Cufflinks

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Bit by Bit, bitcoin gains value: but is it sustainable?

In an economic reality where those in charge of central banks around the world are akin to little kids running around a park frantically blowing bubbles, it is often hard to spot what is real and what isn’t; what is the true worth of certain assets given today’s scenario.  The policy du jour is excess liquidity, i.e., unprecedented devaluation, coming from all dams (central banks) emptying out their seemingly never-ending reservoirs (printing press) of fiat money and raising the water (price) levels little by little as this river (liquidity, no pun intended) flows through all towns and cities, with tributaries running into all sorts of sectors until it dumps out into the great oceans (world markets), effectively raising global averages.

Enter bitcoin, a ‘cryptocurrency’ developed by someone using the pseudonym, “Satoshi Nakamoto” got the world’s attention in 2009 as a potential alternative to the current system of government created fiat currencies.  Given the recent extreme rise in popularity, bitcoins have become the center of attention and the media’s darling as its valuation soars higher and higher against the dollar, euros, et al.  Many ‘experts’ are calling for higher prices, the very same analysts that predicted markets and housing would continue upwards unimpeded in 2007. 

Other cryptocurrencies such as Litecoin have been created, spun off from bitcoin itself now serve as a less expensive substitute with an easier point of entry as many ‘investors’ (speculators) have been effectively priced out of bitcoins due to their current valuation.  This could be analogous to the ratio between gold and silver, silver being the poor man’s gold; Litecoin may be the poor digital man’s bitcoin.

This alternative form of exchange is indeed innovative and offers many a way out of their fiat currency malaise.  Cryptocurrencies can be used as vehicles for wealthy individuals looking to place their holdings elsewhere to evade onerous government regulations and even taxation.  A fine endeavor indeed as taxation run to its logical end is nothing more than [legalized] theft.  Moreover, as more outlets accept this form of payment for their products by consumers a broader market develops encouraging its use and diminishing the need to hold onto other ‘fiduciary media.’

As an open source peer-to-peer electronic money and payment network, it uses what is called cryptography to secure its transactions, hence the title ‘cryptocurrency.’  Below is a brief description of its process directly from Wikipedia:

“Digitally signed payment messages are broadcast to and verified by a decentralized network of computers all over the world.  Specialized computers use a proof-of-work system to prevent people from copying and spending the same bitcoin multiple times, a problem for digital currencies known as double-spending.  The operators of these computers, known as “miners,” are rewarded with transaction fees and newly minted bitcoins.

Bitcoins are stored by associating them with cryptographically generated addresses.  These may be stored on web services, on local hardware PCs and mobile devices, or on paper print outs.  A collection of bitcoin addresses is known as a wallet.  Thefts of bitcoins from web services and online wallet services have been covered in the media, prompting assertions that the safest way to store bitcoins is in a paper wallet generated by the owner on an uncompromised computer.”

Essentially the system itself differs only in its decentralization.  In today’s system one could reword the above to say:

“Digitally created currencies are broadcast to and verified by a centralized network of central banks all over the world.  Specialized printers use a proof-of-work system to prevent counterfeiting, or using the same bills multiple times over without government sanction.  The operators of this network, known as “commercial banks,” are rewarded with transaction fees and newly printed fiat.

Fiat is stored within given central and commercial bank accounts in several different digital or physical addresses.  These may be store in digital banking services, local authorized branches, or on ‘paper’ print outs.  A collection of these print outs can be found in a wallet.  Thefts of dollars from [investment] banks, government taxation, and central bank devaluation have not been (accurately) covered by the media, prompting assertions that the safest way to store fiat is in a pillow or under an uncompromised mattress.”

Bitcoin has been blamed for usage in underground markets involving illegal drugs among other things, also no different than the immensity of such exchanges conducted in dollars or other currencies.  However, as aforementioned, it has slowly garnered more support by legitimate businesses and its use as a medium of exchange is increasingly being solidified, although composing only a small percentage of the global market place.  It is still a ‘vehicle’ relegated to speculators due to its rather still infant stage of development.  Many are still unaware of its inner workings, much less of how to use it as a mode of payment.

What is really quixotic about this new digital creation is that it does not require, rather it does not have a central authority determining its next step or course.  In essence, it retains no driver behind its algorithmic steering wheel as far as it is known.  It has been set on autopilot by its purported creator and disseminated to the masses of computer savvy users for its promulgation and ultimately adopted by the sundry businesses now accepting it.  In these days of so much revolutionary talks and ideas of libertarianism, limited 

government, keeping the tentacles of the bureaucracy out of our daily lives and finances, this presents a very attractive solution for many.  It is the romantic modern ideal of a classical liberal global free market gold standard.

However, is such a statement too provocative and too soon for this rather immature ‘currency?’  A veritable cornucopia of online forums and threads have popped up and are solely dedicated to tips and tricks, know-hows, and other topics relating to this new form of currency.  Young adults always easily persuaded by such new ideas and eagerly wanting to be early adopters are devoting their time into learning more and more and getting involved in this new wave of ‘money.’  Everyone in the digital world, the media, and now even Wall St. is apparently talking about bitcoin.  This is reminiscent of the recent bubbles experienced by all, more recently in the housing market where even college students were remarking about how they planned to purchase or flip homes, home depot and its big box competitors popped up along communities throughout the United States just like the above mentioned dedicated websites.  Could this just be a temporary rush into something, fueling what can already be alluded to a bubble in its early stages?  Perhaps it is one of the many channels into which all of this new excess liquidity is being funneled into at this time.  It is hard to tell due to the intricacies involved.

Considering its nebulous activities, bitcoin could also be a ruse and turn out to be the 21^st century equivalent of the Tulip Mania in the Dutch golden age.  It could also have been the tool of a central authority looking to thwart markets their way and establish a new equilibrium favoring their currency, essential a financial coup d'etat yet to be unmasked.  All distant possibilities aside, this wave could go on as it has not yet crashed on the nearest reality shore, or so it seems.  Bitcoin could continue to rise into unexpected territories, as analysts have recently said, upwards of $98,500.  Much remains to be seen in this still speculation laden alternative.  Should this truly be the first taste of a free market oriented and provided alternative to the fiat monetary system in which all are imprisoned with no way out at the moment, then may it run its course and be a pioneering and turning event in favor of a re-establishment of freedom of exchange unencumbered by a select few, “a gang of thieves writ large” (Murray Rothbard) manipulating prices by setting desired interest rates in accordance with what is necessary to maintain the [statist] status quo.