Worth only ten bucks earlier this year, it’s just touched a thousand. That makes a Bitcoin the hottest financial asset on the planet right now.
The digital currency has lured the tuna-and-toiletpaper set that grew disillusioned and tired with gold. Anarchists and iconoclasts love them because Bitcoins owe allegiance to no nation or central bank. They are perfect for those awaiting, or impatient, for the collapse of America and capitalism. They’re ideal for druggies, terrorists, tax evaders and money launderers. And, of course, those speculating in them have made out like bandits.
Bitcoin is a currency used to buy stuff from retailers, drug dealers, hookers or assassins who accept it, plus it operates as a payment system like PayPal. It was born out of the 2008 financial crisis and runs on an elaborate global network of host computers without a central control agency (like the Bank of Canada, which dictates the supply of dollars). Many think it will evolve into a world payment system and an alternative currency free from the surly bonds of any country’s tax system.
In short, could Bitcoin be perfect?
Paul ain’t so sure:
“I’m one of those people that straddles the Gen X/Y border. As such, I have a bunch of moron friends who think that Bitcoins are worth an investment and that they are the way of the future,” he writes me. “Funny enough, some of these guys are the same who said gold and silver were worth holding. Can you please help me cut them down to size? Ultimately I don’t carry the same clout you do, nor can I write it with the same eloquence.”
Actually Bitcoins have traction. There are 12 million in circulation, and while you can create or ‘mine’ Bitcoins if you have enough computing horsepower, they’re designed to inflate less quickly than technology advances. So, like precious metals, there’s a finite, rationed supply. Bitcoins are virtual money when they act as a borderless, frictionless, instant, global medium of exchange.
In many ways, it’s digital gold. If that sounds even more quixotic than the real stuff, you get it. But while Bitcoin commerce is immature and seems more like romanticized piracy than Wal-Mart, it just took a big jump towards the mainstream. That happened two weeks ago when a US Congressional panel held hearings into the utility of digital currencies, and even heard some kind words from Fed boss Ben Bernanke.
“While these types of innovations may pose risks related to law enforcement and supervisory matters,” he said, “there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system”. Wow. Sounds legit, almost.
No conclusion was reached in Washington, but the FBI recently shut down the most prominent Bitcoin commerce site, Silk Road, for selling illegal drugs, arrested its founder and seized 30,000 Bitcoins. In other words, Big Government and Big Law aren’t about to let a cryptocurrency circumvent all those regulations designed to keep us ruly.
Ironically, all this has massively inflated the value of a Bitcoin. As I mentioned, it just hit $1,000 for the first time, which is cool if you bought in at $186 a month ago. It could go higher, the Internet being what it is – full of weird people who trust anonymous, peer-to-peer, unfiltered, unregulated transactions more than they do the money they pay rent with. But it could tank at any moment, too. In fact, it has in the past. Spectacularly.
So it’s volatility which turns Bitcoins from money into a speculative commodity. Anything that bounces around this dramatically is no storehouse of value, which has been a traditional role for gold. As for being a viable currency, forget it. How could you possibly conduct a serious retail business selling heroin or AK47s when your medium of exchange was so wonky? If you sold stuff for a few Bitcoins and the price collapsed a week later, you’d be whacked. If the buyer paid in digital coins which then doubled in value, he’d be screaming. Without a central bank trying to control the money supply, inflation, deflation and borrowing costs, chaos wins. Bitcoin loses.
That means only convert if you’re a specker who understands the value could be $10,000 or zero next year. Also realize if Bitcoins actually do form a bigger part of ecommerce, they’ll end up being regulated and controlled by the same authorities that print pictures on paper and let you buy lunch with them.
Having said that, digital money is a certainty. We’re almost there already. When was the last time you actually went to a bank or a machine to get cash? From earning to spending money, most people never touch actual bills. Now with smart phones storing money, credit cards you tap and ubiquitous online shopping, the entire concept of currency has changed. Bitcoin’s just a radical version of that, stripped of control, stripped of discipline.
As such, absolutely perfect for moron friends.