What Bitcoin Is and Is Not & The Ominous Chart of the DOW

There is an excellent explanation on what Bitcoin is and is not in layman's term if you scroll down to the middle of this article on ZerooHedge. The article talks about "How To Steal Bitcoins In Three Easy Steps" 1. Copy the keys 2. Getting Away With it and 3. Get Rich. At my last check, Bitcoin is trading at $658.20, with a low of $615 and a high of $700. The trading band has narrowed considerably, low volume on an up day, and much higher volume on a big move down. Are we about to witness a big break south on big volume?

On another topic, market participants have been talking about the eerie similarity between the DOW in 1928-1928 and now (see chart below). With the Dow, Nasdaq and even S&P hitting record closes even in the face of the first Taper last week, the comparison of the two market indices may seem laughable to many bulls but Black Swan event needs no warning and that is why it is called a Black Swan. Severe market corrections do happen as history tells us unfortunately we will only know when we look back. Irrational exuberance has taken hold, major bears have bailed, some have even turned bullish. Market multiples artificially supported by 4 rounds of QEs and mountain heap of cheap liquidity, the big correction could just be around the corner. You know how sometimes one can smell the rain even though the storm clouds are still forming in the Pacific ocean, that is how I feel now about the state of the market. Buyers beware.

Precious metals have been under pressure since the very first hint of Fed taper this summer. Physical gold in particular is looking very attractive, here or $100 lower from here presents a very good entry point for the next leg up. I bought gold when it was $680 in 2006 (still own it, physical is not something I would sell), and I loaded up on Half Franklin at $9.98/oz of silver that same summer and sold them when silver hit $45. I like silver here, it has a commercial component and if I must be invested at this time, silver etf would be a good place to park some money short term. It also looks to be finding and building support here. I have been trading smaller silver miners as a proxy to the Silver ETF (SLV) and Silver Wheaton (SLW). Have also added to my 1 OZ silver eagle collection, although I rather not to have to pay for the $2-4 spread but coin dealers have to make money so I am cool with that. As for gold coins, supply seems tight at the local shop guess they have all gone overseas to the Chinese and Indians who have been stocking on them.

Bitcoin and the Next Tulipmania

Dec 07 2013 5:04 PM PST Screen grab of MTGOX.com Bitcoin Chart
I am old fashioned, gold and silver coins (bullion or numismatic) are what I prefer as an alternative asset class to cash (as a defense against the printing presses of the world's Central Banks). I do not understand the buzz with Bitcoin, nor its meteoric rise to stardom in the last 2 months. Yes, may be there is a finite supply of Bitcoins in this universe and if so yes, someone may choose at will to offer an unfathomable premium for one. I am willing to pay more (not insanely more) for something that is rare, unique and in a finite supply if that something has withstood the test of time. Bitcoin may be the former but definitely not the latter. It is a poorly understood concept by many who embraced it with blind faith, the concept of crypto-currency is definitely not new. See Bitcoin wikipedia page. With brilliant marketing and plenty of media buzz last 2 months the price of one Bitcoin surged to match the price of one ounce of gold. Now that to me is beyond insane. Many might secretly wished they had bought a few Bitcoins instead of working at their day job. Even if Bitcoin proves itself in the future to be a viable alternative transaction "platform", it is a platform plagued with so many unknowns today, with the exchanges located in some faraway places totally unregulated. It is like doing business with the underground drug lords. If someone were to hack into the network and you found your Bitcoins gone overnight who are you going to call? (Ghostbuster?) (and that has happened to some though not publicized). Yet many jumped on the bandwagon hoping to get rich on Bitcoins and never having to work for a living again.

Look at the screen grab of the Bitcoin trading chart on Mtgox.com above, taken on 12 07 2013 5:04 PST. A method of "exchange" this volatile cannot be a currency, it is poker chips at best. Something that went up this fast on pure speculation and hype will come down just as fast as soon as that hype dissipates. China halted acceptance of Bitcoin payment last week to be followed by Baidu doing the same citing unstable prices and Bitcoin promptly crashed to a low of $576 overnight (50% off its peak). Wasn't there a lucky person who drove away with a Tesla Model S paying with his (or her) bitcoins. Kudos, you are one lucky person. If you were smart, you would quickly sell that Tesla S and lock in your gains if the dealer has not come running asking for the car back telling you he has made a huge mistake.

Now that I have vented my thoughts on the next Tulipmania, I am going to curl up by the space heater this wintry evening and read Charles Mackay's book - Extraordinary Popular Delusions and The Madness of Crowds.We had picked up a copy of the 1993 hardcover edition published by Barnes and Nobles Books at a local Friends of the Library book sale. This 714 page classic, a Jesse Livermore's favorite, is definitely not an easy read, but I shall attempt to make some progress tonight.