One of the most fascinating aspects of market analysis is learning to separate fact from fiction. If you study and participate in markets long enough you will quickly come to understand the power of stories in shaping a narrative which creates the economic canvas which everything operates under. Sometimes the stories are complete fabrications. Sometimes the stories contain a grain of truth. Sometimes the stories represent a strong alternative viewpoint worthy of consideration. Within these colors and textures markets operate offering price discovery to their participants.
One of the sacred cows in economic thinking has always been that nations are the only entities that can control the money of a country. In the past, money was usually perceived to be a hard asset as the base layer. Precious metals were considered to be money for thousands of years. Banks and countries then created paper notes which were redeemable for the hard asset as a second layer of money. This worked very well until a nation would spend too much leading its citizens to stop trusting the paper asset.
Then in 1971, as The United States was faced with paying for a very expensive War in Vietnam, increased social spending domestically and gargantuan space exploration budget, foreign nations began to question the financial stability of the U.S. Dollar and for the first time since the 1940’s requested to settle their debts and obligations in precious metals. This event led to President Richard Nixon closing the Gold redeemability window on August 15, 1971 and ushered in the era of pure fiat currency. Because of this economic reality, the paper money we all use is literally only backed by political promises. It is the first time in the history of the world, where all nations have attempted to trade with one another, utilizing a floating exchange rate system where no currency has been backed by any assets.
Today, the US dollar is considered the “reserve” currency in the world. Unofficially, the US dollar began its global reserve status in 1921, after Britain’s pound sterling lost its status in 1920. Then after the Bretton Woods Conference in 1945 the monetary authorities in the world decided that the U.S. Dollar would become the Reserve currency for the civilized world. However, for the last 50 years this system has been a source of tremendous controversy among economists. Opponents of the current system claim that fiat currency-based economies are the source of wealth inequality in the society. They claim that since the money is only backed by political promises that it provides tremendous advantages to those who are politically connected and have first access to the capital before inflation occurs. Advocates of fiat continuously propose new adjustments claiming that they need more control to effectively manage the economy.
If you watch the news closely, over the last several months, Treasury Secretary Janet Yellen has been talking up the idea that a little bit of inflation can be a good thing for the economy. She recently stated, “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.”
The problem in understanding her commentary boils down to how you choose to define inflation. Traditionally, inflation means that your money purchases less and less. And now, our nation’s chief monetary authority says this would be a good thing?
Gradually falling prices are the telltale footprints of economic progress. In 1972 the Hewlett Packard 3000 cost over $95,000. That is over $500,000 in today’s dollars. Today, the flimsiest computer on the market is one thousand times faster than the 1972 model and costs 99.9% less. This simple example from the tech world communicates why deflationary trends always benefit consumers. I can’t help but remind others that when Janet Yellen was Fed Chairman, she proudly announced that she did not expect another financial crisis in our lifetimes.
It is within this controversial and volatile backdrop that the cryptocurrency market was born during the darkest days of the Great Economic Recession of 2008. As we approach the 50th anniversary of President Nixon eliminating gold redeemability, many traders, economists and nation states are forcefully re-evaluating the fiat monetary system. As countries experience burgeoning deficits and citizens witness declining purchasing power, more and more people are questioning the integrity and effectiveness of money backed by only political promises. Keep in mind that over the past 18 months the United States has printed over $4 trillion in new currency.
In this regard, one of the most historic and memorable days in monetary economic history occurred this past weekend at the end of the Bitcoin Conference in Miami, Florida. Strike founder and CEO, Jack Mallers, a lead developer on Bitcoin’s Lightning Network announced that the President of El Salvador, Nayib Bukele will make bitcoin legal tender within the El Salvador, along with plans to add bitcoin to their reserves. While this announcement went predictably un-noticed in the mainstream media, it clearly has sent tremors through the world’s financial markets.
Maller’s announcement framed the breakthrough along the lines of the now familiar bitcoin mantra. “Fix The Money, Fix the World. One Small Step for Bitcoin. One Giant Step For Humanity.”
It is fascinating to dissect what is happening here — the President of a country has decided to embrace Bitcoin. El Salvador wants to be a leader regarding the future of money. The President of El Salvador wants to demonstrate by using his country that the world can benefit from it. He believes that a better country for Salvadorians will lead to less illegal immigration to the United States and other Latin American nations. The bitcoin legislation mandates that every merchant in El Salvador must accept bitcoin as legal tender as long as they have the technology to do so, but they are not required to hold bitcoin once they accept it. What is remarkable to think about is that in the last 4 days the President was able to announce his plan for bitcoin adoption, draft a simple 3-page bill, have the government vote and approve the bill. It is unfathomable that this type of event could occur in any developed nation where bureaucratic red tape is the norm.
El Salvador had a protracted Civil War between 1979 and 1992 during which they lost their own currency. Since the end of their Civil War, they have been using the U.S. Dollar as their primary currency. The El Salvador Colon was their former currency is still considered legal tender, but it is rarely used. Now, 29 years later, the controversial President has decided to embrace Bitcoin as the best means for his poverty ridden country to move forward.
After this announcement, President Bukele made several tweets that have captured the attention of economists, monetary authorities, central banks, and traders alike. Over the past several months, when Quarterback Tom Brady decided to acquire bitcoin, the community adopted a “laser eyes” meme, to celebrate Brady’s announcement and to communicate to others that their “superpowers” had been activated. The following tweets by President Bukele are worthy of your attention, starting with his new laser eyes twitter profile pic.
Jack Mallers framed President Bukele’s announcement as a means of pushing back against the Feds “unprecedented monetary expansion.” He referenced how emerging markets have been crushed by greenbacks being printed ad nauseam.
President Bukele’s announcement was pre-recorded he stated:
“Central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador. In order to mitigate the negative impact from Central Banks, it becomes necessary to authorize the circulation of digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria.”
Mallers’ company Strike has been on the ground in El Salvador this year, with Mallers claiming to have onboarded 20,000 Salvadorans a day during their peak activity.
While El Salvador is a small country the announcement caught the immediate attention of Latin American political leaders as Mallers stated that he is open sourcing the Strike protocols so that other countries can also follow suit.
The Twitterverse quickly became electric as further announcements were made by President Bukele and other Latin American leaders.
One obvious takeaway from President Bukele’s tweets is that it is apparent that he has been paying attention to recent moves by Miami Mayor Francis Suarez. What has helped revitalize Miami has been a theme of technology, entrepreneurship, low taxes and of course bitcoin.
Bitcoin recognized as legal tender, and as a currency, would generate no capital gains taxes on what have so far been considered to be bitcoin investments. The ramifications for this amount to billions of dollars of taxes that would not be paid to countries.
The response which President Bukele’s received is what makes this drama so interesting. Mainstream establishment proponents of the fiat system have been mostly silent. In one regard this is almost to be expected as cryptocurrency has always been viewed by the mainstream like “flies at a picnic.” However, the response from political leaders in Latin America displays the enthusiasm for an alternative form of money.
A politician from Paraguay, Carlitos Rejaja, posted a laser eyes photo of himself on Twitter Sunday evening and promised an announcement this week regarding bitcoin and his country.
The translation of his tweet is as follows: “As I was saying a long time ago, our country needs to advance hand in hand with the new generation. The moment has come, our moment. This week we start with an important project to innovate Paraguay in front of the world. The real one to the moon.”
Next, a Panamanian Congressman, Gabriel Silva shared similar comments on Twitter after hearing about the event in El Salvador. Congressman Silva said that Panama cannot be left behind and that he plans to propose similar action.
“This is important. And Panama cannot be left behind. If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies We will be preparing a proposal to present at the Assembly. If you are interested in building it, you can contact me,” said Silva.
Similar enthusiastic responses were posted by political leaders in Brazil, Argentina, Nicaragua, and Mexico leading Tyler Winkelvoss founder of Winkelvoss Capital to tweet:
It is way too early to tell how much merit this trend has. Unlike President Bukele of El Salvador, these other politicians speak on behalf of their smaller constituencies as congressmen or senators.
However, what speaks volumes is that this is probably the most important macro trend to pay attention to. Bitcoin is redefining finance, money, and international trade. The implications and stakes have never been higher.
In traditional finance, the most important input to determine the viability of a project is a careful evaluation of the currency. For the last hundred years, the risk or stability of a currency has determined where factories and labor will be invested in internationally. Should this consideration be eliminated and replaced by bitcoin, the lesser developed countries of the world can compete more equally with the top industrial nations. As for now it looks like bitcoin will become legal tender in El Salvador along with the U.S. Dollar.
As the first countries to start talking about this, they represent an acceleration of the Bitcoin experiment as a true currency in a nation.
But what is equally fascinating about these developments is what happened to the bitcoin price after this news was announce. This massively bullish announcement of a nation state adopting bitcoin as its reserve currency was met with a 13% further decline over the next several days.
Study the following chart to see how the VantagePoint artificial intelligence forecasted the continuation of the downtrend that has rocked the bitcoin price over the past two months.
We have written at great length in the past about our long-term bullish outlook for bitcoin. We advise people to study bitcoin carefully and allocate a small percentage of your portfolio into this unique asset class. Bitcoin is not for the timid. Historically is has been the #1 performing financial asset of all time, it is also the most volatile instrument we have ever monitored. Over the past two months bitcoin has lost over 50% of its value.
I write these words trusting that you will be able to appreciate the power that artificial intelligence brings towards your decision-making process. Fundamentally, we consider this story to be massively bullish for bitcoin. But the only thing that matters for traders is price – not our opinion on a newsworthy story.
Artificial Intelligence provides you with the breathtaking money-making power of total perspective.
The difference between great traders and bad traders is whether they focus on what “IS” happening in the market or what “SHOULD” happen.
“IS” and “SHOULD” are two very different words!
Great traders understand that putting your money into what “IS” happening is at the very heart of success. Likewise, they understand that “SHOULD” is a word that will take hold of imaginations, but it will never put money in the bank.
To make money you must move past opinions… and focus on FACTS. However, most traders love DRAMA and there is no shortage of that when it comes to making money. Braggards are everywhere trying to proclaim their dominance and insider knowledge.
There is only one fact in the world of markets and that is PRICE. What the price of an asset does is the only thing that matters to a trader.
Price is the only thing that can create wealth. As experienced traders have learned, the market is never wrong, but opinions often are!
This is painfully obvious in hindsight, but traders often get trapped in the story and it forces them to behave quite irrationally.
“Stories” capture the imagination and make us all think about possibilities. BUT stories are where RISK lives.
Traders must concern themselves only with how the price of an asset responds to NEWS and STORIES. This is exactly why artificial intelligence is invaluable in helping traders focus on solid trends.
We’ll say it again: There is only one fact in the world of markets and that is PRICE.
Stories pull on our heart strings and can make traders make decisions irrationally. Trading success comes from making decisions based only on cold, hard FACTS!
We live in very exciting times.
What hurts others can instruct us.
A.I. is the framework where risk and opportunity are very clearly defined.
Remember, artificial intelligence has decimated humans at Poker, Jeopardy, Go! and Chess. Why should trading be any different?
Discover why Vantagepoint’s artificial intelligence is the solution professional traders go-to for less risk, more rewards, and guaranteed peace of mind.
It’s not magic. It’s machine learning.
Make it count.
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