Some have asked our view on Bitcoin, and my response is simply -- I view these
things from a Free Market perspective. I have often stated that "The Market
knows more than any of us". I would not want to be labeled a hypocrite by stating
my conviction that the "real" free market is capable of making decisions that
are in the best interest of masses, and then proceed to disparage Bitcoin through
a personal bias.
However, I do have a personal bias as to the basic construct
of money, or what I would prefer to think of as "real" money. Here the span
of history has given us a very clear message that a fair exchange of value
for value is the only ethical way for people to conduct a transaction that
is mutually beneficial for both parties.
Essentially, a cryptocurrency is a digital medium of exchange. The first one,
created about four years ago, was Bitcoin. Since then, scores, if not hundreds
of various permutations of the concept have been launched. Even the Royal Canadian
Mint has gotten into the act, announcing the MintChip. They call it "the evolution
of currency" - with a billing as the world's first government cryptocurrency.
The MintChip site states that "until now, there has been no electronic solution
that cost-effectively addresses the very-low-value transaction markets, protects
privacy, is available to everyone and emulates the characteristics of cash." Well,
time will tell...
The idea has been to create an electronic "currency", designed to have a
finite number of "coins" with which business can be conducted online, and transferable
electronically with low transaction fees. Units are created and stored electronically.
In the case of Bitcoin, users create an account, buy Bitcoins at the going
rate, download the Blockchain - which contains a copy of all Bitcoin transactions,
and then make purchases from their online "wallet".
Bitcoin is decentralized, with no specific institution controlling its network.
A person uses random sequences of letters and numbers to create a bitcoin
address and a private key. Using the private key (or even two keys), a message
is sent out to the bitcoin network with the amount of the transaction and its
destination, which is then solved by a transaction block. One can use as little
as one-millionth of a bitcoin in a given transaction.
A stated advantage is the concept that a cryptocurrency is relatively safe
from illicit seizure by another party other than the individual or business
entity - this entity owning a given amount in a "wallet" or other similar
holding place. Yet last fall, the FBI took down one site, The Silk Road, arresting
its administrator, accusing him of engaging in money laundering and narcotics
trafficking conspiracy, and confiscated as much as $4 million in bitcoins.
And in early February, when the largest of the Bitcoin exchanges, Mt. Gox,
based in Tokyo, instituted a withdrawal halt, the price there tumbled by 25%.
A week later an offset block of Bitcoins sent the price down by over 80% in
a few seconds - from $600 down to $102. Interestingly enough, that same day,
the gold price hit a one month high. Quite a decrease for a "currency" which
in December 2013 traded at over $1,200 apiece. (At this writing the price hovers
around $600).
More recently Mt. Gox declared bankruptcy after announcing that as much as
$400 million in bitcoins may have been stolen by unidentified online hackers.
Between cyberattacks and subpoenas, the current king of the digital currencies
has been having some very severe, some might even say, fatal growing pains.
James Turk, whose GoldMoney group has launched a new digital currency
company in the UK offering free secure encrypted storage for digital currencies
said recently,
"I think Bitcoin and gold/silver will eventually work in a complementary
way with one another, and that is what we are eventually trying to do with
GoldMoney and specifically, our new subsidiary Netagio.com (analyzing the
digital currency space and using a blended rate from leading Bitcoin exchanges
to reflect the broader market), where we have taken our first baby-step
into the Bitcoin world by providing secure Bitcoin storage."
It is supposedly private, unless someone, e.g. a government agency, can determine
and track down the string of transactions, but there is increasing evidence
that this would not be an inordinately difficult activity for government agencies
such as the FBI or NSA to accomplish.
Byron King unreservedly comments:
"For all the current problems of the dollar, Bitcoin was not the answer...To
be perfectly blunt, Bitcoin always struck me as an overambitious ship awaiting
its iceberg. Now, looking ahead to far horizons... the holds of our respective
ships are filled with dollars, although the ballast near the keel of my
hull, at least, is formed of real gold and silver. Gold, silver and dollars...
That's how the world works. It's how the world has worked for a long time."
Bitcoin opens a whole new world of hacking...
Andreas Antonopoulos' biographical site lists him as having founded
three bitcoin businesses and launched several open source projects. In an online
interview earlier this year he stated:
"Bitcoin is not a safe investment. Bitcoin is the first experiment
in a global distributed currency, stuff that's never happened before; we have
no idea how this is going to work out. "We've never had a currency that can
enable distributed consensus without a third party (without a sovereign actor
behind it; transmitted across borders without controls)."
Andre, who stores 90% of his Bitcoins off line (encoded/stored on a piece
of paper) continues: "Bitcoin are an asset class of their own - not commodities,
not strictly currencies, not stocks. Bitcoins can be stolen/hacked from your
online "wallet". Bitcoin opens a whole new world of hacking."
Taking the longer view, he posits, "I'm not sure Bitcoin is going to be the
ultimate crypto currency that wins. I am sure that crypto currencies
are here to stay. Crypto currencies were invented, and once they were invented,
they're not going anywhere..."
Is Bitcoin "The Perfect Scam"?
Editor of The Market Oracle, Nadeem Walayat, has recently written an
article titled "Bitcoin The Perfect Scam". His take on the topic is perhaps
a bit less "nuanced" than others, but his perspective is certainly one that
a person who seeks to understand "all things bitcoin" might want to add to
their knowledge base on the way to creating a personalized informed opinion.
Walayat feels, and given what has taken place at Mt. Gox and other sites,
makes some real sense, that fundamental elements of this cryptocurrency's operation
system have the potential of placing Bitcoin holders at extreme risk. He believes
that "thieves have been busy producing a whole host of bitcoin wallet malware
that seeks to steal any wallets that they find on infected computers." If
this practice becomes widespread, then a bitcoin holder could potentially wake
up some morning to find his "wallet" has literally been emptied while he slept.
Second - and several analysts in addition to Walayat have commented on this
- the "block chain" - the method by which new transactions are verified, as
well as earlier ones recorded - and by which new bitcoins are "mined", will
by definition become increasingly complex and more expensive to operate as
time goes on. The fallout from this, according to Walayat, is that,
"...what bitcoin holders are going to be increasingly exposed to is ever more
sophisticated malware that are aimed at the theft of their bitcoin holdings
at every stage of the processes, starting right from their internet connected
desktop PC's to the interception of transactions between servers to the wild
west bitcoin exchanges that can disappear with all of their customers bitcoin
holdings overnight, to the highly sophisticated bot net infected mining pools
that seek to target all bitcoins in existence by seeking to rewrite who owns
what."
Walayat sees this evolution as meaning that bitcoin "ultimately has a destiny
with extinction". Even if his premise stretches the likelihood of eventual
collapse for the system beyond what ultimately takes place, it certainly would
seem to behoove us all to consider the possibility.
Perhaps Cryptocurrencies are best for Governments?
The trials and tribulations of Bitcoin notwithstanding, it seems unlikely
that cryptocurrencies will disappear from the contemporary scene. What tomorrow's
digital exchange media will look like, how their values will be determined,
and how much privacy will remain after governments around the globe have inserted
themselves into the inner workings of these systems remains to be seen. But
you can be absolutely certain that no government is going to just roll over
and let a parallel fiat "money" system be introduced which could meaningfully
compete with its own currency, let alone replace it.
As just one example, The U.K.'s forward-looking tax authority, Her Majesty's
Revenue and Customs (HMRC), has set out guidelines for the taxation of crypto
currencies, saying, "Gains and losses incurred on bitcoin or other crypto
currencies are chargeable or allowable for Capital Gains Tax if they accrue
to an individual or, for Corporation Tax on chargeable gains if they accrue
to a company."
An important thing to consider about Bitcoin is that in many ways it is really
not so different from most of the "paper promises" that no longer reside physically
in our wallets. Think of the way a lot of people pay their bills nowadays -
mortgage and insurance auto pay/online payments through intermediaries like
PayPal, or wire transfers. Your "money" is moved about digitally, in concept
just like Bitcoin transactions. The Federal Reserve creates "money" with a
keystroke - along the lines of Bitcoin users' creation of new coins through
computer algos. Virtually all of these digital transfers can and are being
tracked by governments - again not unlike Bitcoin transactions - protestations
from its backers notwithstanding.
So there is very little privacy involved anymore when we make the majority
of our "monetary" transactions. The knee-jerk response by government entities,
as well as many of our citizens who have not fully reflected on the unintended
consequences of such a system, is that if you are conducting transactions beyond
the scrutiny of government, then it must be because "you have something
to hide" - that you're engaged in illegal activity.
But I would argue that we have a right to privacy when we seek it,
and that this desire does not necessarily mean we are doing anything illegal.
While the U.S. Constitution contains no express right to privacy, the Bill
of Rights, especially in the Ninth Amendment, strongly infers that the citizens
do retain privacy rights in a variety of ways not specifically enumerated in
the first eight amendments.
"Gold Stacking"
"Bitcoin is a tool to get more gold"
Stu Thomson has an interesting take on the issue, remarking:
"Bitcoin is a tool to get more gold. It's not gold. Comparing bitcoin
to gold is like comparing a Buckingham palace gardener to Buckingham palace.
He enhances the palace. He isn't the palace. Do I think central banks deserve
to own gold? No. If they had brains bigger than amoeba cells, they would
have top sculptors sculpt the taxpayer gold into priceless works of art,
to build national treasures that would gain incredible value over time.
"In a crisis, some could be melted, but, over time, the pressure on the
Gman to spend less rather than destroy national treasure would be staggering.
The central banks don't deserve to own any gold. Crypto currency is not
gold, but it's all the central banks deserve to own. They can't handle
gold, and they don't deserve to handle it. Crypto is perfect for the Gman.
It puts some pressure on him to keep his financial house in order, chops
costs, and gets him out of the gold price wrecking business."
Hugo Salinas Price, long a proponent of silver as sound money - via
the issuance of the silver Mexican Libertad, has this to say about the cryptocurrency:
"The Bitcoin has no history, which is the essential element which
makes all digital currencies acceptable, utterly false though they are.
The Bitcoin is simply a childish distraction for a childlike world population
incapable of discerning falsity, much to the satisfaction of all the crooks,
big and small, who prosper by scamming the public.
"I remit to Von Mises, who stated that no fiat currency has ever
been successfully introduced into circulation without a monetary value
ultimately derived from when that currency was gold or silver money. Bitcoin
does not fill the bill; it cannot circulate along with the established
fiat currencies of the world because it has no history, no ancestry reaching
back to its parent, gold or silver."
Finally in our effort to research the topic we contacted Richard Grove of www.TradedyandHope.com.
Richard provided documentation that the National Security Agency was the first
to explore this idea. Does this mean that the NSA is ultimately behind bitcoin?
Of course not! But it does give one pause to reflect, does it not?
Looking at what has taken place, especially over the last year or so, I must
conclude with this simple - and to my thinking - self-evident statement. Whereas
Bitcoins can vanish, Gold cannot. Just remember for all who read this,
the timeless advice of - caveat emptor! And may the Free Market Reign.
