Bitcoin transcends novelty

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Nov 22, 2013
The United States has tripled its balance sheet since 2008, and Great Britain has quadrupled theirs in the same timeframe.

Theoretically, the growth in the currency base should be accompanied by a corresponding decrease in the purchasing power of our dollars and pounds. Many of us who’ve worked diligently for years trying to manage our personal budgets and build up our personal stores of wealth find the governments’ actions downright criminal.

This is the scenario that’s drawn billions into the gold market. We’ve been taught that gold is the first choice alternative investment for fighting inflation and maintaining the value of our savings. This week, we revisit an alternative to gold as a hedge against inflation and currency debasement — the Bitcoin.

I published a piece on the Bitcoin in June 2011 titled, “The World’s Strongest Currency.” Many viewed this as a passing novelty at best or the next .com bubble. At worst, people saw it as the international street criminals’ Swiss bank accounts.

Bitcoin is an Internet currency that is traded globally for goods and services and can be cashed out in the physical currency of your choice. It is “mined” on individual computers that are placed, by anyone, on the network. The mining is basically using your computer to solve an equation.

The equations get harder and harder through time. This ensures that the supply of Bitcoins grows at a stable rate.

The publicly validated equations place more Bitcoins into circulation by the people who’ve mined them. The number of Bitcoins currently stands at about 12 million.

The next equation and number of coins in circulation are all publicly available in real time.

When I wrote the first piece in June 2011, Bitcoins were trading at about $14 per Bitcoin, with 6.6 million Bitcoins in circulation for a market cap around $92 million.

The Bitcoin mining equation is public information. It’s always known how many are in circulation as well as the growth rate. Furthermore, the total number of Bitcoins will be limited to 21 million by the equation itself. These are the currency controls lacking in today’s global economy. The proof lies in the adoption and acceptance rate of Bitcoins, which is growing exponentially.

The current Bitcoin market is 12 million Bitcoins at $400 each for a market capitalization of $4,800,000,000. This places it between Exxon Mobil and Apple in market value.

This leads to the .com bubble argument. There’s no question this market is extremely volatile. Let’s put the volatility in context before Bitcoin is dismissed and demonstrate why it isn’t a fad. The S&P 500 declined by more than 50 percent in four months during the housing crash and has more than doubled, reaching all-time highs since. The European Central Bank just cut its interest rates in half and gold is almost 40 percent off of its highs. The world we live in is a volatile place.

I’d argue we haven’t seen this much change in the political/economic/social aspects of this world since World War II. I’d argue further that it is precisely this volatility that has made Bitcoin a globally accepted alternative form of payment at both the retail and business-to-business levels.

Bitcoin has clearly passed the novelty stage. EBay, as well as Amazon, accepts them. They’re even beginning to show up as an ATM. The first ever Bitcoin ATM was recently installed in Vancouver and it processed more than $100,000 in transactions in its first week. This is no ordinary ATM. There are financial controls on Bitcoin just like normal currencies.

In Canada for instance, they are only allowed to exchange $3,000 per day without filing anti-money laundering documents. I recently visited Mt. Gox.com, the leading Bitcoin exchange, and found their registration requirements to be every bit as stringent as the ones we face in the commodity futures markets. This degree of regulation continues to add validity to the Bitcoin system rather than hindering its growth.

We live in a world of fiat currencies subject to monetary adjustments or downright manipulations that many of us have no say in. Frequently, the decisions that are made for us negatively impact the very foundation that we’ve worked so hard to build.

Bitcoin is a known quantity in a world full of unknowns. It travels globally without the processing fees of PayPal, Western Union or the banking industries. In fact, the current banking systems’ loss of processing fees is both a boon to Bitcoin business as well as the reason for the most vocal arguments against it. After all, JP Morgan has to recoup the $8 billion they’ve received in regulatory fines over the last two years somehow, right?

Comments

The Hero Zone's picture
The Hero Zone

I found this very interesting, thanks!

J. Hartman

Folks should have jumped on board when it was at about $150 because at that point it wasn't just a passing fad. However, when the PAPER money becomes worth the lint in your dryer, and it will, I will say thank you for not listening! My bad, I'm not a cpa or a financial guru, what do I know?

Contango

Re: "Folks should have jumped on board when it was at about $150,"

Reminds me of the old joke about when's the best time to buy an investment: Last year.

IMO, BTC smells like a classic pump and dump.

Other "copy cats" are joining the frenzy:

"A 'cryptocurrency' craze has spawned more than 80 entrants, from peercoin and namecoin, to worldcoin and hobonickels."

http://online.wsj.com/news/artic...

DGMutley

Thanks for the article.

A Wired study showed that 45% of Bitcoin exchanges end up closing.

An interesting read "Theft and exchange shut downs" at http://en.wikipedia.org/wiki/Bit...

***Happy Holidays -- Remember St. Jude's this Holiday Season***

Contango

Until Walmart and other big retailers accept it, it looks like tulip mania or the dot.com bubble replicated.

It's all supply and no demand.

A good tutorial:

http://www.zerohedge.com/news/20...

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@ Mr. Waldock:

Are you recommending that BTC has a place in a retail investor's investment portfolio?

I fail to see a disclaimer.

BTW: What are you suggesting that your clients presently do with bonds with the inevitability of rising interest rates and lower values?

The Bizness

Bitcoins have a following with the libertarian crowed. They see the lack of regulation as a way of it being "Safe".

Contango

Re: "They see the lack of regulation,"

More like lessening the possibility of govt. manipulation, i.e. fiat currency.

Historically, democracies have tended to inflate their way out of debt.

Also, historically govts. have cheapened their "hard currencies" by lowering their precious metals content.

See: Pre-1964 U.S. coins.

NOTHING is "safe" from govt. manipulation.

I would place Mr. Schiff (tutorial) firmly in the "libertarian crowd."

thinkagain

Sounds great, I’ll definitely jump on this…right after my Iraqi dinars appreciate. I’ll be a multimillionaire any day now. lol

kURTje

"We own nothing - we only occupy time & space."

ancabe

I just found out about the comments and questions. I apologize for the delay.
First and foremost, this is NOT a recommendation to buy or sell Bitcoins.
I feel the most interesting aspect of this situation is the growing mistrust of global fiat currencies. I don't treat my budget the way the governments (US, Euro, Brazil, etc) treat theirs. Many people feel that they should be able to protect their earnings from the value destroying political systems that run their countries.
Bitcoin's depth of market penetration is beginning to place it on the global radar as perhaps the first global currency.
The really interesting part comes when the governments and banks attempt to force their way in. It's burning their behinds to see missed revenue sources.
Once again, this not a recommendation to buy or sell Bitcoin in any way shape or, form.

ancabe

I just found out about the comments and questions. I apologize for the delay.
First and foremost, this is NOT a recommendation to buy or sell Bitcoins.
I feel the most interesting aspect of this situation is the growing mistrust of global fiat currencies. I don't treat my budget the way the governments (US, Euro, Brazil, etc) treat theirs. Many people feel that they should be able to protect their earnings from the value destroying political systems that run their countries.
Bitcoin's depth of market penetration is beginning to place it on the global radar as perhaps the first global currency.
The really interesting part comes when the governments and banks attempt to force their way in. It's burning their behinds to see missed revenue sources.
Once again, this not a recommendation to buy or sell Bitcoin in any way shape or, form.