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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Bitcoin Miners See a Bullish Breakout on the Horizon
July 30, 2018

overbought or oversold? let these mathematical signals be your guide

The price of bitcoin surged above $8,000 last Tuesday for the first time since May after the Group of 20 (G20) meeting in Argentina concluded with little urgency to take regulatory action on cryptocurrencies. In a communiqué, G20 finance ministers and central bank governors expressed confidence that the technology underlying alt-coins “can deliver significant benefits to the financial system and the broader economy.”

Many of these benefits were discussed in my interview with Marco Streng, cofounder of Genesis Mining, the world’s largest cloud bitcoin mining company. Genesis had a huge win last week as securities regulators in South Carolina dismissed their cease-and-desist orders from March. The move, according to CoinDesk, marks the first time the state dropped such orders against a blockchain startup.

The U.S. global sentiment indicator reaches 54 percent mid-week
click to enlarge

Further support came courtesy of a July 16 report by the Switzerland-based Financial Stability Board (FSB), which concluded that, “like crypto-assets in general, crypto-asset platforms do not pose global financial stability risks.” Trading platforms include Coinbase—the most popular by far—Bitfinex, Kraken and many others.

From its low of $5,850 in late May, bitcoin was up nearly 44 percent on June 24 before pulling back on the Securities and Exchange Commission’s (SEC) decision not to approve a bitcoin ETF filed by Cameron and Tyler Winklevoss. (It was back above $8,000 on Friday.) I believe bitcoin’s fundamentals are lining up for a significant move higher, its price having already broken sharply above the 50-day moving average.

Keep in mind, though, that we’re still very early in crypto investing. It was only 10 years ago that the mysterious Satoshi Nakamoto wrote the now-famous whitepaper that led to the creation of bitcoin. Volatility is still roughly six times as high as large-cap stocks and gold in a single trading session, and 11 times as high in the 10-day period. As I told Market One Media recently, the space remains speculative, but there are opportunities for tremendous upside.

understanding cryptocurrency's "DNA of volatility"

Bitcoin’s Hash Rate Is Telling a Bullish Story 

Among the most bullish signs is bitcoin’s rapidly surging hash rate. In simple terms, a “hash” is a calculation made by a bitcoin miner in an attempt to secure a block reward, which currently sits at 12.5 bitcoin per block. (The reward automatically halves every 210,000 blocks. At the present mining rate, the next halving is estimated to occur in May 2020, after which the reward will drop to 6.25 coins.) The “hash rate,” then, is how many calculations are made per second across the globe. It generally reflects the pace at which new miners are joining the network.

Every 10 minutes on average, a new block is mined, meaning 1,800 bitcoin—or $14.8 million at today’s prices—are created every day of the week. Blockchain technology, remember, guarantees the validity of these new virgin coins. Imagine if stock trading were as quick, efficient and worry-free as crypto-mining. You can see now why JPMorgan, Citigroup, Bank of America and other big banks are rushing to patent blockchain processing systems of their own. 

Look at the chart below. The bitcoin hash rate has continued to grow at an astonishing pace despite the selloff, suggesting miners are still very bullish on future prices.

despite decline in bitcoin price, miner enthusiasm has continued to surge
click to enlarge

In July, the number of operations passed above 45 trillion per second for the first time ever. That’s a more than sixfold increase in power from only a year ago. It also signifies a huge recovery after extensive flooding in Sichuan, China knocked out significant amounts of hashing power earlier in the month.

Mining Doesn’t Consume as Much Power as Previously Thought

Speaking of bitcoin mining power, critics often like to point out how much electricity the network consumes, in an effort to turn public opinion against the industry. To be sure, mining bitcoin and other cryptocurrencies requires a lot of energy, but the figures you might have seen are highly exaggerated. Some sources claim that industry demand stands at 65 terawatts per hour (TWh), or 65 trillion watts per hour, on an annualized basis. But a more accurate estimate is closer to 35 TWh, “less than the annual energy consumption of Luxembourg, a country of 585,000 people,” according to CoinShares Research analysts Christopher Bendiksen and Samuel Gibbons.

How did Bendiksen and Gibbons arrive at this figure, and why is it so drastically lower than other estimates? The analysts point out that hardware efficiency is nearly doubling every year (81 percent), while the cost of hardware is almost cut in half on an annual basis (-48 percent). This means miners are increasingly able to do much more for much less. Miners also prefer to operate in colder climates, which lower cooling costs, and they largely rely on cheap green energy. This is part of what attracted me to HIVE Blockchain Technology, which conducts most of its business in Iceland and Sweden.

“Our total findings suggest that the bitcoin mining industry is relatively healthy, profitable and continues to grow at breakneck speeds,” Bendiksen and Gibbons write. “The hash rate is tripling on an annual basis while the efficiency of the hardware is rapidly increasing and costs are coming down.”

You Can Now Trade Crypto Securities on Coinbase. When Will We Get an ETF?

Investors have a growing number of options to gain exposure to bitcoin and cryptocurrencies, besides buying the actual assets themselves. There are several publically traded companies that have begun integrating blockchain technology into their business, such as IBM and Hitachi. Other firms have direct involvement in mining cryptos—HIVE Blockchain, for instance, and China’s Bitmain, which is seeking $1 billion in financing before a possible initial public offering (IPO). Bitcoin futures are available for trading on the CME and CBOE. And Coinbase just received SEC approval to “move forward with a trio of acquisitions that could allow it to become one of the first federally regulated venues for trading digital coins deemed to be securities,” according to Bloomberg.

most crypto investors favor ethereum and bitcoin
click to enlarge

But so far a bitcoin ETF has not yet been made available. I believe that once such a product comes on the market, the price of bitcoin will really take off.

Just look at the chart below. Gold traded mostly sideways throughout the 1980s and 1990s. Then in March 2003, the first gold ETF appeared, and the price of the yellow metal skyrocketed 420 percent as trading became more liquid and streamlined. I can’t say bitcoin would respond likewise, of course, but a crypto ETF would certainly attract more curiosity to the space.

the first gold ETF boosted metal prices. can the same happen with bitcoin?
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There’s no lack of investor interest in a bitcoin ETF. A recent survey conducted by international law firm Foley & Lardner found that nearly three quarters of participants, 72 percent, were hopeful they’ll have the opportunity to invest in an ETF that holds bitcoin or other cryptocurrencies.

As I mentioned earlier, the Winklevoss twins have now made two (unsuccessful) attempts to bring one to market, and the SEC has said it will postpone making a decision on five other proposed ETFs until September. Even if these get struck down as well, we move closer to getting one every day.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

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Blockchain Will Completely Revolutionize How We Mine Gold and Precious Metals
May 21, 2018

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017

Last week I had the pleasure to attend Consensus 2018 in New York, the premiere gathering for the who’s who in blockchain, bitcoin and cryptocurrencies. Attendance doubled from last year to an estimated 8,500 people, all of them packed in a Hilton built for only 3,000. Ticket sales alone pulled in a whopping $17 million, while event booths—the largest of which belonged to Microsoft and IBM—generated untold millions more.

The entire three-day conference, hosted by crypto news outlet CoinDesk, had the energy and flair of the world’s greatest carnival. Sleek lambos sat outside the hotel, attracting all sorts of gawkers. Passersby also stopped and stared at the “bankers against bitcoin” protest, conceived and funded by Genesis Mining, one of the largest bitcoin mining companies. (You can read my interview with Genesis cofounder and CEO Marco Streng here.)

Bankers agaisnt Bitcoin protest

The same money went to finance bitcoin awareness billboards outside the Omaha office of Warren Buffett, who recently bashed the cryptocurrency, calling it “rat poison squared.”

“Warren,” the billboards read, “you said you were wrong about Google and Amazon. Maybe you’re wrong about Bitcoin?”

Warren Buffet billboard Bitcoin Genesis Mining

Bringing #BitcoinAwareness to the Masses

That Buffett has a negative opinion of bitcoin shouldn’t surprise anyone. The “Oracle of Omaha” has famously been averse to emerging technology and tech stocks he doesn’t fully understand, including Google, Amazon, Microsoft and others. But he’s changed his mind in the past after he’s seen the value these companies provide.

I’m old enough to remember when Buffett was vehemently against airline stocks. The industry was a “death trap” for investors, he once said. Today, his company Berkshire Hathaway is one of the top holders of stock in the big four carriers—United Continental, Delta Air Lines, Southwest Airlines and American Airlines. He even told CNBC he “wouldn’t rule out owning an entire airline.”

Obviously there’s a world of difference between airline stocks and bitcoin—although blockchain, the technology that bitcoin is built on top of, is already being used in aviation to increase transparency in aircraft manufacturing and maintenance. All I’m saying is I wouldn’t rule out bitcoin, or cryptocurrencies in general, just because Buffett isn’t a fan. He doesn’t like gold as an investment either, and that hasn’t stopped it from being one of the most liquid assets on the planet.

The Future of Gold Mining (And Investing)  

But back to Consensus. It wasn’t all fun and games, and there were some serious discussions on how governments might one day use cryptocurrencies; the future of bitcoin mining; and blockchain applications in finance, health care, insurance, energy and more. As I explain in last week’s Frank Talk Live, charitable giving is down because donors are increasingly concerned about fraud. Blockchain can help validate where your money is going.

I would include the mining industry to that list. Blockchain has the potential to revolutionize how gold and precious metals are manufactured and delivered. Consider the journey a gold nugget must take along its supply chain, from mine to end consumer—it cuts through several other industries and practices, including legal, regulatory, financial, manufacturing and retail, each of which might have its own ledger system.

These ledgers are vulnerable to hacking, fraud, errors and misinterpretations. They can be forged, for example, to conceal how the metal or mineral was sourced.

With blockchain technology, there’s no hiding anything. Decentralization guarantees complete transparency, meaning anyone along the supply chain can see how, when and where the metal was produced, and who was involved every step of the way.

This will give the industry a huge shot of trust, not to mention dramatically increase efficiency.

Many producers, tech firms and entire jurisdictions have already adopted, or plan to adopt, blockchain technology for these very reasons. IAMGOLD, a Toronto-based producer, announced last month that it partnered with Tradewind Markets, a fintech firm that uses blockchain technology to facilitate digital gold trading. IBM just helped launch a diamond and jewelry blockchain consortium, TrustChain, that will track and authenticate diamonds, metals and jewelry from all over the world. And sometime this year, the Democratic Republic of Congo will begin tracking cobalt supply from mines to ensure children were not involved.

With precious metals being used more widely in industrial applications, from smartphones to electric cars to Internet of Things (IoT) appliances, tracking metals across the supply chain has become increasingly more important to businesses and consumers. According to the Semiconductor Industry Association (SIA), global sales of semiconductors—which contain various metals, including gold—crossed above $400 billion for the first time in 2017. Total sales were $412.2 billion, an increase of nearly 22 percent from the previous year.

That’s a lot of metal and other materials that blockchain tech can help authenticate.

Global sales of semiconductors crossed above 400 billion for fisrt time in 2017
click to enlarge

Before I get off this topic, I want to mention that blockchain is also bringing change to gold investment. Consider Royal Mint Gold (RMG), which aims to provide the “performance of the London Gold Market with the transparency of an exchange-traded security.” There’s also the Perth Mint’s InfiniGold, which issues digital certificates guaranteeing ownership of gold and silver in the mint’s vault. A number of other platforms exist to help facilitate gold trading.

Should even one of these become hugely popular, it “could be as big a change to the gold markets as the development of ETFs, but with the added advantage of appealing to younger generations,” according to the World Gold Council’s (WGC) chief strategist, John Reade.

Who Says Size Matters?

The small-cap Russell 2000 Index closed at its third straight record high on Friday after putting up bigger gains than the larger-cap S&P 500 Index and Dow Jones Industrial Average.   

the russel 2000 index hit a new all-time high
click to enlarge

As I’ve explained before, President Donald Trump’s protectionist policies and low corporate tax and regulatory environment strongly favor small-cap stocks. Investors hate uncertainty, which is precisely what the market is feeling with regard to tariffs and global trade. Because small-cap companies don’t rely as heavily on overseas markets as huge multinationals do, it’s little wonder why we’re seeing money flow into the Angie’s Lists and Yelps of the world right now.

 

The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The index is maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (03/31/2018): IAMGOLD Corp., United Continental Holdings Inc., Delta Air Lines Inc., Southwest Airlines Co., American Airlines Group Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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My Conversation with Bitcoin Visionary Marco Streng
May 14, 2018

Marco Streng CEO and co-founder of Genesis MiningLast week I had the opportunity to sit down with Marco Streng, the wunderkind bitcoin visionary behind Genesis Mining. Genesis, as many of you reading this might know, is the world’s largest cloud bitcoin mining company, with over 2 million customers worldwide. It calls Iceland home, whose cool climate and affordable green energy are ideal for mining newly minted virgin cryptocurrencies. Last year, Genesis helped connect the blockchain sector and traditional capital markets by partnering with HIVE Blockchain Technologies, the first publicly traded digital currency mining firm.

This week, Marco will be one of the panelists at the Consensus 2018 blockchain technology summit in New York, which I will also be attending. Below are highlights from our conversation.

Tell us how you got started in this industry.

I’ve always had a passion for mathematics, science, physics. I wanted to understand how nature works. I used to spend days and nights in the library, and I was actually on my way to becoming a math professor.

But then blockchain and bitcoin came along, and that changed everything. At the time, the community was very small, but the ideas and visions were very big. No one fully realized then how fast it would all grow or just how revolutionary it could end up being. I watched as new marketplaces began to emerge, businesses began to bet on bitcoin and people started adopting it. More and more exchanges popped up. All of this happened within a year of me first reading about blockchain and bitcoin—it progressed that quickly.

It was clear that something big was happening. The world was changing, and I needed to be part of it.

How would you describe bitcoin to someone who knew nothing about it?

With bitcoin, you can send money anywhere in the world to anywhere else without worrying about boundaries or having the transaction controlled or stopped by a third party. It’s a completely independent, decentralized, peer-to-peer system. This is what makes it so revolutionary.

The conventional banking system really shows its limitations when we try to move money between developed and underdeveloped countries, particularly those in Africa. There are some serious inefficiencies that, frankly, many of the big banks just aren’t interested in fixing. But with bitcoin, you don’t have to worry about that. You can send money to, say, a coffee farmer in Africa, and he’ll receive it directly.

Money transfers are only one among a number of many other uses. Bitcoin is also a store of value. It’s one of the few assets that I would say are uncorrelated to the broader financial markets.

As for blockchain, it has innumerable world-changing applications across a wide range of industries. That’s why I believe it’s crucial that people have the right information about blockchain and understand it. If people don’t understand it, and it gets overhyped, I’m afraid it could start going in the wrong direction.

We recently mined the 17 millionth bitcoin, leaving only four million left. Explain why it becomes exponentially more difficult to mine coins the closer we get to that 21 million-coin ceiling.

It’s not that the mining itself becomes more difficult. To answer this, I think we have to look at two components.

One component is the daily supply of bitcoin. At the moment, only 1,800 bitcoins can be generated every day by the whole network, meaning all the miners worldwide. But it’s important to remember that after every 210,000 blocks that are mined, the rewards are halved. What this means is that after the next halving, which I believe is expected sometime in 2020, the number of bitcoins mined a day will fall from 1,800 to 900. And then after the next halving, it’ll be 450. This helps reduce the supply in a natural way.

only around 4 million bitcoin remain to be mined out of 21 million total
click to enlarge

The second component is a measure of how many miners and how much computing power is in the network. If more miners come online, then of course the competition becomes greater. Because the daily supply is already fixed, your market share shrinks.

bitcoin mining is now in highly concentrated range of the herfindahl-hirschman index
click to enlarge

Think of it like the California Gold Rush. Mining gold at first was relatively easy because the metal was plentiful and there were few miners. By the end, it became more difficult because the easy gold had already been claimed, and you were competing with far more miners. We’re seeing the same thing happen with bitcoin and other mineable digital currencies.

Speaking of computing power, HIVE Blockchain just announced that it expanded to 24.2 megawatts (MW), up from 2.4 MW in August. What’s next in the pipeline for HIVE?

Yes, the last expansion was a massive build-out in Sweden. It was done in three phases. I think this was a remarkable achievement for HIVE, that it could add so much computing power so quickly.

This is only the beginning. The year is still long and you can expect to see some bigger expansions on the way. In September, for example, we’re going to ramp up another bitcoin mining facility worth 20 MW, which is very exciting. And from there it goes even further.

a picture inside hive blockchain technologies cryptocurrency mining facility in inceland

G20 finance ministers are scheduled to share their plans for more uniform regulation of cryptocurrencies by July. What are your expectations?

I personally think that this is very good and that it will bring more professionalism into the market. The momentum and adoption has grown so much and so rapidly that there really needs to be some kind of strategy—the world’s economic leaders can’t just leave this space untouched. Anyone who believes otherwise isn’t facing reality.

Having said that, regulating this market will not be easy because it’s in a whole other dimension than anything that has come before it. As an analogy, imagine someone trying to regulate flying cars using the same measures that have been written for cars driving on the street. It wouldn’t make any sense. So there will certainly need to be some innovation to get it right. I think it’s also important that the regulators talk to the right people, the industry leaders. They have good input, and I think it could be a very fruitful dialogue.

Along those same lines, South Korea’s central bank just announced that it was looking seriously into how the Korean economy might use blockchain and cryptocurrencies. Specifically, there’s talk of the country going cashless by 2020. Do you think that’s where the global financial systems are headed?

I think there’s a natural incentive for governments to go in that direction because, of course, they want to have greater control over their economies. But as is the case with overregulation, too many controls—or going completely cashless—could be harmful to the economy. This is certainly part of a long and interesting debate, and I’m curious to see how it plays out, in South Korea and elsewhere.

Where do you see the best application of blockchain technology right now?

Blockchain’s greatest contribution is its ability to erase boundaries. It completely removes the element of trust—or distrust, I should say—and adds a stabilizing effect to nearly every industry because of decentralization.

Take the global banking industry, for example. You don’t need to look far to find some serious inefficiencies, as I mentioned earlier. We’re already seeing some very concrete instances where blockchain can be of help here. The banks recognize this and are getting together to make use of this technology to improve their services.

What’s been the greatest challenge you’ve faced so far in your journey?

For me, the greatest challenge can usually be found in the moment that you’re currently in. I always compare this industry to the beginning of the internet—no one knew where it was headed or what it would eventually look like. Most people had a general idea that it was innovative and could benefit the world, but the full implications were unclear.

Similarly, no one knows where blockchain and cryptocurrencies might take us, and having to deal with this constant uncertainty is, I’ll admit, not trivial. You must always be prepared to act quickly in response to another bitcoin fork, a hack or some other unexpected event. These are things that keep you up at night.

But it’s exciting. I think what history has shown again and again is that it’s dangerous to be ignorant and to not have an open mind. Not everything was euphoric and wonderful when the internet first emerged. Problems still occur online, but I believe most people would agree that the benefits far outweigh the drawbacks.

No industry is without its challenges, and as long as you’re willing to address them, it can be very rewarding. As for blockchain technology, I’m very happy and thrilled to be a part of it this early on.

Interested in learning more? Click here to watch the short film “Cryptocurrency Revolution,” featuring Marco Streng and Enigma, the world’s largest Ethereum mining facility.  

 

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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How Long Till Bitcoin Replaces Cold Hard Cash?
April 30, 2018

$1 trillion worth of u.s. banknotes could disappear by 2028. will bitcoin replace it all?

Bitcoin is back in the news in a big way. The world’s largest cryptocurrency neared $10,000 last week, meeting strong 200-day moving average resistance of around $9,800. Also last week, the 17 millionth bitcoin was mined. Remember, the crypto was originally designed to have a limited supply of “only” 21 million, an attractive feature that should continue to burnish its value as we get ever closer to that ceiling.

It’s no coincidence that the rally we’re seeing right now began soon after Tax Day. Many bitcoin and altcoin investors likely liquidated some of their holdings ahead of the filing deadline to cover capital gains taxes from last year and are now getting back into the trade. Month-to-date as of April 27, bitcoin was up more than 33 percent.

tax season contributed to bitcoin sell-off
click to enlarge

Also moving prices is news that Goldman Sachs and Barclays are both rumored to be working on introducing cryptocurrency trading desks. Similarly, Nasdaq CEO Adena Friedman told CNBC last week that Nasdaq “would consider becoming a crypto exchange over time,” and that “digital currencies will continue to persist.”

As I see it, these are huge steps for the crypto market to take on its path to full maturation and acceptance as an asset class. We’re still in the very early stages, and recent calls that “bitcoin is dead,” not to mention general negativity toward bitcoin in the media, are strikingly premature.

I’m bullish, but I don’t expect bitcoin to test $20,000 again in the short term, especially before July. That’s when G20 finance ministers are scheduled to present their recommendations on how cryptocurrencies should be regulated.

More and More Smart Money Flowing into Cryptocurrency and Blockchain Tech

As I’ve said before, I don’t necessarily see regulation as a major headwind to cryptocurrencies, so long as it’s fair and reasonable. Such rules might even spur some investors, who until now have been watching from the sidelines, to participate.

That includes hedge funds, financial firms and other large institutional investors. A recent Thomson Reuters survey found that one in five firms are planning to trade altcoins this year. Of those, about 70 percent said they would do so in the next three to six months. Clearly, an increasing number of big investors see cryptocurrencies as an opportunity too good to pass up.

More and more money from venture capital firms is also being plowed into startups focused on cryptocurrency and blockchain technology. In the three months through February, the amount of capital flowing into blockchain businesses far exceeded the monthly average of $55 million for the three-year period. Momentum is building.

venture capital funding on blockchain startups picked up in recent months
click to enlarge

And it’s not just “dumb money” making these bets. Bloomberg reports that successful venture capital firm Venrock Associates is ready to start speculating in the space. Venrock, a compound of “Venture” and “Rockefeller,” was founded in 1969 by members of the wealthy Rockefeller family, and it has a stellar track record for investing early in wildly profitable companies, including Apple and Intel.

Bitcoin to Meet Growing Demand for Alternative Payment Systems

One of the most bullish crypto participants right now is venture capitalist Tim Draper, an early investor in Hotmail (since acquired by Microsoft and renamed Outlook), Skype (also purchased by Microsoft) and Tesla (not currently owned by Microsoft, as far as I know). At a recent Intelligence Squared debate in New York, Draper made the bold claim that bitcoin is bigger than those three ventures combined. “Bigger than the Industrial Revolution,” he said.

Further, he doubled down on his bullish call of $250,000 per coin in the next four years, and predicted that fiat currency will disappear much faster than expected.

“In five years, you are going to try to go buy coffee with fiat currency and they’re going to laugh at you because you’re not using crypto,” he said.

No doubt some of you reading this are laughing at Draper’s hyperbolic claims. But as I’ve written before (here and here), there’s already a global war on cash, incited by some central banks, economists and policymakers.

To try to prevent terrorism financing and drug trafficking, the eurozone has already scrapped the 500 euro note. India did the same with its 500 and 1,000 rupee notes to combat corruption. (See the dramatic dip in the chart below.) And Sweden, one of the first countries to experiment with paper currency, could soon become the first to eliminate it altogether and rely exclusively on electronic payment systems. (Again, notice Sweden’s steady slope toward 0 percent of GDP.)

banknotes in circulation as a percent of nominal GDP
click to enlarge

Here in the U.S., the $100 bill’s days might be numbered, which would affect not only America but also many countries where Benjamins are still in high demand. In fact, more than three quarters of all $100 bills in circulation today live outside the U.S., according to the Federal Reserve Bank of Chicago.

banknotes in circulation as a percent of nominal GDP

Banning large denomination banknotes might be well intended, but ultimately it debases people’s economic freedom. This becomes especially true when low to negative interest rates are also introduced, as they are in Japan. (Today, in fact, the Bank of Japan announced it would keep its short-term rate at minus 0.1 percent.)

The demand for other liquid assets and “alternative technologies for making payments,” as the Chicago Fed puts it, is therefore surging, and I expect digital currencies such as bitcoin and Ethereum to fill that need. Today, U.S. currency in circulation stands at $1.59 trillion. According to one estimate by the Chicago Fed, that figure could sink to as low as $501 billion within 10 years as altcoins become more widely used to make transactions.

In a report for the second quarter, the St. Louis Fed likewise predicts a rapid transition from cash to cryptos:

In the near future, a close cash substitute will be developed that will rapidly drive out cash as a means of payment. A contender is Bitcoin or some other cryptocurrency. While cryptocurrencies still have many drawbacks… these issues could rapidly disappear with the emergence of large-scale off-chain payment networks (e.g., Bitcoin’s lightning networks) and other scaling solutions. 

Maybe Tim Draper is onto something!

Frank Talk Turns 11 Years Old!

banknotes in circulation as a percent of nominal GDP

On a final note, I’d like to give a huge thanks to all of my readers, new and old, who’ve made my Frank Talk blog such a pleasure to write these past 11 years. If you’re still not a subscriber, you can sign up here and join thousands of other curious investors from around the world.

I also invite you to subscribe to the U.S. Global YouTube page, where we regularly share the latest episodes of Frank Talk Live, Gold Game Film and much more.

Blockchain and Digital Currencies SWOT

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended April 27 was Daneel, which gained 769 percent. Last week during an interview, Adena Friedman CEO of Nasdaq, said that “Nasdaq would consider becoming a crypto exchange over time.” Although it is unlikely to launch a service anytime in the near future, this is very positive news for the cryptocurrency market in gaining widespread adoption, writes Coindesk. “I believe that digital currencies will continue to persist, it’s just a matter of how long it will take for that space to mature,” Friedman added.
  • Some of the world’s biggest cryptocurrencies rose again last week, reports Bloomberg. This extends their April rally deep into its fourth week, taking this month’s increase past 75 percent. According to Marc Ostwald, global strategist at ADM Investor Services in London, “The noise from regulators has been far less destructive in recent weeks than since the end of last year, and we haven’t had a big theft from an exchange recently.”

Top 10 Digital Coins Head Past 75 Percent Gain in April Rebound
click to enlarge

  • Walmart Inc. is getting suppliers to put food on the blockchain, according to Frank Yiannas, vice president of food safety and health. As Bloomberg reports, the move would help reduce waste, better manage contamination cases and improve transparency. Another new use for blockchain technology is tracking jewels. From mines all the way to retail stores, four gold and diamond companies – Helzberg, Richline, LeachGarner and Asahi – are developing a network to do just that. These companies will use the TrustChainInitiative, running on IBM’s technology, to prove to consumers that their purchases don’t include blood diamonds or other conflict metals, writes Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended April 27 was Global Cryptocurrency, which lost 41 percent.
  • Bloomberg reports that some ERC20 tokens, which are based on the Ethereum network, could be susceptible to a bug in the system. These tokens encompass about 90 percent of the $53 billion token market, according to CoinMarketCap. On Wednesday, two exchanges suspended the ERC20 token, with one going back up the same day.
  • Central bankers still don’t seem to agree on cryptocurrencies and how to regulate them, but they do agree that tokens such as bitcoin and Ethereum won’t replace traditional currencies. The IMF wrote in a report this month that, “while they may serve as a store of value, their use as a medium of exchange has been limited and their elevated volatility has prevented them from becoming a reliable unit of account.” Different approaches around the world to regulating cryptocurrencies would mean that the effectiveness of regulation is limited, writes Bloomberg.

Opportunities

  • A litecoin trade is turning heads in the cryptocurrency community, writes Business Insider. In a single trade at the end of the week before last, $99 million-worth of litecoin was sent between two crypto wallets in a single trade. The trade cost only $0.40 and took around 2.5 minutes to complete. Users are pointing out that a similar transaction in traditional finance “would take days to clear, multiple parties to sign off and carry heft fees,” the article continues.
  • The Federal Reserve Bank of St. Louis has conducted a new study breaking down cryptocurrencies and asking some of the biggest questions in the space today, reports CCN.com. The study includes an analysis of the control structure of various currencies and also looks into whether or not central banks will adopt cryptocurrencies as a form of payment. As the article points out, the study shows the bank as stating “we welcome anonymous cryptocurrencies, but also disagree with the view that the government should provide one.”
  • Venrock Associates, a venture capital firm that grew out from the Rockefeller fortune, is setting its sights on investing in cryptocurrencies, specifically blockchain startups. Bloomberg reports that it is looking to invest some in tokens, but mostly in startups before issuing its own cryptocurrencies. David Pakman, a partner at Venrock Associates said that he thinks “this is one of the most transformative tech ecosystems and has the possibility of creating hundreds of companies worth billions of dollars each.”

Threats

  • According to the Mosaic Network, cryptocurrencies’ “number-one problem” is the massive void in reliable research. Of course, there are books, blogs and critical media coverage on the space, but there still remains very little in the way of timely and rigorous 1) fundamental analysis of project teams and track records, 2) quantitative analysis of adoption and community traction, and 3) technical road-map risk assessment, to name a few, the article continues.
  • Many large brokerage firms, such as Merrill Lynch and Wells Fargo, are banning their financial advisors from recommending cryptocurrencies. However, Jack Tatar, who is the co-author of “Cryptoassets” and was a Merrill Lynch financial advisor for almost 10 years, says “these firms will back-track their policies” eventually. Furthermore, Forbes writes that even though brokers can’t trade cryptos for their clients, they’ll go against their employers’ policies and advise their clients to make a personal investment. 
  • According to Coindesk, Capital Group, a financial services company with $1.7 trillion in assets under management has prohibited its associates from investing in initial coin offerings (ICOs) or initial public offerings (IPOs). The code of ethics says that there may be some exceptions to investing in IPOs, with no exceptions for ICOs. The ban could be positive with implications that the firm might invest in ICOs on behalf of their clients sometime in the future.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The MVIS CryptoCompare Digital Assets 10 Index is a modified market cap-weighted index which tracks the performance of the 10 largest and most liquid digital assets.

The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.

The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets.

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Looking Ahead to $20,000 Bitcoin
March 27, 2018

will bitcoin price follow its previous trajectory?

In last week’s Investor Alert, our investment team shared with you a report from Morgan Stanley that says bitcoin’s price decline since December mimics the Nasdaq tech bubble in the late 1990s. This isn’t earth-shattering news in and of itself. The main difference is that the bitcoin rout happened at 15 times the rate as the tech bubble.

Morgan Stanley has some good news for bitcoin bulls, however: The 70 percent decline is “nothing out of the ordinary,” and what’s more, such corrections “have historically preceded rallies.” Just as the Nasdaq gained back much of what it lost in the subsequent years—before the financial crisis pared losses even further—bitcoin could similarly be ready to stage a strong recovery.

Is Bitcoin pain almost finished
click to enlarge

One research firm, in fact, believes bitcoin and other digital coins, or “alt-coins,” have likely found a bottom. New York-based Fundstrat, headed by strategist Thomas Lee, issued a statement to investors last week saying that, though a cryptocurrency bull market isn’t necessarily underway, the worst of the pain could be “largely over.”

Fundstrat research shows that periods of cryptocurrency consolidation, or “purgation,” generally last 70 to 231 days. Bitcoin hit its all-time high in mid-December, almost 70 days ago as of March 26. Taking into consideration Fundstrat’s estimates, then, it’s possible the bear market could conclude sometime between now and early August.  

In the meantime, Lee writes, alt-coin investors should stick with larger-cap cryptocurrencies such as bitcoin, Ethereum and Ripple.

Take the Long-Term View

It’s helpful to compare bitcoin with Nasdaq, as Morgan Stanley did, but what about comparing the current cycle with one from the past?

In June 2011, bitcoin peaked at nearly $30 and found a bottom of $2.02 five months later, in November. It would be an additional 15 months before it returned to its former high. This might seem like a long time to some, but investors who managed to get in at the bottom would have seen their position grow more than 1,300 percent.

will bitcoin price follow its previous trajectory?
click to enlarge

So can bitcoin do the same today? Obviously no one can say for sure, but what I can say with certainty is that bitcoin, like all digital coins, is highly volatile. Plus, there’s not quite 10 years’ worth of data, meaning it’s been difficult to identify trends.

Cryptocurrencies are also currently facing tougher oversight from several world governments and central banks, not to mention Facebook and Twitter’s bans on ads promoting them—obstacles they didn’t have to contend with back in 2011 and 2012.

But I remain bullish. Cryptocurrencies are still in their very early stages. To return to the comparison with tech stocks, we don’t know at this point which digital coins will be tomorrow’s equivalent of Amazon, Google, Apple and Facebook. A long-term view is key.

Finally, I still believe in the power of Metcalfe’s law, which says that as more and more people adopt a new technology—cell phones, for instance, or Facebook—its value goes up geometrically. A poll conducted in February shows that just under 8 percent of American adults report ever owning or purchasing any cryptocurrencies. Market penetration, then, hasn’t been as pervasive as some might expect, but as people increasingly become more confident in dipping their toes in the space, demand could rise and, with it, prices.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Nasdaq Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 12/31/2017.

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Net Asset Value
as of 11/15/2018

Global Resources Fund PSPFX $4.86 0.06 Gold and Precious Metals Fund USERX $6.41 0.13 World Precious Minerals Fund UNWPX $3.16 0.01 China Region Fund USCOX $8.21 0.18 Emerging Europe Fund EUROX $6.33 0.07 All American Equity Fund GBTFX $24.92 0.09 Holmes Macro Trends Fund MEGAX $18.50 0.09 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change