Get Bit, The Bitcoin Market

There is a debate in the financial world as to the value of digital (or crypto) currencies. Bank of America recently stated they "could become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers" and assigned a fair value of $1300 per bitcoin. On the other side, critics argue, "It’s a complete joke.  Even a crappy currency has government taxing ability behind it, or some sort of a standing army or something like that." My opinion is that crypto currencies are a revolutionary idea that provides an alternative to fiat currencies (dollars) and precious metals.

The two major online currencies are Bitcoin and LiteCoin. Neither are backed by governments, but instead are generated by deciphering encrypted keys. Each "coin block" found makes the next more difficult to find through increasingly difficult encryption. The code that generates this currency is completely open source which ensures there are no back doors or cheating. Solving these encrypted codes is known as "mining." The coins mined are then traded for goods and services or other currencies. The coins have value for the same reason the US dollar or other currencies have value. People assign them value.

What are the mayor differences between fiat currencies like dollars and crypto currencies?

• There are no governments involved to inflate and manipulate the value of crytpo currencies. 
• Most crypto currencies have an absolute limit in quantity, so they can't be printed. 
• There is an equal opportunity to find or "mine" for crypto currencies with free software.
• Very few transaction fees, no wire fees and quick transactions. 
• The exchange of coins is a completely free market with major players (like coinbase) helping users move money between fiat currencies and crypto currencies.
• You can save your crypto currencies in a file with backups and encryption known as a "wallet" instead of a bank.

Bitcoin Exchange

The value of crypto currencies is mostly determined on exchanges, like other currency exchanges. There are dozens of crypto currencies, some are created as college projects and others by enthusiasts. Most can be exchanged for bitcoins, the dominant player. For instance, the video game Second Life uses Lindon Dollars to transact within the game. An exchange called Virwox allows the purchase of Lindon Dollars and the exchange between bitcoins and Lindons. This is one of the more expensive ways to purchase Bitcoin due to the number of transaction fees.

Where as most crypto currencies have little value, Bitcoin is essentially the gold of cryptos. Litecoin is the silver of crypto currency. You can see this relationship in the markets, with Litecoin slightly above the value of silver and Bitcoin slightly below the value of gold. It is a safe bet that many people are diversifying away from precious metals into cryptos due to recent market manipulation by central banks.

The exchanges are mostly completely free markets with little or no regulation or manipulation by governments. As such people have begun to speculate in the markets as an alternative to stocks or slow moving precious metals. The result is an explosion of wealth creation for both bitcoins and litecoins.

Litecoin Exchange

If you read candlestick charts and indicators, there may be a place for you in the exchanges. If you don't, you can "mine" for crypto currencies like a old-timey gold prospector. You could also buy crytpo currencies while they are cheap as Christmas presents for family members who are always on their smartphone.

As a Christmas present, there is a growing number of markets and apps that accept bitcoin and litecoin. SpendBitcoins and UseLiteCoin are incomplete lists of places where the digital currency is accepted. You will mostly find tech related goods and services.

Right now the risk of holding bitcoin as a currency is about the same as holding currency from Cuba or Zimbabwe based on the market cap of $11,023,236,650. As you can see in the above charts, that market cap is rising fast. As of writing this article, one bitcoin is $840 and a litecoin is $30.50. This is definitely something to look into for yourself.

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Notes

Basic Information

• Add bitcoin payments instantly to almost any webpage
• How the Bitcoin Protocol actually works
• List of Bitcoin Exchanges
• Get a Bitcoin Wallet (free)
• HOW TO BUY BITCOIN, LITECOIN, AND DOGECOIN

Government vs We The People

• Reuters: U.S. Treasury cautions Bitcoin businesses on legal duties
• China Bans Financial Companies From Bitcoin Transactions

Post Election Thought

Since the reelection of President Barack Obama gold prices have begun to rise and the Dow Jones Industrial Average has fallen below 13,000. This reflects the prospects for the country moving forward, at least in the minds of business leaders. So how did President Obama win?

I turned over some research to my friends at GulagBound.com on the Virginia military vote. Look for this article in the days to come. However, I want to mention a more apparent trend in the election.

Conservative men did not show up to vote, at least in California.

It is my assumption that many conservatives have left California for greener pastures in Texas. Additionally Republican Mother over at Left Coast Rebel reports that Ron Paul supporters refused to vote for Mitt Romney after the Republican Convention.

All these factors led to Ron Paul supporters taking the solemn "I'll never vote for Romney" oath. There was no blood involved, it was more of an internet pinky pledge.But after being maligned as potheads for pointing out that the War on Drugs is leading to a police state that will consume us all, all of liberty voters said, ya know what? Knock yourselves out-without us! CHEATERS NEVER WIN!

Additionally, Gov. Gary Johnson received 1.1 million votes, representing the Highest Vote Total Ever for Libertarian for President.

Both libertarians and Ron Paul supporters tend to be male. This may account for some of the lower turn out from conservative men.

FED Commits to Devalue the Dollar by $40 Billion Per Month: Updated

(9/13/2012 11:27 AM) Bloomberg has an excellent article on the subject HERE:

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

Most people have seen this coming. It is the intersection of election year politics and monetary policy. The money printing is tied to the unemployment rate and assumes that the rate will eventually fall to an acceptable level. Richmond Fed President Jeffrey Lacker dissented and added that interest rates will need to be raised in 2013 in order to deal with inflation.

Standard Keynesian economics ties inflation and unemployment in an inverse relationship that has not existed since the 1970's. We will get the intentional inflation, but unemployment will remain stagnant. Yes, Lacker is being honest, we can't have that.

For those of us who invested in gold, a live AU chart is available here to watch your investment skyrocket.

For most Americans, the price of gold is not rising, the value of the dollar is falling. Thankfully for the Fed, most Americans have their eye on Libya...who's leader wanted to start accepting gold for oil instead of dollars just before we helped overthrow him.

From an investment point of view, you could rush to buy gold and silver or invest in other real assets like small companies, real estate, intellectual property, etc... Consider the "reverse mortgage" ads you see. These are companies trying to buy cheap real estate from people who are damaged by the artificially low interest rates. This example of movement from cash to real assets is known as leveraging.

Update (9/13/2012 10:51 PM): Detailed explanation of the policy. The $40 billion is in addition to current policy.

On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month.  The FOMC also directed the Desk to continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June and to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS.

The FOMC noted that these actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 

 Fed Chairman Ben Benanke on how this will help: (italics ours)

We are trying to meet our maximum employment mandate. So that is the objective.

The tools we have involve affecting financial asset prices (contractual assets like bank deposits). Those are the tools of monetary policy. There are a number of different channels, mortgage rates, other interest rates, corporate bond rates, but also the prices of various assets, like for example the prices of homes. To the extent that homes prices begin to rise, consumer will begin to feel wealthier. They will feel more disposed to spend. If house prices are rising then people may be more willing to buy homes, because they think that they will make a better return on that purchase. So house prices is one vehicle.

Stock prices, many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand. There are not enough people coming and demanding their products. If people feel their financial situation is better because their 401k looks better or reason, their house is worth more, they are more willing to go out and spend. That's what is going to provide the demand that firms need in order to be willing to hire and to invest.

(We are inflating an asset bubble.)  

Bernanke on if this will cause the Fed to abandon their inflation targets:

Well our policy approach doesn't involve intentionally trying to raise inflation. That is not the objective. [...]

Well if inflation goes above our target level, as we talked about in our statement in January, we take a balanced approach. We bring inflation back to the target over time, but we do it in a way that takes into account the deviations of both of our objectives from their targets.

(No,but yes we want inflation)

Bernanke on specific economic conditions that will end the policy:

We haven't at this point come to a set of numbers, a set of data that we can put out.

What we are trying to convey here is that we are not going to be premature in removing policy accommodations. Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we are not going to rush to begin to tighten policy. We are going to give it some time to make sure the recovery is well established.

(For the foreseeable future.) 

The issue as viewed by the other members of TheSlobs.org:

• Liberator Today: The Most Dangerous Easing Yet
• WC Varones: QE 3 ∞: Zimbabwe Ben goes Full Retard
• The Scratching Post: A Trillion Bottles of Beer on the Wall, a Trillion Bottles of Beer
• Temple of Mut: We know the post is imminent.

Profitable Silver Option Trading Strategy

Silver is a blue chip investment. Conservative long term investors looking to store wealth often turn to silver and gold. We are going to review one of Reed Canter's option trading strategy to make excellent returns through silver as a core holding in your portfolio. Did you know that you can make a 25% dividend from silver options by holding it as a core of your portfolio? For background information and definitions, please read our article on Gold trading.

We will be looking at iShares Silver Trust (ETF) SLV which is currently trading at $33.17/share. iShares Silver Trust Holdings has about 9.6 metric tons or 308.4 million troy ounces of silver.


Click to Enlarge

As you can see in the above weekly graph, silver has been trading in a sideways fashion. The upper trading limit is around $34/share and the lower range looks about $30.67/share. If the stock moves above $34 with any significant volume, we expect the stock to move into a new trading range.

The strategy to make money in a sideways market with options is known as a covered call. Our silver strategy will be:

1. Purchase shares of SLV at the current market price
2. Sell the call option for those shares with one week expiration @ $34
3. Place a buy stop order slightly above the call option execution price at $34.01 to $34.03

By selling the call option at about the breakout point $34 we collect a premium or dividend while retaining our shares. If SLV reaches the call option execution price by the end of the week, we will be obliged to sell our shares at a profit. Because we want to hold SLV in the new trading range, we place a buy stop order at $34. By placing a buy stop order at $34 we maintain our position in SLV as it moves into the new, higher trading range.

Due to the sideways movement of SLV over the last several weeks, multiple call options have sold. This sideways movement is referred to a handle. While the handle continues, we project an excellent annualized rate of return. Current Call options are selling at $.24 for the February 24 expiration strike price $34. Selling call options on SLV over the last 5 weeks averaged a premium of $.18 per week. Collecting $.18 per week for 52 week equates to a 28% annual return or dividend for holding SLV. Why hold silver hoping to make money only when it goes up when income can be made while it moves sideways?

We believe silver and gold are going to "break out" into a new higher trading range. The current buy order is $34.01 with limit of $34.03. This represents our buy stop recommendation which keeps us holding SLV after it "breaks out."  After SLV enters the new trading range, we continue this strategy with higher call option and buy stop prices.

For more tips on how to make money with conservative silver, gold and other blue chip core holding investments join our facebook group: Option Trading Strategies.