Bitcoin Fever

Bubble or not Bubble ?

2014 is set to be a banner year for BoomBustBlog. As you may have noticed, postings have slowed down to almost nothing. This due to another battle with hackers on the server. As we bounce back, we will take the global macro world by storm. This includes the digital currencies and how they will affect the world as we know it.

I'm not a gold bug, I'm not crypto-currency bug, I'm a risk-adjusted return bug! I attempt to see things as they truly are and will call it as I see it. Those of you who instanteously dismiss Bitoin as a bubble or Ponzi scheme are likely doing so without taking the time to fully understand it (it is quite different, I must admit), or read the disruptive change that it's capable of bringing into play - a disruptive change at the level of the Internet and World Wide Web during the the early to late 90's. 

The Definitive History Of Bitcoin

Here is the definitive history of the famous crypto-currency. From the pseudonymous "Satoshi Nakamoto"'s founding to the innovation of block chains to the "genesis block", buying pizzas, Sandiches, Teslas, and now houses... Bitcoin has come a long way (and where it goes is anyone's guess)...

see infographics here 

A Trip Through The Bitcoin Mines

Once upon a time, money - in the form of precious metals - used to be literally dug out of the earth. Limitations on the amount that could be mined, and on how much growth could be borrowed from the future (all debt is, is future consumption denied), is why eventually the world's central bankers moved from money backed by precious metals, to "money" backed by "faith and credit", in the process diluting both. It was the unprecedented explosion in credit money creation that resulted once money could be "printed" out of thin air that nearly destroyed the western financial system. Which brings us to Bitcoin, where currency "mining" takes place not in the earth's crust, or in the basement of the Federal Reserve, but inside supercomputers.

It is these supercomputers, that are the laborers of the virtual mines where Bitcoins are unearthed, that the NYT focuses on in a recent expose:

Bitcoins are invisible money, backed by no government, useful only as a speculative investment or online currency, but creating them commands a surprisingly hefty real-world infrastructure.

Instead of swinging pickaxes, these custom-built machines, which are running an open-source Bitcoin program, perform complex algorithms 24 hours a day. If they come up with the right answers before competitors around the world do, they win a block of 25 new Bitcoins from the virtual currency’s decentralized network. The network is programmed to release 21 million coins eventually. A little more than half are already out in the world, but because the system will release Bitcoins at a progressively slower rate, the work of mining could take more than 100 years.

As the following chart shows, in addition to the surge in the price of Bitcoin, another explosion witnessed recently is in the processing power of the Bitcoin network: from non-existent a couple of years ago, the "mining" power dedicated to hashing, or the calculations used to extract new Bitcoins,has risen to nearly 10 quadrillion per second!

So what do these supercomputer-populated mines look like? Below we look at two examples of just that.

* * *

First, we look at Hong Kong, where one of the largest Bitcoin mines in the world is located.

In an industrial backwater near Hong Kong's massive port, one of Asia's largest Bitcoin mines is quietly turning raw computing power into digital currency.

Located about eight miles from the city's finance hub, the entire facility is no larger than a two-bedroom apartment. Aside from a small bathroom, the mine offers no creature comforts.

It is dominated by vertical racks that house hundreds of ASIC chips. Shorthand for application-specific integrated circuits, these chips are custom-built to mine bitcoins.

These racks house hundreds of ASIC chips used to mine bitcoins.

Chinese investors have been enthusiastic early adopters, a trend amplified by a lack of more traditional investment vehicles in the country

The Kwai Chung mining facility is extremely quiet -- except for the whirr of computers

Industrial bitcoin mines devote their massive amounts of computing power to working on the algorithm, and are rewarded with an equivalent share of bitcoins. Currently, a winner is rewarded with 25 bitcoins roughly every 10 minutes.

A closer look at the towers. Most of the facility is devoted to mining for an investor group in China.

Miners are lured to Hong Kong because of its proximity to chipmakers in China and the city's permissive regulatory environment.

A bubbling liquid produced by 3M cools the ASIC chips.

This mine was purpose-built by Allied Control for clients based in China.

Kar-Wing Lau, Allied Control's vice president of operations, said the mine is cheaper to run and more efficient than many others because it uses a technology called immersion cooling.

Heat sinks and fans are typically used to disperse the heat generated by massed ranks of computer chips, but this Hong Kong mine is liquid-cooled using a product developed by 3M.

The processors used in the mine were build specifically for mining. They have no other function. "These ASIC chips, they can mine bitcoins and do nothing else," Lau said. "Given the pace of advancement, we need them to be constantly upgraded."

These radiators, housed on a balcony outside the mine, help disperse heat produced by the chips.

Immersion cooling allows Allied Control to leave less space between the chips, which saves money that would otherwise be spent on rent.

The technology also cuts down on electricity use -- one of the other major costs associated with Bitcoin mining. Lau wouldn't reveal how much it cost to build the mine, but he said that electricity bills for a fully-operational mine of this size would typically exceed $50,000 per month.

"The real question from a business perspective is how efficiently you can run your mining operation," Lau said.

The inside of the racks used to house the mining chips.

Cooling, however, is only one of the key factors when determining Bitcoin "mine" placement. Another key one: access to cheap electricity, because those massive servers sure soak up a lot of electricity: electricity, whose costs can quickly add up once a parallel processing cluster gets big enough.

* * *

Which brings us to Bitcoin mega-mine #2 in Iceland.

It is here that the NYT goes searching for digital excavators used to procure the digital currency.

On the flat lava plain of Reykjanesbaer, Iceland, near the Arctic Circle, you can find the mines of Bitcoin.

To get there, you pass through a fortified gate and enter a featureless yellow building. After checking in with a guard behind bulletproof glass, you face four more security checkpoints, including a so-called man trap that allows passage only after the door behind you has shut. This brings you to the center of the operation, a fluorescent-lit room with more than 100 whirring silver computers, each in a locked cabinet and each cooled by blasts of Arctic air shot up from vents in the floor.

“What we have here are money-printing machines,” said Emmanuel Abiodun, 31, founder of the company that built the Iceland installation, shouting above the din of the computers. “We cannot risk that anyone will get to them.”

Mr. Abiodun is one of a number of entrepreneurs who have rushed, gold-fever style, into large-scale Bitcoin mining operations in just the last few months. All of these people are making enormous bets that Bitcoin will not collapse, as it has threatened to do several times.

Iceland's low electric bill and its effective infrastructure, may be a reason why the one country that rebelled against the banker syndicate and jailed some of its bankers, may become the place where the bulk of Bitcoin mining takes place:

The computers that do the work eat up so much energy that electricity costs can be the deciding factor in profitability. There are Bitcoin mining installations in Hong Kong and Washington State, among other places, but Mr. Abiodun chose Iceland, where geothermal and hydroelectric energy are plentiful and cheap. And the arctic air is free and piped in to cool the machines, which often overheat when they are pushed to the outer limits of their computing capacity.

The operation can baffle even those entrusted with its care. Helgi Helgason, a burly, bald Icelandic man who oversees the data center that houses the machines, said that when he first heard that a Bitcoin mining operation was moving in he expected something very different. “I thought we’d bring in machines and put bags behind them and the coins would fall into them,” said Mr. Helgason, with a laugh.

No coins, but the cash miners get in exchange for BTC, especially if each Bitcoin continues to trade close to $1000, the mining can be quite lucrative. The flipside, however, is that the business is just as if not more capital intensive than running a gold mine for the same profit.

Until just a few months ago, most Bitcoin mining was done on the home computers of digital-money fanatics. But as the value of a single Bitcoin skyrocketed over the last few months, the competition for new coins set off a race that quickly turned mining into an industrial enterprise.

“Even if you had hardware earlier this year, that is becoming obsolete,” said Greg Schvey, a co-founder of Genesis Block, a virtual-currency research firm. “You are talking about order-of-magnitude jumps.”

The work the computers do is akin to guessing at a lottery number. The faster the computers run, the better chance of guessing that right number and winning valuable coins. So mining entrepreneurs are buying chips and computers designed specifically — and only — for this work. The machines in Iceland are worth about $20,000 each on the open market.

...

In February, Mr. Abiodun used the investors’ money to buy machines from a start-up dedicated solely to manufacturing specialized mining computers. The competition for those computers is so intense that he had to pay for them and wait for delivery.

When the delays became lengthy, however, he went on eBay and paid $130,000 for two high-powered machines, which he set up in June in a data center in Kansas City, Kan.

This was the beginning of Mr. Abiodun’s company, Cloud Hashing, which rents out computing power to people who want to mine without buying computers themselves. The term hashing refers to the repetitive code guessing that miners do. 

Today, all of the machines dedicated to mining Bitcoin have a computing power about 4,500 times the capacity of the United States government’s mightiest supercomputer, the IBM Sequoia, according to calculations done by Michael B. Taylor, a professor at the University of California, San Diego. The computing capacity of the Bitcoin network has grown by around 30,000 percent since the beginning of the year.

What is the upside of mining?

At the end of each day, the spoils are divided up and sent to Cloud Hashing’s customers. Last Wednesday, for example, the entire operation unlocked 225 Bitcoins, valued at around $160,000 at recent prices. Cloud Hashing keeps about 20 percent of the capacity for its own mining.

To be sure, like any industry in its infancy, there are numerous glitches, and mining for Bitcoins is no different:

Some Cloud Hashing customers have also complained on Internet forums that it can be hard to get a response from the company when something goes wrong. But this has not stopped new contracts from pouring in. Cloud Hashing now has 4,500 customers, up from 1,000 in September.

Mr. Abiodun acknowledges that the company has not been prepared to deal with its rapid growth. He said he had used $4 million raised from two angel investors to add customer service representatives to offices in Austin, Tex., and London. Cloud Hashing is now preparing to open a mining facility in a data center near Dallas, which will hold more than $3 million worth of new machines being produced by CoinTerra, a Texas start-up run by a former Samsung chip designer.

The higher energy costs — and required air-conditioning — in Texas are worth it for Mr. Abiodun. He wants his operation to be widely distributed in case of power shortages or regulatory issues in one location. But he is also expanding his Icelandic operation, shipping in about 66 machines that have been running for the last few months near their manufacturer in Ukraine.

Mr. Abiodun said that by February, he hopes to have about 15 percent of the entire computing power of the Bitcoin network, significantly more than any other operation.

Hopefully Bitcoin will still be around by then.

* * *

The future of Bitcoin mining is uncertain. There are a fixed number of bitcoins available -- and more than half have already been extracted. Kar-Wing Lau of the Hong Kong-based Allied Control, compared the explosion of professional mining operations to an arms race. For now, it appears to be a profitable endeavor. Lau said that Allied Control is currently exploring other mining platforms, including a mine built in a shipping container -- something that could prove useful if regulators crack down on the currency.

China debt crisis

Fears of a looming China debt crisis 

Equities around the world got dinged and the yen jumped Wednesday after Chinese money-market rates spiked and a Bloomberg story said China’s biggest banks had tripled debt write-offs. So, what is going on?

Given concerns earlier this year about the Chinese shadow banking sector it would appear that the acknowledgement that there is a problem and Chinese authorities are starting to deal with it has seen some investors take some money off the table in case there are a lot more provisions to come,

It’s no wonder officials and investors are keeping a close eye on the situation. A major hit to the Chinese banking sector is likely to have massive ramifications across the G-20 universe and could have a deflationary impact on global growth. Little wonder then that Aussie saw so much selling pressure in overnight trade as it will likely suffer the most from any drop off in Chinese demand.

After falling sharply in recent days, especially yesterday after the disappointing jobs data, the US dollar is broadly higher today, with the yen the main exception.  It has strengthened by almost 1% today.  

Many are attributing the price action to news that the five largest Chinese banks tripled the bad loans written off in the first half of the year to CNY22.1 bln (~$3.65 bln). Yet, tellingly and importantly, the Chinese banks had already made the provisions and thus did not, reportedly, impact the record profits (~$76 bln) in H1.  

There is some speculation that this is a precursor to a wave of defaults, but in itself writing off the bad loans is a very important step in its own right.  It is a step toward modernization and liberalization.  Provisioning for bad loans and then drawing on those provisions is part and parcel of a modern banking system.    

Precisely why one would sell, say the New Zealand dollar, the weakest major currency today, losing about 1.4% through the European morning, or the Mexican peso, which, with a 0.8% loss is the weakest among the emerging market currencies, in response to Chinese banks writing off bad loans in the first half of the year, is not immediately self-evident.   Indeed, not writing off bad loans, we would argue, was part of the problem.  Writing off bad loans is part of the solution.  For the record, the yuan itself rose to a new 20-year high against the dollar.  

There is another liquidity squeeze in China today.   Corporate tax payments are draining liquidity and thus far the PBOC has not deemed it necessary to counter this.  However, after money market rates jumped the most since July, the PBOC is likely to respond tomorrow.  The 7-day repo jumped 47 bp to 4.05% and the 1-day repo rose 72 bp to 3.80%.  

The PBOC's ability to manage the liquidity conditions seems clumsy and often responding belatedly to clear signals of important imbalances.  Admittedly, at times, the PBOC may be trying to send a signals of displeasure, like it did earlier this year, about wealth management products and shadow banking.  That does not seem to be the intent now.  

The firmer headline CPI, though still concentrated on food prices and not the general price level, and rising house prices has spooked some investors who feared a policy response.   The rise in money markets is not a prelude to a rate hike or a snugging of monetary policy.   That is in fact, the point, there is no policy implication, except to reinforce the perception of the PBOC's difficulty in managing liquidity.  

The rise in money market rates may be a key spur to the largest decline of small company share prices in a year and a half.  The ChiNext index of small companies fell 2.9% today, more than twice the decline of Shanghai Composite.  In comparison, Japan's JASDAQ fell 0.8%, while the Nikkei lost almost 2%.  

It strikes us that many observers seized upon the story to explain the price action throughout the capital markets.  We suspect that if the markets were advancing, many would cite Chinese developments too.  Instead, we suggest there have been some large moves in recent days, and the new positions were in weak hands.  That is to say, the dollar and yen's bounce and the pullback in shares is more a function of market positioning than Chinese banks finally writing down bad loans four months ago, for which provisions were already made. 

Euro : Entretenir l'espoir !

Ce sale espoir,  comme disait Antigone. 

Grâce à cet espoir, on continue de faire confiance en la monnaie, on évite de monter trop les taux d’intérêt, puisque l’on est persuadé qu’un jour la débauche finira! L’opposition entretient le pour et le contre sans lesquels rien ne peut durer. Imaginez ce qui se passerait s’il n’y avait qu’un sens. Les marchés seraient booming, exploseraient, le risque financier contre lequel il faut, vous le savez, lutter, -dixit le dernier Jackson Hole-, le risque financier deviendrait colossal. Si l’escroc n’inspirait pas confiance, il ne pourrait escroquer, pour prendre une comparaison désobligeante.

Nous pensons que la fonction de la Bundesbank et de son patron, figure emblématique, est du même type. La Buba a prêté son crédit à la monnaie commune au moment de la formation de l’Union; si on a fait confiance à cette monnaie, c’est parce que l’on savait que la Buba était derrière, ce qui a permis des taux très bas, un change ferme. 

A la faveur du crédit emprunté à la Buba, les taux ont chuté pour les pays du Sud; ils ont pu s’endetter, se surendetter, et ils ne s’en sont pas privé. Ces pays déficitaires ont bénéficié, non seulement des taux bas qu’ils ne méritaient pas, d’un change stable qu’ils n’avaient jamais osé espérer, mais aussi des facilités de Target 2, système qui permet d’accumuler les déficits et les créances sur la Bundesbank. 

Avec la crise de surendettement, crise de compétitivité, crise de balance de paiements, le système européen doit évoluer. On connaît le sens de l’évolution ; ce sens, c’est l’intégration de plus en étroite au plan économique, financier, bancaire, politique et surtout social. Le FMI vient cyniquement de publier un travail sur cette question. On doit ajouter culturel. On doit faire ce qui n’a pas été fait au début, mais qui avait été envisagé sans le dire. On se reportera à l’ouvrage indispensable de Daniel Lebègue et Christian de Boissieu : « Monnaie unique européenne, système monétaire international, vers quelles ambitions », paru aux PUF en 1991. 

L’escroquerie de l’euro a consisté à dire que c’était faisable, avantageux et de se placer, pour l’analyser,  dans la situation finale, dans la situation d’aboutissement.  C’est à dire à se placer dans la situation où tous les problèmes sont résolus, tous les déséquilibres résorbés. Dans la situation où grâce à la fluidité, grâce à la malléabilité, les Français ont cessé d’être français, les Italiens d’être italiens, les Grecs d’être grecs, etc. 

Néron contemplant Rome brûler

L’ennui, c’est qu’avant d’être dans la fin de l’histoire, dans la situation finale, il faut suivre le chemin du processus! Il faut y arriver. L’état final est certes l’objectif, mais ce n’est pas un guide ; le guide, il faut l’inventer. Il faut balbutier, se tromper, tromper. Le processus a été négligé et en plus escamoté par les Maîtres. On a fait « comme si » alors que précisément « ce n’était pas comme si ». 

La non convergence, la divergence réelle non prévue, mais très prévisible, a produit une crise, une accélération de l’histoire. Il a fallu en catastrophe précipiter les transitions, dévoiler ce que l’on souhaitait garder caché. Ainsi, il a fallu basculer, faire basculer la Banque Centrale, la BCE, vers un autre modèle que celui de la Buba. Il a fallu que cette Banque Centrale devienne souple, qu’elle apprenne à privilégier le court terme, le circonstanciel, l’aléatoire sur le long terme, sur le fondamental. Il lui faut faire une transition dans laquelle elle passera du stade de fille, sous tutelle bénéficiant de la réputation et du crédit de la Buba, à une situation nouvelle, amalgame hétéroclite au service du mouton à cinq pattes européen. 

Il faut gérer cette transition qui fait passer d’un objectif de discipline inter-temporelle incontournable au profit du long terme, à une flexibilité court-termiste, opportuniste. Dans cette transition, il est évident que le risque, si les marchés étaient lucides, non manipulés et donc étaient de vrais marchés, le risque est que la filiation avec la Buba vole en éclats. Que les taux explosent, que le change chute.

On passerait en un rien de temps du « père avare », au « fils prodigue ». Le crédit, la confiance, la réputation empruntés à la Bundesbank, disparaîtraient, seraient soumis à dévalorisation, dépréciation; les taux monteraient. Le processus, le fameux processus qui doit conduire à l’état final serait plus qu’interrompu, il serait anéanti.

D’où la fonction systémique de la Buba et de Weidmann, ils sont là pour faire durer le crédit de la Bundesbank le plus longtemps possible, pour faciliter la transition, le fameux processus que l’on vous a dissimulé. Les interventions oppositionnelles, critiques, de la Buba, de Weidmann, ont pour fonction systémique objective, peu importe le subjectif, ont pour fonction de freiner la dégradation, la prise de conscience de la mutation. Elles entretiennent l’espoir, le fameux, le triste espoir. Leurs interventions servent à installer ce contre quoi ils font semblants de lutter: l’ordre nouveau européen, la BCE nouvelle, celle des Maîtres. Celle qui renie le « traditionnal Central Banking ». 

On a fait la monnaie unique à crédit, celui de la Buba et la Buba accepte de prêter la main à la dépréciation de ce crédit, de cette dette; on retrouve, en concentré, tout le processus de gestion malhonnête, injuste, trompeur de la crise. Nous l’avons signalé un jour: « On peut toujours prolonger les dérives, il suffit d’accepter de dévaloriser son capital de réputation ». C’est vrai pour les firmes, pour les pays, pour les Banques Centrales,  pour les individus. 

ABENOMICS

Some Facts : Best of

Abenomics Synopsis

• Year-over-year the is Yen down 21.82% vs. the US Dollar
• Japanese consumer prices are still falling
• Imports jumped 9.4%, up for a sixth straight month
• Exports up 3.8%
• Trade balance negative for 10 straight months
• Largest April trade deficit since 1979

People think Shinzo Abe is a hero because the Nikkei is up.

I think Abe is an absolute economic nutcase who is going to create a currency crisis in Japan if he succeeds in changing the constitution like he desires (and quite possibly even if he doesn't).

See also our website :  Japan : Plan ‘jg’ B

Abegeddon

So, what’s behind this jarring surge in yields, which occurred even as the BoJ began to roll-out its aggressive purchase program? 

In Japan, the term Banzai! literally means “ten thousand years” and can be used to wish someone long life and happiness. But during World War II, “Banzai!” was shouted in battle. It was the Japanese equivalent of “Long live the king!” – but to soldiers on the other side it came to mean a suicidal, hell-for-leather attack.

If the central bankers of the world think they’re hearing a battle cry of “Banzai!” from the lips of their Japanese brethren, they may not be far from wrong, because the Japanese are indeed on a mad charge to fight deflation at all costs. As with all good suicidal charges, at least in legend and lore, once the cry has gone up and the thundering charge has begun, there can be no turning back.

SEE  BANZAI ! Abegeddon and  

there

                         

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Edition

                        
                                                      
                                

Krugman tempted to support Abe : Not Enough Inflation

Olivier Delamarche : 05.21.2013

On assiste en direct au décès du Japon et tout le monde se réjouit. Ça se paiera dans un bain de sang. Ça va se traduire par un effondrement total de la monnaie, la République de Weimar mais au Japon. Bernanke est obligé de continuer les QE, s’il arrête ça sera un effondrement économique. 

As the BoJ prepares to thrill us with even more in its latest policy meeting the following brief presentation covers it all . Christine Hughes sums it all up perfectly, for Japan, "The Math Is Stacked Against Japan - It's Not 'If', It's When." 






Investors, take note… the financial system is sending us major warnings..

Two big events have occurred/ are occurring.
1) Chicago Fed President, Charles Evans who is one of the biggest pushers for QE, stated that the Fed has “the appropriate monetary policy in place” and that the economy is “improving quite a lot.”

2 )The Bank of Japan declaration after a two-day policy meeting.

Regarding #1, Evans has been one of the biggest pushers for more QE. So for Evans to suddenly change his tune and state that the Fed’s current policy is “appropriate,” indicates a significant shift in tone. This goes along with the Fed’s recent hint at tapering QE, which we’ve noted before on these pages. It’s now becoming more and more clear that the Fed is planning on tapering QE in the coming months and is trying to manage down investor expectations.
Which means that stocks are going to be losing some (not all) of their life support.

Regarding #2, The Bank of Japan raised its economic assessment at the end of its two-day meeting on Wednesday, while holding its policy unchanged. The central bank said the measures would continue “as long as it is necessary” to achieve its goal of a stable inflation rate of 2%. It also said that the policy board had voted down a proposal by one member to set a “time frame of about two years” for its “intensive” quantitative easing.

As noted yesterday, Japan is Ground Zero for the great QE experiment. For decades now, Bernanke and his pals have claimed that the biggest problem with the Fed’s actions during the Great Depression was that it didn’t do enough.
Japan, which has now engaged in NINE QE efforts, has finally hit the “enough” stage by announcing a record $1.2 trillion QE plan. To put this in perspective, Japan’s economy is $5.86 trillion, so this single QE effort is equal to 20% of their GDP.

If this plan fails to bring about economic growth in Japan, or worse still fails to bring about growth and unleashes inflation, then it’s GAME OVER for Central Bankers.


FALLING YEN

After Japan's Crash…

Will Japan Trigger a Global Financial Meltdown? Japan’s bond market is officially losing control.We have definitely taken out the multi-year trendline here, making a new high higher after a higher low. This is BAD news as it indicates that Japan’s bond market could be entering a cyclical downturn.  see our website 

If this happens then the great global bond market rig of the last five years is coming to an end. Most analysts have been ignoring bonds because stocks are at record highs.As Japan has indicated, when bonds start to plunge, it’s not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7%... despite the Bank of Japan funneling $19 billion into it to hold things together.

Don't get spooked by nowaday's action. Too many investors are easily "brainwashed" when markets move in one direction for too long. Anyone who thought stocks would never have an off day is waking up on the wrong side of the bed today…