My Two Bits about Bitcoin

By: David Morgan | Wed, Mar 19, 2014
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Some have asked our view on Bitcoin, and my response is simply -- I view these things from a Free Market perspective. I have often stated that "The Market knows more than any of us". I would not want to be labeled a hypocrite by stating my conviction that the "real" free market is capable of making decisions that are in the best interest of masses, and then proceed to disparage Bitcoin through a personal bias.

However, I do have a personal bias as to the basic construct of money, or what I would prefer to think of as "real" money. Here the span of history has given us a very clear message that a fair exchange of value for value is the only ethical way for people to conduct a transaction that is mutually beneficial for both parties.

Essentially, a cryptocurrency is a digital medium of exchange. The first one, created about four years ago, was Bitcoin. Since then, scores, if not hundreds of various permutations of the concept have been launched. Even the Royal Canadian Mint has gotten into the act, announcing the MintChip. They call it "the evolution of currency" - with a billing as the world's first government cryptocurrency. The MintChip site states that "until now, there has been no electronic solution that cost-effectively addresses the very-low-value transaction markets, protects privacy, is available to everyone and emulates the characteristics of cash." Well, time will tell...

The idea has been to create an electronic "currency", designed to have a finite number of "coins" with which business can be conducted online, and transferable electronically with low transaction fees. Units are created and stored electronically. In the case of Bitcoin, users create an account, buy Bitcoins at the going rate, download the Blockchain - which contains a copy of all Bitcoin transactions, and then make purchases from their online "wallet".

Bitcoin is decentralized, with no specific institution controlling its network.

A person uses random sequences of letters and numbers to create a bitcoin address and a private key. Using the private key (or even two keys), a message is sent out to the bitcoin network with the amount of the transaction and its destination, which is then solved by a transaction block. One can use as little as one-millionth of a bitcoin in a given transaction.

A stated advantage is the concept that a cryptocurrency is relatively safe from illicit seizure by another party other than the individual or business entity - this entity owning a given amount in a "wallet" or other similar holding place. Yet last fall, the FBI took down one site, The Silk Road, arresting its administrator, accusing him of engaging in money laundering and narcotics trafficking conspiracy, and confiscated as much as $4 million in bitcoins.

And in early February, when the largest of the Bitcoin exchanges, Mt. Gox, based in Tokyo, instituted a withdrawal halt, the price there tumbled by 25%. A week later an offset block of Bitcoins sent the price down by over 80% in a few seconds - from $600 down to $102. Interestingly enough, that same day, the gold price hit a one month high. Quite a decrease for a "currency" which in December 2013 traded at over $1,200 apiece. (At this writing the price hovers around $600).

More recently Mt. Gox declared bankruptcy after announcing that as much as $400 million in bitcoins may have been stolen by unidentified online hackers. Between cyberattacks and subpoenas, the current king of the digital currencies has been having some very severe, some might even say, fatal growing pains.

James Turk, whose GoldMoney group has launched a new digital currency company in the UK offering free secure encrypted storage for digital currencies said recently,

"I think Bitcoin and gold/silver will eventually work in a complementary way with one another, and that is what we are eventually trying to do with GoldMoney and specifically, our new subsidiary Netagio.com (analyzing the digital currency space and using a blended rate from leading Bitcoin exchanges to reflect the broader market), where we have taken our first baby-step into the Bitcoin world by providing secure Bitcoin storage."

It is supposedly private, unless someone, e.g. a government agency, can determine and track down the string of transactions, but there is increasing evidence that this would not be an inordinately difficult activity for government agencies such as the FBI or NSA to accomplish.

Byron King unreservedly comments:

"For all the current problems of the dollar, Bitcoin was not the answer...To be perfectly blunt, Bitcoin always struck me as an overambitious ship awaiting its iceberg. Now, looking ahead to far horizons... the holds of our respective ships are filled with dollars, although the ballast near the keel of my hull, at least, is formed of real gold and silver. Gold, silver and dollars... That's how the world works. It's how the world has worked for a long time."


Bitcoin opens a whole new world of hacking...

Andreas Antonopoulos' biographical site lists him as having founded three bitcoin businesses and launched several open source projects. In an online interview earlier this year he stated:

"Bitcoin is not a safe investment. Bitcoin is the first experiment in a global distributed currency, stuff that's never happened before; we have no idea how this is going to work out. "We've never had a currency that can enable distributed consensus without a third party (without a sovereign actor behind it; transmitted across borders without controls)."

Andre, who stores 90% of his Bitcoins off line (encoded/stored on a piece of paper) continues: "Bitcoin are an asset class of their own - not commodities, not strictly currencies, not stocks. Bitcoins can be stolen/hacked from your online "wallet". Bitcoin opens a whole new world of hacking."

Taking the longer view, he posits, "I'm not sure Bitcoin is going to be the ultimate crypto currency that wins. I am sure that crypto currencies are here to stay. Crypto currencies were invented, and once they were invented, they're not going anywhere..."


Is Bitcoin "The Perfect Scam"?

Editor of The Market Oracle, Nadeem Walayat, has recently written an article titled "Bitcoin The Perfect Scam". His take on the topic is perhaps a bit less "nuanced" than others, but his perspective is certainly one that a person who seeks to understand "all things bitcoin" might want to add to their knowledge base on the way to creating a personalized informed opinion.

Walayat feels, and given what has taken place at Mt. Gox and other sites, makes some real sense, that fundamental elements of this cryptocurrency's operation system have the potential of placing Bitcoin holders at extreme risk. He believes that "thieves have been busy producing a whole host of bitcoin wallet malware that seeks to steal any wallets that they find on infected computers." If this practice becomes widespread, then a bitcoin holder could potentially wake up some morning to find his "wallet" has literally been emptied while he slept.

Second - and several analysts in addition to Walayat have commented on this - the "block chain" - the method by which new transactions are verified, as well as earlier ones recorded - and by which new bitcoins are "mined", will by definition become increasingly complex and more expensive to operate as time goes on. The fallout from this, according to Walayat, is that,

"...what bitcoin holders are going to be increasingly exposed to is ever more sophisticated malware that are aimed at the theft of their bitcoin holdings at every stage of the processes, starting right from their internet connected desktop PC's to the interception of transactions between servers to the wild west bitcoin exchanges that can disappear with all of their customers bitcoin holdings overnight, to the highly sophisticated bot net infected mining pools that seek to target all bitcoins in existence by seeking to rewrite who owns what."

Walayat sees this evolution as meaning that bitcoin "ultimately has a destiny with extinction". Even if his premise stretches the likelihood of eventual collapse for the system beyond what ultimately takes place, it certainly would seem to behoove us all to consider the possibility.


Perhaps Cryptocurrencies are best for Governments?

The trials and tribulations of Bitcoin notwithstanding, it seems unlikely that cryptocurrencies will disappear from the contemporary scene. What tomorrow's digital exchange media will look like, how their values will be determined, and how much privacy will remain after governments around the globe have inserted themselves into the inner workings of these systems remains to be seen. But you can be absolutely certain that no government is going to just roll over and let a parallel fiat "money" system be introduced which could meaningfully compete with its own currency, let alone replace it.

As just one example, The U.K.'s forward-looking tax authority, Her Majesty's Revenue and Customs (HMRC), has set out guidelines for the taxation of crypto currencies, saying, "Gains and losses incurred on bitcoin or other crypto currencies are chargeable or allowable for Capital Gains Tax if they accrue to an individual or, for Corporation Tax on chargeable gains if they accrue to a company."

An important thing to consider about Bitcoin is that in many ways it is really not so different from most of the "paper promises" that no longer reside physically in our wallets. Think of the way a lot of people pay their bills nowadays - mortgage and insurance auto pay/online payments through intermediaries like PayPal, or wire transfers. Your "money" is moved about digitally, in concept just like Bitcoin transactions. The Federal Reserve creates "money" with a keystroke - along the lines of Bitcoin users' creation of new coins through computer algos. Virtually all of these digital transfers can and are being tracked by governments - again not unlike Bitcoin transactions - protestations from its backers notwithstanding.

So there is very little privacy involved anymore when we make the majority of our "monetary" transactions. The knee-jerk response by government entities, as well as many of our citizens who have not fully reflected on the unintended consequences of such a system, is that if you are conducting transactions beyond the scrutiny of government, then it must be because "you have something to hide" - that you're engaged in illegal activity.

But I would argue that we have a right to privacy when we seek it, and that this desire does not necessarily mean we are doing anything illegal. While the U.S. Constitution contains no express right to privacy, the Bill of Rights, especially in the Ninth Amendment, strongly infers that the citizens do retain privacy rights in a variety of ways not specifically enumerated in the first eight amendments.


"Gold Stacking"

"Bitcoin is a tool to get more gold"

Stu Thomson has an interesting take on the issue, remarking:

"Bitcoin is a tool to get more gold. It's not gold. Comparing bitcoin to gold is like comparing a Buckingham palace gardener to Buckingham palace. He enhances the palace. He isn't the palace. Do I think central banks deserve to own gold? No. If they had brains bigger than amoeba cells, they would have top sculptors sculpt the taxpayer gold into priceless works of art, to build national treasures that would gain incredible value over time.

"In a crisis, some could be melted, but, over time, the pressure on the Gman to spend less rather than destroy national treasure would be staggering. The central banks don't deserve to own any gold. Crypto currency is not gold, but it's all the central banks deserve to own. They can't handle gold, and they don't deserve to handle it. Crypto is perfect for the Gman. It puts some pressure on him to keep his financial house in order, chops costs, and gets him out of the gold price wrecking business."

Hugo Salinas Price, long a proponent of silver as sound money - via the issuance of the silver Mexican Libertad, has this to say about the cryptocurrency:

"The Bitcoin has no history, which is the essential element which makes all digital currencies acceptable, utterly false though they are. The Bitcoin is simply a childish distraction for a childlike world population incapable of discerning falsity, much to the satisfaction of all the crooks, big and small, who prosper by scamming the public.

"I remit to Von Mises, who stated that no fiat currency has ever been successfully introduced into circulation without a monetary value ultimately derived from when that currency was gold or silver money. Bitcoin does not fill the bill; it cannot circulate along with the established fiat currencies of the world because it has no history, no ancestry reaching back to its parent, gold or silver."

Finally in our effort to research the topic we contacted Richard Grove of www.TradedyandHope.com. Richard provided documentation that the National Security Agency was the first to explore this idea. Does this mean that the NSA is ultimately behind bitcoin? Of course not! But it does give one pause to reflect, does it not?

Looking at what has taken place, especially over the last year or so, I must conclude with this simple - and to my thinking - self-evident statement. Whereas Bitcoins can vanish, Gold cannot. Just remember for all who read this, the timeless advice of - caveat emptor! And may the Free Market Reign.

 


 

David Morgan

Author: David Morgan

David Morgan
Silver-Investor.com

David Morgan

David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided.

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