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BitCoin. I first learned about it in October and wrote about it 17 January 2011 in BitCoin – The Best Financial Privacy Is Here … Probably. The article was theoretical not practical. I missed the trade of the year. This was a serious woulda, coulda, shoulda but didn’t moment. I even told a few friends I was going to put in about $5,000. Today with a completely non-levered investment that would have turned into slightly over $550,000 in 8 months. $550,000 in a completely anonymous account with neither a paper or audit trail nor a 1099 and the asset would have been purchased with $5,000 of physical cash. That is one way to vanish some equity.
But there was a lot of risk to be taken in making that initial investment. The risk has since decreased but I still think there is a tremendous amount of upside potential. Perhaps even a thousand percent gain between now and the end of the year. Regardless of what ultimately happens with BitCoin I think you will want to know what BitCoin is and the potential for this new type of technology and its application to monetary science in the Information Age.
WHAT IS BITCOIN?
WHAT ARE BITCOIN’S ADVANTAGES
BitCoins are merely some computer bits that are limited in amount. The network for their generation is decentralized and bitcoins are transferred between individual’s via the Internet with extremely low fees, they can be used anytime or anywhere, the account cannot be frozen and there are no silly or arbitrary rules such as Know Your Customer, source of funds, limits on amounts that can be transferred or stored, currency controls, etc.
The entire software is open-source. That means anyone can read the code, publish opinions and engage in review within the full view of the marketplace of ideas. There is no centralized individual, entity or organization that pressure can be applied towards to force the disclosure of customer records, freezing of funds, transaction history or any number of other private and sensitive information. This is a serious attack on the fiat currency and fractional reserve banking conspiracy.
WHAT ARE BITCOIN’S DISADVANTAGES
The main disadvantage of bitcoins is their being an illusion. In chapter 1 of The Great Credit Contraction I distinguish between money, money substitutes and illusions which can all function as currency. An illusion is a negotiable that promises nothing and has no intrinsic value. It is like a silver certificate that promises the bearer no silver. It has value only because individuals are willing to bear the payment risk and other risks of the illusion. The bearer usually tolerates the risks because their cost is lower than the value placed on the utility derived from the service the currency provides to the market participants.
Consequently, bitcoins have a value history in The Regression Theorem like the evaporating Euro. Bitcoins have no intrinsic value and unlike Euros or FRN$ cannot even be used for their combustible or defecation cleaning properties. But despite this serious disadvantage, which GoldMoney solves, I think because of the decentralized aspect BitCoin may actually be a superior form of transaction currency to GoldMoney. Together and combined with hawala techniques these two currencies almost perfectly compliment each other.
REASON MAGAZINE’S Q&A ABOUT BITCOIN
HELPFUL BITCOIN RELATED SITES
How To Store BitCoins – You can store the bitcoins in your own wallet or with a third party.
If you store in your own wallet then I would recommend Dropbox and TrueCrypt. If you keep your BitCoin wallet on your computer or in the cloud then you may lose the file, have a TrueCrypt file header get corrupted, etc. and the bitcoins would be unrecoverable. Remember, they are like digital cash.
If you store with a third party then an easy way I would recommend is Trade Hill which is free and much easier to figure out than trying to setup your own wallet and then using tools like TrueCrypt and Dropbox to protect it but I suppose the risk is that they could abscond with your bitcoins. So all things considered for now I think TradeHill poses a small risk of loss.
How To Get BitCoins – A few ideas are that you can use an exchanger, a broker, trade with someone via the Internet or in person or engage in bitcoin mining.
The largest exchanger is MtGox. They exchange hundreds of thousands of FRN$ value of bitcoins for cash and vice versa per day.
If you are interested in using cash then I might be willing to help out with smaller transactions but I am not really that interested. I suppose you will find a way to contact me if you really want to. I would prefer to refer you to someone who I have had a positive experience with but there is always risk. I just know how cautious I am and imagine many of you are likewise very cautious.
CONCLUSION
BitCoins have sustained a tremendous rally from about $0.25 to over $30.00 in less than 8 months. I missed this perceived risky trade because I was too cautious. After a thorough study I think there is tremendous merit to the BitCoin project and think it deserves some serious due diligence by holders of capital and speculators. I would not be surprised to see a triple or quadruple digit BitCoin price by the end of year. There is some serious speculative potential here. Also, at RunToGold and HowToVanish are willing to take bitcoins as payment for any products we offer.
Please let me know in the comments what you think of this new BitCoin project. Thanks!
DISCLOSURES: Long physical gold, silver, platinum, palladium and bitcoins.
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http://www.reuters.com/article/2011/06/08/us-financial-bitcoins-idUSTRE7573T320110608
I wrote about Bitcoin in my book, Escaping Oz: Protecting your wealth during the financial crisis. My point was to address disintermediation effects with money and its potential deflationary effects. The recent interest in Bitcoins and its parabolic rise in USD speaks to a potential bubble. Bitcoins may not survive in its current form or perhaps may be supplanted by another digital currency. What is important is the idea itself and what it could signify in the future.
Thanks.
Dear Trace,
The fact that bitcoins is open source does not mean that there are no fatal flaws in this approach.
I do not invest in bitcoin yet because I have no time to embark on a huge task that will verify that the system is without a fatal flaws. Validating protocols is one of the most difficult tasks and there may be a flaw in Bitcoin protocol that would allow to for example to print bitcoins without any limitations.
Only time will tell that Bitcoin is safe. When bitcoin is very popular then huge resources will be commited by hackers to break it because they will be able to earn huge amount of money doing it. Nowadays, my guess nobody is doing serious analysis of this protocol in terms of bugs. What if Bitcoin is vulnerable in the following way. The virus has access to bitcoin peers (since they are connected in peer to peer fashion) and is using the OS vulnerabilities to change the behavior of bitcoin programs in peers to randomly steel bitcoins from single users masking the theft by complete crash of the computer? It will be very easy to exploit vulnerabilities in OS and bitcoin peer to peer protocol to quietly and continously steel money from unsuspecting users.
It is a very interesting concept, but any investment in this should be treat as very aggressive speculation. What are the chances that this software is bug-free and hacker proof? In my view too small and it will eventually die. If I was a bitcoin owner then my greatest dillemma would be when to sell my bitcoins, so I am before hackers kill this product.
best,
Radek
“WHAT IS BITCOIN?”
BitCoin is yet ANOTHER American invention aimed at separating fools from their hard-earned REAL money. Operating very similarly to a classic Pump & Dump stock scam or a Ponzi Scheme, BitCoin seeks to enrich early adapters of the system at the expensive of those foolhardy enough to pony-up REAL currency in exchange for an algorithm-based “coin” that doesn’t even exist.
If anything, the creation of BitCoin proves that Americans have become so financially IGNORANT that they can no longer distinguish between what constitutes a REAL investment opportunity and what constitutes a S-C-A-M.
The following link addresses at least FOUR severe problems with BitCoin:
http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea
I am skeptical about it. I’m not saying that you can’t make a quick buck from something like this but long term I have my doubts. It appears to be a private fiat currency with a predictable rate of debasement. I don’t know how widely owned it is but I wonder if a few big bitcoin owners start to sell if that would create a panic. Time will tell.
Jack and Radek, for politicians like Schumer trying to fight natural law all I can say is ‘good luck’. The BitCoin network currently has as much computational power being employed by miners, who are actually securing the network, as about 250% of the combined computational power of the 500 fastest supercomputers in the world. There is no other network in the world with anywhere close to the amount of computational power and therefore BitCoin is the safest and most secure encrypted system in the world. And BitCoin is just getting started. As of 16 June 2011 it is processing an estimated $100,000 of transactions per hour. This is about the same amount of transaction volume as the company Square which has a market capitalization of about $240m.
Radek, I agree that BitCoin is a very aggressive speculation. But I think the issues you raise are immaterial for the reasons I mentioned in the response to Jack. I do agree about the exchangeability issue if one had a lot of value in BitCoin currently.
Al Falfa, I read that article on quora and found it extremely lacking in any type of coherent logical or rational argument. The arguments were mainly policy related. They focused neither solid economic theory nor the technical aspects of BitCoin.
I do agree that BitCoins could become absolutely worthless, just like FRN$, Euros, Zimbabwe Dollars and all the other remains in the fiat currency graveyard. As far as who is enriched, that is an irrelevant issue to whether something is a scam. It is the entrepreneur, the risk taker or speculator who is rewarded or punished by profit or loss based on the ability to properly prognosticate. If they do so correctly and tremendously profit it does not necessarily indicate a scam.
Bitcoin has crashed.
http://dont-tread-on.me/bitcoin-flash-crash/
Silver Shield, That is incorrect as it was MtGox that crashed not BitCoin. There has been no fundamental problem with BitCoin.
Cyber Theft Incident Outlines the Downside of Bitcoin
http://news.softpedia.com/news/Cyber-Theft-Incident-Shows-the-Other-Side-of-the-Bitcoin-206205.shtml
An early adopter of the Bitcoin virtual currency claims he was robbed of 25,000 bitcoins as a result of malware infection amounting to a loss of $500,000.
Bitcoins do not seem very trustworthy after reading the above article. I much rather own gold & silver since that is constitutional money & has proven itself to be a store of value/wealth over a long period of time.
The issue in that article is one of theft and that is not a result of any underlying defect with Bitcoins. People have been stealing gold, silver, Euros, Federal Reserve Notes, etc. for a long time also.
Bitcoins are actually easier to protect that gold or paper currency. The owner of the bitcoins in the article should have taken proper precautions to guard such a large stash of them using things like the open-source encryption software TrueCrypt. After all, who would leave 500 American Gold Eagles on their desk in plain sight with the windows open?
It’s only $6 now, buy it all up, I dare you!
You mean it could become as worthless as the Dollar :D
I don’t think so. As nobody can just print it as what the FED is doing everytime there is a crisis.
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