Bitcoin Market Update 4/18

Hi Everyone,

This week we've seen highly volatile bitcoin markets.  Starting at the $420/BTC to $440/BTC range, the price shot up to around $540/BTC before settling back down to $486/BTC where it rests now.  As Chinese fears subside, the sentiment in the market has taken a turn towards optimism.

In Bitcoin news this week, Second Market has opened its dealing desk to do block trades of bitcoin no smaller than 25 BTC per trade.  We have been openly quoting and receiving quotes from Second Market in these previous weeks prior to this for exactly this type of block trading and it seems now they are opening this up to a broader market though still not the retail public just yet.  Given the prices I've seen from them, they are looking to take a profit while dealing, have low immediacy, and are willing to deal on both sides of the bid-ask.  Currently, us and Bitpay seem to offer more aggressive quotes on large block trades but Second Market still offers a better quote than sliding through the various exchanges' orderbooks.

Also worth nothing, mobile wallet Mycelium released their Local Trader feature which allows their users to find other Bitcoiners physically near them who are willing to buy and sell bitcoin.  It's functionally a Local Bitcoins marketplace for users of their wallet.  On the plus side, I like the disintermediation this sort of peer-to-peer marketplace allows.  On the con side, trades on their application and on Local Bitcoins for that matter often cost a premium for the added anonymity. Mycelium charges a .2% fee per trade.  Any interesting coincidence to note is that just as Mycelium was announcing their Local Trader feature, cases of coins being lost and stolen from Local Bitcoins started to appear.

Today I'd like bitcoin aside for a moment and talk about the state of the American economy.  It seems to me unsustainable in the long run to continue our fiscal policy of quantitative easing, expanded social benefit programs, and a continuation of fighting proxy wars with Russia be it in the Middle East or Ukraine.

The question with QE is whether it ultimately debases the currency through inflation and, directly related to this, is this "economic recovery" as seen in the rallying equity markets real? I personally believe that there is no free value to be created by the central bank printing money and what we expend now to "recover" and give us comfort from our 2008 recession must be paid for sometime in the future by inflation in full.  While official reports based on the CPI show inflation in the low single digits for the past few years (1.5%-3%), there has been some controversy on whether the weightings of the CPI accurately reflect the proportional spending of households on each expenditure type (e.g. housing, food, transportation, medical care, etc.).  When thinking about real inflation, we can do away with economic models and just reflect back to a time when goods and services were cheaper (particularly rent, tuition, and healthcare).  My memory of prices 5 and 10 years ago gives a different story than the low single digit annual inflation numbers reported.  Also this is just baseline inflation without considering the lagging effects QE might have on inflation in the future.  It is often the case that inflation lags the expansion of the monetary base by a few years.  It seems to me that this fiscal stimulus has failed to defibrillate our economy and soon the we will have to pay for that defibrillator we bought on credit.

Currently 69% of all government expenditures are on entitlements and welfare (this includes medicare, medicaid, and social security).  Furthermore, most of these programs have expanded in the past few years.  Given that it is politically unviable for any politician to severely cut back on these social programs in a democracy, I see the trend of continued expansion inevitable.

Where there is spending, there must be either taxes or deficits.  Taxes are a tricky issue since greater taxes cause capital flight.  Sometimes I feel that the government is killing the geese which lay the golden eggs.  Revenue can be generated by unexpected tax policy changes but eventually people adapt their behavior to the now expected tax policy to minimize their taxes.  They do this through a variety of ways including offshore account, tax loopholes, and foreign investments.  Eventually people even adapt to the expectation of unexpected changes in tax policy.  Also, as special interest groups on K Street gain power, the tax code becomes more convoluted enabling special loopholes and causing more lost revenue.  Deficits are fine so long as the country running them has an internal rate of return on capital at higher than the interest charged.  So long as we are productive with our borrowed capital, things should be fine but in times of economic strife and stagnation, deficits could bloom to unsustainable levels.  I wonder if Japan's decade of stagflation foretells our own country's future.

Currently 18% of all government expenditures is for the national defense (or offense as I like to joke).  Much of this money goes into fighting proxy wars with Russia mostly over oil interests in the Middle East.  To the US's credit, we are becoming more efficient about our resources.  Inciting (possibly) and supporting a revolution costs much less than sending troops over to stabilize a region as we've learned with Afghanistan and Iraq.  Ukraine is a little different.  Right now Russia is attempting to annex the Crimea region of Ukraine, a region which is predominately ethnically Russian.  I say let Putin have it.  We've already gained greater Ukraine and any economic sanctions against Russia will only hurt both sides (albeit it will hurt Russia more).  Western Europe gets most of its oil from Russia with most of that flowing through Ukraine.  Also with Ukraine proper joining the EU, we will have gained another buffer state to Russia and they will have lost a buffer state.  Moreover, Putin is in a hard spot because of the strategic importance of Crimea as a major military port to the Black Sea.  Should Putin give up Crimea, he exposes the southern area of Russia to western military action and there will be anxiety for people living there in the same way that the Cuban missile crisis cause us great discomfort.  I think he cannot back down from Crimea.  In my opinion, physical war is the worst but economic war does neither side any good either.  Proxy wars are less expensive yet but cultural wars are even cheaper and not bloody for that matter.  Cultural imperialism is more permanent than physical or economic imperialism.  We should seek to convert rather than fight if our goal is a globalized world.  Already most of the world speaks English.  I wonder if one day we will all share a single currency as well.

Kevin & Team Buttercoin
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