What is happening at the Repo markets.

What is happening at the Repo market?

Rehypothecation - The process by which someone pledges an asset for a loan but it has already been pledge for another prior loan. Strange but it seems that this practice is allowed and common among hedge funds, banks and financial institutions. It is also possibly the source of the problem manifesting in the Repo market.

The Repo Market - There are 3 players in the Repo market. The main banks, qualified financial institutions and the Federal Reserve. Banks and financial institutions have to maintain a minimum deposit held at the reserve bank in proportion to their loan portfolio. At the end of the day banks and financial institution lend to each other to keep the system in balance. This system works well and has been working perfectly without the participation of the Federal Reserve since the financial crisis of 2008, that is until September 16 this year, when the Repo rate hit 10%. The Reserve Bank stepped in to provide liquidity and calmed the markets. Since then they have provided 300 billion in short term liquidity.

What happened on 16 September 2019?

Even though some banks had ample reserve deposited at the Reserve Bank, they were unwilling to lend to other institutions as per usual, because they did not trust the "existence" of the assets (treasury bills) that were offered as collateral. They suspected that something was not right.

In overnight lending at the Repo market, the securities are only promised and not actually transferred. So in theory the banks trusted one another to deliver if needed. This trust evaporated on September 16, and borrowers had to offer ever higher interest rates or better securities. Borrowers had to have this money or they will be in breached of their lending ratio. ( Similar to exceeding your bank overdraft limit and the bank request that you deposit money to bring the overdraft under the limit immediately. You have to comply at whatever the cost or your cheques will bounce and your facility terminated. )

The banks knew something and they were unwilling to lend to one or some institutions at the standard Repo rate or perhaps at any interest rate! The only option left for those institutions is the Federal Reserve. Attempts were made to discover the identity of the institutions concerned but the Federal Reserve have block these requests. It seems that they do not have to disclose this information for 2 years.

So now, only the Federal Reserve is able and willing to lend on the promissory notes of the financial institutions affected and to this effect they have printed and loaned out 300 billion on a "temporary short term" basis. This problem is only growing is not going away anytime soon. The Federal Reserve will have to stop pretending that this is short term and actually "bring" those assets into their balance sheet permanently. But there is a problem. These assets don't exist and they do not know how large the problem is. It is at least 300 billion and growing.

In 2008 under QE1 they actually bought the toxic mortgages (Mortgage Back Securities) from the banks and financial institutions giving them fresh liquidity. ( This is similar to a company in trouble transferring or selling the bad debts or dead inventory in their books to another party. ) They actually cannot do the same with treasury bills this time, because the treasury bills don't exist! The banking system has no way of tracking how many institutions have claims to the same securities. Speculations are abound that it is as high as 3 dollars promised for every dollar of treasuries issued! Surely not! But the fact remains that there are no assets for the Federal Reserve to buy. The only option is permanent Repo market operations until they figure this out how large this problem is.

When the tide goes out we will know who is swimming naked.

Under normal circumstances, if a bank borrows on the Repo market from another bank, it will repay the other party with excess money from it's daily operations such as interest received, loan maturities and daily deposits, and take back their promissory note.

However if other banks sense that a particular institution is in trouble then they would require a higher interest, better securities or just refuse to lend. That institution will then have to go to the Federal Reserve window for funding and everyone will then know that, that institution is in trouble and no other banks will be willing to lend on their promise to pay, backed only by securities of doubtful value, as in the case of Lehman Brothers in September 2008.

If circumstances were normal then the failure of a single institution will be just that. However circumstances are not normal. The problem has only grown larger. The Federal Reserve have expanded overnight lending and also refuse to name the institutions involved. The likely scenario is that it is a systemic problem. All the banks and financial institutions are involved no one knows the extent of the rehypothecation. It is at least a 300 billion problem and growing!

How does this end ?

The Reserve Bank cannot keep renewing and extending the lending in the Repo market. This situation must be made permanent sometime and soon. If the treasuries are non existent, then the problem is even worse than 2008. The Federal Reserve can't even pretend to hold these assets in heir balance sheet as they do not exist. It has to be written off. The financial institutions involve declared insolvent and made bankrupt.

But alas the problem is again too big and involve institutions too big to fail. WE HAVE A HUGE PROBLEM. The solution will affect the value of the US dollar and by implication the world economy as the US dollar is the world's reserve currency.

How do we protect ourselves ?

The only way is to hold on to cash, precious metals, collectibles, blue chip companies and perhaps even cryptos. Any asset that does not carry a counter-party risk. Blockchain is a very young industry and we do not even know which crypto will ultimately prevail. My bet is on Bitcoin SV but that is only a personal opinion.  Good Luck. Hold on to your seats there is turbulence ahead!

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References

https://www.forbes.com/sites/caitlinlong/2019/09/25/the-real-story-of-the-repo-market-meltdown-and-what-it-means-for-bitcoin/#46e927207caa

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961904

https://www.thebalance.com/stock-market-crash-of-2008-3305535#:~:targetText=The%20stock%20market%20crash%20of,rejected%20the%20bank%20bailout%20bill.

https://wallstreetonparade.com/2019/11/the-fed-has-created-the-big-lie-for-congress-on-its-repo-loans-while-the-new-york-fed-blocks-freedom-of-information-requests/

Tom Lee Interview Craig Wright And Jimmy Nguyen - Big Win For BSV

The best informative and contextual interview every about the crypto space and especially BSV.
Notice that Tom Lee had a nonchalant attitude from the beginning but as the interview got into the 20th minute his body language and posture towards Craig and Jimmy got warmer.

Fact is that Tom Lee gets that he is speaking to two people that understands the world that he comes from. That is the world of investors and him being a conduit. His job is to give good and valuable advise to the world and his clients.

https://www.youtube.com/watch?time_continue=4&v=623Dk419aSs&feature=emb_title

BSV Is The Real Bitcoin

Disclosure. I am invested in BSV and have been with BSV ever since it forked away from BCH.

The reason I chose BSV was because I have always believed that Craig Wright is Satoshi. Refer to my previous article ( https://bitcoinandtheblockchain.blogspot.com/2017/07/does-it-matter-if-you-believe-craig.html )

My conclusion there was that it mattered because if he is Satoshi and if you are invested in other blockchains then you stand to lose some or all of your investments. Well is he Satoshi? After all this time, are we any wiser? Let us examine what has transpired.

Scaling.
Craig says that BSV can scale and scale massively. We can clearly see this happening and gathering momentum daily. Track these 3 metric.

1) Transaction count. https://bitinfocharts.com/comparison/transactions-btc-bch-bsv.html#3m Since 10th November transactions have passed BTC and the gulf will now continue to widen.

2) Sent From Addresses. https://bitinfocharts.com/comparison/sentbyaddress-btc-bch-bsv.html#3m  This measures the number of active users and it is now consistently above BCH. As more applications come online on the BSV blockchain we can expect the line to pass BTC as well.

3) Applications on the BSV blockchain. https://trends.cash/ranking/   Earlier on the detractors were cynical that the only use for BSV was a weather app. If you point to this fact only, without qualifying that BSV has only been alive a few months, it is disingenuous. Today there are 4 such similar apps all writing real data to the BSV blockchain for storage, and later retrieval, as a business model. The mass adoption use cases have not materialised yet and many are in closed beta. We should see huge growth after the genesis upgrade in February.

4) The genesis upgrade will most importantly set the protocol in stone and then also allow for unlimited blocksize.

Why don't he prove that he is Satoshi?

Well he did. It is just that many chose not to believe or accept for selfish reasons of their own. Biggest ask is that he sign a transaction with the original keys. Well this only proves that he has those keys not that he is Satoshi. Satoshi will know every aspect of how, why, when and with whom he created Bitcoin. He has to have the background and knowledge and personality to be able to piece these together in order to create Bitcoin, because it is a hard problem. It a problem which when solve is worthy of a Nobel prize. If you need prove just check his explanations against everything you know about Bitcoin and it's timeline. Examine the trivial details that he reveals because if you set about to fabricate a story you will not drill down to the details and you will often contradict yourself in different retelling of the story.

BSV is focused on usage.

For any crypto to gain value, it has to be useful. For it to become useful it has to be widely used ie it has to scale. BSV can scale, and the most significant use of this is the tokenisation of national currencies. Many countries are planning digitisation of their national currency.Most are planning launch on their own private blockchain. This just bring us back to the intranet and internet argument of the 80's and 90's. Tokenisation on a private blockchain is comparable to the intranet. Tokenisation on the BSV blockchain is akin to building on the internet.

The BSV public blockchain is where cutting edge development in blockchain technology will be taking place.  As the BSV protocol will be set in stone, after the genesis update, developers building on BSV will not have to waste resources, rewriting their application everytime that the protocol is modified. This guarantees longevity, security and eliminates the cost of running and maintaining a less secure private blockchain.

Craig Wright and nChain

nChain is well staff and funded to further the development of the BSV base layer protocol. They are putting in the plumbing for others to build on. In a relatively short period of time there are now numerous tools available for developers.

On top of this nChain through Craig Wright, are building a large trove of patents free to use on the BSV blockchain. The significance of this will be more apparent going forward as developers on other blockchains come to realise that they have to pay a licence fee to use. It is a departure from the current practice of copy and paste code at will for free. Call it selfish or whatever but that is going to be the reality. If any of these patent turns out to be a chain breaking technology than all other blockchains will die.

The halvening

By May 2020 the block reward subsidy will halve to 6.25 coins. The estimated break even cost of mining is about $5000 per block. If true and the price of BTC does not rise then miners on the BTC chain will leave. The chain death spiral scenario looms. If the current bearish sentiment persist, the situation will become volatile to push prices down even further.

Bitcoin was designed for fee to replace block reward. Unless Bitcoin scales massively this will not be possible. Only on BSV is this problem being addressed. Whichever chain will survive and thrive will surely play out by the halvening.

So why is the price of BSV so low.

We should not be fixated on price. The price of BTC fluctuated from between $20,000 and $3500 in the last two years just on speculation. Also in play is the position of people heavily invested in BTC. They have huge balances in all the major exchanges and are in a position to defend the price of BTC until they can't. That is when BSV user base grows with usage and adoption from the wider community. App developers are focused on users using BSV without them knowing that they are. This means using BSV in the background only, invisible to the user.

It will be difficult for BCH to survive the halvening. There are hardly any transactions occurring on the BCH chain meaning that fee based revenue will not be available for miners. The existence of both BTC and BCH are threatened by the rise of BSV.

The price of BSV on the other hand have and will grow over time as it's usefulness grows.

Universal Basic Income - New Zealand Leads The World

What is Universal Basic Income (UBI)?

Universal Basic Income is the concept that every individual is entitled to and given a minimum income just for being alive or a member of a community. Such a guaranteed income gives every individual a feeling of self worth, gives them more life style choices and makes them less exploitable.

Is UBI neccessary?

Despite our perception that we live in a world of scarcity, in actuality we live in a world of abundance. Advances in knowledge and technology have brought us to the point where we can feed clothe and house every living individual on earth. Scarcity is intentionally introduced to benefit various power sectors.

We are now entering an age where all the dangerous, repetitive, cognitive and mundane jobs can be done better by Artificial Intelligence and robots.

Rather than limiting the number of working hours per person to share the available "productive work hours", we should broadly redefine what constitute useful work.

We can view UBI as rewarding "community centric work" and wages as rewarding "economic centric work".

Is this not communism or socialism?

This is capitalism starting with everyone having a minimum income rather than from zero. When everyone has money to spend capitalism thrives, and the worst aspect of capitalism, wealth inequality, is mitigated.

How can UBI be paid for ?

Our monetary system will be digital soon. With digital money, taxation (Value added tax) can be coded into every transaction. Money can also be easily coded for UBI distribution. There will be huge savings in the verification, collection and distribution of tax revenues, and elimination of corruption and unfairness within such a system.

As AI and robots displaces the dirty and mindless portions of "work" in our economy, UBI gives us the ability to pursue "work" that we value, treasure and appreciate individually and by our community.

Huge monopolies will form, but efficient monopolies will mean more and greater value creation for taxation, and the social impact of monopolies can be modulated with the right incentives.

One of the most interesting aspect of blockchain technology is token issuance for securing the blockchain. People and businesses compete to win these tokens and use them to transact even though they were never issued as legal tender by any government. This brings up the question as what constitutes money, but that is for another discussion.

For our discussion here, the fact that a token independent of any government can be accepted as money means that we have a "source of new money" that can be use for the purpose of UBI. Such a source will transcend government and borders. All it will require is a uniquely identifiable token wallet and general everyday use of these tokens worldwide.

Government support for UBI.

Some countries have experimented with various form of UBI however no country have instituted it as a principal pillar.

The state of Alaska however have instituted an annual dividend for every citizen finance from oil revenues.

New Zealand has a universal pension* of about $1000 USD a month for every citizen above the age of 65. This amount is not means tested and is opt in. We can argue that this is UBI for every citizen aged 65 and above financed from taxation. New Zealand has a 15% Value Added Tax on all goods and services with only financial transactions and exports zero rated.

Recently US presidential candidate Andrew Yang** have made UBI a central platform of his campaign. His proposal is to make $1000 USD a month payable to every citizen above the age of 18 finance in part from a value added tax on all goods and services at a rate of 10%. Except for the age of eligibility the system is very similar to the New Zealand's system.

Economic impact of UBI.

Most farm based small towns are capable of having a sustainable economy. Factory towns however are decimated when the factory closes and the monetary lifeblood of the community is shut off. This is now happening on a grand scale worldwide as the fourth industrial revolution*** takes hold. A UBI for every citizen will mean that financial lifeblood of communities become independent from the location of revenue generators. Mom and Pop businesses will generate jobs, employment and thrive. This will be a game and life changing phenomenon.



*    https://sorted.org.nz/guides/retirement/about-nz-super/
**   https://www.yang2020.com/
*** https://www.britannica.com/topic/The-Fourth-Industrial-Revolution-2119734

Can Bitcoin Survive - Part 3

This bear market is a “forrest fire” raging through the crypto ecosystem. It is necessary for a healthy ecosystem to clear the deadwood and allow new more resilient shoots to sprout and grow. What is important is to take stock of your position understand the changes and identify which are the new and innovative unicorns. Do this without the baggage and drag and of emotional attachments to any pet projects. It is your money and your future.

You may have lost a good part of your investment, but it is relative. The ratio of your crypto worth is still the same. Re-evaluate your investment strategy and spot those unicorns that are sure to appear. They are usually the silent ones. Above all remember it is only money, and when one door closes another opens.

If you need empathy hope and direction, this video will help you reset your bearings.

After The Fire.

You will no doubt hear all the reasons why the bear market set in. Perhaps they all play a part but really going back to history and saying crypto have always drop 90% and then risen to new heights, therefore just hoddle, think again. History does not repeat. It Rhymes. The conditions of the future are different from the past.

A blockchain without a token is just another database. BTC is just another token. It may not survive or more likely remain in its’ premium position but blockchain technology will change, evolve and improve. Take a wide angle look at this space. Like transport technology, we needed the horse and buggy to develop the automobile and the formula one speedster. Take a critical unemotional look at your pet projects. This space moves faster than the internet age. Ten years is too long for a project to be still in its’ infancy. More likely the evolution have taken place and you have been left behind. 

Blockchain is an internet technology. If your project is not growing then it is dying. That is the unemotional unvarnished truth. Blockchain technology have moved from BTC to Ethereum to EOS. There is a whole new ecosystem built around EOS. This ecosystem is growing and gaining new users everyday.

Eos Knights – 3700 daily users and growing. You can earn real money (EOS) by mining and  crafting items. Businesses will set up to do this on an industrial scale because there is a real revenue stream here. Users spend an average of $6 a day on  Eos Knights compared to about 30 cents per month on the most popular online game today. The gaming industry have taken notice and are rushing to build and incorporate blockchain technology into their products. This is only possible today on the EOSIO platform.

BetDice, EosPoker and a host of other gambling dapps are launching on the EOS platform. Developing on the EOS blockchain bypasses the licencing, identity and fiat on/off ramp issues. They are designed to transition into Decentralised Autonomous Corporations and so be impossible to shut down. Currently, for the investor returns of 1% a day is the norm. This situation will not last. Price of tokens in the best of these DAC will rise to reflect a more normal rate of return.

EVA will disrupt the ride share industry because it gives most of the income and control back to the drivers and users. Everipedia will replace Wikipedia because a system will be in place to rank and value truth and facts. EDNA seeks to give back control of bio-metric information to the individual. Of course it is only logical that new versions of Youtube, Facebook, Instagram, Wechat will launch, moving away from push ad based systems where your private information is a commodity to these behemoth. A new email system will arise where unsolicited spam will be a thing of the past.

The most interesting aspect of the EOS blockchain is free transactions. Because of this it will be possible to introduce Universal Basic Income. The concept that every living person on this planet will have access to a basic income. We are moving into a new future where the concept of work, jobs and income will change. When we solve fusion power, which is looking promising, hunger will be a thing of the past. We will be able to synthesise our food and reshape our environment with abundance of free energy. Payments can be made instantly and for free to every account in the system. The only question is where this new wealth for distribution will come from. Dan Larimer proposes his concept of Universal Resource Income where the income from resource trading on the EOS blockchain is distributed. I have no doubt that something like this will be the future as the economy depends on people spending and discouraging uneconomic static wealth accumulation.

How will this bear market play out?

The IMF have advised governments to look into blockchain currencies. Venezuela have introduced the Petro, Iran have indicated that they want to develop a digital currency. The biggest hurdle that they will encounter if they use a private blockchain is recruiting an army of developers, security and a useable wallet.

The only viable solution is to develop on a public blockchain and that blockchain will be EOS. A government can effortlessly issue their national currency on the EOS blockchain. They will have full control over its’ issuance, be able to give their citizens full transparency over monetary and fiscal policies, security, free instant transactions and have many mobile wallets to choose from.

With Bancor these currencies, even if they are on sister chains and be moved effortlessly from one to the other effectively solving the problem of currency translation. Perhaps the concept of a stable coin is unnecessary. Value can just be moved and interchange from one to another through the Bancor network.

This brings us back to the existing bear market. How will it play out? Coins don’t die. Each will have its’ own band of converts and die hard users. The value of each will depend on utility and user base. EOS will probably become the most valuable token and most used blockchain. BTC may evolve to be a digital asset and a store of value. Money will remain the purview of governments and be used as the prime legal tender within their own boundaries with the assurance that if they abuse this privilege their citizens will simply switch to another token.

Finally, please beware. These are only my predictions and not facts. Critique the reasoning behind and do your own research. Good Luck.

If  you wish to tip me, you can do so with BSV.