Bitcoin

While Cyprus grabs the headlines, there are stirrings in Spain, New Zealand, and the UK with regard to how depositor funds (and their apparent insurance) is considered in the new normal banking system. As John Aziz notes, essentially, if there is to be any confidence in the banking system, the possibility of depleting liquidity insurance funds to bail out banks needs to be taken off the table completely. The possibility of insured depositor haircuts needs to be taken off the table completely. If banks need bailing out, the money must not come from insured depositors, or funds designed to compensate insured depositors. If banks fail, the losers should be the uninsured creditors.

It would appear that physical assets trump digital assets this morning in Europe as Silver has just spiked over 1% (and Gold back over $1615) as Bitcoins plunge on heavy volume... Did the Europeans run out of Bitcoins?

Something extreme is happening in Europe. Since Sunday, Bloomberg Businessweek reports 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. “This is an entirely predictable and rational outcome for what’s happening in Cyprus,” says ConvergEx's Nick Colas. "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 almost 30 percent in the last two days. "One hundred percent of that is due to Cyprus," says Colas. "It means the Europeans are getting involved." 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.

If you don’t collapse the system, the system will collapse you.

It would appear that the imploding rule of law and currency weakness in Europe has done nothing but increase the value of a 'haircut-proof' digital currency. Since we first saw the ECB 'bash' Bitcoin in November of last year, when the central bank "stooped" so low as having to issue a 55-page pamphlet warning readers against "virtual currency schemes", the value of the digital currency has risen from EUR10 to record highs around EUR37 currently.

Earlier in the week, we wrote about an Argentine car rental agency that had started accepting Bitcoins as a means to bypass local capital controls. We received a lot of questions about the article, the most common of which was "What in the world is a Bitcoin?" Let’s start by looking at our current monetary system. In most countries, a small tiny banking elite exercises total control over that nation’s money supply. And we’re just supposed to trust them to be good guys. Yet central bankers around the world have conjured trillions of dollars out of thin air, debasing the money’s value. It’s a concept any six-year old can understand. If money grew on trees, it wouldn’t be worth very much. This is one of the key reasons why people buy gold. You can’t just conjure gold out of thin air. It takes years of exploration and investment to pull it out of the ground. In the information age, though, we have an alternative. Bitcoin is digital currency. It doesn’t actually exist in our physical world... only in computers...

On March 3, we said that Bitcoin is interesting technology, and a useful currency, but it's not money. Yesterday it crashed to $37. What happened??

While we are used to seeing insta-crashes in our highly-regulated and trustworthy equity markets, the unregulated digital world of Bitcoins suffered another flash-crash last night. According to Ars Technica, the 23% plungefest in the value of the digital currency (the second in a week) was due not to Waddel & Reed, not HFT algos, but 'forking' Cryptographic algos gone wild agreeing on different (legacy) keys as being correct - akin to finding Tungsten in your Gold bars (and hence the drop in the value). This latest glitch is different from the problem that caused Bitcoin prices to briefly crash to zero in June of 2011. In that case, the sell-off was caused by the compromise of the exchange itself, whereas this time the glitch occurred in the core Bitcoin software. Obviously, the incident will be another important test of the cryptocurrency's decentralized governance structure - to say nothing of its reputation among the less technically-capable owners and miners (even though BTC rapidly recovered almost all its losses).

With the growing popularity and perhaps relevance of a globally decentralized currency system in a world adrift in fiat devaluation death-matches, it is perhaps interesting to understand just who these Bitcoin'ers are? The ongoing survey of Bitcoin users (here) has some intriguing results already: The 'average Bitcoin user' is male (96%), 32.7 years old, libertarian / anarcho-capitalist (37%), non-religious (61%), with a full time job (43%), and is in a relationship (56%). The biggest motivation for new users are curiosity, profit, and politics; and 39% of users do not drink, smoke, gamble, or take drugs. Just over half of users have mined bitcoins and the greatest community fear for Bitcoin is “regulatory/legal intervention” followed by ”reputation problems”. Overall more people seem to find Bitcoin intellectually rewarding (70% have learned more about cryptography) than socially rewarding (22% have made friends).

Nathan Lewis proposes a "gold standard" which is not based on gold. He argues that since gold's only job is to regulate the quantity of paper, we can just tweak the policy of the Fed. Instead of buying bonds to control the rate of interest, they can buy bonds to control the gold price. This is like trying to steer a car by opening and closing the windows.

We really hate to beat a dead horse, but we wouldn’t be doing my job for you if we didn’t point out some of the most intellectually dishonest, self-aggrandizing Bernanke-speak to come out of the Fed Chairman’s testimony this week. I know this goes without saying, but entrusting this man with your life savings is a dangerous course of action. I strongly urge you to consider diversifying into precious metals, productive farmland, or even a digital currency like Bitcoin. After all, you know the old saying – it’s time to be very concerned when the politicians and bureaucrats tell you to not be concerned.

The best performing currency year-to-date has no home country, no central banker and no physical scrip; it is the online-only ‘Bitcoin’ and as we noted recently, it is becoming more mainstream.  BTC, as the currency is known, up 130% year to date in dollar terms, thanks to rising demand from a wide variety of adherents, which ConvergEx's Nick Colas notes, includes libertarian activists, small businesses, online drug dealers and gambling sites.  That makes the Bitcoin a controversial subject, to be sure, but Nick notes we can also learn from this unique case study a lesson in global economics.  Bitcoin ‘Money supply’ growth is capped at a slow rate – far below its current levels of demand.  That makes it prone to boom-bust cycles.  It also has no sovereign sponsorship, which means it works outside any nation’s security apparatus.  Lose your bitcoins to hackers?  Tough luck – there is no FDIC in these parts.  Still, Colas concludes, in the creation and growth of the Bitcoin it is not hard to see the online future of currency, especially as real-world alternatives continue to struggle with sluggish economies.

Bitcoin represents another way to fight back against the current repressive and immoral monetary system that has a strangle hold on the planet.  Ever since WordPress.com (the extremely popular blogging platform and 22nd most popular site on the internet), decided to accept Bitcoin as payment last November the value of Bitcoins versus the U.S. dollar has more than doubled. The esoteric crypto-currency continues to gain popularity and technologies to make it even more user friendly are popping up all over the place.  The latest is the Bitcoin ATM, which could be a serious game changer for adoption.

That precious metals are not the best friends of central banks, whose sole provenance is in creating, and lately massively diluting, faith-based fiat currency is no secret, especially not after the recent snafu involving the Bundesbank and its shocking gold repatriation announcement which came in direct refutation of its public statements just 2 months earlier about faith in the NY Fed this, and bashing of a "phantom debate" on the safety of gold reserves that. Yet it was not gold gold, silver or even tungsten that was the object of derision in an amusing paper released by the ECB in early November titled "Virtual Currency Schemes", which we profiled at the time, but rather the decentralized electronic currency BitCoin, which was supposed to highlight what, in the eyes of the Draghi-led Frankfurt institutions, is nothing but a Ponzi scheme. Why the ECB suddenly felt threatened so much by Bitcoin, it felt an imperative to issue a 55 page paper decrying such electronic currencies we will never know. What we do know, however, courtesy of a reminder by Bloomberg's Max Raskin, is that since the publication of said paper, the value of Bitcoin as tracked by the Mtgox exchange, has soared some 40% in just under three months, from a "fiat equivalent value" of $13 to a most recent closing price of $18.50, and has doubled in the past 12 months alone.

Peer-to-Peer Lending and Crowd-Funding Have the Power to Change Finance