This week’s discussion is wide open to anyone who can shine a positive light on bitcoin, a digitally encrypted, virtual currency whose manic popularity should vex every prudent man. Bitcoin’s appeal as a speculative trading vehicle is understandable, given that its violent price swings promise huge profits to anyone on the right side of the moves. (And for the record, speaking as a trader, I have only respect and admiration for those who have been able thus far to exploit the hordes of greater fools who gave flocked to the game.) It’s also easy to see why bitcoin would appeal philosophically to those looking for an alternative to sovereign currencies that have been rendered hollow by the Banksters and their political lackeys.
But bitcoins as money? This makes no sense to me. Granted, a peer-to-peer payment system that cuts out the middle man sounds appealing in theory, since, as far as swindlers go, the world’s central banks make Bernie Madoff look like a paragon of rectitude. But why would any business that offers services or products accept payment in bitcoin when the electronic currency’s value could fall by half overnight? Worse has actually occurred. In the last month alone, bitcoin has traded for more than $1000 and less than $100. Even the wackiest Nasdaq stocks never behave that psychotically.
Can You Spot a Fake?
Just this weekend, one of the busiest bitcoin exchanges, Mt. Gox, based in Japan, was on the verge of collapse due to security problems. A “transaction malleability” flaw reportedly made it possible for crooks to trick the exchange into double-sending withdrawals. This could be likened to counterfeiting, but with a key difference: While anyone can learn to recognize a counterfeit bill, only a cryptographers can tell fake bitcoin from the real thing. Merchants use computers to do this, of course. But even then it takes at least ten minutes to determine with reasonable confidence whether a bitcoin token is good, and closer to an hour to be nearly certain of it. Will a liquor store take that chance if you try to pay for a $50 bottle of wine with bitcoin?
In theory, at least, my business is ideally suited for taking payments in bitcoin. It costs me nothing to fulfill a subscription electronically, and if someone turns out to have paid for it in snide, I can simply cut off his subscription. But consider the headaches and risks. For one, if I had left the payment on deposit at Mt. Gox, it would be worth only a small fraction of what it was worth when received. And although, to get around this problem, I could presumably convert bitcoin to dollars at the time of payment, bitcoin-exchange freeze-ups have been all too common. Get caught with cryptocurrency when the music stops, and you are s.o.l.
Lucky? Think Again…
Meanwhile, anyone lucky enough hold bitcoin when it appreciates will have a capital gain to report if it is subsequently cashed out or used in a transaction. Those who think they can hide the gain from the IRS are in for a nasty surprise if not a jail sentence, since each bitcoin comes encrypted with its entire transaction history. And if bitcoin held on deposit should fall in value, keep in mind that the loss one has incurred cannot be deducted from income, only from present or future capital gains.
Bitcoin is catching on for all the wrong reasons, and it is predictable that it will attract increasing regulatory scrutiny as its popularity grows, assuming it does. Can anyone give me a good reason why I should accept bitcoin as payment for Rick’s Picks subscriptions and the $1000 trading course I offer online? (Before you attempt to answer that question, I’d suggest reading Karl Denninger’s detailed argument against bitcoin here.)
