about a systemic run on the entire industry if BTC is propping up multiple stable coins (as I suspect is the case with Tether).

We have never witnessed a sustained bear market and recession in the age of crypto. The last honest-to-God bear market was about 40 years ago. Every one has been bailed out. If inflation stays high though, the Fed's hands will be tied. It won't matter even if they try to help. Lending rates will keep rising, meaning debtors who need capital will go bust if they cannot finance those ever rising rates of interest. If they're backing their own assets with BTC...there's no central bank issuing BTC to stop the collapse the way the Fed can issue more FRNs to banks...and while they probably could bail it out if they wanted to, I'd bet USG would rather see all the private cryptos fail and then unveil the central bank digital currency or US Treasury Coin. Update: Here's UST/USDT

Support Bounces

Apple at 200-day. FDX, BTC. Many more, but some big ones. Anecdotally, fear peaked among the dumb money. My guess is most bulls sold out over the past few days, if not this morning. I doubt many bought today's dip, which was likely driven by short covering. Buying will come later, if at all, setting up the next mvoe lower. Nothing has been solved with respect to inflation or the Federal Reserve's policies. As with omicron, Russia is a distraction. The market is rallying today for technical reasons. Bulls will buy into bullshit narratives like this one: Is This a Crisis to Buy? Financial media will be out saying peak fear is the time to buy...not reminding people that Russia has zero do with this decline. The whole way down they will make up new narratives post hoc.

What have bonds done? Some have been pummeled, but there ZB sits right near its long-term support.

The bond market remains the main event. Things are taking more time to develop, but the inflation/deflation resolution is still an open question in my mind. Rate hike expectations did fall today, helping the Nasdaq lead.

The smart move for a bull was selling everything on December 31. Or convert their entire portfolio to commodities and related investments. The bear market is the slow process of bulls realizing they are in a losing position that is growing weaker over time.

Finally, bear markets destroy the financial sector. There hasn't been a real bear market since the 1970s. Stimulus has pumped money in every time. Technology made it easier to trade. A lot of people are trading and day-trading in the markets because its "the place to be." At the depths of the bear market, being a stock trader or day trader will be like telling someone you trade something like potting soil. The attention the markets receive, the amount of money trading every day, is itself a symptom of the credit bubble and bull market. A real bear market will grind most traders into dust. Bulls will give up years of gains.

For now, everyone still thinks this is some type of correction like has happened several times over the past decade. I believe a real bear market is underway, and that stocks are going to be making a new low next month. For myself, I closed out almost all my positions today. Which might be a contrarian signal! But most of my options are short-term and I don't want to sit through an extended rally. There are gaps above that will be prime spots for going short again.

I Like Big Blocks, BitcoinSV Closing in on Sustainablility

Here is Block #725511Why does this matter? Bitcoin started with a mining subsidy. The coins are issued as a reward for each block mined. Eventually, these rewards become too small to justify mining (and eventually go to zero because there's a fixed amount of coins). Either the price or transactions must rise to make it a viable long-term operation. BTC went the "digital gold" route. It survives on high prices. With the block reward currently 6.25, a miner can expect about $250,000 if they solo mine a block. BitcoinSV goes the opposite route, aiming for microtransactions. The 3.8 GB block above had 188,101 transactions and generated 9 BSV in fees at an average of about half-a-cent USD, exceeding the mining subsidy. Since BSV is currently around $100, that is only $900, plus the 6.25 reward for $1525 total. Miners can switch seamlessly between chains so the profitability of all the chains is similar.

However, the fact that BSV has generated blocks with fees that exceed the reward means it can become a sustainable business for miners. I was turned off by mining in part because I wondered what happens when the speculative bubble pops. Putting up millions in capital to possibly obtain an asset at some future date at some unknown price is less attractive than a business with growing, reliable profits. Or less attractive than putting millions into the asset itself if expecting a price increase.

A consistently growing block fee puts a floor on the mining reward and lowers revenue risk for miners, particularly if some fees are fiat-based because that will further reduce volatility. Mining revenue becomes more predictable from a consistent stream of fees. This will attract low time preference miners who will make longer-term investments in the chain, versus the high time preference miners who are engaged in speculation on price. When a chain can consistently exceed the block reward in fees, it becomes a self-sustaining enterprise and has a viable shot at become once of the few winners that emerge from the start-up jungle.

Make Way for The Gods of the Copybook Headings, Terror and Slaughter Could Return in 2022

Back in November I posted Don't Be Surprised by a Crash. I posted this chart of Vanguard Short Term Bond (BSV):

I took my eye off it, but it completed in early January:

There's nothing particular about this fund. I haven't looked at every chart, but I assume all of the short-term bond funds have the same topping pattern. Some look particularly ugly, such as the MUB chart I posted yesterday.

With bond funds, it is important to look at the funds without dividends such as the futures contracts or the interest rate charts. Here is BSV with the dividends taken out.

There is about 1 percent downside to the $79.50 target on BSV, but the larger target is the $78 level (2.8 percent below Friday's close) from 2018 that is associated with a 3-percent yield on the 2-year Treasury (BSV has a duration of 2.75).

Anyone who has been reading this blog knows I lean in the disinflationary/deflationist camp. As happened in 2008, 2011, 2014-2016, 2018 and 2020, commodities will roll over, long-term bonds will rally, stocks will plummet and the Federal Reserve will pump one more time. Looking at the chart above, maybe the 2-year Treasury peaks out at 1 percent here, or around 1.5 percent later this year, and then goes negative in the next downturn.

And yet, there's going to be a time when this doesn't happen. That is the moment when terror and slaughter return to the stock market because it means the Federal Reserve is at the mercy of the bond market.

What will this moment look like? It'll go something like this. The markets will be tanking and bonds will be rallying, but not as strong as in prior downturns. Maybe commodities fall too, but they might be outperforming stocks. Then the Fed will announce its rescue package. It could happen immediately or months later (my hunch is sooner rather than later), but traders will funnel the Fed's pump into commodities instead of stocks. Crude oil will surge higher. Bond traders will eventually react by selling bonds down. BSV, as one example, will crash right through that $78 level. The 2-year treasury will have broken through 3 percent on massive volumes. The 10-year will be through 4 percent. 

At some point, the stock market will realize what is happening. It will know the Fed not only has to reverse QE, but it also has to begin emergency rate hikes and maybe start dumping bonds. Like Volcker in the early 1980s, the Fed will have to front run the bond vigilantes. If this all happened in a few days, stocks could experience a 20-percent limit-down day that closes the stock market early, maybe right after the first opening trade. If it plays out over weeks and months, there will be periods of relentless selling, bounces, and then resumption of selling as soon as crude oil and interest rates make a new high.

I don't believe this is the highest probability outcome this time, but the purpose of the charts is to tell me both when I'm right and wrong. The 2-year treasury yield should not clear 3 percent and should reverse much sooner. Crude oil should repeat the taper pattern:

If I'm "wrong", crude oil isn't going down. The end game for the Federal Reserve has arrived. I put wrong in quotes because what is really wrong is losing money. It doesn't matter if your thesis is wrong, as long as you have a falsifiable thesis. What makes your outlook wrong? For me, it will be rising crude oil and interest rates beyond resistance. Rising stocks would count too, but that is a separate scenario. I would be totally off base if stocks rise, bond yields rise and crude falls, or if all three rise without causing any negative shocks.

As for how bad things will get if the Federal Reserve has met the end game, the answer is extremely bad for the entire society. It's not going to be solely an economic event. It will be the crisis phase of what is commonly dubbed the 4th Turning. Turchin, Prechter, pick your favorite. Many people like myself have lost whatever remaining trust we had in institutions following the coronavirus scamdemic, including losing trust in doctors and teachers. The people who trust the government, who trust the Federal Reserve, are going to be wiped out when this crisis hits. America is led by its most corrupt, malicious and incompetent people. The corrupt and malicious are at the top, with the incompetents providing the buffer layer between them and the public. The government asnd Fed willl curse anyone associated with them. If I was running a pension fund and could not go short or substantially shift my allocations, for example if I was banned from buying oil because of ESG rules, I would resign. When the collapse comes, the public won't understand that you were a fool for taking the job at all, and weren't actually the one responsible for the losses. Von Mises correctly turned down the job of central bank president in Austria and fled to America. We could be at that level of crisis if inflation doesn't reverse.

Europe Hasn't Solved It's Banking or Sovereign Debt Problems, Locking Down Again

Twetch sign up.

Is Satoshi in Court?

All I'm going to say about this is I see a non-zero probably that he might be Satoshi, and the expected move in the crypto market multiplied by that very tiny probability is a big number. If you wanted to hedge you could buy BitcoinSV symbol BSV, or look at shorting BTC, or via various stocks such as COIN and MSTR. The chart of BTC is making me somewhat bearish on crypto here as well, not enough to take a position yet. BTC met resistance at the March 2000 trendline again. I do own some BSV.

Coindesk: Kleiman v. Wright: Bitcoin’s Trial of the Century Kicks Off in Miami

BSV Blockchain Fees Exceed Block Subsidy

When I looked into cryptomining as a business, the one fear I had was what happens when the block subsidy fades? Fees are very small compared to the block subsidy (the issuance of coins for mining a block). I was excited by the BSV fork of Bitcoin because it was aimed at growing fees by supporting business deevlopment. And now, fees exceeded the block subsidy for the first time. It was only one block so far, but eventually this will be regular. It means BSV is well on its way to generating enough economic activity such that mining will be a sustainable business. It also speaks to the thriving businesses on the chain. This is an historic moment.

Taleb and Roubini to Speak at Coingeek Conference

Bitcoin sceptics Nouriel Roubini and Nassim Nicholas Taleb join speakers’ roster at CoinGeek Zurich

Discussion topics will include but not limited to:

What currently drives market value of BTC vs what should drive real value of a digital asset

Does the market correctly consider the real utility of a blockchain or its native token(s)

How should actual utility influence the market price of a blockchain’s token

How should scalability of a blockchain influence the market’s valuation

Nassim Nicholas Taleb: “I had hoped bitcoin would be a currency that could be transacted with but BTC has turned out to be too volatile and thus a speculative tool, so I look forward to sharing my thoughts and discussing further on this roundtable panel.”

Nouriel Roubini: “I think calling cryptocurrencies a currency is a misnomer. The question is if Bitcoin is an asset and if cryptocurrencies can have real utility? I am happy to discuss this further look forward to discussing this at CoinGeek Conference.”

I am surprised to see Taleb using the trading symbol, BTC, instead of Bitcoin. Taleb had said in February that he was selling his BTC because of the volatility, and he has called it an open Ponzi. He also recently had a spat with BTC holders over whether it was following the Bitcoin white paper or not.

Bitcoiner Max Keiser Debates with Nassim Taleb Regarding Bitcoin White Paper

The crux of the debate between BTC and other chains such as the Bitcoin fork BSV, is about what the digital money should do. BTC limits the number of transactions via the size of its blocks and thereby moved towards a "digital gold" model where the coin has a very high value. BSV moved in the opposite direction towards unlimited blocksize. BTC is the digital equivalent of gold because it is very slow and expensive to transact. BSV is akin more to high-frequency trading, aside from potentially saving businesses and consumers billions in fees collected by payment networks such as Mastercard and Visa, it also allows for future applications in data markets and new economies.

I discussed why I believe BSV's model is the future in: Using Bitcoin for Censorship Resistant Communication

My most recent post on Bitcoin, more BTC price focused is here: BTC Waterfall Decline Approaches

As I expected would happen with a BTC sell-off, BSV went down with it. It bounced off long-term support, but I believe that will break when BTC heads towards $20,000 and potentially lower prices.

I see long-term support around $50 if BTC goes into a major bear market. I will be keeping an eye on the BSVBTC ratio if that happens. For now, BSV has not broken down relative to BTC. Volume is collapsing in the crypto market though...

If this ratio is rising in a bear market, I will be aggressively buying. If it dips along with BTC, I will probably wait longer because it will indicate the whole market is getting blown out. I expect 90 to 99 percent of the crypto market will disappear in major bear market. The survivors will eventually generate returns that will mirror the gains in BTC and Ethereum over the past decade. The corrollary is the doctom bubble versus the survivors such as Amazon and startups such as Google, Facebook and Netflix.

Finally, BTC looks like it could be ready to collapse as soon as this week given the drop in volume:

BTC Waterfall Decline Approaches

My first target for this BTC bear market is $20,000, with a firmer bottom in the range of $12,500 to $14,000. There was support at the $30,000 level, but I think this is a bigger move. BTC has already failed at former support,now resistance at $42k.

I am not shorting BTC. I'm more interested in BTC secondary plays such as MSTR and RIOT, but what I'm really looking at is BTC as a thermometer for speculation and what that implies for stocks. Tertiary plays such as Nvidia and beyond in the Nasdaq, such as Apple and Amazon.

On to the charts. Here's BTC. Everyone was focused on $30k support for good reason: the vast majority of BTC buyers via the market this past year have bought above $30k. Volume in Q1 was 267 million and Q2 is already 159 million BTC. That makes for 426 million transactions above $30k. I have to go back to the 2017 Q4 peak in BTC to accumualte enough volume to exceed what has traded since December. More than half of BTC buyers over the past 3 years paid more than $30k.

Both the chart pattern price support levels are simialr to the 2017 top.

The 2017 peak was in the context of a bull market in financial assets. BTC have never existed during a broad bear market. If BTC can go lower, let's look at the volume profile for a clue. Below I show the 3-, 5-, and 7-year time frames.

Lo and behold, the volume profile corroborates the green horizontal I have on the chart. There is strong support between the green and violet horizontals.

Summary

$30k was a tradable short-term support level

$20k is firm support for a major correction

$12.5k to $15k is support for a BTC bear market

Lower is possible in a broad bear market accompanied by a financial crisis on par with 2008 and March 2020. Perhaps the $1000 area could be tested in a deflationary panic. It would depend entirely on whether the government devalues the currency and if competing coins displace BTC as "digital gold." It depends on if the Tether bubble pops. See: Did Unbacked Tether Creation Manipulate Bitcoin Prices?

I hold BSV, a Bitcoin fork that makes micropayments possible. It can replace both Ethereum and BTC. Unlike other coins endlessly hyped as speculative trading vehicles, BSV is more preferred by developers building applications. (BSV is not listed on many exchanges because it calls itself Bitcoin and the exchanges claim this would confuse investors.) It is implementing the full vision of what digital currency should be. I'm speculating on its survivorship and emergence as the superior blockchain. I think it will get crushed along with everything if BTC collapses, but will add more on the way down.

Finally, here is BTC inverted. It looks like the mining charts I've been buying the past 2 years. If you think about the volume profile in reverse, there's lots of support down to $30k (up on the inverse chart). After that, it's a straight shot to $20k. There is some support there, but it isn't deep because after that, the well of buyers came in around $15 or lower.

The real way to acquire "diamond hands" is by paying a low price. The volume profile says the real diamond hands won't be tested until around $15k.

Update: Here's BSV. Unfortunately, falling BTC will take out the uptrend and probably send BSV down to around $50.

BSV Cascading Bases

Similar to many gold and commodity producer charts, BSV has a nice base that if completed, points to an even nicer gain. Relative to BTC, it also sports what some miner charts have: the cascading (fractal) bases. The completion of one base begets a larger base, and a larger, etc. Above $370 (assuming BTC is $62,000) a series of breakouts could take the coin to $4000, again assuming BTC holds around the $62,000 area. If BSVUSD clears $400 it similarly completes a base with a target above $750, which going back to BSVBTC triggers another breakout level.

In a commodity producer, this type of move would play out over years. With crypto, time is compressed as phase changes come quickly. BSV is not a speculative coin though. Many exchanges do not allow BSV because they consider it a "scam" coin trying to ride on the Bitcoin name. I hold it because I see BSV as the full expression of Bitcoin's potential. I'm probably more excited about BSV in 2021, than I was about what became BTC in 2010, becase developers are close to showing the full potential of the technology.

Coinbase and other fintech companies associated with BTC are shadows of the current financial system. BTC is marketed and memed as digital gold. A store of value, decentralized, transferrable across time and space. What BSV aims for is the original aim of Bitcoin, to turn even the smallest bits of information into money. It's sort of like imagining a bank as the place to store physical dollars coming out of the gold standard world, versus the potential for new financial products and derivatives. BSV can change the way people organize, search and exchange information. Where people think of BTC like a digital gold bar, BSV is more like air. At this moment it is accumulated by those speculating on the network itself and developers building on it, but if successful, the price will be high not because people want to hold it like a gold bar, but because it would be like air is to the ecosystem. Whether you have more or less of it would depend on your level of activity. This demand will drive the price, rather than price leading demand as in speculative markets. You can see some of its potential on Twetch, which allows for quick posting of information to the blockchain and is developing an NFT marketplace. Canonic is publishing books directly to consumer. The even bigger market potential is in more fundamental "information supply" such as search engines and advertising, along with eliminating spam information by driving out of the marketplace by imposing cost barriers. Beyond that are all sorts of digital interactions you pay for today, such as streaming music and cloud storage, plus all sorts of new markets that can be created by very low transaction costs.

BSV Ruler Chart

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