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Kid Mercury
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Are we finally there yet?

I've been expecting something to resembling a run out of the US dollar for about ten years now. That's a long time to be mostly wrong.

But I've remained by my expectation because the data leaving to that hypothesis had in my opinion only gotten more convincing. Most notably, the yield on the ten year treasury bond had finally broken above its 30 year trendline. The US tax cut will also increase the budget deficit, which means the US government will need to borrow more at a higher borrowing cost. As the cost of servicing debt takes up more and more of the budget, until it becomes clear that even servicing will not be possible, I think pressure to exit the dollar will only grow.

So what comes next? I suggest this will be the opening for new currencies and new "digital nations" -- net native governments whose borders are delineated by the economic transactions if their cryptocurrencies.

In the meantime, though, gold should come into favor can once again.
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A Framework for the Crypto-Economy

I've been thinking a lot about bitcoin and cryptocurrencies lately, and I think I finally got to a point where I feel comfortable with a framework on its future. This post is simply to help me crystallize my thinking.

1. I've come to loosely accept the Exter's pyramid meme being floated out there, in which bitcoin is digital gold and ethereum is likely digital silver. This means bitcoin is not for transactions but is a store of wealth, and ethereum is sort of the common person's gold -- costs less, more realistic for small transactions if needed for a currency, but more volatile, plentiful and subject valuation gyrations from industrial demand (i.e. applications that actually use the token).

2. From this perspective, an allocation to bitcoin as a store of wealth may be a legitimate part of any portfolio. However, I wouldn't buy bitcoin or ethereum now, since I simply am better at buying and selling value than momentum. If the ~$19,000 high holds and we are popping in the process of deflating the bubble, I would look to buy at around $4,500-$5,000. Of course it would be preferable to see a range form at this price level, and to accumulate in this range over time.

3. I suspect the next phase in the cryptoeconomy will be the creation of digital states, whose primary task will be to establish monetary and fiscal policy for the currencies they issue. This phase will be where digital states usurp the role of nation-states. The states built using cryptocurrencies will be vastly larger than the dollar-based market cap of bitcoin and ethereum. To put it in perspective, the total value of all gold mined is around $7.8 billion (this is the above ground, legitimate economy only; the hidden economy is estimated to be vastly larger, but for this discussion I will only consider the acknowledged economy, since the hidden economy is too vast of a subject. I acknowledge this as a major assumption that could derail this part of the analysis). Meanwhile, the US GDP is over $18 trillion. China's GDP is over 11 trillion. The next phase will involve creating the digital China, digital USA, etc. These states won't come from national governments -- though they certainly will try -- but rather will emerge in a more "net native" manner.
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Is bitcoin digital gold?

I've been thinking a lot about this question lately.

Bias disclosure: I own a very small amount of Bitcoin that I bought in 2014, and some ethereum that I bought in the first half of 2017. I own a substantial amount of gold (relative to my overall personal wealth) that I accumulated from 2008 through 2015.

I understand the argument that bitcoin, with its supply fixed and its detachment from any governmental monetary system, is a potential universal store of wealth -- much like gold. The reason I'm reluctant to buy more of it, even if it were not so bubblicious, is because:

1. software decay: https://en.wikipedia.org/wiki/Software_rot. bitcoin is still subject to software decay, which makes its future hard to predict and more mutable. it's not as constant as a truly stable store of value should be, in my opinion. for instance, once bitcoin is fully mined, i suspect there will be a push to create a fork to induce greater supply. that kind of stuff doesn't inspire trust in me. it may be decades or more away, but the big money that moves these kinds of markets are often taking a long term view on how to preserve wealth for generations.
3. electricity and security: what if the power goes out, how can i securely store it....this is part of the risk that may lead to the reward for those who get in now, but i'm not wiling to take that risk with an amount of money that is substantial for me.
4. i have trouble with the whole satoshi nakamoto thing, a mysterious guy/girl/team create this thing and don't spend any coins....i'm much more comforted by seeing and reading vitalik buterin of ethereum; the fact that he's real and out there and interacting gives me confidence in the future of ethereum.

meanwhile, gold has remained relatively calm while everything else has gone through the roof in 2017. when the everything bubble pops, i think that is where a fair amount of money will go -- doubly so since china continues to slowly push the yuan towards internationalization, and the PBOC is accumulating gold to make this a more viable offering.

i do like ethereum a lot, though. i'm not sure if it will go up a lot in value, since it seems to me to be a platform for transactional currencies -- and such a platform may not have sustainable incentives for appreciation in value -- but i do think it's going to be a big part of the future, and so it may be worth staking a claim to it in whatever way possible. all of my high risk capital is put towards entrepreneurial endeavors, but if i have any excess high risk capital, some of it will certainly go towards increasing my ethereum position -- especially if/when the crypto bubble deflates.
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The end of California dreamin'

I'm in Palo Alto now for some potential business. I just don't see how California is going to survive. Ive had that mentality since I left here in 2012, but I feel it's gotten even worse somehow now, and that we are finally at its breaking point. It costs way too much, the state government keeps raising taxes and giving so little back in value. I know the network is here, and that is undeniably a huge source of value, but I think we finally have enough of a network in many other cities to make the California advantage seem smaller -- especially when the costs and lack of government support are considered.

I'm reading Meredith Whitney's book now, fate of the states. In it she talks about how the central corridor of states in the US are in such a better financial state that they will end up drawing migrants from other states that are so financially messed up that they keep raising taxes and see are still unable to improve infrastructure, schools, security, etc.

I think, finally, she will be proven right.
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The wrongest I've ever been

I don't think I've been as wrong about anything as I have been about Facebook, which is why I've come to admire the company so much -- though I do find it's trajectory to be creepy and dangerous in some ways.

But I didn't think Facebook, or any social network, could get beyond a few hundred million members, and that niche was a better strategy. I didn't think they could monetize their product well, I didn't think they could exist mobile, I didn't think WhatsApp or Instagram made sense as those acquisition prices.

I think it's reasonable now to say I was entirely wrong on all of that.
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The next depression has started

I think it has. Retailers closing en maase I think is the clearest sign. But also interesting is that we are starting to see things like the cryptcurrency bubbles, US tech stocks still soaring, and certain real estate markets soaring. So I don't think this will be a conventional crash that sends everything down. I think, finally, money will start leaking out of public debt and nation state currencies, and this will create a speculative frenzy and price instability everywhere. If so, a great opportunity will exist in bringing about price stability.
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About the ethereum flash crash

Yesterday ethereum had a flash crash in which it's value fell by 96% before recovering. Coinbase froze ethereum order execution while this was going on.

A few thoughts:

1. This will happen a lot more often, still a long way to go until things are stable
2. Is ethereum a stable network for coins to be built on top of? I used to think it could be, but after yesterday, and thinking about how much more development it still needs, I wonder if instead the world should be taking the opposite approach: start with wholly independent coins, then connect them through an agreed upon protocol.

Maybe too early to know the answer there.
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Hyperinflation?

One of the things I talked about back in the day -- like 8-9 years ago or so -- was hyperinflation.

I thought it would have happened by now, but I still believe it to be likely. The price of housing, food, and financial assets all show it is lurking and ready to emerge. The fed hiking rates could expose the inability of public debt to be paid, and a loss of confidence that will ensue.

US Stocks have a CAPE ratio of what we had in 1987 before the crash, rates are rising, and vix is at the 2007 lows. I believe a breakout is coming, and that the breakout will be higher for stocks and real estate, and lower for bonds and the dollar.
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What I got right, what I got wrong

Last week I reviewed my old blog posts (now offline) that talked about my views on virtual currencies about a decade ago.

What I got right, in my opinion:

That internet platforms would issue currencies that would supplant nation states and revolutionize monetary policy, and that this would be an opportunity that creates immense profits and changes the world. Many will say it is too early, but I think at least the rise of cryptcurrency bubbles makes this viewpoint far more likely.

What I got wrong:

I thought virtual currencies would emerge from game economies and leverage game mechanics significantly. I still think this may happen, but at least for now, it does not appear to be a meaningful driver.

I also did not see the blockchain coming. While I still believe the solution that gains adoption will be far more closed -- and already we are seeing trends in that direction in my opinion -- the blockchain is an important technology that could allow for many currencies to work together in a federated way. I think ethereum is already on this path.
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Entering the Promised Land

It took me until a few weeks ago to understand that ethereum, or something very much like it, is the promised land -- the fulfillment of the prophecy of entering a golden age, a Utopia. Smart contracts designed natively with the protocol will allow for a revolution in monetary policy and a transition away from the nation state to a world governed by internet platforms. The return of sound money means the potential to solve essentially all of the world's biggest problems, since all of the biggest problems stem from monetary policy. Moreover, it will unleash the business models that disrupt google, Amazon, apple​, etc and unleash a new class of Titans. More importantly, though, the new blockchain Titans will be disrupting nation states, and in doing so will redefine things like nationalism and patriotism.
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