Tuesday, 25 February 2014

Bitcoin goes pop

Hmmm. For the uninitiated Bitcoin is a computer-code based currency, beloved of geeks and drug-runners in equal measure. By some standards this should give it some staying power as the pure hard cash of the criminal world is allied to the computational nous of the geeks.

And to date this has been the case, even today Bitcoins trade at at $440 which is a massive increase on the $30 or so that they traded at last year

It's a classic bubble showing a typical ponzi-scheme type of return to early investors (which, annoyingly I cam very close to buying some at $30 but chickened out!). Today Mt Gox one of the most well know trading houses has closed its doors. It's banking licence has been suspended and whether those who store their coins there will ever get them out is doubtful.

Behind Bitcoin though is one of the biggest questions in the world; what is money? After all, even gold you cannot eat. Neither of course can you eat a Bitcoin, nor even really store it without electricity.

Yet today's Governments across the world have debased money in a way that has never happened outside a hyper-inflationary incident in history. Trillions of dollars and pounds have appeared on the balance sheets of the Fed and Bank of England - but who owns the Bank of England? Where is this money from? The reality is that it is a fiction - the complexity of which hides from everyday people the con-trick of fiat currency. You and I may struggle to earn a few hundred pounds a week - yet the Bank of England will create and spend that in a few millionths of a second.

Bitcoin, for all its faults (i.e. people hack computers, don't they, even NASA...), seeks like Gold to provide a currency that is not controlled by central banks and manipulated by Governments. In the long-term this type of currency, with set inflation linked to productivity growth only, is surely the answer to the world's monetary problems - its unlikely to be Bitcoin, but at some stage in the future a version will replace the dollar as the world's reserve currency.


Ryan said...

I suspect you will never take politics out of currency manipulation. Who would run this government approved bitcoin? Probably the UN..... well there's your first stumbling block!

As I have said many times the economy should be measured in terms of real "wealth" - labour hours worked and products and services traded. As soon as you start talking about cash it gets complicated, and you have the problem that cash only "goes off" very lowly (through inflation) whereas most real wealth goes off quite quickly.

john in cheshire said...

Could one answer be local currencies; ie. small is beautiful? Let any local; ie town, borough, county or whatever; issue currency and trade across currency borders with similar others? You know, true capitalist competition? A world currency will be the worst outcome; no better than the pseudo-world currency we have at the moment, the US dollar.

hovis said...

"who owns the Bank of England? ...Where is this money from? .. the con-trick of fiat currency."

CU: You'll be labelled a conspiracy theorist next or even worse a FMOTL :-)

The strange thing about bitcoin is that for all its freedom advocates, it has a transaction record, so can at a level be traced.

I see the bitcoin = bad people's money. in teh same line of attack as physical goldbugs=lunatics line put out by the mainstream concensus.

As an aside wouldnt EMP (or lack of electricity) simply wipe the value of the bitcoin? I'm not a fan personally.

John in Cheshire: There are some attempts for local quasi currencies but they tend to be from /idealist groups on a small scale, think Lewes Pound etc. In reality I doubt HMG would easily surrender the power that the monopoly of money creation gives.

Steven_L said...

Cue the 'I need someone like you I can trust to take delivery of the frozen bitcoins' scams.

I thought about buying one when they were $100 or so, but quickly realised I wouldn't have a clue how to.

The cranks and loons at Zerohedge were tipping them when they were $1 - DOH!

DJK said...

You're spot on about currency debasement. The ease with which the BofE can create money, and indeed impossibility of imagining how many pounds is 1 followed by 12 zeros (our National debt) means that the sums created to bail out the banks --- or the politicians --- bear no relation to what could ever be repaid in a reasonable number of human lifetimes. Trouble ahead, perhaps?

Anonymous said...

Why is currency debasement a "necessary evil".

If you have a populace that has a minimum wage that goes up every year - irrespective of how world economy is performing - then you lose the uncompetitive jobs to those countries willing and able to do it for less.

If you fail to upgrade your workforce with a decent education system, the number of uncompetitive jobs increases year by year as work like capital is increasingly transferrable.

Enter the Fiat currency and floating exchange rates. A race to the bottom ameliorates the lack of competition and preserves some jobs for some time. While at the same time, hard assets like houses and land inflate as overseas buyers with their harder currencies seek bargains in London.

People still have jobs and house prices go up. Everyone happy despite the long term relative decline.

But like a spoiled kid who upsets the game when losing, we can always invade or destabilise the competitors's areas of economic influence.

formertory said...

I spent £50 on Bitcoin in 2011; got 13.75 or so through Intersango (the then UK Bitcoin intermediary). I came to sell the Bitcoin in 2013 and found that the UK financial authorities had effectively strangled Intersango in its bed by - as I read it - "encouraging" Metro Bank to refuse to continue dealing with Intersango thus preventing people from paying in and withdrawing funds.

Not too big a surprise since much seems possible when the magic words "money laundering" are whispered by regulators in the ears of financial organisations.

Moved the Bitcoins to MtGox and sold them for GBP but then found MtGox had no idea when they might be able to transfer Sterling to my UK bank account - their GBP bank was apparently having money transfer / laundering issues with national authorities. Had to buy Bitcoin back again and resell for euro. Then I waited, and waited, for funds to transfer from their Polish bank to my UK bank. They took 5 months to arrive, less the currency loss for conversion to GBP.

So it seems that the forces of LornOrder, or at least, control of monetary systems, have been sniffing around for a while. Is it fanciful of me to wonder whether the apparent spoofing of 700,000 Btc and the alleged duplication of them in the Bitcoin blockchain - and the kind of expertise it might imply - is the sort of thing that specialists like GCHQ and NSA might get involved with on behalf of their respective Governments to discredit or bring down a system they can't currently control?

Using money laundering regs to attack the "real currency" interface and tech to attack the vaunted inviolability of Bitcoin sounds like a highly effective strategy.

CityUnslicker said...

thanks formertory - a useful insight and I don't doubt that the powers that be are using soft powers to undermine bitcoin. on the other hand, it could be doing it to itself.

AML is pernicious indeed, you can't even get 10k of cash out of your own account at HSBC now without being accused.

Timbo614 said...

Being the computer geek in these parts I should've commented here but I've been extremely busy with my geekery lately.

The gubmints don't want you having bitcoins and they no longer want you having cash either. Period.

Once everything is track-able & traceable in their mega-bases there is no escaping their dipping fingers.

I am in favour of the local currencies that keep money where it belongs, but that can be achieved by just dealing locally, doesn't matter what currency you use.

Personally I don't think it matters what they do with currency devaluation provided you can keep up. As CU points out none of it really exists anyway so something that doesn't exist "getting bigger" or "being lost"is really academic when you actually need is water, food and shelter (plus beer & tobacco if can get it).

Bitcoins are just another means of swapping the essentials of life around and keeping track. we won't miss them. I'm sure there are plenty of dirty dollars waiting to take their place.

Blue Eyes said...

I think ofteb people miss a big point about currencies of all flavours. Why does anyone think that currencies *should* provide a stable store of vaue? It's highly irresponsible to rely on one investment in the long term. Central governments have to balance various pressures, gold or oil or whatever may be affectee by supply and demand in their own right and entirely artificial constructs such as Bitcoin are always going to be vulnerable one way or another.

The future is actually already here for most of us: we are not forced to be paid in £ or to save in £. Hayek's dream of competing currencies is already here.