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Bitcoin: Millennials' Fake Gold

By Vitaliy KatsenelsonCryptocurrencyDec 05, 2017 12:36AM ET
www.investing.com/analysis/bitcoin--millennials-fake-gold-200270435
Bitcoin: Millennials' Fake Gold
By Vitaliy Katsenelson   |  Dec 05, 2017 12:36AM ET
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I’ve been asked about Bitcoin a lot lately. I haven’t written anything about it because I find myself in an uncomfortable place in agreeing with the mainstream media: It’s a bubble. Bitcoin started out as what I’d call “millennial gold” – the young (digital) generation looked at it as their gold substitute.

Bitcoin is really two things: a blockchain technology and a (perceived) currency. The blockchain element of Bitcoin may have enormous future applications: It may be used for electronic contracts, voting, money transfers – and the list goes on. But there is a very important misconception about Bitcoin: ownership of Bitcoin doesn’t give you ownership of the technology. I, without owning a single bitcoin, own as much Bitcoin technology as someone who owns a million bitcoins; that is, exactly none. It’s just like when you have $1,000 on a Visa debit card: That $1,000 doesn’t give you part ownership of the Visa network unless you actually own some Visa’ stock.

Owning Bitcoin gives you a right to … what, actually? Digital bits?

I can understand gold bugs and the original Bitcoin aficionados. The global economy is living beyond its means and financing its lifestyle by issuing a lot of debt. Normally this behavior would cause higher interest rates and inflation.

But not when you have central banks. Our local central bankers simply bought this newly issued debt and brought global interest rates down to near-zero levels (and in many cases to what would have been previously unthinkable negative levels). If you think investing today is difficult, being a parent is even more difficult. I tried to explain the above to my sixteen-year-old son, Jonah. I saw the same puzzled look in his eyes as when he found out where babies come from. I also felt embarrassed, for my inability to explain how governments can buy the debt they just issued. The concept of negative interest rates goes against every logical fiber in my body and is as confusing to this forty-four-year-old parent as it is to my sixteen-year-old.

The logical inconsistencies and internal sickness of the global economy have manifested themselves into a digital creature: Bitcoin. The core argument for Bitcoin is not much different from the argument for gold: central banks cannot print it.

However, the shininess of gold has less appeal to millennials than Bitcoin does. They are not into jewelry as much as previous generations; they don’t wear watches (unless they track your heartbeat and steps). Unlike with gold, where transporting a million dollars requires an armored track and a few body builders, a nearly weightless thumb drive will store a dollar or a billion dollars of Bitcoin.

Gold bugs would of course argue that gold has a tradition that goes back centuries. To which digital millennials would probably say, gold is analog and Bitcoin is digital. And they’d add, in today’s world the past is not a predictor of the future – Sears was around for 125 years and now it is almost dead.

A client jokingly told me that his biggest gripe with me in 2016 and 2017 was that I didn’t buy him any Bitcoin. I told him not so jokingly that if I bought him Bitcoin, he’d be right to fire me.

Maybe I’m a dinosaur; but, like gold, Bitcoin is impossible to value. What is it worth? It has no cash flows. Is a coin worth $2, $200, or $20,000? But Wall Street strategists have already figured out how to model and value this creature. Their models sound like this: “If only X percent of the global population buys Y amount of Bitcoin, then due to its scarcity it will be worth Z”. On the surface, these types of models bring apparent rationality and an almost businesslike valuation to an asset that has no inherent value. You can let your imagination run wild with X’s and Y’s, but the simple truth is this: Bitcoin is un-valuable.

In 1997, when Coke’s (NYSE:KO) valuation started to rival some dotcoms, bulls used this math:

“The average consumer of Coke in developed markets drinks 296 ounces of Coke a year. These markets represent only 20% of the global population.”

And then the punchline: “Can you imagine what Coke’s sales would be if only X% of the rest of the world consumed 296 ounces of Coke a year?” Somehow, the rest of the world still doesn’t consume 296 ounces of Coke. Twenty years later, Coke’s stock price is not far from where it was then – but on the way it declined 60% and stayed there for a decade. Coke, however, was a real company with a real product, real sales, a real brand and real tangible, dividend-producing cash flows.

If you cannot value an asset you cannot be rational. With Bitcoin at $11,000 today, it is crystal clear to me, with the benefit of hindsight, that I should have bought Bitcoin at 28 cents. But you only get hindsight in hindsight.

Let’s mentally (only mentally) buy Bitcoin today at $11,000. If it goes up 5% a day like a clock and gets to $110,000 – you don’t need rationality. Just buy and gloat. But what do you do if the price goes down to $8,000?

You’ll probably say, “No big deal, I believe in cryptocurrencies.” What if it then goes to $5,500? Half of your hard-earned money is gone. Do you buy more? Trust me, at that point in time the celebratory articles you are reading today will have vanished. The awesome stories of a plumber becoming an overnight millionaire with the help of Bitcoin will not be gracing the social media. The moral support – which is really peer pressure – that drives you to own Bitcoin will be gone, too.

Then you’ll be reading stories about other suckers like you who bought it at what – in hindsight – turned out to be the all-time high and who got sucked into the potential for future riches. And then Bitcoin will tumble to $2,000 and then to $100.

Since you have no idea what this crypto thing is worth, there is no center of gravity to guide you or anyone else to make rational decisions. With Coke or another real business that generates actual cash flows, we can at least have an intelligent conversation about what the company is worth. We can’t have one with Bitcoin. The X times Y = Z math will be reapplied by Wall Street as it moves on to something else.

People who are buying Bitcoin today are doing it for one simple reason: FOMO – fear of missing out. Yes, this behavior is so predominant in our society that we even have an acronym for it. Bitcoin is priced today at $11,000 because the fool who bought it for $11,000 is hoping that there is another, greater fool who will pay $12,000 for it tomorrow.

This game of greater fools is not new. The Dutch played it with tulips in the 1600s– it did not end well. Americans took the game to a new level with dotcoms in the late 1990s – that round ended in tears, too. And now millennials and millennial-wannabes are playing it with Bitcoin and few hundred other competing cryptocurrencies.

The counterargument to everything I have said so far is that those dollar bills you have in your wallet or that digitally reside in your bank account are as fictional as Bitcoin. True. Currencies, like most things in our lives, are stories that we all have (mostly) unconsciously bought into. (I highly encourage you to read my favorite book of 2015: Sapiens, by Yuval Harari.)

Of course, society and, even more importantly, governments have agreed that these fiat currencies are going to be the means of exchange. Also, taxation by the government turns the dollar bill “story” into a very physical reality: If you don’t pay taxes in dollars, you go to jail. (The US government will not accept Bitcoins, gold, chunks of granite, or even British pounds).

And finally, governments tend to look at Bitcoin and other cryptocurrencies as a threat to their existence. First, governments are very particular about their monopolistic right to control and print currencies – this is how they can overpromise and underdeliver.

No less important, the anonymity of cryptocurrencies makes them a heaven for tax avoiders – governments don’t like that. The Chinese government outlawed cryptocurrencies in September 2017. Western governments are most likely not far behind. If you think outlawing a competitor can happen only in a dictatorial regime like China’s, think again. This can and did happen in a democracy like the US. With Executive Order 6102 in 1933, US President Franklin D. Roosevelt made it illegal for the US population to “hoard gold coin, gold bullion, or gold certificates.”

However, nothing I have written above will matter until it does. Bitcoin may go up to $110,000 by the end of the 2018 before it comes down to … earth. That is how bubbles work. Just because I called it a bubble doesn’t mean it will automatically pop.

Disclosure: Vitaliy Katsenelson is CIO at Investment Management Associates; His investment strategy is spelled out here.

Bitcoin: Millennials' Fake Gold
 

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Bitcoin: Millennials' Fake Gold

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Gold Key Real Estate
Gold Key Real Estate Dec 07, 2017 2:12PM GMT
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Because there is finite amount of Bitcoin you can place a value on it's supply. Basic Economics although i agree it is a bubble based on the valuation
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John Baldwin
John Baldwin Dec 07, 2017 10:52AM GMT
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It will go up to $110,000? Buddy, once it goes up to $100,000 a TON of people will lock in their profits. If you started at less than $100 and bought a lot of Bitcoin and sold even 5% of your bitcoin at $100,000, That's $5000 cash. That's a 5000% net INCREASE from where you started. In finance you're considered an idiot if you don't understand simple math.
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Francisco Javier Lazarini Díaz Barrig
Francisco Javier Lazarini Díaz Barrig Dec 06, 2017 2:51PM GMT
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Comment sponsored by Black Rock and the Illuminatti bank boys.
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Solomon Lalani
Solomon Dec 06, 2017 11:14AM GMT
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On a serious note, any item gets a currency status when PEOPLE give it that status. Nothing is currently priced in Bitcoin due to its volatility, but for that matter, nothing is priced in Gold either.  Still, Gold has status of fiat currency.  Similarly, BTC fulfills all requirement of money, just like GC does: measure, medium, value and store!  Even if there is a crackdown by Governments of the world on BTC, that may create a little further volatility, for a while, but BTC will rise back...because people believe in it.  Yes, there will be a crash, but BTC will rise again...and next time, even more strongly.
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Stop Lost
Stop Lost Dec 06, 2017 10:21AM GMT
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Another bitter nocoiner that missed the train.
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Thum Keong
Thum Keong Dec 06, 2017 2:36AM GMT
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The real value of bitcoin or any other cryto is zero. And that's the value it will go to once the bubble burst and confidence evaporates.
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Vitali Tchalov
Vitali Tchalov Dec 05, 2017 11:28PM GMT
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Thanks, quite enjoy reading your articles, that is another good one!
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Adrian Schmidt
Adrian Schmidt Dec 05, 2017 6:12PM GMT
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I agree with all this, except the statement that negative interest rates go against logic. Negative interest rates aren't that unusual, if you think in real terms. We had them for long periods in the past. The only problem with negative nominal interest rates is that it makes cash attractive to hold. If there were no physical cash, there would be nothing difficult about negative rates. ..As for those who are saying cryptocurrencies are the future, I have yet to see anyone explain what makes them attractive as a currency unless you are an international criminal. The blockchain technology may be very good (everyone tells me it is) but it doesn't make Bitcoin an attractive currency any more than it makes it a good way of keeping a record of your socks.
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Jay Epp
Jay Epp Dec 06, 2017 5:37AM GMT
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The system needs negative interest rates to survive.  They are trying to figure out a way of getting people out of cash in order to keep this system going.  They are trying to build confidence in electronic currency so that they can give everyone a hair cut when required.  Its all a sham. I think in actuality this could be a massive money laundering scheme.
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hem Ra
hem Ra Dec 05, 2017 5:32PM GMT
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Wow!!! now that was the home run...
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Nadine Farah
Nadine Farah Dec 05, 2017 4:48PM GMT
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You're short sighted to evaluate the currency and not really ponder about the blockchain movement. The value of transparency, eliminating the middle person of a transaction, speed at which it happens and so on are rising. As those values go up, the value of coins goes up. Is the idea of a public ledger a bubble? Or that people have an option to own their data? Some time innovation gets backlashes- it has happened a million times.
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Jay Epp
Jay Epp Dec 06, 2017 5:39AM GMT
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They haven't got rid of the middleman they have just shifted who is in the middle.
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Dellano Manassaram
Dellano Manassaram Dec 05, 2017 4:22PM GMT
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I hope you're right about Bitcoin going up $110k in 2018 before it hits a bubble. I'll gladly take my profits from the small investment ($400) I made last month when it was $8k
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David Jaenen
David Jaenen Dec 05, 2017 4:11PM GMT
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great read. I like you take on hind sight. We could all be wrong and this thing could go to just 15k and stabilise. However most money managers have to figure in risk, at this point there is still too much uncertainty to make a informed decision, there is no doubt crypto currencies will come to be at some point but until there is some clear direction it will be like vhs and beta. that sorted out eventually but today both are gone? We all may have egg on our face but Vegas was built on gambles and more information is needed to make informed decisions.
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P A Charnel
P A Charnel Dec 05, 2017 3:50PM GMT
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Vitaliy, kudos for your excellently written article. You are an unusually wise young man and, yes, parenting is more challenging than investing. Lost money can always be recouped by trying again with the right strategy, but losing a son or daughter seldom has any promise of return. All the best.
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Ramzi Batarseh
Ramzi Batarseh Dec 05, 2017 3:22PM GMT
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Today will you accept payment for your house that's worth half a million dollars in 45 bitcoins? I do think the future belongs to digital currency(ies) but bitcoins seem like a speculative asset.
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Mankash ash
Mankash ash Dec 05, 2017 3:04PM GMT
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Excellent article..
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Ronald Brian Ogwal
Ronald Brian Ogwal Dec 05, 2017 2:56PM GMT
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You could be right but when the majority of people decides to go for a revolution in how they handle their money, bitcoin will be unstoppable force to reckon. The whole system is decentralized so there is no way to shut it down. Land and cryptocurrencies will remain the only true value of wealth come 2025!
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Mankash ash
Mankash ash Dec 05, 2017 3:06PM GMT
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Negative people always have the same speech...Please bid your house on bitcoin and comeback comment in 2 year.
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Romain Bouis
Romain Bouis Dec 05, 2017 3:09PM GMT
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the revolution you are talking about is made by people who wants to make money easuly and quickly, not trying to change the world... wake up
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Andrew Davis
Andrew Davis Dec 05, 2017 2:53PM GMT
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Sensible insight. I have not traded bitcoin because the only fundamental driver behind the moves is mania. Too hot for me :-)
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StudioTwentyFour Zoom
Jack_of_Zoom Dec 05, 2017 2:49PM GMT
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Good article-- and although i recognize the merits of your premise that BTC is the millennial's digital gold, BTC bears no debt that benefits a consortium of fractional reservists. And sure, the anonymity of cryptos make it perfect organized crime, but what on earth do you think is going on in the current system? That there's no corruption?
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Theo Khotlele
Theo Khotlele Dec 05, 2017 2:49PM GMT
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thanks for the article but you seem to be a bitter denialist. Anything under the sun has end period. The fiat system seem to advocate for has failed dismally and unfortunately the masses around the world are aware of that. we are ready for change and usher in a new order of how things should be done. Anything and everything that refuses change has no future. Buy a factory of popcorns and wait for the bubble you talking about. its gonna be a long wait my good. Bitcoin has been endorsed by the people. Who said dollars is money.... Have u forgotten what happened in Zimbabwe, Venezuela and Syria. Their fiat has collapsed and became nothing with no value. Have u checked how the USD dollar lost its value to this day. There is nothing backing the once powerful dollar and its value is fake because nothing is backing it currently....Its a disaster in waiting. If the dollar or any fiat has something left to give it value, it is so because people came together and agreed to give it. The same with bitcoin we give it value and we want it to be a form of exchange. It our money of the future...Remain in your status quo and comfort zone u will regret. Nobody can do anything about bitcoin.
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Bruno Sorrilha Ferreira
Bruno Sorrilha Ferreira Dec 05, 2017 2:46PM GMT
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I do agree with your theory. Let's see what the future holds. Good article.
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Abdul Zondo
Abdul Zondo Dec 05, 2017 2:43PM GMT
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The South African government is already making a move against cryptocurrencies, I said they were a bubble when they were trading at 3000 and I had to swallow my words, when it kept going up and not participating, but now I'm just really eager to see how it will progress.... Just standing on the sidelines on this one
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Axel Afelafalene
Axel Afelafalene Dec 05, 2017 2:33PM GMT
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Thanks for adding perspective  .... $110,000 for Bitcoin ... wow :)
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Kalin Stefanov
Kalin Stefanov Dec 05, 2017 2:32PM GMT
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Can you follow up the moment you tell about ECB money printing €2B a day and transfer it central banks? What happens next with the freshly printed fiat? I can tell you: it gets wrongfully distributed to a select group in the pyramide. The middle class gets nothing extra (so no inflation). Do you think this is sustainable? I would like to tell you this: with scarcity in crypto the war on fiat just started. What you see is the great international movement of worth and value from one system to another. The icteasing price of almost all cryptocurrencies reveal that transfer as well as the hidden inflation (worthless fiat). BTC will fall and rise, yet the war will finish and the fiat will die of , remember my word: HYPERINFLATION, a run from the less and less valuable freshly printed monopoly fiat money.
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Ronald Brian Ogwal
Ronald Brian Ogwal Dec 05, 2017 2:50PM GMT
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I agree with you, bitcoin is doing what fiat has failed to do and that is equal distribution of wealth among the people.
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KING LEE
KING LEE Dec 05, 2017 2:31PM GMT
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Great insight....
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Cesar Hanshoff
Cesar Hanshoff Dec 05, 2017 2:28PM GMT
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Agree 100%. Unless governments start using it as an accual currency for real-time purchases the coin will go to ********
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Joshua Haire
Joshua Haire Dec 05, 2017 2:34PM GMT
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Which is why bitcoin futures are being added to the world's second largest exchange in the world come December 10th. It is seen as legal currencies in many economies throughout the world, as well as becoming implemented, in a way, through our stocks. But what you don't understand is that i.can make real time purchases with bitcoin through the use of a VISA debit card without any fee. It seamlessly transfers bitcoin to USD without having to physically exchange it and yet it is severely outperforming any fiat currency. Those who think it is a bubble will watch the paradigm shift and wonder where they went wrong and that answer is where their comprehension and understanding of cryptos, blockchain, and everything else has failed them.
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Romain Bouis
Romain Bouis Dec 05, 2017 5:34PM GMT
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your problem is understanding of currencied actually. bitcoin is not a currency at all. all this is growing because of this misunderstanding. keep up with your conviction but do not invest too much money or you will loose the money you worked hard for
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Cesar Hanshoff
Cesar Hanshoff Dec 05, 2017 11:21PM GMT
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Well, if you buy something with btc through a VISA the whole point of using a btc is lost. I am talking about using the cryptos directly for shopping a Burger at a restaurant etc. If that is not possible nation wide cryptos will only be used in trading and soon lose its value. (With reference to the preceding article's perfect gold trading analogy.)
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Cesar Hanshoff
Cesar Hanshoff Dec 05, 2017 11:22PM GMT
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Just look at BRENT or WTI the past 5 years...
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