Is this a Bitcoin Price Correction? Maybe…

Bearish pressure has pulled the Bitcoin price into a deeper correction. The advance is on hold pending ongoing price correction. Most markets including Gold and equities are engaged in sudden counter-trend price movement – a condition that seems temporary.

Many strong reversals are evident across the board in the past 48 hours. The Gold price dropped to $1,227 from $1,250 today. The S&P500 has surged back to support near 1,970, and the US Dollar has resumed advance toward 86. Possible factors underlying these changes, as well as the sudden Bitcoin drop, are not evident, and a return to the longer-term trends should resume in the coming days or by next week.

Unless a swift reversal takes price back above $368 and then $400, we can only assume that wave 2 will target one of the Fibonacci retracement levels at 50%, 61.8% or 89% of the entire advance of the past three weeks from $275. The following Bitstamp hourly chart shows the Fibonacci retracement levels on the righthand side. The 50% (.5) retracement is at $346 and the 61.8% (.618) retracement level is at $330.

Yesterday, before price broke out below the consolidation triangle, the correction had been labeled a-b-c-d-e. A new wave count is annotated and shows price action in wave 3 of wave C. We’ll refine that as more of the wave structure becomes apparent.

The final wave in the expected sequence, wave 5, is shown to terminate at $330 although it may equally well extend all the way to the .89 Fib retracement level at $290. We cannot know at this stage whether wave 5 will end nearer $330 or $290, but a sensible trade strategy is outlined below.

Edward J Gerety III









Trading The End of Wave 2 

The same advice given during the past week applies: It is recommended that traders do not short trade this decline. Doing so is risky because the decline’s lower target is unknown and, once terminated, reversal could be swift.

One trading strategy is to systematically buy into wave 2 as it approaches its potential reversal levels at $346 (50% retracement), $330 (62%), etc. down to $290. A stop-loss placed at $275 would then close the position at a loss should price continue declining to $260 or $205 to make a new decline low. However, this strategy is wasteful and resembles stepping in front of an approaching bus.

A more sensible strategy and the one with the highest probability and lowest risk is to wait patiently for wave 2 to complete. Once price action reverses and starts heading up in those first few long green candles, the urge to buy into the apparent advance will be strong, but don’t pull the trigger just yet. Wait longer still. The risk remains that what appears to be a reversal at the end of wave 2 (at say, $330) is not the end of wave 2 at all.

Once price action has drawn some long green candles and makes a correction without making a new low – this is the time to buy into the advance. Place a stop-loss just below the reversal level where the advance started from.

If price does turn down again to make lower lows, your loss is minimal, and the process can be tried again at 62% retracement and again at 89%. If reversal occurs at one of these points, you will have gotten in near the beginning of wave 3 which is characterized by swift advance and great distance.

Edward J Gerety









Wave 2 is drawing the Bitcoin price into a deeper correction than was initially expected. Prepare to buy in lower at $346, $330 or even $290, but don’t short-sell the market here since the reversal level is not certain.

Edward J Gerety







Price may eventually print a new decline low, but we’ll deal with that scenario once the wave down declines below $275.

Once wave 2 reverses, the advance in wave 3 can be expected to commence with great vigor. For now, we observe and wait for a reversal above $275.

Ecuador and Dominica are taking on experiments with digital currency

ecuadorVirtual currency, still in its nascent phase, has prompted scrutiny by economists and regulators around the world. But in Latin America, two countries – Ecuador and the tiny Caribbean island of Dominica – are taking on very different experiments with digital currency, with government support.

Ecuador announced earlier this summer that it planned to begin issuing a new digital currency through its central bank in December, targeting poor and rural segments of the population without access to traditional banking. The move would make it the first country in the world to have government-issued digital money.

Details of the plan are still scarce, although a presentation on the Ecuadorean government’s website lays out a few more specifics: The new currency – which does not yet have a name – will rely heavily on mobile transactions for the estimated 48 percent of the population lacking a traditional bank account. President Rafael Correa said that the new currency would exist in parallel to the U.S. dollar – Ecuador’s official currency – and be backed by liquid assets.

This stated goal of financial inclusion and focus on mobile payments appears to put the new Ecuadorean system closer in line with M-Pesa, the mobile monetary transaction system that has been wildly successful in Kenya. M-Pesa has been credited with providing a faster and more convenient way for poor and rural populations to make payments, send remittances and run businesses. But M-Pesa is a mobile platform for dealing in the existing local fiat currency, whereas Ecuador’s system would create an entirely new digital-only currency.

The decision to create a new form of electronic money rather than just adopting a mobile payments system has prompted some analysts to suspect that Correa’s real aim is to devalue the U.S. dollar. Ecuador, which adopted the dollar as its official currency after facing a banking crisis in 2000, is currently in debt to China for $11 billion, or one-seventh of its entire economy. A devaluation would make that debt less of a burden.

But while many other details are still unknown, Correa has emphasized that the new system will not resemble a cryptocurrency like Bitcoin, which is not controlled by any central authority and relies on a fixed supply. In fact, the law that authorizes the creation of Ecuador’s new currency simultaneously prohibits the use of decentralized currencies like Bitcoin.

Meanwhile, in the tiny Caribbean country of Dominica, Bitcoin is surging ahead. The “Bit Drop,” sponsored in part by a handful of Bitcoin businesses and interest groups, is a planned event to send all SMS-capable residents of the 70,000-population island a small, unspecified amount of bitcoins on March 14, 2015, thereby creating the “world’s largest and highest-density Bitcoin community.” According to the sponsors of the “Bit Drop,” the project has received cooperation and backing from Dominica’s government.

The groups behind the “Bit Drop” include Bitcoin wallet service provider Coinapult, Dominican insurance firm Aspen Assurance, nonprofit organization College Cryptocurrency Network and the Bitcoin Beauties network, which is aimed at encouraging women to adopt Bitcoin.

Project manager Sarah Blincoe told CoinDesk, a Bitcoin news site, that Dominica’s small population, widespread mobile usage and diaspora make it a strong test case for the use of bitcoins in making local payments and sending remittances. College Cryptocurrency Network executive director Jeremy Gardner also told CoinDesk that his group would hand out educational materials about Bitcoin to local retailers in an effort to use the drop as a launching pad for longer-term adoption.

It’s unclear whether the project would actually have a lasting impact on island residents’ perceptions and usage of the currency, or if the drop – which will coincide with an island-wide party – is simply a clever, one-time marketing campaign. Still, the support of a national government is a significant step for the cryptocurrency movement.

But elsewhere in the region, digital currency – especially Bitcoin – is still very much in a fledgling state. Bitcoin usage has been on the rise in Argentina and Brazil as national currencies face rising inflation, but difficulty of access and perceptions of high risk mean that proponents still have far to go in gaining traction for virtual currency in the region.


– or at least maybe the end of this most recent stock market correction …

A very helpful tool for spotting intermediate-term bottoms is to watch large outflows, or signs of capitulation, in key exchange traded funds (ETFs). To do this, first identify which areas of the market are getting hit the hardest, look at a widely followed ETF for that market, and then watch for fund outflows to hit an extreme to mark capitulation. A case in point is the early February bottom in which the 20-day average of fund flows for the SPDR S&P 500 (NYSEARCA:SPY) ETF reached the lowest level for the entire bull market. Here’s the chart I showed at the time where fund outflows correctly signaled the February bottom in the S&P 500:

Source: Bloomberg

Similarly, back in the middle of April I argued we were nearing the end of the pullback in the markets when viewing the technology-heavy PowerShares QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq 100 Index. The 20-day average of fund flows for QQQ reached an extreme level and suggested we had reached selling capitulation in the markets. The extreme selling in QQQ that was highlighted in April is shown below (click for link):

Source: Bloomberg

This go around the selling appears most intense in the small-cap equity and junk bond market segments as discussed last month (click here and here). Given these two areas were under the most pressure, I looked at fund flows for both segments and based on the 20-day average of outflows for both I would suggest a bottom is likely in for the markets. As capitulation selling in the SPY and QQQ marked earlier bottoms this year, we’ve clearly seen capitulation in the junk bond market as the 20-day average of outflows from the iShares High Yield Corporate Bond ETF (NYSEARCA:HYG) reached the worst outflows seen since the bull market began in 2009 as nearly $100M in average daily outflows have taken place in the last 20 days.

Source: Bloomberg

Even greater outflows were seen in the iShares Russell 2000 ETF (NYSEARCA:IWM), which averaged $162M in daily outflows over the last 20 days. Outflows of this size have marked prior bottoms over the last few years and suggest we’ve seen yet another intermediate-term bottom in the markets (Note: two red arrows did not lead to intermediate market bottoms).

Source: Bloomberg

So Bearish It’s Bullish

Last Thursday I highlighted that breadth had turned so bearish that we were reaching levels associated with market bottoms. For gauging market breadth I analyze the Russell 3000, which makes up roughly 98% of the entire US market capitalization. The percent of members below their short-, intermediate- and long-term moving averages (2nd panel below) has reached levels associated with prior market bottoms. We’ve also seen a spike in members with 3-month new lows (4th panel below) and one of my favorite indicators, the percent of members with a MACD line above zero (5th panel below), reached the 30% threshold, which has marked solid bottoms over the last few years. All of this suggests the markets have bottomed and what we need to watch now is how strong and robust is the recovery off the lows.

(click to enlarge)
Source: Bloomberg

Buy Signals on Major Indexes

One indicator I’ve come to rely on that has proven to be quite reliable, particularly at bottoms, is the Bloomberg TrendStall indicator that attempts to find changes in trend. When the conditions for a reversal have been met the indicator paints the index purple and when the actual trigger is met a triangle is shown for the signal – a red triangle for a sell signal and a green triangle for a buy signal. Currently, we have the conditions for a reversal (see green circles below) in all of the major indexes but the trigger has not been given yet. As seen below, past buy signals by the TrendStall indicator have proven to be spot on in calling prior bottoms over the last two years and if the buy trigger is given that would be another nail in the coffin that the bottom of this pullback is probably in.

Source: Bloomberg

Given Strength of Economy, Recent Pullback Not Indicative of Bull Market Top

With the weakness in the markets this past month, particularly in small-cap stocks and the junk bond market, there have been a growing number of bears calling for the end to the present bull market. Given that most bear markets are associated with recessions it is always worthwhile to take a look at the economy and its trajectory before making a bear market call. Doing so shows the risk recession for the US economy in the near future is in the low single digits according to our recession model, which currently calls for only a 3% chance of a recession on the horizon.

(click to enlarge)
Source: Bloomberg

Additional data also suggests near-term recession risks are remote. Today we were treated to the Fed’s Senior Loan Officer Opinion Survey for Q3 2014 and there was a lot of encouraging data to suggest the US economy is still on solid footing. For example, the net percentage of loan officers reporting stronger demand for commercial and industrial (C&I) loans from large and medium firms is near the upper end of the range for the last two decades and not yet showing any deterioration. This is very encouraging as loan demand typically falls off well before the onset of a recession (see red arrows below). If anything, loan demand is currently accelerating (blue arrow).

Source: Bloomberg

Commentary from the Fed’s release is provided below (emphasis added):

The July survey results showed a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand. Domestic banks generally continued to ease their lending standards and various terms for commercial and industrial (C&I) loans…Banks also reported having experienced stronger demand over the past three months, on net, for many more loan categories than on the April survey.

In addition to strengthening C&I loans we also saw the strongest demand for commercial real estate loans since the late 1990s:

Source: Fed

Demand for consumer loans also increased to the highest level since 2005:

(click to enlarge)
Source: Fed

The data from the Fed’s survey shows not only banks continue to ease standards as liquidity is readily available, but the demand for that liquidity is growing as business and consumer loan demand continues to grow. These are not the conditions you see before a major economic slump.


Based on capitulation-like selling in both the small-cap equity and junk bond segments of the market, it is quite likely that Friday marked a low. While the recent pullback was not fun it also wasn’t the beginning of a bear market as many bearish pundits claimed. The risk of a recession is simply too low and, if anything, the economy continues to build on the momentum coming out of the second quarter as banks, businesses and consumers show expansion.

While it is probable that Friday marked the low, there clearly has been some damage done to the market’s technical condition and some repairing needs to occur over the coming days before we can say with confidence that the low, not just a low, is in. For that, I’d like to see the S&P 500 reclaim its 50-day simple moving average and the iShares Iboxx High Yield ETF (HYG) also begin to trend higher and see strong fund inflows.

I would also like to see a strong surge in momentum of enthusiastic buying that has accompanied other bottoms. While we are clearly oversold (see middle panel) we need to see a surge in demand (bottom panel) for the final element of a market bottom. Currently, we’ve only seen 8% of the Russell’s 3000 members generate a MACD buy signal in the last 10 days. For a solid bottom to be in place we need to see this number jump at least over 15% and ideally higher for a stronger signal. I’ll touch back on this indicator later in the week for an update and provide any other clues as to the market’s direction.

Source: Bloomberg

How much time do you spend on your smartphone a week?

Youth-obsessed marketers are anxious to figure out the best way to reach the so-called “Millennial Generation.” A new report validates the popular notion that the smartphone is the best vehicle.

Millennials, people ages 18 to 34, are the most connected generation, according to a new study from Experian Marketing Services.

The study, based on a survey of almost 24,000 U.S. adults, found that 77% of adult millennials own a smartphone and the average owner spends 14.5 hours a week using his or her smartphone texting, talking and on social media.

Marketers are already beginning to respond to the shift by increasing their spending on mobile advertising. Research firm eMarketer estimates that advertisers are expected to shell out about $17. 7 billion on mobile ads in the U.S. this year; almost double from what they spent last year.

Experian’s report does warn that other forms of media should not be ignored when trying to reach young adults. The study says that although millennials spend less time watching TV than others such as Boomers and Generation X, TV still accounts for more than a third of millennials total weekly media time — about 25 hours.

Here is a look at how device usage by millennials stacks up against other demographic groups:


Quietly, I will admit here in the small print that I am news addicted and 14.5 hours is a little low per week.

Bitcoin rises as E-BAY CEO states it is the Future

acceptedBitcoin jumped $16 in 2 hours after John Donahoe, the CEO of Ebay, told CNBC that Paypal ‘’will have to integrate digital currencies into our wallet’’. When asked how soon the move may come Donahoe said ‘’I don’t know, I can’t give a specific time.’’

The CEO seems to understand bitcoin very well however, as he expounded on the possible uses for the cryptocurrency in the next sentence:

‘’I think you’ll see bitcoin used in different use cases, whether it’s a peer-to-peer use case, a cross-border transaction, someone’s sending currency to someone else, and over time, you’ll start to see it with some merchants accepting bitcoin.’’

John Donahoe went on to say that he owns some bitcoins but he’s not buying it as an investment: ‘’I’m not buying it as an investment. I’m buying it to understand how it works. There are two sides of it, the investment side and the digital currency side. I’m more interested in the digital currency side.’’

The interview ends with a very upbeat insight on bitcoin: ‘’I don’t know if it’s a Stockholm Syndrome or what but everybody that I talk to out here, and you sort of get into it, really does talk about bitcoin as the next big thing. And they believe it. And they mean it.’’

Before the brakeout, BTC prices spent the previous 12 hours trading aimlessly around the $640 figure. After the Donahoe comments, BTC/USD jumped from $640 to a high of $656 (BTC-E). One bitcoin is currently quoted at $647.40 on BTC-E. Prices are trading slightly higher on on BitStamp at $660.



Banks mock Bitcoin and then try to replicate their success

BitcoinExchangeWhile Jamie Dimon and Warren Buffett express doubts about bitcoin, executives running the financial industry’s back offices are looking at mimicking the virtual currency’s methods of moving money quickly and cheaply. FIS, a provider of systems used by banks to handle payments, is examining whether a public ledger like bitcoin’s could help securely move funds on existing networks, Fred Brothers, the firm’s chief innovation officer, said in an interview. Fiserv Inc. (FISV), a provider of technology for payments and accounts, is examining bitcoin’s use of encryption to ensure transfers are secure, said Marc West, a senior vice president. Such interest shows how Wall Street could seek to reap benefits touted by bitcoin’s backers without using the virtual currency itself. Bitcoin, proposed by an anonymous programmer or programmers in 2008, has drawn entrepreneurs and retailers looking to popularize it as a low-cost alternative to established payment systems, supplanting credit cards to international wire transfers. Instead, a variety of financial firms might copy its underlying design to hone their own systems or services sold to clients. “It’s safe to say that every bank is looking at what’s going on with bitcoin and those types of technologies,” said Steve Kenneally, a vice president at the American Bankers Association. “Most of the larger banks are investigating it. The larger the banks, the further along they are.”

The Golden View

Goldman Sachs Group Inc. analysts wrote in a March report that while bitcoins may not make a viable currency, the technology “could hold promise.” The software relies on a public record of transactions. When someone spends all or part of a bitcoin, the change in ownership is recorded by a global network of computers and posted to the register, ensuring individual units can’t be simultaneously held or spent by multiple people. Operators of computers solving and verifying transactions are rewarded with new bitcoins for their work. Bitcoins are valued at about $435 today, compared with prices of more than $1,100 in December and about $13 at the start of last year, according to CoinDesk, which tracks prices across key exchanges. Bankers including JPMorgan Chase & Co. (JPM) Chief Executive Officer Dimon, 58, have predicted bitcoins probably won’t last after governments subject them to rules and standards akin to those for other payment systems. “I wouldn’t be surprised if it’s not around in 10 or 20 years,” Buffett, the 83-year-old billionaire chairman and CEO of Berkshire Hathaway Inc. (BRK/A), told CNBC in March. “It does not meet the test of a currency.”

‘Rat Poison’

Buffett’s long-time business partner, Charles Munger, was less charitable this week, telling Fox Business Network that calling bitcoins “rat poison” would understate his disdain. The technology could augment, or even replace, existing systems such as the Automated Clearing House fund-transfer system used by entities including banks, said Gil Luria, an analyst at Wedbush Securities Inc. Wedbush is examining the potential use of systems akin to bitcoin for interbank money transfers, said Luria, who oversees the effort. Such technologies include Ripple, a bitcoin-like system that completes transactions faster. “If there was a better solution that we felt was secure, we believe we’d use that infrastructure,” said Luria, who doesn’t rule out that firms might use bitcoin directly. “If banks were to transact with each other in bitcoin, that would be a large opportunity.”

Existing Systems

ACH handles debit and credit transfers in the U.S. Its network moved $9.8 trillion during last year’s fourth quarter, according the NACHA, the electronic payments association. The system typically settles transactions within a business day, which is one reason why it can take days for money to transfer to an account. Bitcoin moves funds in minutes, while Ripple settles in seconds. The Clearing House, which operates an ACH network for companies including banks and credit unions, doesn’t view bitcoin-like systems as a challenger, even if some banks could use the technology for transactions, said Dave Fortney, a senior vice president who oversees new products. Fiserv provides technology and services to more than 14,500 clients such as banks, brokerages and mortgage companies and runs a person-to-person payments service called Popmoney. The Brookfield, Wisconsin-based firm is looking at many emerging technologies, including bitcoin, and may use such concepts in its products, West said. He’s interested in bitcoin’s use of cryptography — a mix of mathematics and computer science to verify transactions quickly.

Regulators’ Concerns

Companies are also sprouting up to help financial firms handle bitcoins. Vaurum, a Palo Alto, California-based startup that enables companies including banks and brokerages to trade and store bitcoins on behalf of customers, said in a statement today that it raised $4 million in seed funding from investors including Battery Ventures, America Online Inc. co-founder Steve Case and Timothy Draper, co-founder of investment firm Draper Fisher Jurvetson. Regulators around the world have expressed concern that bitcoins may be used to finance terrorism, trade in illicit merchandise or launder money. That reputation makes banks reluctant to use the digital currency directly, said Cary Whaley, a vice president at the Independent Community Bankers of America. While virtually none of the group’s members are interested in using the digital money, a small number are examining its concepts, he said. That doesn’t mean they’ll adopt it, he said. “What banks are looking at is updating the technology they already have — using the rails that they have in a more efficient, faster manner through modifying existing payment systems,” Whaley said.

Bitcoin Bettors Gamble Billions

bitcoin-gambling-reviewMechs is a whale. More specifically, Mechs is the username of a well-known high roller whale on an online gambling website where there is nearly no limit on the size or frequency of bets. Last October, Mechs made a series of winning online wagers, culminating with a single all-or-nothing bet of a little more than $800,000. Mechs had a 96.2 percent chance of winning. Mechs lost.

But what really set Mechs’ game apart wasn’t the odds, but the currency. All of his bets were placed in Bitcoins. The wagers rolled instantly across the Internet in both directions, registered in Bitcoin’s public ledger, known as the blockchain. Mechs’ transactions were anonymous, but as public as a scoreboard at a high-school football game. While Mechs betted, other gamblers watched as his fortune drained away.

Bitcoin gambling has had a short, but explosive lifetime on the Internet., the most widely-known gambling service, was founded in April 2012. In July 2013, the site’s founder, Erik Voorhees, sold it to an anonymous buyer for 126,315 bitcoins—equal to $12.4 million. That pile of Bitcoins is worth around $70 million today. By most estimates, more than half of global Bitcoin transactions are wagers on gambling sites., where Mechs made his colossal bets, has handled more than $2 billion in wagers since it was founded in June 2013. All of this gambling happens in a currency that is largely unregulated, on websites set up on offshore servers, and right under the noses of officials who are unaware it exists.

Bitcoins have gained popularity in a relatively short period of time (as our Making Sen$e broadcast segment explained). The currency is growing and changing so fast, regulators are having a difficult time keeping up. Even Sen. Tom Carper, D-Del., who chaired last November’s Homeland Security Committee hearing on virtual currencies, admitted to the PBS NewsHour that he’d only learned about Bitcoin six months before. His only knowledge of virtual money had come from his teenage son’s World of Warcraft habit. Carper had heard of Bitcoins being gambled, but said “we talked about a lot of uses of virtual currency yesterday, and I don’t recall gambling ever coming up in a two-and-a-half hour hearing.”

Efforts to regulate Bitcoins, let alone Bitcoin gambling, have barely begun to materialize. Meanwhile, wagering the currency grows ever-more popular.

Bitcoin makes online gambling simple

By most accounts, gambling represents between 50 and 60 percent of all Bitcoin transactions.

Transaction costs are extremely low, meaning it doesn’t cost a lot to send and receive coins. Transactions are also irreversible. Once you send Bitcoins to someone else, you can’t request them back in exchange for returning the service or good you purchased. For gambling operators, this irreversibility eliminates the risk of chargeback fraud.

The benefits of doing business in Bitcoins have been a boon for 34-year-old professional poker player Bryan Micon, the chairman of Bitcoin poker site The site, Micon estimates, has done about 20,000 transactions over its 2.5 year existence, and paid about $20 in transaction fees.

Betters like Bitcoin because they receive their winnings right away. There are no bank wires or deposits to wait on because Bitcoin is itself a payment processor.

“This is absolutely revolutionary, and isn’t being done by any billion dollar casino in Vegas,” Voorhees said.And in the same way the Internet breaks down international boundaries, the uniformity of Bitcoin enables international gambling without the hassles of currency exchanges.

Bitcoin gambling sites also take a lower cut of the winnings than a Las Vegas Casino would, said Satoshidice founder Erik Voorhees, in an email. SatoshiDice’s house edge is about 1.9 percent. Just-Dice is only 1 percent. “A Vegas casino game might have a house edge of 10%,” Voorhees said. “This means that if you’re going to gamble, it’s far smarter to play SatoshiDICE than a Vegas casino.”

Central to Bitcoin’s success is this apparent contradiction: all transactions are at once anonymous and transparent. Every transaction and its size is listed in a public ledger, while the parties involved remain anonymous. When it comes to gaming, Voorhees said, that transparency allows all players to verify that each bet is fair. Because of Bitcoin’s mathematical algorithm, there’s no way for the house to cheat, he explained.

But with all gambling, players have to trust that the operators won’t steal the money they put down, which seems particularly risky with anonymously run sites. The immediacy of transacting Bitcoins minimizes that risk. And for the gambling operators, not holding players’ money for long periods of time allows them to more easily skirt gambling laws that crack down on payment processing.

SatoshiDice, Voorhees’ Bitcoin casino game, was the first, and for a long time, the most popular Bitcoin gambling site. The game is simple. The “Ghost of Satoshi” rolls the dice to select a number. If the “lucky number” is less than your chosen number, you win. (“Satoshi” refers to Satoshi Nakamoto, the anonymous person or group who circulated the whitepaper floating the “peer-to-peer electronic cash system” that gave birth to Bitcoin.)

But is it legal?

In May 2013, SatoshiDice, whose servers are overseas, announced that the site would be blocking IP addresses from the United States.

The move was not, SatoshiDice claimed, in response to any official investigation, but rather a “proactive measure” to minimize risk. U.S. courts have been unclear about the definition of Internet gambling, and the ambiguity has been enough to spook the sites.

Voorhees sold SatoshiDice because he said running a Bitcoin gambling site made him a target. “I needed to separate myself from it before it put me in the crosshairs of the U.S. government.”

“Bitcoiners” are generally wary of the U.S. government–their aversion to a centralized monetary system is typically what draws them to Bitcoin in the first place. But avoiding any legal grey area is a smart move, said Whittier Law School professor Nelson Rose, who’s consulted for the gaming industry and taught classes about gaming to the FBI.

There are no signs the federal government is cracking down on Bitcoin gambling, Mercatus Center senior fellow Jerry Brito, who testified before the senate, told the PBS NewsHour.

But that doesn’t mean it’s legal – or does it? You’ll be sorry you asked.

Even though online gambling carries an illicit perception, there is no consensus on its legality within the United States. Gambling in general, Rose explained, has always been a state issue, and almost all federal statutes require that gambling be a violation of state law for the feds to take action. Half of states have laws against making a bet, but many of these laws haven’t been updated in the era of online gambling, let alone Bitcoin gambling.

Complicating the state-by-state laws are subjective assessments of whether a game involves “betting” or “gambling” and whether it’s a “game of chance” or “game of skill.” In only three states–New Jersey, Delaware and Nevada–gambling on games of chance (which includes Poker) is legal, as is online gambling.

But even those states haven’t updated their laws to include the possibility of betting with digital currency. A.G. Burnett, the chairman of the Nevada State Gaming Control Board, told us that the state doesn’t allow gambling with Bitcoins. “Unless it’s expressly allowed,” he said, “it simply can’t happen.” But the laws don’t say you can’t gamble with Bitcoin either. The state’s gaming regulations make no mention of digital currency at all. “The laws don’t contemplate it,” he said, “and we’re not interested in changing that.”

Of course, the laws Burnett was talking about regulate official operators; they have no oversight over people wagering with Bitcoin on their own computers in the middle of the night. Asked whether that was happening, Burnett said, “I have no idea.”

At the federal level, the legislation that does exist isn’t very strong. The laws focus on the gambling operators, not the betters. The Unlawful Internet Gambling Enforcement Act (UIGEA), for example, can only go after gambling businesses who are already doing something illegal. It’s a toothless law, Rose and fellow gaming law expert Dr. Joseph Kelly agreed. The bill squeaked through Congress at 2 a.m. attached to an anti-terrorism bill.

The Wire Act used to be the federal government’s most powerful weapon against online gambling, but two years ago, the Department of Justice loosened the law by limiting its application to online sports betting.

What has been used at the federal level to crack down on online gambling (in the Black Friday crackdown on poker sites, for example) is the Illegal Gambling Business Act. It’s a relic of the Organized Crime Control Act of the 1970s, but here again, U.S. attorneys can only go after operators big enough to be violating interstate commerce regulations.

The clearest anti-gambling laws regulate payment processors (like credit card companies and banks) that would funnel winnings from the operators to the betters. But Bitcoin is a decentralized payment processing system. So there’s no person or organization to prosecute.

And even if Bitcoin could be regulated, Bitcoin–or the various organizations that speak for it–could argue, Rose said, that they’re just like the U.S. Treasury–separate from the activities people use Bitcoins for.

Of course, how the feds interpret Bitcoin gambling depends on what Bitcoin actually is. A currency? A commodity? A payment system? “If it’s not money, it’s not gambling,” said Rose. No one is sure, and November’s senate hearings didn’t come any closer toward settling the matter.

Days after the Japanese Bitcoin exchange Mt. Gox collapsed, taking many people’s coins with it, Federal Reserve chair Janet Yellen said last week that the Fed doesn’t have any authority to regulate the coin.

For now, Bitcoin gamblers are free to keep rolling the die – even in the U.S., where porous blockage from dice sites is hardly enough to restrict tech-savvy betters in the mood to win a Bitcoin — or lose $550.

Read more about a Bitcoin Exchange — VCs need to fund an official Exchange for Bitcoin

Cork City Football Club – 30 Years!

Cork-City-FC-CrestLast Season
This will be a season that won’t last long in any Cork City fans memory due to its poor performances that resulted in the dismissal of manager Tommy Dunne last August after a succession of poor results. The season started off with huge expectations with the signings of Danny Furlong and Daryl Kavanagh to give the club some much needed firepower up front. They beat the top teams from the Danske bank Premiership Cliftonville and Crusaders but this proved a false dawn as Cork were hit by a string of injuries that meant they played 12 different centre half partnerships at one stage early on in the season which didn’t improve matters at the back with a huge amount of last minute goals being conceded. None of which was more cruel than the last minute goal scored by Shamrock Rovers in Turners Cross by new city player Billy Dennehy in the Setanta Cup semi final.

The arrival of Shamrock Rovers striker Ciaran Kilduff on loan heralded a recovery for Cork City as he was able to provide a stronger attacking option for Cork City than was previously there and as a result performances and results improved for the Leesiders.

Stuart Ashton helped steer the club out of a rocky patch by giving them a renewed sense of confidence before stepping way to Paul O’ Brien in October once his 60 day period had expired due to him not having the required coaching qualifications.

The season signaled the introduction and increased game play of Danny Morrissey who is certainly one to watch out for in the coming season after he overcame injuries in the early part of last season that attracted significant interest from across the water but he decided to stay put for the coming season. Yet also saw the departure of numerous players from the Cork City side in July such as Daryl Kavanagh, Adam Rundle and Denis Behan. It was clearly a mixed season and the clubs supporters will be hoping for an improvement on last season’s 6th place finish.

This season sees a new manager take charge in the form of city legend and current club record holder for both appearances and goals scored John Caulfield who takes over the reign’s having managed local Munster Senior League sides Avondale United and UCC. One can only expect the side to be enthusiastic for the coming season knowing Caulfield’s passionate support of the club in past seasons. It will be interesting to see how John Caulfield’s knowledge of the local soccer scene will be put to use in the coming years with regard to future transfer signings.

This knowledge has already been put to use with regards to the signing of Avondale United players Mark O’ Sullivan, Liam Kearney and Kevin Mulcahy. Two of these players have had previous spells with the club before to different results. Mark O’ Sullivan had a short stay back in the 2010 season under Tommy Dunne in the first division before returning to play local football with Avondale United. While Kearney has scored some of the most iconic goals in the clubs history such as against Derry in 2005 to win the league along with scoring in the Setanta Cup success over Glentoran in 2008. He returns to the club having had stints abroad in Australia while also playing with Avondale United. Kevin Mulcahy joins the club having had spells with Aston Villa as a youngster before returning and playing with Avondale United.

Of course some of the more well known transfers include the signings of Anthony Elding, Michael Rafter, Darren Murphy and Billy Dennehy. Anthony Elding joins after having a successful season with Sligo Rovers where he scored the winning goal in the FAI cup final last year. Michael Rafter joins after scoring 12 league goals in the 2013 league season. Darren Murphy returns to the club he left at the end of the 2008 season after having spells cross channel with Stevenage and Woking. He will strengthen an already strong centre midfield area. Lastly Billy Dennehy joins Cork City from Shamrock Rovers having been part of the set up there for the past few years. This season he will now be playing with his brother Darren in the Cork City team.

Of course there’s been many exits as well over the off season none more high profile than Daryl Horgan joining Dundalk but only after a long drawn out process which involved a compensation payment. Danny Furlong left for Wexford Youths having endured a tough season with Cork City that even involved him being loaned out to Waterford United. Waterford United signed Stephen Kenny and Kevin Burns after both had failed to make the break through with Cork City in the premier division. Rob Lehane left to join UCC having failed to see much game time in the premier division.

Cork City is expected to sign keeper Matt Gledhill formerly of Sligo Rovers and defender Andy O Connell a former city youths player in the coming days to further strengthen options available to John Caulfield.

First 6 Fixtures
Cork City has a very attractive opening game of the season at home to current champions St. Patricks Athletic which is sure to draw a very large crowd to Turners Cross but it’s going to be a very tough game due to the presence of Keith Fahey in the opposition line up. They’ll be happy with a draw out of this game.

After this is the long trip up to Derry City for the first away game of the season owing to it having the Roddy Collins factor I can see Cork City winning this one as they’ve won all their recent games against Roddy Collins sides with Monaghan being the most recent. I can see Cork City expecting a win from this game.

Next up is Bray Wanderers at home and the return of former manager Alan Matthews to the cross. If City is serious about their European expectations then they’ll need to be winning these matches.

Next up is an away trip to Athlone Town which proved a happy hunting ground for city back in the first division years and this should continue looking at the vast difference between the current team’s playing squads.

Then one of the most eagerly awaited clashes on Leeside will see the visit of Shamrock Rovers to the cross. One all city fans will hope for a win and going by current transfer signings that looks very possible as Shamrock Rovers look to have a weaker midfield than Cork City at present.

Lastly the Munster derby will take place in the splendid Thomond Park Stadium with city taking on Limerick. Limerick don’t seem to have recruited heavily during the transfer window so I can see Cork City going there with huge confidence but off course the home side will have something to say about that.

I expect Cork City to be in the top 4 after the first 6 games due to the strong midfield and attacking force they possess with the likes of Colin Healy, Gearóid Morrissey, Danny Morrissey, and Michael Rafter along some of the others available to manager John Caulfield in the coming season.
Any Possible Weaknesses

Defensively Cork City hasn’t strengthened hugely with only the signing of Kevin Mulcahy to show from the transfer window. They still have players who struggled at times last season with opposition attacks and the failure to sign some experienced players for the centre half positions could prove costly against some of the better teams in the league. Also the failure to sign a more experienced goal keeper as back up for Mark McNulty could prove costly but with the likes of ne captain John Dunleavy and young John Kavanagh one can always be guaranteed 100% in the defensive area of the field.

Captain: John Dunleavy
Manager: John Caulfield
Young Player to Watch: Brian Lenihan
Experienced Player to Watch: Gearóid Morrissey

Texting during a Meeting – Don’t be that GUY!

hi-852-smartphone-meeting-4colAre you one of those people who brings your cell phone into a meeting and pulls it out every time it vibrates? According to a recent study from the USC Marshall School of Business, you are probably annoying your boss and colleagues. The paper indicates that older professionals and those with higher incomes are far more likely to think it inappropriate to be checking text messages or emails during meetings.

The study reveals that:

  • 86% think it’s inappropriate to answer phone calls during formal meetings
  • 84% think it’s inappropriate to write texts or emails during formal meetings
  • 75% think it’s inappropriate to read texts or emails during formal meetings
  • 66% think it’s inappropriate to write texts or emails during any meetings
  • At least 22% think it’s inappropriate to use phones during any meetings
  • *These are working professionals from companies of 50 employees or more who earn at least $30k a year.

In a small business, this can be like walking a tightrope. Some companies and coworkers expect instant responses to emails and text messages, but others clearly view these as distractions and do not want them to be part of meetings. I suggest understanding the expectations of your boss as well as the person leading the meeting. When in doubt, ignore the phone and pay attention.

How reform is impacting Growth in China

ChinaI have an argument over and over again about how the implementation of the reforms proposed in the Third Plenum all but guarantees that growth rates in China will slow down. For that reason, I thought it might make sense for me to explain a little more carefully why I think this must happen, and why I think that we can almost judge how successfully the reforms are implemented by how quickly growth slows.

The first point to recognize is that when a country’s growth has been driven by wasteful investment, GDP growth will exceed real economic wealth creation, productivity will be overstated, and debt will rise faster than debt servicing capacity. Why? Because in China we record growth in terms of the cost of inputs, not in terms of the value of the outputs, and so if the cost of inputs exceeds the value of outputs, we will overstate the real value of economic activity.

Now of course this happens elsewhere too, but there is an automatic mechanism for writing down this excess. This mechanism is usually the recognition of bad debt. Companies that invest poorly go bankrupt, and the value of their loans is written off. This writing off of bad loans shows up as a correction to the overstatement of growth and productivity.

In a system in which bad debt isn’t written down, the losses are simply hidden and rolled over. Of course after many years they are effectively written down, but this happens indirectly. In order to service the loans there is an explicit or hidden transfer from some other part of the economy to cover the full extent of the losses, so that future growth is reduced by the amount of the transfer.

Over long periods of time, in other words, real economic value and recorded economic value is the same, but over shorter periods of time they can differ enormously. If a country fails to record bad debt, its growth today will be overstated by that amount, but its future growth over the longer term will be understated by the same amount.

I think most of us agree that a significant share of the loans in the Chinese banking system would be considered, from an economic point of view, as bad loans. They were made to support investments the true economic value of whose outputs are less than the cost of the inputs. Because many of these loans are implicitly guaranteed, it may make perfect legal sense for the banks to treat these as performing, but this does not change the fact that the loans are uneconomic.

I would argue that China’s GDP is overstated by the value of these hidden losses, and over time these losses will be worked out. As long as bad loans (as I am defining them here) are increasing, it is pretty safe to assume that the gap between China’s real economic output and its recorded output is also increasing. This has been the problem with China’s growth of the last several years.

Beijing’s response is the economic reforms proposed during the Third Plenum, aimed at unlocking greater productivity potential in the Chinese economy and returning the country to a sustainable growth path. They will do this by improving the capital allocation process, so that capital will be diverted from SOEs, real estate developers, local governments and other inefficient users of capital, to SMEs, the agricultural sector, and more efficient users of capital. They will also eliminate constraints that prevent more productive use of resources, including weak legal enforcement of business claims, better protection of managerial and technological innovation, educational improvements, and so on.

The implementation of these reforms is not certain. There is likely to be tremendous political opposition for all the reasons I have discussed in the past three newsletters. But, even assuming they are forcefully implemented, the higher productivity resulting from the reforms will not lead to higher reported GDP growth. This is one of the great recent myths that, to me, make no sense at all. The higher productivity will not even allow China’s economy to continue growing at current rates. On the contrary, successful implementation of the reforms will cause GDP growth rates to drop sharply.

There are at least four reasons to expect healthier but slower GDP growth over the rest of this decade if the reforms are implemented.

1. Leverage boosts growth and deleverage reduces it. By now nearly everyone understands that China is over-reliant on credit to generate growth. Much new borrowing is needed simply to prevent borrowers from defaulting on existing loans, so that new lending can be divided into two buckets.

One bucket consists of loans made to roll over the debt of borrowers who do not generate sufficient cashflow from the investments that their original loans funded. The loans in this bucket, of course, do not create additional economic activity, but as debt rises, financial distress costs rise with them (most financial distress costs, as is well understood in corporate finance theory, are a consequence of the way rising debt changes the incentive structures of the various stakeholders and so distorts their behavior in non-economic ways). Of course any disruption in lending would cause a surge in defaults.

The second bucket consists of loans that fund new expenditures. These expenditures, of course, generate economic activity, but if they fund consumption, or if they fund investments the value of whose output is less than the cost of the inputs, they incur additional losses that must ultimately be rolled over by loans that belong in the first bucket. Any reduction in loan growth, in other words, is positive in the long term for Chinese wealth creation, but in the short term will either force the recognition of earlier losses or will reduce economic activity.

Beijing has attempted since 2009-10 to rein in credit growth, but each time credit growth has decelerated, GDP growth rates – as we would expect – dropped so sharply that Beijing was quickly forced to relent. Because growth is more dependent than ever on credit, as Beijing finally acts to rein in credit growth decisively, GDP growth will drop sharply.

2. Hidden transfers will be reduced. As I have discussed many times, the investment-led model encourages investment by transfers – hidden or explicit – from the household sector to subsidize investment. In the Japanese version of this model, which very broadly is the version China and the Asian Tigers pursued, the main form of these transfers is the undervalued currency, low wage growth (relative to productivity growth) and, most of all, financial repression.

Because these transfers no longer create net value on the investment side (China over-invests in infrastructure and has excess capacity in a broad range of manufacturing sectors), and the extent of the transfers are at the heart of China’s very low consumption level, the proposed reforms will act to reverse the mechanisms that goosed growth by transferring resources from the household sector to subsidize manufacturing, infrastructure building, and real estate development. These mechanisms put downward pressure on household income even as they subsidized manufacturing and investment and led directly both to higher growth rates and to the investment and consumption imbalances from which China suffers and which it plans to reverse.

It should be clear that as Beijing reverses policies that once acted to increase growth, the result must be slower growth. It is hard to estimate the amount by which growth will decline once all the transfers are eliminated, but when one considers that the total amount of transfers to SOE’s during this century may exceed the aggregate profitability of the SOE sector by as much as five to ten times, it is pretty clear that their impact is likely to be substantial.

3. Excess capacity will be resolved. Beijing recognizes that cheap credit and limited accountability have created excess capacity in industry and real estate. Why build so much excess capacity? Local governments have supported this build-up of capacity to boost growth and, with it, revenues and local employment, and because capital was essentially free (its real cost may have even been negative for much of this century) and because most projects are implicitly or explicitly guaranteed by local and central governments, there seemed to be no cost, and plenty of benefit, simply to pile on capacity.

As Beijing acts to wring out excess capacity, we will inevitably see a reversal of the earlier growth impact. If building capacity generates economic activity (and it must have, or else why do it), closing down excess capacity must become a drag on growth.

4. Losses will be recognized. As I discuss above, because many years of over-investment have left a large amount of unrecognized bad debt on bank balance sheets, China’s GDP growth has been overstated by the amount of the unrecognized losses. Over the next decade, as Beijing cleans up its financial system, this bad debt will either be explicitly recognized or, more likely, implicitly written off over the remaining life of the loan. Either way, as the losses are recognized, growth over the next several years will automatically be understated by the amount previously overstated.

These reforms, and others – like attempts to protect the environment – will ensure that even as China’s real economic productivity improves, its GDP growth numbers will drop as the reforms are implemented. For now most commentators argue that by increasing productivity, real reform will ensure a soft landing of GDP growth rates of 7-8 percent during the rest of President Xi Jinping’s administration. A growing minority worries, however, that rapidly rising debt will force China into a hard landing.

GDP growth is an inverse proxy for reform

Although rising debt increases the probability of a hard landing, for now I expect neither outcome. More likely, I believe, is a “long landing”, during which growth rates will drop by roughly one to two percentage points every year for the rest of this decade. Implementing reforms will protect China from a hard landing. It will however force much lower, albeit healthier, growth rates.

In order to understand China’s growth prospects I think we must recognize that while a growth model can deliver healthy growth for many years, this growth can itself transform conditions to the point where the model is no longer able to deliver. At that point the economy must adjust to a new, more appropriate growth model.

The Chinese growth model is a version – in probably its most extreme form – of the investment-led growth model described by Alexander Gershenkron fifty years ago. To simplify tremendously, growth in “backward” economies is supported by policies that subsidize investment while suppressing consumption (usually by constraining household income growth). These “backward” economies are ones in which the level of capital stock is much lower than the country’s social and institutional ability to absorb investment efficiently.

Early on, many years of high investment allowed China to catch up. Once it did, however, continuing to invest in the same way and to the same degree was no longer wealth enhancing. At this point the economy needed institutional and social reforms to continue growing. The political logic of the system, however, forced– as it almost always does– continued high investment growth and, with it, increasing investment misallocation.

With this, almost by definition debt began to rise faster than debt servicing capacity. This, clearly, was unsustainable, but of course it can go on for many years. It was as long ago as 2007 that former Premier Wen described the Chinese economy as “unsteady, unbalanced, uncoordinated and unsustainable”, but it proved politically very difficult for Beijing to implement the reforms his advisors suggested, and so the distortions associated with the growth model continued.

Debt surged even as the consumption imbalance deteriorated until late 2011. We have only seen in 2012-13 the beginning of any partial rebalancing, although during this time there has been at best only a deceleration in the growth rate of credit.

And yet the minimal amount of rebalancing that has occurred in the past three years has already lopped three percentage points off China’s GDP growth rate, just as we predicted. China still has a long way to go to rebalance its economy. By my calculations, consumption growth must outpace GDP growth by 3-4 percentage points every year for at least a decade just to allow China to raise the household consumption share of GDP to a still-low 50 percent.

The proposed reforms will certainly unleash greater productivity, but they will also eliminate the very mechanisms that had previously turbo-charged economic activity and which showed up in the form of higher reported GDP growth rates. They will cause a sharp deceleration in economic activity even though growth will be more productive than in the past. The fact that growth rates have dropped by almost a third even before the reforms were implemented suggests to me just how much further they must drop.