Bitcoin crash coming?

[sc_rufctr]

An interesting Australian perspective which I don't entirely agree with.

"What started off promising as the “people’s currency” and a middle finger to governments and central banks has since turned into one big joke."

https://www.smh.com.au/business/markets/i-sold-all-my-cryptocurrency-and-you-should-too-endless-growth-is-not-sustainable-20210522-p57u6u.html

[ShopCat]

Originally Posted by Wayne 962

I'll stand by my previous statements. Bitcoin is a fringe technology, used pretty much only by speculators, is not used for hardly any practical/legal commerce, and the support of this fringe system uses more electricity than the entire country of Argentina. As with most people arguing about random stuff these days, it comes down to "Scope and Scale". In this case, the scope of Bitcoin's usage is minuscule, yet the scale of it's energy usage is obscene, particularly in relationship to the scale of the other systems that you quote - namely the stock market, which is utilized by millions, if not billions of people to aid in the flow of capital. It does not make any sense to compare the current energy usage of the stock market (which stock market are you referring to in particular?) to the current energy costs of Bitcoin.

-Wayne

The specific stock market does not matter, my point was that those systems are actually NOT large in scope and scale in relation to the worlds population and wealth distribution. I'm sorry but you are straight up DELUSIONAL about the current system and what its purpose is. You have the "flow of capital" part right but conveniently forgot to mention the money mostly only flows up. The rich have been getting richer and the system promotes the consolidation of wealth. The top 1% control about HALF of all equities and the top 10% control almost 90%! Yes, wonderful scope and scale!

https://financialpost.com/investing/how-americas-1-came-to-dominate-stock-ownership

[Roswell]

[Skillet83]

Originally Posted by Roswell

Not for the faint of heart, hehe. Full disclosure, I bought as high as 56K, but purchased a chit tonne between 7K & 22K. I own a lot more than just BTC, but they are all in the toilet today. I also bought more today as well as 500 more SLT. This is play money for me, risk only as much you are willing to lose. Black or Red sir? There will be huge winners in this and huge losers, this ain't going away, choose wisely.

[Wayne 962]

Originally Posted by ShopCat

The specific stock market does not matter, my point was that those systems are actually NOT large in scope and scale in relation to the worlds population and wealth distribution. I'm sorry but you are straight up DELUSIONAL about the current system and what its purpose is. You have the "flow of capital" part right but conveniently forgot to mention the money mostly only flows up. The rich have been getting richer and the system promotes the consolidation of wealth. The top 1% control about HALF of all equities and the top 10% control almost 90%! Yes, wonderful scope and scale!

Your reply has made me chuckle. So, this response is a textbook case of "deflect and attack" - a technique commonly used when direct, salient facts cannot be made to counter someone's argument and/or support the original person's position. In this case, the deflection is an attempt to move the argument to a completely different subject (the supposition of wealth inequality) - and distract from the original discussion which revolves around the scope, scale, and viability of Bitcoin in the wake of it's terrible environmental impact.

I'm happy to start a new thread/discussion on both the merits and the flaws of the "stock market" - I'd actually probably agree with you on a wide variety of points.

-Wayne

[Wayne 962]

On a related topic, I also wanted to post a prediction for the future (which may or may not happen). So, it may be likely that Bitcoin will remain below the price on February 8th for quite a while. That date is significant because that's the date that Elon announced that Tesla had purchased $1.5 billion ($1,500 million) of Bitcoin. Strangely and surprisingly (typical Elon-style), as we all know, he basically trashed his own $1.5B investment by stating that Tesla would no longer accept Bitcoin due to environmental concerns:

Elon Musk: "We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel. Cryptocurrency is a good idea... but this cannot come at great cost to the environment."

It's estimated that Elon's original purchase of Bitcoin for Tesla was $34,700. This is based upon the SEC 10K filing that Tesla made recently:

https://fortune.com/2021/04/27/tesla-tsla-bitcoin-btc-bet-how-much-has-it-made-elon-musk-profits/

April 27, 2021- How much has Tesla made on Bitcoin?

Ever since Tesla announced its $1.5 billion Bitcoin purchase in the 10K, issued on February 8, it's been clear that the EV-maker's been harboring big gains. Still, the Q1 report provides new detail on the approximate price Tesla paid, how many coins remain on its balance sheet, and how much it's made on its big wager. The numbers also reveal a troubling truth: In the first quarter, the digital currency's appreciation dwarfs what Tesla earned in its bedrock business of selling cars and batteries, and providing software updates and other services.

Accounting rules classify digital currencies as "indefinite-lived intangible assets." If at the end of a quarter, the price of Bitcoin falls below what the company paid, it's required to take an "impairment" charge reflecting the size of the hit. But if the price rises, the owner doesn't show that appreciation on the balance sheet. The holdings are still shown at the amount or "book value" the company originally paid.

The big profit recorded in Q1 reveals the approximate size of the overall windfall. A note on page 5 discloses that Tesla booked a $101 million "positive impact" from the sale of Bitcoin, recorded in the 'Restructuring & Other' line on the income statement. The cash flow statement shows that the sale garnered proceeds of $272 million. Hence, we know that Tesla paid $171 million for Bitcoin it sold for $101 million more, clinching a 59% profit. On the conference call, CFO Zach Kirkhorn stated that the transaction happened "later in March."

Bitcoin's price was uncharacteristically steady in the last three weeks of March, averaging $55,100. So the math suggests that Tesla sold around 4,800 Bitcoins at that price to raise the $272 million. We also can reckon what Tesla originally paid for its stake. Since it pocketed a 59% gain on every Bitcoin sold, its original cost must have been about $34,700. Makes sense. That's close to the average quote in the January to early February period that bookends Tesla's purchases. It appears that the $1.5 billion investment bought roughly 43,000 Bitcoin.

Once again, the book value––or what it paid––for the tokens sold is $171 million. So we know the approximate balance-sheet number for what remains is the original investment of $1.5 billion, less the $171 million, or about $1.329 billion.

Result: Tesla still holds around 38,300 Bitcoin that cost $1.329 billion. At Bitcoin's price of $54,100 on April 26, Tesla's trove is worth over $2.07 billion. Tesla's gain on what it still owns is $741 million. Add the $101 million from the Q1 sale, and its total take is $842 million.

These numbers are approximate, but present what should be close to the full picture. On its balance sheet, Tesla displays its "digital currency" holdings at $1.331 billion. That's $2 million more than the number I get from deducting the sale from its original purchases. But on the earnings call, Kirkhorn said that Tesla "continues to accumulate Bitcoin from transactions from our customers as they purchase vehicles." Musk's famous declaration in February that Tesla would accept the coins in lieu of dollars or yuan may well explain the $2 million discrepancy. If forty customers opened their Bitcoin wallets to buy or make deposits on $51,000 Model 3s, those sales would account for the extra $2 million-worth in Tesla's coffers.

And here is an opinion further down in that article that I somewhat agree with:

Excluding the $101 million profit, its appreciation from the Bitcoin foray amounted to well over $700 million. Despite that bounty, the decision to tie Tesla's fortunes to an ultra-volatile investment was a poor one. Given the crypto's wild fluctuations, the big holding will only make Tesla's already uncertain profitability harder to forecast. What Tesla investors don't need more of is risk. Instead of gorging on Bitcoin, Musk could pay a special dividend with this excess cash, and let shareholders decide whether to buy Bitcoin or do something else with the cash.

If Tesla hasn't already sold it's Bitcoin holdings, then it will have to declare a huge loss on it in their Q2 report, assuming the Bitcoin price doesn't bounce back. So, my prediction is that Elon will face a rash of shareholder lawsuits from angry shareholders who feel that the CEO risked a large portion of the Tesla cash pile on a huge speculative asset - insanely being one that he tanked himself!

What an odd period in time we have going on right now...

-Wayne

[Wayne 962]

Here's an interesting snapshot of the Bitcoin blockchain from a few minutes ago:



Quite interesting to observe the transactions and associated fees involved. There appears to be a large number of small-dollar transactions, like this one worth $44.47 with a $27.43 transaction fee. Or the $33.34 one with a $7.05 transaction fee. Or the one at the bottom that's $28.78 with a $9.74 transaction fee. Under what practical circumstances would one want to pay these types of fees with respect to these transaction sizes? I can think of only one - illegal activity? One can't tell about the larger transactions, but the smaller ones definitely seem likely to be for suspect purposes, in my opinion...

-Wayne

[ShopCat]

Originally Posted by Wayne 962

Your reply has made me chuckle. So, this response is a textbook case of "deflect and attack" - a technique commonly used when direct, salient facts cannot be made to counter someone's argument and/or support the original person's position. In this case, the deflection is an attempt to move the argument to a completely different subject (the supposition of wealth inequality) - and distract from the original discussion which revolves around the scope, scale, and viability of Bitcoin in the wake of it's terrible environmental impact.

I'm happy to start a new thread/discussion on both the merits and the flaws of the "stock market" - I'd actually probably agree with you on a wide variety of points.

-Wayne

I'm not trying to deflect or distract, you are missing my entire point. I do not argue to attack the stock exchange, I argue to attack the argument itself. No government has ever tried to outlaw the NYSE because "it wastes too much energy" just for a financial instrument and everything negative that come along with it. Do you even question that? I am saying the entire argument is disingenuous.

[Wayne 962]

Originally Posted by Wayne 962

Bitcoin is a fringe technology, used pretty much only by speculators, is not used for hardly any practical/legal commerce, and the support of this fringe system uses more electricity than the entire country of Argentina.

-Wayne

[Sooner or later]

What is proof of stake?

Supposedly cuts energy use significantly.

[ShopCat]

Originally Posted by Sooner or later

What is proof of stake?

Supposedly cuts energy use significantly.

cuts energy by 99+% but is less secure as a result

[ShopCat]

Originally Posted by Wayne 962

And here is an opinion further down in that article that I somewhat agree with:



If Tesla hasn't already sold it's Bitcoin holdings, then it will have to declare a huge loss on it in their Q2 report, assuming the Bitcoin price doesn't bounce back. So, my prediction is that Elon will face a rash of shareholder lawsuits from angry shareholders who feel that the CEO risked a large portion of the Tesla cash pile on a huge speculative asset - insanely being one that he tanked himself!

What an odd period in time we have going on right now...

-Wayne

Thats not how PL works... if they hold it as an asset they dont have to declare "a huge loss," its on their BS. The person you quoted does not know basic accounting, which misleads readers. They suggest that somehow Tesla giving the money away is a better option than holding an asset they obviously think will appreciate, even if there is a risk it depreciates. 100% loss vs ???. Im sorry, I can't take these arguments seriously as its too obvious to me they have no idea what they are commenting on. Also, Tesla is still in the green on BTC (for now,) and I would bet they plan to hold long term, so profitability forecasting sales of BTC is not even a thought in their minds. Plus cash and cash equivalents for Tesla is like $20B, so this $1.5B bet is not some all in make or break risk event... To me, we are still in asymmetric risk, yes it could easily drop back to around $10k where it resided for the past few years, or it could continue and go exponential over the next 10-15 years. IMO its never going back to $5-$10k, so you risk 2/3rds loss for 20x gain, while cash loses purchasing power every day. To me its a no brainer to hold minimum 5% of NW and as much as 20% in crypto.

[Wayne 962]

Originally Posted by ShopCat

Thats not how PL works... if they hold it as an asset they dont have to declare "a huge loss," its on their BS. The person you quoted does not know basic accounting, which misleads readers. They suggest that somehow Tesla giving the money away is a better option than holding an asset they obviously think will appreciate, even if there is a risk it depreciates. 100% loss vs ???. Im sorry, I can't take these arguments seriously as its too obvious to me, as an accountant, they have no idea what they are commenting on.

Sorry, but you are mistaken. I suggest that you Google this topic to learn more about it. The IFRIC indicates that cryptocurrencies are generally intangible assets under IAS 38 Intangible Assets. These assets need to be tested on an annual basis for "impairment." A discussion of this can be found in this article as well as other articles by the "big four" accounting firms:

https://www.accountingtoday.com/news/companies-investing-in-crypto-may-be-in-for-a-rude-accounting-surprise

The most commonly accepted accounting treatment for cryptocurrencies in the U.S. requires writedowns of losses, which can be common given the volatility of many digital currencies, but the rules don’t permit “writeups” of gains. That could potentially mislead investors when they’re reviewing financial statements, so companies may need a stronger non-GAAP financial disclosure system to keep investors informed about digital assets that are gaining in value.

“For most companies in the U.S., U.S. GAAP accounting rules really require you to account for those investments like an intangible asset,” said Amy Park, an audit partner in Deloitte’s national office for accounting and reporting services who specializes in consolidation, financial instruments and digital assets, who co-wrote the report. “If you think about how some of these companies are using this, they’re looking at this as a form of investment. That may be a little counterintuitive, but in the accounting rules, you have to look at the specific definitions. When you look at the definition of a cash equivalent, or inventory, or financial instruments per se, the accounting definitions don’t really line up with what Bitcoin is. It really falls into this intangible model.”

Companies typically have to account for an intangible asset initially at cost, which is probably the fair value of what they’ve paid for it on day one. “You have to assess that asset for potential impairment, but not like other financial instruments,” said Park. “You don’t get to really mark-to-market, or account for the appreciation in value related to that asset.”

Unlike a traditional company stock investment, companies need to treat cryptocurrency differently. “I usually will think of the value I can sell it to somebody else in the marketplace as what it’s worth to me today,” said Park. “The accounting for that financial asset or financial instrument is mark-to-market, so if the value goes up or the price goes up, I can mark it up on my balance sheet. As the price goes down, I can mark it down on my balance sheet. But with the intangible asset, you’re not in that model, so as the price goes up, you don’t get to recognize any of that appreciation on your books. As the price goes down, if it’s impaired, you do have to reflect that on your books, so you sometimes end up with the downward adjustments, but no potential upward adjustments, which can be challenging because I think some companies are viewing this as very similar to an investment or a financial asset but the accounting doesn’t allow that.”

More links that pretty much say the same thing:

https://www.cpajournal.com/2019/06/21/cryptoassets-accounting-for-an-emerging-asset-class/
https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/04/cryptoassets-accounting-tax.pdf
https://www.bdo.com/insights/assurance/financial-reporting/cryptocurrency-the-top-things-you-need-to-know

-Wayne

[ShopCat]

Originally Posted by Wayne 962

Sorry, but you are mistaken. I suggest that you Google this topic to learn more about it. The IFRIC indicates that cryptocurrencies are generally intangible assets under IAS 38 Intangible Assets. These assets need to be tested on an annual basis for "impairment." A discussion of this can be found in this article as well as other articles by the "big four" accounting firms:

https://www.accountingtoday.com/news/companies-investing-in-crypto-may-be-in-for-a-rude-accounting-surprise


-Wayne

Yes, I was mistaken on the current guidance, which I think will change, as that is a trash way to account for these holdings. I was thinking logically as a (former) accountant, I think I underestimated the silliness of GAAP and IFRS, they never cease to amaze. Also, as a small business, the rules are not the same for me. PWC even put out a release saying this is not in line with reality. https://www.pwc.com/us/en/cfodirect/publications/point-of-view/cryptocurrency-bitcoin-accounting.html

It will be interesting to see how they adjust now that more institutions are holding Bitcoin and Ethereum on their books. But this still will not IMO make profit forecasting for Telsa more difficult. So they could have losses from bitcoin (depending on when they do their annual test) but will never have gains until they sell. Also interested if running a node and/or mining would give them enough argument to exempt them from the intangible asset classification. All of this is "interpretation" at this point.

This still does not make giving the money away to shareholders better or even a comparable option. And Tesla is still in the green on their relatively small cash bet for now.

[Wayne 962]

Interesting article on Bitcoin and stable coins in today's Wall Street Journal, which completely echos the comments, questions and concerns of the OP (Original Poster) of this thread...

https://www.wsj.com/articles/bitcoins-reliance-on-stablecoins-harks-back-to-the-wild-west-of-finance-11622115246?reflink=desktopwebshare_twitter&mc_cid=e05049fbd4&mc_eid=f9f5c227af

Bitcoin’s Reliance on Stablecoins Harks Back to the Wild West of Finance

To understand the weakness of stablecoins such as Tether, it is worth a quick history lesson from pre-Civil War American finance


Stablecoins are one of the weirdest things in the whole bizarro world of cryptocurrencies, because they operate on principles directly opposed to the rest of the crypto system.

Crypto true believers argue that bitcoin and its ilk will supplant “fiat” currencies issued by governments, while the whole point of the innovative blockchain that underlies them is to overcome what pseudonymous inventor Satoshi Nakamoto called “the inherent weaknesses of the trust based model.”

Yet stablecoins, and especially the largest, Tether, are thriving. Tether’s $60 billion of issuance leaves it jockeying for third place in crypto market value behind bitcoin and ethereum. There are scores of others, and Facebook’s Libra, renamed Diem last year, plans to join in with stablecoins covering several currencies.

Stablecoins are a type of cryptocurrency tied one-for-one to dollars or other traditional currencies and whose value relies on trusting the issuer.

Stablecoins have also become central to the financial infrastructure of crypto. According to data provider Crypto Compare there’s more trading between Tether and bitcoin than between bitcoin and all fiat currencies put together. For crypto traders, at least, stablecoins are a vital tool, because of the speed with which they can be used to move money from one crypto exchange to another, and because they provide a handy way to park cash temporarily in what is basically dollars.

This creates a major vulnerability for crypto. Instead of building a new financial system immune to the problems of the old one, it is reinventing problems long-since mitigated by regulators in traditional finance.

To understand this weakness, a quick history lesson. Stablecoins are the living embodiment of free banking, the system of lightly-regulated and often fraudulent issuers of dollar bank notes that dominated U.S. finance until the government stepped in after the Civil War. Paper money was backed by the assets of these banks. But trust in those assets determined whether and how big a discount to apply to any given dollar bill. Alongside the regulated banks were thousands of issuers of small-value IOUs, such as from a Michigan barber, that were used as money in frontier towns short of cash.

There’s a good reason these stablecoins of yore were eventually junked. Users of money—that is, pretty much everyone—had to keep up-to-date on the condition, and perceived condition, of dozens of bank note issuers to avoid being duped on a transaction. The costs of this alone were incalculable, quite aside from the widespread failures and fraud.

The twin dangers to the scores of stablecoins that have been created are the same as the pre-Civil War scrip: the assets turn out to be worth less than thought, or people come to believe that the assets are worth less than thought and there’s a run.

The biggest stablecoins—from Tether, Circle and Paxos—publish reports from accountants attesting that their assets match the amount issued, in an attempt to ensure trust. So far, all three have succeeded, with their stablecoins proving remarkably stable around $1.

A glance at the free banking era should remind traders of the risks. Back in the 1830s, banks would fool auditors by shipping the same chest of coins from one to the next to be counted multiple times, or by topping up a barrel of nails with a layer of silver, according to Joshua Greenberg’s enjoyable study of the era, “Bank Notes and Shinplasters.”

The parallel is clear from the details of Tether’s $18.5 million settlement with the New York Attorney General in February:

https://ag.ny.gov/sites/default/files/2021.02.17_-_settlement_agreement_-_execution_version.b-t_signed-c2_oag_signed.pdf

It said Tether was lying about having full backing for its issues, and when Tether tried to head off rumors about its financial situation by employing an accountant to attest to the assets, cash was put into its new account only on the day of the assessment. Tether also lent $475 million to work with Bitfinex to help it through a cash crunch, this time the day after publishing the balance of a new bank account in the Bahamas. This is the modern version of mobile chests of silver.

Stuart Hoegner, Tether general counsel, said the firm is “taking steps to obtain audits for several financial years“ and will publish them. “To be clear, these kinds of transfers are not happening,“ he said by email when asked about assets being moved just before or after an assessment.

Tether doesn’t do business in the U.S., with a few exceptions, and agreed in its February settlement not to take on customers in New York. Circle has a “bitlicense” issued by New York state, while Paxos is regulated as a trust in the city, in an effort to boost confidence. This being crypto, there is of course a full crypto stablecoin too, called Dai, which gives each user a “vault“ to store collateral; it will be liquidated by “keepers” if its value falls too low to support the Dai issued against it.

My worry is that it isn’t enough to be regulated, transparent and solvent, as the run on money-market funds in 2008 and again last year showed. Ultimately nothing beats access to Federal Reserve loans when large numbers of depositors are demanding their money back. Unlike with banks and funds, there’s no chance of the Fed helping out stablecoins in a crisis. That means the assets they hold are vital, along with their terms. Paxos’s accountants’ attestation shows it holds cash and Treasurys in accounts with unnamed U.S. banks, while Circle says it holds “cash, cash equivalents and short-duration investment-grade assets.”

As part of its legal settlement Tether disclosed more detail of its assets, showing a big exposure to commercial paper, a form of short-term lending to companies. Mr. Hoegner said the company uses in-house traders to invest in commercial paper, “always ensuring that we have an adequate amount of liquidity to meet any eventual redemptions.“

JPMorgan interest-rates strategist Josh Younger points out that Tether’s scale ranks it alongside the biggest money-market funds and companies as a major owner of commercial paper.

In one way Tether has more protection against a run than an ordinary bank if something goes wrong: Its terms allow it to suspend payments or repay with a chunk of its assets instead of dollars. That’s unlikely to be reassuring to users, however.

It surprises me that Tether is so popular given the revelations from the New York case, the ease with which it can suspend payments and the concern among regulators, including the Fed, about stablecoins. But there is a key difference to the earlier era that helps stablecoins avoid the discounts that plagued the bank notes of the Wild West.

Back then the effort of traveling to a bank’s branch to swap its notes for solid silver dollars meant it was hard to arbitrage away discounts, especially for notes from faraway banks. In the digital world it isn’t much of a hassle to cash in a stablecoin, so any discount quickly vanishes.

At least so long as the stablecoin issuer has ready money to pay back claims.

[Wayne 962]

So, I don't really understand why anyone would hold a stablecoin. That doesn't make any sense to me. Take a US Dollar and convert it into something else that is far less of a credit risk (far, far less), but also keep all the risk of the US dollar and inflation? Unless I'm missing something, that doesn't make sense. It only seems to make sense if there is an intangible benefit that I'm not seeing, like being able to use it easily for illegal activities. That's pretty much the only thing I can think of?

So, is there a market to launch a "stable coin" that is backed by real estate? Seems like it could be a smart move. Say someone has a sizable real estate portfolio. They could issue their own "stable coin" backed against the assets. With a 1-to-1 trade on the US dollar, the assets would be guaranteeing the coin. But, for the portfolio owner, the money received would be essentially a zero-interest loan from the coin holders, and then the income from the properties would be "management fees". If one could borrow from Joe and Bob at zero percent interest (there's some management costs involved) and then go invest the funds in quality real estate investments, that could be a rockin' business model. It all relies on people wanting to obtain, hold, and use the stablecoin though. I'm also not sure what one would do with "oversuccess". As in, if one has $100M of real estate and then there is $200M worth of demand, I'm not sure how that would work. I guess one could just keep the excess funds in the bank? Also, the issue that real estate values rise and fall and are not locked in step with the dollar. That's an issue too.

Food for thought though...

-Wayne

[Racerbvd]

[img]http://forums.pelicanparts.com/uploads26/FB_IMG_162217775822316222448851622330614.

[brainz01]

I'm pretty amazed at the legs of this thread. A very interesting chain over an interesting period for BTC.

Wayne, thanks for all your thoughtful posts. I've learned a lot from what you've posted. You've done a lot of good research.

I'm generally in your camp on crypto these days: blockchain is clever/useful, but solving the hash is hugely inefficient/wasteful and does not make for a good currency. And your point on swapping a relatively sovereign currency for a questionably-backed stable coin is a good one - - really makes no sense unless one is skirting the law/taxes/currency controls/etc.

It will be interesting to see how deep this rout of late goes...

[ShopCat]

Originally Posted by Wayne 962

So, I don't really understand why anyone would hold a stablecoin. That doesn't make any sense to me. Take a US Dollar and convert it into something else that is far less of a credit risk (far, far less), but also keep all the risk of the US dollar and inflation? Unless I'm missing something, that doesn't make sense. It only seems to make sense if there is an intangible benefit that I'm not seeing, like being able to use it easily for illegal activities. That's pretty much the only thing I can think of?

-Wayne

I think you misunderstand the uses of stablecoins, and personal bias informs your conclusions. Look into the decentralized finance space. Many governments will be coming out with their own "stablecoins" soon.

[Brando]

Originally Posted by Racerbvd