Focus on Bitcoin

EURO BEWARE: THE REAL THREAT MAY BE BITCOIN, THE ONLINE "CRYPTO-CURRENCY"

World Crunch,

21 March, 2013

BERLIN - With all its other problems, the euro is also getting unexpected -- and “underground” -- competition from a new virtual currency.

It's called the bitcoin, and in case you haven't heard, it is the most ambitious (and to-date, successful) attempt to create a new online currency, generated by the calculations of thousands of computers. Some say it amounts to a kind of anarchic money.

This week, as the euro crisis has reached Cyprus, the bitcoin (BTC) marked a record high on the largest online exchange, bitcoin.de. The exchange rate has approached 50 euros, more than doubling the value of the virtual currency within four weeks.

The latest run on bitcoins was caused by reports of a bitcoin fund being launched by Malta-based hedge fund called Exante. The Bitcoin Fund has an initial minimum subscription of $100,000 and a 0.5% upfront subscription fee. Current assets under management in the Bitcoin Fund are $3.2 million.

"Investor demand is rising quickly," says Oliver Flaskämper, who drives bitcoin.de: "Many investors realize that the present market cap of around $520 million leaves a lot of room."

Europeans alone have more than 5 trillion euros in their wallet files and accounts. Everyone can use bitcoins as long as they have a wallet app installed on a PC or a smartphone.

What makes bitcoins particularly attractive is that users can use them for payment at an increasing number of places. Over 2,000 companies and organizations now accept the alternative currency, including pizza delivery outfits, but also gambling sites of dubious repute

It has also been said that bitcoins are used in drug transactions. Unlike credit cards or online payment services like Paypal, bitcoin transactions are essentially anonymous which has aroused the suspicions of bankers and politicians alike. Bitcoin fans argue that cash was and remains the primary means of paying for drugs – and that nobody has aired the idea that cash should be abolished.

The history of the bitcoin has so far been marked by ups and downs. The virtual currency was introduced in 2009 by Japanese programmer Satoshi Nakamoto, who wanted to create counterfeit-proof money for the web. It now appears however that the name is a pseudonym, and that nobody really knows who is behind the bitcoin idea.

Bubbles and fluctuations, but still there

Hype developed around the crypto-currency relatively quickly. In 2011 the first speculation bubble – that had driven the exchange rate to $30 – burst. Then came a hacker attack on the major bitcoin exchanges. Users lost virtual coins worth several hundred thousand euros and confidence – and prices – collapsed.

Despite fluctuations, bitcoins remain an extremely interesting concept. They are created by highly complex calculations running on thousands of computers. Approximately every 10 minutes, 25 new bitcoins are created. The algorithm takes into account that at some point a maximum number of virtual coins will be reached – ostensibly around 2140, and from 2033 on no large quantities of new bitcoins will be made.

In that sense the bitcoin system bears resemblance to the gold standard. Unlike euros or dollars the amount of bitcoins cannot be increased at will. The virtual coins are interesting for investors betting on the inflation of paper money.

Bitcoins might even presage a whole new era. "Money is being re-invented," 

Thorsten Polleit, chief economist at Degussa Bank, believes. He sees a future where different kinds of money will be competing with each other. "The banks are misusing the money monopoly they have, using money for political purposes. In the long run that will lead to devaluation" – and the demand for private mediums of exchange will increase, he says.

Jittery Spaniards Seek Safety in Bitcoins

Businessweek,

20 March 2013

Since Sunday, a trio of Bitcoin apps have soared up Spain’s download charts, coinciding with news that cash-strapped Cyprus was planning to raid domestic savings accounts to pay off a $13 billion bailout tab. Fearing contagion on the other end of the Mediterranean, some Spaniards are apparently looking for cover in an experimental digital currency.

“This is an entirely predictable and rational outcome for what’s happening in Cyprus,” says Nick Colas, chief market strategist at ConvergEx Group. “If you want to get a good sense of the stress European savers are feeling, just watch Bitcoin prices.”

The value of the virtual currency has soared nearly 15 percent in the last two days, according to the most-recent pricing data. “One hundred percent of that is due to Cyprus,” says Colas. “It means the Europeans are getting involved.”

That Spaniards would consider converting a portion of their dwindling savings into a peer-to-peer currency vulnerable to wild price fluctuations and the odd thieving Trojan speaks volumes about banking confidence in some parts of Europe. As German economist Peter Bofinger warned in an interview with Spiegel Online: 

“European citizens must now fear for their money.” The same apps download 

data, however, showed that Italians aren’t ready to abandon commercial banking, remarkable as many Italians still recall that black day in 1992 when they woke up to a levy on their savings accounts to prop up the nation’s teetering finances.

Meanwhile, for Russian millionaires who have also been burned by the Cypriot tax levy, Bitcoin is far from a safe haven shelter. “Bitcoin is good if you want to make a deposit of between $1,000 and $10,000. But the liquidity is just not there in the system for multimillion dollar transactions,” Colas points out.

Bitcoin Goes Parabolic: My Updated Thoughts

Michael Krieger

Liberty Bitzkrieg,

21 March, 2013

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.

- Nassim Taleb on Reddit yesterday

So Bitcoin has finally dipped its electronic toe into the fringes of mainstream consciousness. The results have been, to put it mildly, explosive, divisive and highly emotional.  I can see why.

While I had been aware of it prior, I never truly became curious about Bitcoin until I read an excellent six page article about it in the New Yorker on October 10, 2011.  I had no clue how the technology worked, but it intrigued me to such a degree that I sent it to my email list of close contacts.  What really struck me was the rationale for creating Bitcoin by its creator, the anonymous “Satoshi Nakamoto.”  This cryptographer was well aware of the cancerous nature of the world’s monetary system and the key role of Central Banking in that system.  This wasn’t just some technology geek playing games with virtual currency, this was a well thought out monetary revolution.

He had thought this entire thing out like a chess grandmaster.  He knew he had to be anonymous and that Bitcoin had to be decentralized, because he knew the Central Bank overlords would fight to the death to protect their money monopoly.  He created a currency that central planners could not naked short to infinity and manipulate with derivatives as they do with the precious metals markets.  It was this foresight that has led to its tremendous success today.

it wasn’t until I started accepting Bitcoin donations in September (donate here) of last year that I truly started gaining a small understanding of the technology and who the major players in the “Bitcoin Economy” are.  It was at 10 back then, it is 73 as I write this today.

A chart like the one above is nothing short of parabolic, and parabolic charts beget parabolic emotions.  From my end, I have received some complaints from “gold bugs” who seems annoyed that I am highlighting Bitcoin seemingly in preference to precious metals.  To them I have a few things to say.

First, I spent four years writing about gold and silver non-stop.  Sorry, it just gets repetitive and boring.  Never once have I wavered in my conviction on the need to buy and hold these metals; however, the world is dynamic and when new things enter the picture I will formulate new thoughts.  Some of the complaints against Bitcoin are valid, others are not.  The one I hear the most, which is completely untrue, is that Bitcoin is another “fiat currency.”  I’m often shocked that people make this error, as the definition of fiat is: 1. A formal authorization or proposition; a decree and 2. An arbitrary order.  Synonyms include: decree, diktat, directive, edict, rescript, ruling.  Bitcoin is 100% voluntary.  No one is declaring it the “money of the land,” forcing you to pay taxes in it, or invading the Middle East to protect the pricing of oil in it.  So let’s move on.

The one legitimate criticism of Bitcoin with which I sympathize is that it has no intrinsic value.  It really doesn’t.  Bitcoin can absolutely go to zero.  All that would take is people losing confidence in it, or something better coming along.  While I see absolutely no evidence of either of these things happening any time soon (in fact I see the opposite), in theory this could happen.  Would I rather have a flash drive of Bitcoins in a safe and open it 500 years from now, or the equivalent in gold?  I’d still take the gold ten times out of ten.  That’s still not the point.

Proponents of precious metals need to be very careful not to tread into the realm of religious dogma when it comes to money.  The point of gold and silver is not to sit around worshipping its beauty and the fact you have to mine it, but rather to appreciate it as a means to an end.  As a way to vote against the corrupt monetary and financial system plaguing the world.  As a potential means of exchange that is decentralized and not of or by the government.  While I personally don’t plan on putting a huge amount of my net worth into Bitcoin, I support it wholeheartedly for what it represents and the ingenious philosophy and technology behind it.  Do I think Bitcoin could become a huge deal in the world of currency over the next decade?  Yes, I do.  Do I also acknowledge the enormous risks inherent in it.  Yes, I do.  Once again, that’s not the point.

                       

The point is no matter what ends up happening with Bitcoin, it is showing us all the way forward.  It is showing humanity that we don’t need government for money.  We certainly don’t need Central Banks.  All we need is each other and a mutual means of exchange by which we agree to trade with each other, no matter what that may be.  Bitcoin has led the cat out of the bag and there’s no putting it back in now.    

As I write this, there are about 10.9 million Bitcoins in existence, putting the entire market at around $775 million.  To put this into perspective, even after this parabolic move, Ben Bernanke still prints into existence an average of four new Bitcoin markets every single day.

So What’s Next

Based on intuition, psychology and nothing more I suspect the Bitcoin market will hit a total value of about $1 billion before experiencing a severe pullback.  That would put the price at around 92.  At that point, it is likely to be all over the financial press and I think “the state” may be tempted to threaten it.  Supporters of Bitcoin should not only expect such an attack, we should embrace it.  Just think about how ridiculous the government will look if they attack Bitcoin.  I mean, these guys can’t put a single banker in jail, but when citizens decide to freely exchange goods using a currency of their choice that is where they draw the line!  Bitcoin’s purpose is to both show us the way forward and to make the authorities look foolish as they spastically and irrationally respond to it.  I suspect it will be highly successful in accomplishing both objectives.

As Woody Guthrie might say if he were alive today:  This Digital Currency Kills Fascists.

In Liberty,

Mike