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Market Lab Report - Premarket Pulse 2/12/18 - Market corrections since 2011 + Dr. K's Crypto-Corner

Major averages bounced Friday on heavy volume that was well above average. The S&P 500 found support at its 50-day moving average. Carnage has been observed most everywhere. The 20-day moving average once again proves its worth as a place not just to identify Wyckoff undercut & rally as well as voodoo low volume set ups, but also makes for an effective though somewhat liberal sell stop. Futures are currently up about a percent at the time of this writing as the markets continue to bounce off lows and focus turns to Trump's infrastructure plan.

As we have mentioned in prior reports, the TLT 20-year Treasury bond ETF telegraphed the start of the bear market in bonds as it broke through its 200-day line then proceeded to reverse an entire year's worth of feeble gains over the last two weeks:


Markets are forward looking and perhaps are projecting that the great unwind of trillions in debt will come at a steep price. The current correction is just as sharp and fast as prior corrections that exceeded 10% but is different than prior corrections as it is related to fears that the unwinding of trillions in debt will burst the global sovereign debt bubble that began when the U.S. Federal Reserve started its QE program in late 2008 to save the markets from further collapse. Other central banks then launched their own QE programs. While central banks such as the ECB has reduced its monthly purchases from 60 to 30 billion euros, this is not a meaningful amount when compared to the trillions in debt outstanding. And they have yet to actually reduce their balance sheets. So debt continues to grow given that major global central banks are continuing to print money.


As we have written many times before, central banks have painted themselves into a corner. Never before in the history of the world has so much debt ever been repaid. If hundreds of years of history are any guide, fiat currencies collapse. Fiat currencies have an average lifetime of about 40 years though some currencies such as the U.S. dollar are revalued such as in 1933 when it lost 42% of its value overnight when the government revalued the price of gold to $35 from $20 an ounce.

Legendary futures trader Ed Seykota wrote in his seminal book "Govopoly in the 39th Day" that fiat currency collapse is how the old orders get swept away to be replaced with new forms of government, restarting the process once again. He discusses his book in detail in an interview he gave with Michael Covel. After governments become beyond overbearing, revolution in some form often results. Fiat can be destroyed by hyperinflation, war, independence, or monetary reform.

Segue into Dr. K's Crypto - Corner... by Dr. Chris Kacher

Bitcoin is the biggest leap forward in the democratization of money that makes for a more fair world

While fiat can be destroyed a number of ways, this time, the change at hand may be both evolutionary and revolutionary. After a series of email exchanges I had with Seykota, he switched his stance from bitcoin being a tool of the darkweb and other nefarious activities to a technology that may greatly benefit and provide a counterbalance to collapse. The underlying technology of bitcoin involves cryptography and the basics of contract law while the blockchain has hundreds of use-cases.

What makes bitcoin so powerful?

Bitcoin is evolving like a protocol rather than a company. Bitcoin does not have a board, earnings, or capital, and has all the patience in the world, yet its growth is exponential. Bitcoin is decentralized, trustless, and censorship resistant with a robust protocol. No other cryptocoin shares these qualities. Further, the most important factor with cryptocoins is hashing power. Bitcoin dominates here by almost an order of magnitude even when stacked against all the other 1600+ cryptocoins combined. Two other important factors are the number of users and number of transactions. Across all three factors, bitcoin is in a league of its own.

Consequently, bitcoin's 'killer app' is its role as 'digital gold', a revolutionary store of value that offers a dependable monetary system free from unbounded inflation and political intervention. Meanwhile, since the U.S. went off the gold standard in 1971, the dollar is backed by the 'full faith and credit' of its government. The same goes for all other governments. Yet governments are mired in debt.

Meanwhile, bitcoin continues to evolve. Additional layers built upon bitcoin, such as the Rootstock.io smart contact platform, threaten to trespass on ethereum’s playground. Rootstock promises to do everything ethereum can, with the added security of a two-way peg to the more secure bitcoin network. This begs the question of whether we need more than one protocol. If not, ethereum's days may be numbered. Doubts remain regarding ethereum’s high rate of inflation and its significant pre-mine. If ethereum is to survive, it must also evolve past dependence on a single trusted authority, or as Vitalik Buterin calls himself, a 'benevolent dictator'. The key behind bitcoin is its massive lead against all other cryptocoins from which the network effect and Metcalfe's law will continue to play an increasingly vital role.

Can other blockchains such as ethereum co-exist?

Ethereum is evolving into the world's supercomputer, a blockchain-based programming language enabling code-based contracts and decentralized applications. But before we can assume the answer is yes, if you remember, when the internet was born, some 'experts' said the internet would only be used for low latency, low bandwidth applications and x25 would be used for high bandwidth apps. There would consequently be a number of networks, one network for the web, another for voice, another for video, and so on. While this made technical sense, it didn't turn out that way. TCP/IP which always has been the backbone of the internet has always dominated and is consequently used for everything including voice, video, data, and so on. Analogously, the same is true for value in the cryptospace. If a cryptotechnology has value in the cryptospace, odds are it will eventually be built on the bitcoin blockchain. While it might be built on other higher platform layers, in time, there may be just one prevailing layer, just one blockchain for value. And given the metrics for hashing power, number of users, and number of transactions, bitcoin stands to be this prevailing layer. The network effect and Metcalfe's law are key to bitcoin maintaining its dominance.

What about bitcoin's high fees?

Remember that bitcoin continues to evolve. While the level of fees remain high, bitcoin will eventually be able to process transactions quickly and cheaply. By analogy, it took the internet a number of years to power audio then video, but it would have been a mistake to bet against the internet just because it took time for these features to be realized.

At the start of the internet, there was Compuserve and AOL who made similar arguments against the internet. Both said the internet was slow and complicated, so AOL offered a much simpler solution that replicated the internet. But in the end, open source always wins when it comes to technology. And bitcoin is uncensorable and trustless. In time, it may become apparent that we do not need multiple protocols for blockchain technology.

What about bitcoin's volatility making it poor for payments?

The first stage of bitcoin is its store of value, not payment. Two billion families in the world today are unbanked. In the coming years, many of these will come online and start to use bitcoin as a store of value over gold or dollars due to the ease in which monetary value can be safely stored and sent. Various third world countries are slowly becoming 'bitcoinized' as a means to preserve savings against a falling currency while relatives abroad send money to their families in these third world countries. In time, bitcoin will naturally turn into an important payment mechanism.

What about other cryptocoins which are superior to bitcoin?

Litecoin is cheaper and faster, but with protocols, it doesn't matter which one is better. What matters is which one is being used the most thus enabling it to maintain its lead via the network effect. Bitcoin has the clear advantage.

By way of analogy, an email protocol could be launched that is much better than normal email because normal email doesnt handle spam very well, cant prove the identity of the sender, and other shortcomings. But it's hard to get people to use it. Likewise, it's a mistake to jump on board a cryptocurrency just because it may have better functionality. A lot of people made that mistake with the TCP/IP internet when they bet against the internet vs. four other superior but late-to-the-game protocols that existed at the time because, back then, the internet was supposedly never going to be good enough for voice or video. They were wrong. The same could be true for bitcoin.

What about bitcoin being a threat to central banks and governments?

The U.S. is best positioned to take advantage of what bitcoin brings just as the U.S. benefited the most from the evolution of the internet. Further, central banks and governments did not worry about gold taking over their respective currencies though the U.S. government made everyone turn in their gold prior to 1933 when they revalued gold from $20 to $35/oz. With bitcoin, this would not be possible. Furthermore, China could have made it illegal to own bitcoin but they didn't. They are concerned about ICOs and the trading of bitcoin. Of course, if there was a global ban on bitcoin, bitcoin would go underground and be used in the black market economy which has been outpacing the growth of major economies according to this Forbes article. This shows a pronounced number are starting to reject 'asinine' government bureaucracy, intervention, and rights crippling laws as told in Seykota's Govopoly.

Technologically speaking, bitcoin's blockchain is creating the fifth protocol layer that will power the next generation of the Internet, call it Web 3.0, and no government wants to be left behind. By comparison, Web 2.0 is what exists today as the interactive, e-commerce, and social web facilitating collaboration between people while Web 1.0 was static, thinks days of the Mosaic browser, where websites were information dumps that could be read but little interaction took place.

What does this mean long-term for bitcoin?

Well, my million dollar prediction for one bitcoin by 2022 still stands since the space is growing at exponential speeds. While bitcoin is no stranger to corrections exceeding 75%, it is also no stranger to achieving new highs even after having corrections as steep as 93%. Bitcoin was born with a value of 0.0007 dollars (or 0.07 cents) per bitcoin. Based on today's $8,300 valuation, that represents an 11.8-million fold gain. Nothing in the history of speculation even comes close. And no bubble in the history of speculation ever survived even one 75%+ correction. Meanwhile, bitcoin has had numerous 75%+ corrections before reaching new price highs once again. So perhaps there is method to this 'madness'...

In time, bitcoin could become the meta currency, the global standard for foreign exchange, value, and settlement. We haven't had a global standard of value in 500 years. Prior to the last 500 years, the global standard of value was gold. Gold resembled bitcoin in that it was apolitical and not controlled by any one country. But for the past 500 years, value has been based on fiat currency. First, fiat came as Portuguese then Spanish then Dutch then British then the US dollar.

Should bitcoin become the meta currency, this does not mean other currencies would vanish but bitcoin would instead become the connector to all currencies. For this to be realized, bitcoin would have to be worth in the tens of trillions of dollars. At $1,000,000 a bitcoin, its market value would be worth $17 trillion, a starting point. By this time, with a far more mature and evolved bitcoin, volatility will be greatly reduced and would further diminish with a rising valuation.

Buckle up... a brave new world awaits.

(͡:B ͜ʖ ͡:B)
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