White Dragon Society Cryptocurrency
Portfolio Update
Following our initial report
describing the overall Cryptocurrency
State of Play, we aim to begin releasing quarterly reports summarizing
major market developments and changes to our working investment
portfolio. The White Dragon Society (WDS) has access to a wide range of
esoteric intelligence and aims to share this cryptocurrency intel on a
continuing basis with Benjamin Fulford’s readership.
Investment commentary is provided as
is, with no warranty. “Investments may go up as well as down.” As
always in investing, it is important to look for a good entry point, but at the
moment the prices of almost all cryptocurrencies are going up, up, up, as
capital continues to flow rapidly into the space. It’s a “firehose of
liquidity” according to early cryptocurrency investor and hedge fund
manager Michael Novogratz.
In any case, we hope that some of
Benjamin’s readers profited from our last report. The fourth quarter of
2017 was an amazing time to be a cryptocurrency investor.
As almost everyone is now aware, 2017
was a quite a year for cryptocurrency. Bitcoin garnered most of the media
attention, especially during its fourth-quarter price surge, as people new to
cryptocurrency began hearing about it and buying in for the first time.
This prompted a debate of sorts as to whether Bitcoin, or cryptocurrency in
general, is a “bubble.” That debate misses the point.
Regardless of whether Bitcoin manages
to keep its #1 seat at the top of the cryptocurrency market cap tables and its position
as the base currency with which all other cryptos are priced and traded,
cryptocurrency in general is obviously here to stay. It has begun to
transform not only finance but all manner of other industries as well, in the
same way that the Internet did before it.
Indeed, all technology bubbles
are transformative
events. We believe that the key to investing in any such bubble is
holding a position in a diversified portfolio of startup projects, each of
which stands to disrupt existing industries in a unique way. In that
regard, our portfolio aims to garner exposure to a wide range of
different sectors of
the cryptocurrency market.
Remember that even though the DotCom
bubble was one of the biggest in history, a buy and hold investment in Amazon
and many other tech stocks in the late 90’s ended up being spectacular
investments. Of course the bubble popped in 2001 and many companies
crashed and burned, but others continued on to enormous heights.
Using the DotCom bubble as a
template, and noting the particular industries which already comprise the
lion’s share of online revenue generation (advertising, e-commerce, gambling,
etc.), we aim to select a diversified portfolio of projects aiming to disrupt
in this latest round of DotCom mania (perhaps better referred to as Dot IO
mania, given the recent popularity of domain names ending with “.io”).
Amazon and Google are not the small
upstarts that they once were. They now represent the entrenched “powers
that be” and will likely be disrupted by younger competitors. Remember
that all of the original
12 companies of the Dow Jones Industrial Average were dropped from the
average long ago. Business is about constant transformation and rebirth.
2017 will certainly be remembered as
the year that cryptocurrency exploded and hit the mainstream. Bitcoin
finished the year up approximately 13x (1300%). Ethereum did even better
and clocked in a return of 70x (7000%). Returns were so amazing that one
cryptocurrency commentator, Willy Woo in Bali, Indonesia, quipped that
the old economy uses the percent sign (%) to measure returns, whereas the new
crypto economy uses the multiplication sign (x).
It is obvious that those heady
returns cannot last forever. However, there is some chance that they
could continue for the foreseeable future as cryptocurrency-based systems begin
to replace swaths of the old financial system, or as the flight of money from
overpriced paper assets (dollars, treasuries) begins to accelerate.
Remember that the real bubble (or “pyramid
scheme,” as it were) is the U.S. dollar, and it is one of the largest in
the history of the world.
Whether we are in for a disorderly
unwind of that great bubble remains to be seen. There are certainly those
who are hoping that occurs (MaxKeiser1, MaxKeiser2).
The White Dragon Society does not believe that a disorderly unwinding of the
existing financial system would be in the best interest of humanity.
Whether or not Bitcoin itself is just
another kind of “paper asset” like the USD is a topic of great debate. In
2017, gold ended up having its best year since 2010 (+13%) and the dollar its
worst year since 2003. By design, cryptocurrencies are limited in supply,
unlike dollars. However, at the end of the day, cryptocurrencies, like
dollars, are just entries in a ledger, or in other words, just “numbers in a
computer.”
The Achilles heel of cryptocurrency
is perhaps the fact that although each cryptocurrency itself is limited in
supply based on the consensus of the people who “mine” it, it is very easy to
copy an existing cryptocurrency and create another.
Therefore, the total number of
cryptocurrencies is exploding. In addition to Bitcoin, there are now
Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, Super Bitcoin, etc. Of
those, Bitcoin Cash is perhaps the most serious contender to replace Bitcoin,
and it has some prominent backers within the cryptocurrency community,
including Roger Ver.
The problem with Bitcoin itself is
that it is suffering from its own success. The Bitcoin network is
completely overloaded at the moment, very slow, and transaction fees are
skyrocketing. Cryptocurrency commentator and pioneer Cøbra detailed
the problems recently
in a series of tweets and pointed out that Bitcoin mining power is concentrated
in the hands of a few people in China. (Interestingly, his Twitter banner
image is a picture of Tiananmen Square.)
In that sense, Bitcoin has arguably
been “taken hostage” by miners who are collecting increasingly large
transaction fees and avoiding making the necessary upgrades to scale the
capacity of the Bitcoin network. Bitcoin was originally envisaged as a
fast, cheap kind of digital cash. Barring substantial upgrades to the
Bitcoin system which did not materialize as planned in 2017, that possibility
is long gone.
Bitcoin could still remain as a kind
of “Gold 2.0,” but there is a real risk of it being superseded by other
technology. In particular, we would point to platforms like Ethereum, Waves, and Stellar, which will allow for the
digitization and tokenization of real assets like gold.
Stellar was founded by cryptocurrency
pioneer Jed McCaleb. McCaleb’s long involvement in cryptocurrency and
peer-to-peer technology is detailed in a massive 2015 New York Observer article
titled “The
Race to Replace Bitcoin.” The article paints McCaleb as something of
a deadbeat who tends to eventually abandon the projects he starts.
However, we find it curious that someone would go to so much trouble to pick
apart McCaleb’s life, including his romantic affairs with Korean women (a
country which happens to be in the midst of a cryptocurrency buying
frenzy). Quite frankly, the article had the opposite of its intended
effect on us—we liked Jed McCaleb even more after reading it. We are
always interested to see well-meaning projects being attacked in uncanny ways,
because it usually means that they are on to something.
McCaleb originally founded Ripple, but left to found Stellar when he
determined that Ripple had been overtaken by the corporate powers that
be. In the final days of 2017, Ripple staged a massive rally that left
many market participants scratching their heads. Roy Sebag, founder
of GoldMoney, had the following
to say:
“XRP [Ripple] is the government’s preferred crypto. There is nothing the
global elites would want more than for the citizenry to be duped into using
Ripple as a cryptocurrency. I don’t trust it for multiple reasons.”
In October, Ripple held a conference
in Toronto, competing for
attention with SWIFT’s yearly Sibos conference. The keynote speaker at
Ripple’s conference was none other than Ben Bernanke, the former chairman of
the U.S. Federal Reserve. Stellar, for its part, used the opportunity to
announce a partnershipwith
IBM, wherein Stellar technology is already being used for foreign exchange
payments between some countries in the South Pacific.
McCaleb was involved in
cryptocurrency even before starting Ripple. He was the founder of the
infamous Bitcoin exchange Mt. Gox, which was originally
envisioned as a website for the exchange of playing cards from the game “Magic:
The Gathering” (thus the name). McCaleb sold most of Mt. Gox (88%)
to Shibuya Tokyo resident Mark Karpeles in March 2011. In 2013/2014, Mt.
Gox progressively imploded due to legal and banking issues and the discovery
that most of its Bitcoin holdings had been stolen over time.
The implosion of Mt. Gox took the
entire cryptocurrency market down with it into a deep multi-year bear
market. Note the significance of the date of the sale—March 2011 was the
same month of the devastating 2011 earthquake and tsunami in Japan. So
just as Japanese citizens were dealing with the aftershocks of the quake, Japan
was taking control of the first/largest cryptocurrency exchange.
Although Mt. Gox eventually imploded,
it at least set the stage for Japan to take the crown in global cryptocurrency trading,
a process which continues to this day. Japan recognized Bitcoin as legal
tender in early 2017 and that arguably helped set off the year’s buying frenzy,
much of which originated in Asia. Bitcoin is now accepted for payments in
Japan at a growing number of retail shops including large electronics stores,
and a total of 15
different cryptocurrency exchanges have received licenses from the
Japanese government.
All of this took place just as China
was banning Bitcoin trading, prompting Chinese traders and companies to
simply set
up shop in Japan, and ultimately resulting in the Japanese exchanges
rising to first place globally in terms of trading volumes. China will
likely come to regret prematurely killing off all of its nascent cryptocurrency
companies.
Aside from Stellar, another
up-and-coming cryptocurrency platform is Waves, based on Emin Gün Sirer‘s Bitcoin-NG scalable blockchain
proposal. The Waves blockchain now claims to be the fastest
decentralized blockchain in the world. We have also established
a position in the Substratum project.
Substratum aims to create a censorship-free, decentralized, peer-to-peer
version of the Internet.
We noted in our last report that
a bug in the Parity wallet software was exploited in a hack netting over $30
million dollars worth of cryptocurrency (at the time of the theft—it’s worth
much more now) stolen from several cryptocurrency startups.
Interesting, the Parity wallet software was recently found to
contain yet another critical bug which resulted in around $160
million of cryptocurrency funds being semi-permanently “frozen,” at least until
the development community can agree on a safe way to unfreeze them.
Ironically, the company most impacted
this time by the mishap was Gavin Wood’s/Parity Technologies’ own
startup, Polkadot, which had over
$100 million of its funds frozen. Polkadot is attempting to create
something of a “master blockchain” to link together all other
blockchains. Strangely, even after losing access to most of its fund, the
Polkadot project seems to be continuing unabated. Among other things,
this shows the frothiness of cryptocurrency markets at the moment;
companies are able to raise more money than they know what to do with.
The bug report describing
the issue makes for entertaining reading. It’s titled “Anyone can kill
your contract,” and is quickly followed by the comment, “I accidentally killed
it.” In essence, someone discovered that the software was vulnerable to
attack and reported the potential bug. The bug report was then promptly
ignored, following which the initial reporter of the bug apparently decided to
play around and see if he was right about its existence and criticality.
He was right. The end result was the complete compromise of the software
and the freezing of hundreds of millions of dollars worth of funds.
This goes to show that just because
software is open source does not mean that it cannot contain critical
bugs. There are even those who claim that Bitcoin could contain a “back
door.” We find that idea to be a little far-fetched, but nonetheless a
large number of critical flaws are certain to be present in various
cryptocurrency systems. Thus, when analyzing projects and proposals, we
place a high value on the simplicity of software design. Simple
approaches are naturally less likely to contain critical faults.
In any case, we have to question the
wisdom of any company that deems it safe to store funds in the Parity
wallet after the first critical Parity bug/hack in July. For that
reason, we are taking this opportunity to remove Iconomi from our portfolio, as some of
their funds were frozen in the latest Parity debacle. The safeguarding of
funds should be one of the top priorities for any cryptocurrency asset
management firm. In addition, while they appear to be developing a good
platform, there is certain to be stiff competition in the area, and other asset
management platforms such as Melon are
fast up-and-coming. Therefore we feel it is safer to remove this company
from our portfolio.
Another company on which we are
taking a similar downgrade action is ChainLink. One of its
advisors, Ari
Juels, appears to belong to the cult of Demeter.
In addition, we are a little curious as to how such a small startup could
already be working with the infamous SWIFT system
and receiving accolades from the good old boys at the World Economic Forum.
Notwithstanding the idea of a Bitcoin
“back door,” if the powers that be want to stop the rise of cryptocurrency, we
find it more likely that they will revert to “ice-nice”
tactics of simply freezing people out of the banking system. There is
also some likelihood that 2018 will see another media campaign to paint Bitcoin
as a tool mostly used by criminals or terrorists, similar to the Silk Road fiasco
of 2013, the bust of which also resulted in the imprisonment of BitInstant
founder Charlie
Shrem. For example, none other than the Vatican recently highlighted the
use of Bitcoin in the human slave trade. We hope that they also take some
time to highlight the use of US Dollars in the human slave trade.
Charlie Shrem went to prison
(briefly), but the passive investors in BitInstant escaped the 2013 government
takedown unscathed. This includes the Roger Ver, mentioned above as a
strong advocate of Bitcoin Cash, and the Winklevoss twins,
famous for being the ones who actually created Facebook before Mark Zuckerberg
stole the idea from them.
They may end up having the last
laugh. In 2013, the Winkelvosses won a lawsuit against Zuckerberg and
invested the resulting funds into Bitcoin. They are now among the first
confirmed “Bitcoin Billionaires.” In 2015, they founded the cryptocurrency
exchange Gemini,
which recently partnered with the Chicago Board Options Exchange (CBOE) to
launch the first Bitcoin futures contract. The Chicago Mercantile
Exchange (CME), the other big Chicago futures exchange, launched its Bitcoin
futures product a week afterwards, following which the Bitcoin market promptly
proceeded to tank.
Indeed, market manipulation through
futures is another worry, and is something that has been going on in the gold
market for decades.
We will mention here that we
are definitely not investing in the crypto-AI project SingularityNET founded by Ben
Goertzel, a project which received a worrisome amount of capital (~$150
million) in its initial coin offering. Although competition with
corporate-sponsored AIs (e.g. Google) could be considered to be a good thing,
the WDS believes along with thinkers like Elon
Musk that no amount of support for AI is a good amount.
Referencing our previous report, we note here that SingularityNET is
using a version of the infinity symbol as its logo, although it could be
considered to be a “broken” infinity symbol like the former logo of Parity
Technologies. In any case, we will not be investing in it. Nor will
we be investing in the Mimblewimble project from Lord
Voldemort.
The current WDS cryptocurrency
portfolio is summarized below. Note that we are not holding Ether tokens
directly, even though we are strong supporters of the Ethereum platform.
Many of the projects below are built on the Ethereum platform anyway, and as noted
above, Ether already underwent a 70x price surge in 2017. For the time
being we are focusing on holding a diversified portfolio of tokens from smaller
projects, each with relatively more potential for short-term price
appreciation.
§
Ethos: social investing
platform (recently rebranded from Bitquence)
§
Waves: scalable blockchain
For more continuous information
regarding developments in the cryptocurrency space and the financial markets in
general, including timely updates on WDS portfolio buys and sells, please
follow our Twitter account: @generalmilan