Global Market Commentary

The Bitcoin Fork



Bitcoin’s wild gyrations have this year become even wilder, driven largely by an ongoing “civil war” within the commu-nity of coders and miners who make up the cryptocurrency’s ecosystem.


So what’s the nature of this civil war, what are the stakes, and what might the consequences be? On the surface, the conflict is pragmatic; underneath, it reveals two divergent visions of what bitcoin is and what its purpose should be.


The central issue is the speed at which the bitcoin network is able to handle transactions. Readers may be aware that one of the two fundamental technolo-gies underlying bitcoin is the blockchain, a public distributed ledger of bitcoin transactions. Bitcoin “miners” compete to solve fiendishly difficult mathemat-ical problems, which validate bitcoin transactions, and they are rewarded for their investment in dedicated comput-ers and electricity with transaction fees and newly minted bitcoins. Together, the miners permit the entire bitcoin ecosys-tem to reach consensus on what trans-actions should be added to the ledger.


The current bitcoin software is con-structed so that the mathematical prob-

lems gradually increase in difficulty. The consequence is that as computer power is added to the network, the time it takes to validate a new “page” (or “block”) of transactions and add it to the ledger stays the same — about ten minutes.


Does Bitcoin Need to Accelerate Transactions?


Each block takes ten minutes to be verified and added to the blockchain. Though it may be surprising for some observers to learn, bitcoin as it stands is a relatively slow and expensive affair, compared to the speed and cost of mainstream financial transactions (such as credit cards). Visa’s [NYSE: V] network can process 1600 transac-tions per second globally — the bit-coin network processes about six.


The original architect of bitcoin, the pseudonymous Satoshi Nakamoto, set things up this way knowing that it would eventually be a problem — but in the early days, the original implementation served to entice miners to invest in the technology that supported the expand-ing network. Now, though, the problem is coming to a head as use of the digital currency has dramatically increased.


So does it matter that bitcoin is currently so slow? That depends on what you think bitcoin should be able to do. If you think bitcoin should primarily serve as a functional currency that you can use to buy a latte at Starbucks, it matters a lot. On the other hand, if you think bitcoin should primarily be a store of value to protect your assets against the predations of taxation, inflation, or appropriation, or a tool for conducting transactions of which governments dis-approve, it doesn’t matter much at all.



Bitcoin Faces the Forks


Thus the conflict is revealing a philosophical schism among bitcoin users and adherents. How do such conflicts get resolved? Ultimately, the same way everything in bitcoin gets resolved: by consensus.


In the end, bitcoin is software that specifies how the blockchain is constructed. It is open-source software, so any user is free to modify it in any way they see fit. However, it would be pointless for a miner to alter it in a way that rewarded themselves, because unless a majority of the network’s computing



























Source: Bloomberg


power agrees with their new criterion for a valid block, the block would be rejected by the network and all the effort they expended in mining it would be wasted.


That’s a lot of effort. Bitcoin “mining” is now an industrial enterprise. In the early days, anyone could set up a node on their PC and mine bitcoins. Now-adays, the validation process is so difficult and the competition is so fierce that miners are constructing factory-sized operations in remote parts of China, situated directly adjacent to hydroelectric power sources to minimize electricity costs. (For an inter-esting peek inside the world of Chinese bitcoin min-ing, have a look at this article.)


Although some in the bitcoin universe don’t mind if the status quo is maintained, and don’t care if bitcoin transactions get accelerated, many users and most miners are eager for a solution.


The trouble is, users and miners have different solu-tions in mind. Users want a solution that will minimize transaction expenses; miners want a solution that will maximize them. Therefore there are different solutions being proposed. They’re

all variations on a theme: expanding the maximum size of a block. Exactly how this is achieved will result in different rewards for different participants in the bitcoin system.


The bitcoin market is gyrating because in one way or another, down the road, there is looming the pros-pect of a “fork” — that is, that two incompatible ver-sions of the bitcoin software will start operating, and consequently, the one bitcoin blockchain will split in two. (The currency’s most recent rally occurred be-cause an imminent fork had been avoided.)


The first such fork in bitcoin’s history just occurred. It split bitcoin into two different cryp-tocurrencies — bitcoin and a new cryptocurrency called “bitcoin cash.” Anyone holding bitcoins before the split would now own equal numbers of bitcoin cash. (We should note that the fate of your bitcoins could vary depending on whether you held them in your own system, or on an exchange; few exchanges have so far recognized the new currency, so those who held their bitcoins on those exchanges are out of luck. If bitcoin cash gains traction, most exchanges should eventually distribute the new coins to those who held bitcoin before the fork. Transactions oc-curring near the time of a fork could also be prob-lematic and could lead to lost bitcoins; this happened to some users when ethereum weathered a fork in 2016.)


“Bitcoin cash” simply ramped the maximum size of a block in a way that will speed transactions up to about 50 per second. So far the new currency is holding some value although it’s extremely volatile; that may change as more exchanges start trading it and more holders are able to sell.


This doesn’t end the matter, though, as further forks are possible in the future if participants in the origi-nal bitcoin network decide to tackle the transaction speed issue in other ways. Another potential fork looms in November.







Look At It Like a Spin-off


Investors should look at the whole thing as a spin-off. The current bitcoin is the parent company. Own-ers of bitcoins own stock in that company. After a spin-off, current shareholders should own the same number of shares in the original company and in the spin. But the fate of each company will then be independent. And the lack of clarity could offer an opportunity to disruptive competitors to step in and take market share.


After any fork, the behavior of the new coins that arise from the split will be difficult to predict. Although holders of bitcoin who now also hold bit-coin cash have come out ahead, future forks could even precipitate a collapse in bitcoin and the rise of a rival, such as ether, which is already nipping at bit-coin’s heels in terms of market capitalization.


Does that mean that you should diversify your dig-ital currency holdings ahead of another potential intra-bitcoin struggle that may emerge this fall? If you have been on the sidelines, and you want to buy in, should you buy bitcoin, bitcoin cash, or both? That decision, we will leave up to you.



Investment implications: Current holders of bitcoins should evaluate where their cre-dentials are stored and consider whether they want to hold their bitcoins locally or in a virtual wallet. Speculators who are con-sidering entering bitcoin should watch the news carefully for information about dis-ruptive events surrounding potential forks. Speculators may also consider diversifying into other coins in the run-up to a bitcoin fork. We stress again that at this junc-ture, we consider digital currencies to be extremely risky but interesting speculative opportunities — not investments.

Life Insurance Beneficiaries Bump Up Against An Unexpected Barrier: Their Centenary



Many of the prospective investment management clients who visit Guild’s offices are about to retire


  • or getting close enough that they’re thinking about it with new urgency. One thing we’ve noted is that these “imminent retirees” often have an unrealistic notion of their own longevity: they don’t seriously contemplate the likelihood that they’ll make it to their century.


However, the chances that they will have been ris-ing. In the decade and a half between 2000 and 2014, according to the Centers for Disease Control (CDC), the number of Americans aged 100 and over increased 43.6%, from 50,281 to 72,197 (total U.S. population rose just 12.9% in that time).


More broadly, improvement in life expectancy has accelerated — particularly in residual life expectancy, which filters out improvements in infant mortality by assessing how many additional years someone can



expect to live on average once they have reached a certain age. Below is a long-term chart of residual life expectancy for U.S. 65-year-olds.


Women can now expect on average to live more than twenty years past retirement age. (Men, take heart; your average is only 18, but the spread between men and women has narrowed since the 70s; we suspect it’s because men have embraced healther habits.)


Indeed, the improvement in life expectancy is accelerating. A retiree in 2000 could expect to live just five months longer than a retiree in 1990; but a retiree in 2010 added an average of a year and a half to the average life expectancy of a retiree a decade earlier. People are living longer — and the pace of improvement is picking up.


This  longevity  has  become    problematic   for   an

increasing number of life-insurance holders who are hitting their century — and encountering a neglected aspect of their policies. Many policies, perhaps unbe-knownst to their holders, include an age limit. Policy holders who hit that limit have their policies termi-nated and the value of the policy paid out — losing the death benefit they would have received, and in-curring a potentially significant tax event. Until the mid- to late 2000s, that age limit was 100 for many insurers; now most have moved it up to 121. But centenarians whose policies are of an older vintage can find themselves in for an unpleasant surprise.


Investment implications: Investors, and particularly those for whom retirement is drawing closer, should not base their retirement planning on out-of-date assump-tions about their longevity. They may live significantly longer than they expect. If you are concerned about your financial situation in retirement, please contact us and request a complimentary financial plan.

New G.I. Bill Showcases Bipartisan Cooperation



A new effort to improve benefits for veterans is garnering bipartisan support in Congress. The Senate version of the bill was introduced by a Republican and a Democrat, and 16 of the bill’s cur-rent 33 co-sponsors are Democrats. The House version was also introduced by a bipartisan team.


The new bill would remove a current 15-year use-it-or-lose-it deadline for claiming benefits, and expand education benefits to a broad swath of new recipients, including many reservists and Purple Heart recipients who were injured early in their careers (currently, even service-members who are

awarded a Purple Heart need to have served for 36 months before education benefits become available).


The bill stays revenue neutral with a slight reduction in housing allowances for new enrollees.


It’s a small thing, but somewhat encouraging to see that bipartisan legislative action is still possible, in spite of an environment which can sometimes seem toxic.


Investment implications: No direct effects for investors — just a reminder that although partisan Congressional rancor seems to be making new all-time highs, the spirit of cooperation is not dead. Perhaps it will also be able to manifest in some unex-pected places, such as tax reform.


Market Summary


U.S. Stock Market


A few observations:


  1. S. corporate profits are strong, and will be in double digits for the second consecutive quarter.


  1. S. GDP is rising to 2.6%, and will continue to rise if business-friendly regulatory changes con-tinue.


  1. A lower U.S. dollar has helped U.S. exporters, and contributed to stronger GDP growth.
  2. The above factors, when combined with the removal of some Federal regulatory strictures, have allowed corporate profits to rise.


  • A rise in corporate profits has strengthened the underlying argument for a stronger and longer-last-ing stock market rally.


A rise in profit margins and revenues implies a healthy corporate earnings picture for the next sev-eral quarters.


However, we are entering the August/September timeframe, which often features a market setback lasting a few weeks. We will use any setback as an opportunity to buy good stocks at a discount. We favor the high tech sector, especially the disruptive technologies of cloud computing, electronic games, social media, quantum computing, cybersecurity, artificial intelligence, and biotechnology. We also favor real-estate type investments which benefit






from the rise in real estate prices that is being driven by huge investment in U.S. real estate by foreigners and companies which are exporting more due to the weak U.S. dollar.





With the euro rising against the U.S. dollar, European companies will have a hard time growing their profits and exports. However, for U.S. inves-tors, owning the euro or other foreign currencies can be profitable. The U.S. dollar was strong for four years; now it has depreciated for six months. In our view, more depreciation is on the horizon.



Emerging Markets


We continue to believe that the combination of growth and stronger currencies make emerging market stocks a buy. We favor the currencies of the manufacturing nations such as Taiwan, Singapore, India, Brazil, and Hong Kong.



U.S. and European Bonds


The U.S. bond market is overvalued, as are the bond markets of Europe. We urge extreme cau-tion when investing in long term bonds, or in mutual funds or ETFs holding long-term bonds. The weak U.S. dollar is causing U.S. inflation to rise. The prices of many commodities from copper to gold are rising. Many signs point to a resurgence in inflation from the very low current levels. Higher inflation could mean serious problems for bonds. Negative interest rates in Europe are an unsustainable policy that will be reversed.


Please watch out if you hold U.S. or European bonds with long maturities.



Gold is grinding slowly higher and should continue to move up unless it breaks below $1240/ounce. We will become slightly more bullish if it moves above $1280.



Thanks for listening; we welcome your calls and questions.





























© Guild Investment Management Inc.