Digital currency bitcoin suffered a “publicity disaster” this week, noted Dominic Frisby in Wednesday’s Money Morning.
MtGox – “the world’s first and largest bitcoin exchange” – was suspended. Originally founded as an exchange for the trading card game “‘Magic: The Gathering” (hence the odd name), MtGox had a huge first mover advantage when it switched businesses, and “became the portal for buying and selling bitcoins” in 2010.
So the scandal – in which bitcoins worth as much as $350m have apparently gone missing – is hardly a good advertisement for bitcoin.
That said, MtGox “has always been dogged with problems”. Its database was hacked in 2011, while it has had regular problems with the US legal authorities and contractors. “MtGox can hardly have ever been described as reliable”.
So Dominic “is not sure that this is the end of bitcoin”. Instead, “it’s just the end of one bitcoin company that was at best out of its depth, and at worst, a scam”.
In fact, getting rid of bad operators like MtGox is a vital part of bitcoin’s evolution. The software behind the cryptocurrency still offers many tangible benefits. “The efficiencies in terms of cost and time-management are irresistible, particularly for micro-payments,” says Dominic.
And increasingly, there is “a great deal of vested interest in bitcoin”, with investment from venture capital and elsewhere. The MtGox debacle “will force better practice on all participants in the future”.
But let’s be clear on this – as this goes to show, “cryptocurrencies are the Wild West. If you do plan to speculate, you should “only risk money you can afford to use; do your own due diligence; and store your bitcoins somewhere safe”.
Bearing that in mind, Frisby (who is writing a book on bitcoin) thinks “we’re reaching a bad news peak and this may be some kind of low”.
However, it all “rather makes you long for the relative calm of gold”.
Why gold will supplant the dollar
Even as bitcoin had a grim week, Bengt Saelensminde told readers of The Right Side that he thinks the US dollar’s status as “the world’s de facto reserve currency” is under threat in the medium term.
One sign of its decline is that, “faced with increasing currency turmoil, some emerging markets are starting to look at other options”. Indeed, even Turkey and Russia, which have their own currency problems, are now piling into gold. At the same time, “more and more countries are now trading in Chinese yuan or Russian roubles”.
Of course, “a trading currency isn’t the same thing as a reserve currency”. What’s the difference? “A reserve currency offers deep markets in which to invest your spoils”.
At the moment, “neither the rouble, nor the yuan offer a global solution for investor needs”. This is because the ”Chinese government isn’t a borrower (at least not to the extent of the West), so there’s no significant bond market to stash your yuan”.
For its part, “the Russian bond market is thin and still suffers dire investor sentiment following the painful 1998 default”.
However, “countries, or individuals, wishing to extricate themselves from the dollar reserve system” can still invest in gold, which is “a currency that fits very neatly with reserve status”.
The emerging world is starting to get this, which is “why they’re buying”. So even if gold doesn’t end up as reserve currency, it could end up playing a “pivotal role” in the gradual transition away from the dollar.
Overall, Bengt advises that “the safest thing to do is to become your own central bank and hold your own reserves”. And the only way to do that is to hold some gold in your portfolio. You can sign up to The Right Side here.
A beginner’s guide to bioinformatics
This week, Tom Bulford looked at a new big theme that his Red Hot Biotech Alert newsletter will be covering: the way in which big data is being used to transform medicine.
One big project already taking shape is the UK Biobank. Over 500,000 people have given information including blood samples and family medical histories. They have also permitted access to their medical records.
This “vast amount of data” will be “mined” to find patterns that could guide treatments. Already researchers have discovered, thanks to the Biobank, that low birth weight is a symptom of a genetic predisposition to get diabetes, not a cause of diabetes in itself.
“All of this information concerning our background, environment, lifestyle and medical conditions can lead to some real insights and improved healthcare”. However, the real benefits will come through “combining the raw material of our DNA with information about the way we live our lives”.
It also means that “making sense of this data is no longer a job for white coated laboratory technicians”. This new science, called “bioinformatics”, is one of the big trends that will change healthcare in coming years.
Naturally, Tom will be looking at way to take advantage of this trend as “great discoveries are made”.
New rules favour those with final salary pensions
This week, our editor-in-chief, Merryn Somerset Webb, took a look at pensions in her blog. She is struck “by the huge advantages in having a defined benefits pension of any kind”.
While the lifetime allowance for pension savings will be cut to £1.25m, there’s a loophole for people with defined benefits. In order to calculate the value of the pension pot, the taxman will multiply “the annual payment the recipient is entitled to by 20 times”. So, unless you get more than £62,500, you won’t be affected.
The problem is that this doesn’t take into account the low annuity rates that are available at the moment. Indeed, “£1.25m buys an inflation-linked annuity of around £35,600 a year.
The bottom line is that, “a member of a final salary scheme gets not far off double the annual pension as someone in a defined contribution scheme before they have to pay “a 55% flat tax on the excess”. Merryn wryly notes that this perk is “enough to make a person want a job in the public sector, isn’t it?”
As with any posts on pensions, this has sparked a lot of comments. Reader ‘mr clyde’ admits that Merryn’s arithmetic is “spot on, and I would agree that the conversion factor of 20 is way too low”. However, he points out that “when I started out on my public service career the pension scheme on offer was not much different to most others”.
‘Romford_Dave’ also points out that “if gilt returns rise, then the figures used in the comparison will change and lessen or even reverse the difference”. But at the same time, ‘Borderer’ notes that “many public sector workers have the option to retire from the age of 55 should they have sufficient years of service, meaning their real ‘pension pot’ is a higher multiple than 20x.”
What Venezuela teaches us about Latin America
This week, our Latin America specialist, James McKeigue, gave his take on the situation in Venezuela in The New World newsletter. The country is being “ripped apart” by the “ongoing battles between the government and its opposition”.
And Venezuela’s size and role in the oil market mean that we “can’t ignore” the tragic situation. Indeed, it “contains many lessons for investors… in emerging markets in Latin America and elsewhere”.
The student protests were originally about crime. While this is partially down to Hugo Chavez weakening the police and the legal system, it’s important to remember that this isn’t just an issue in Venezuela. Latin America is “home to four of the five most violent countries in the world”.
This “incredible toll” hits growth, reducing GDP by around 10%. However, “places such as Colombia are far safer than they were ten years ago, while Chile and Uruguay are less violent than many European cities”.
Of course, in reality, the fundamental reason for the protests is economic. While growth remains positive, an over-reliance on oil has hit domestic industry. Under-investment in state company PDVSA, has hit government revenues, forcing it to print money.
Meanwhile, although the government controls the TV and press, “the protestors have responded with a very sophisticated social media campaign on Twitter and YouTube”.
Latin Americans are big fans of social media, spending an average of ten hours a month on such sites (double the global average). During his latest trip, for example, James has seen how Mexicans “look to their smartphones and tablets” rather than the TV for news.
However, the revolution is unlikely to spread. While Argentina and Ecuador have both followed Chavez-lite policies of using natural resources “to fuel populist and unorthodox economic policies”, there seem to be “a shift in attitude” of late.
Argentina’s Cristina Kirchner “has started to build bridges with Western oil firms” and also “recently allowed its currency to devalue and fixed its dodgy official inflation statistics”.
Ecuador’s Rafael Correa, meanwhile, is encouraging international firms “and has opened up new areas for oil exploration”. The effects of the Federal Reserve’s taper, seems to have made them “a bit nicer” to foreign investors.
Meanwhile, even in Venezuela, James thinks that the protestors “will have a hard time dislodging Nicolás Maduro on their own”. Indeed, “as long as the army and powerful interests in the country still see him as their best option, then he will cling on”.
Maduro “also has a lot of support among the poor, who remember the misery of the pre-Chávez years”. However, “if the shortages or the inflation get worse, then his support will start to falter”.
That’s all from me for today – have a great weekend!
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