WHITE DRAGON SOCIETY CRYPTOCURRENCY PORTFOLIO UPDATE – JANUARY 3, 2018

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 partnership with 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 shopin 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.

• Quantum Resistant Ledger: quantum secure blockchain
• 0x Protocol: decentralized exchange
• Maecenas: fine art
• Basic Attention Token: advertising/publishing
• Swarm City: e-commerce
• Edgeless: gambling
• Substratum: decentralized web
• Ethos: social investing platform (recently rebranded from Bitquence)
• Stellar: payments
• Waves: scalable blockchain
• Aeternity:  decentralized applications

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

https://benjaminfulford.net/2018/01/04/white-dragon-society-cryptocurrency-portfolio-update/