Saturday, April 13, 2013

Bitcoin Bubble?

The exponential rise and sharp drop in the value of the "virtual" currency Bitcoin has made it into the mainstream media this past week. Even the CBC, official voice of the statist media in Canada, had a reasonably (for CBC) unbiased story here.
The value of a Bitcoin has been extremely volatile of late, possibly because of the European monetary crisis and the little wrinkle that Cyprus created.
This commentary in Forbes magazine addresses the volatility. Of course, there has also been considerable volatility in gold lately, but I'm not going to pretend I know why. I think like gold, Bitcoin is not going anywhere, it definitely serves a purpose and has a niche like the Forbes article suggests.
Will Bitcoin become a widely accepted and used currency, something you might use to pay for your dry-cleaning? Who knows?
Below is an interesting interview with an Austrian School business professor that my daughter posted here.

The rise of the Bitcoin: At what point should we take this seriously?
As one of the world’s first online currencies gains momentum and headline counts, Dr. George Bragues, Acting Vice-Provost and Program Head of Business at the University of Guelph-Humber, offers his thoughts on the viability of virtual mining.
We know that these coins are ‘created’ through a series of complicated computer programs through a sort of digital mining process. How does money emerge spontaneously?
This speaks to the idea that there was no great person who consciously decided, let’s have money. Throughout history, money has emerged spontaneously, through an unplanned process. It started when people first specialized in a trade, or made something that they could then use to trade for something else they needed. And eventually, without any central authority’s designation, people came to converge on a class of objects, like precious metals, that everyone was willing to accept in exchanges.
Whatever object that’s agreed on as currency ultimately needs to have a few key features for it to work. It needs to be divisible, it can’t be perishable, it needs to be portable, and it needs to be relatively scarce so that it doesn’t lose value. The Bitcoin ultimately has these key features.
Despite Bitcoin currency having been developed a few years ago, it’s become a sensation in recent weeks as the exchange prices have surged and plummeted, with fingers pointing toward the financial instability in Cyprus as government there has been interfering with peoples’ savings. What’s the significance of this?
The Cyprus situation basically raises questions about the integrity and safety of the fiat currencies of the world. It suggests that if you have all this money in dollars or euros or pounds stashed in banks somewhere – that if and when these banks get into trouble, you could suffer a big financial hit. So against this backdrop lies a demand for another form of currency that would not be subjected to this problem. And that’s the Bitcoin.
The Bitcoin is not managed by a central bank, like the euro or the US dollar. Its supply is also limited to 21 million, with about 11 million currently in circulation. This essentially replicates a gold or commodity-type of money – meaning, the supply is limited by its availability. And just as gold needs to be mined, so, too, does the Bitcoin. The main difference obviously being that with gold, the mining is a physical process, whereas mining a Bitcoin is intellectual where you have evermore complex mathematical problems that need to be solved.
The supply of this currency – instead of being managed by central authority that could potentially lead to Cyprus-like problems – is left to a market process, where people will mine it to the extent that they see profit in it. There’s already been commentary among respectable analysts that Bitcoin currency should be a part of your financial portfolio.
It’s been recently reported that the Winklevoss twins – infamous in their battle against Facebook founder Mark Zuckerberg – have been building up their stock of Bitcoins, adding to the idea that this currency seems to have surpassed the experiment phase and is now accepted by professional investors. Yet it seems despite all the hype, the big question remains: Should this currency be taken seriously?
Perhaps not too seriously. I hate to use the cop out line, ‘only time will tell’, but at this point I find it very intriguing. In order for it to be taken more seriously, we need to see that it can embody the characteristics of a true spontaneously-emerged money. Which means first and foremost, it needs to be more widely accepted.
We need to reach a point where the dry cleaner says, ‘that’ll be three Bitcoins, please’, and we’ll pull out our phones with our Bitcoin app – and ultimately walk away with our dry cleaning. That’s theoretically possible – we’re probably already there from a technology standpoint. But for now, it’s really more of an investment vehicle. In order for it to be really taken seriously, it will need to become a consumer goods vehicle as well.
Are virtual currencies here to stay?
For e-commerce purposes, I think virtual currencies are here to stay; they’ve already proven the test of time. But for them to go into the physical world? Wow. I think governments would have a real problem with that. I think we have to recognize that it’s no accident governments today control the money supply. The major reason for this is because it allows them to influence the economy in politically preferred directions. So to have a virtual currency getting accepted out there would mean a loss of control on the part of the government over a key lever over the economy.
The Bitcoin’s decentralized nature would ultimately be the big problem governments would have; and given what’s going on in the world, the same reason why people seem to be liking it. All that to say – I haven’t mined for any.

University of Guelph Humber Business Program

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