January 3, 2014

Hey Buddy, Can You Spare A Bitcoin?

There is a lot in the news recently about a new and innovative form of money called Bitcoin. So the real question is, is Bitcoin money? My answer is, sort of. However could the race to create a single global currency that nobody "owns or controls and in which everybody can take part" be nothing more than the latest entry into a long list of financial schemes that proceed it, namely to make the few rich and the many frustrated. Sound familiar? What about trading or hedging do you think we'll see the introduction of Bitcoin Default Swaps (BDS's)?

Have you ever bought into something advertised as one size fits all? It's an idea born of the industrial age that has become a popular descriptive that flows out of the technology think tanks aimed at making the world a better place. The supporters of Bitcoin, the fiat currency attracting the interest of people around the world, claim that. As social media marketing becomes an ever bigger industry it has accomplished that by adhering to a simple rule, namely one size doesn't fit all. If Bitcoin is a currency it doesn’t fit the description of it but if it’s a commodity it does and if it’s a commodity it's an investment and that's where my interest comes in.

But the idea of it being an investment otherwise is open to a lot of debate. First of all in referring to it as a fiat currency it can easily be said that many countries maintain fiat currency in particular the US dollar is one. The dollar's value is in its full faith of a government guarantee not any underlying commodity such as gold or silver. This is interesting because in addition to the government's pledge the markets have needed other insurance which has come in the form of currency management. For example if the US economy is generating less revenue for the government than the amount of currency being printed there is a need to issue debt to finance the difference. To manage this over 50 year ago the Treasury introduced a mechanism to maintain a finite amount of debt outstanding, it was called the debt ceiling.

See there you have it. Besides being a currency you can't touch, Bitcoin is a creation of an entity we don't know, transacted in an environment we can't feel by people we can't see. It also claims to be a controlled supply. Recent decisions banning the Bitcoin in China and safety warnings from the EU have underscored the need for more transparency before governments provide the bridge to legitimacy. At that time who knows? It may start showing up in Mutual Funds, traded on the Futures Exchange, as an ETF and maybe eventually we might see a Bit Bond.  Now wouldn't that be interesting?