Bitcoin…the money of the future?

In the second of our features from The Real Asset Report we look at the rise of Bitcoin. To help us understand it a little better, we also talk to Max Keiser the ultimate Bitcoin Bull. 

Where are you on Bitcoin? In our readers’ poll, we found over 50% of respondents already owned Bitcoin, but the other 50% are still sitting on the fence, if not firmly on the other side of it.

When we first heard about it nearly two years ago we were certainly sceptical of it; we knew that new money was needed, we just weren’t convinced Bitcoin was it.

Neither were many other people, or they just hadn’t heard of it.

As you can see from the Google Trends graph, for the term ‘Buy Bitcoin’, there was a small spike in June 2011 as Bitcoin rapidly approached $30, before falling to as low as $3. Unsurprisingly searches went to an all-time high, almost exactly in line with the price rocketing this year.

There was a greater velocity of growth in searches however for the term ‘Bitcoin scam’ around the last price spike, almost in proportion with the same search growth in 2013.

Is it a scam? So, far there is little evidence to say so and people don’t seem too worried if it is. Following events in Cyprus last month, the desire to put your money where the governments’ sticky fingers can’t reach has sent the virtual currency skyward.

The mainstream media are at the very least a little wary of the decentralized currency and, in the extreme, are declaring it to be a huge bubble set to burst imminently. This no doubt helped to fuel the searches for ‘Bitcoin bubble’ which have appeared in taken off even more dramatically than those mentioned above.

Bloomberg declared it ‘Bubble-tastic’[1], the FT described Bitcoins as ‘less useful than Air Miles[2]’ whilst the Wall Street Journal described it as ‘a mysterious money which has become the darling of anti-government libertarians and computer wizards prospecting in the virtual mines of cyberspace. In Europe…it has found its niche as the coinage of anarchic youth. . .’

The rhetoric used to describe Bitcoin, particularly by journalists, is word-for-word the same as that used for gold and silver. ‘Gold bugs’ are frequently described as ‘anarchic’ or ‘anti-government’.

Very few mainstream commentators have recognised what this rush into Bitcoin means, whether it is something which proves to be untrustworthy in the long-run or not, at present it is clearly something many investors feel they’d rather put their money into than another bank account or asset-class. They feel they can trust it more than their banks and central banks. The other participants are just trying it out, and if they don’t get burnt the Bitcoin market cap will continue to grow as it matures as an alternative currency.

Trust in…a faceless currency

Founded in 2009, Bitcoin’s ethos is aligned with much of the general sentiment abiding since the start of the financial crisis – a lack of trust in the ability of governments and banks to manage the economy and the money supply.

Given that, it is unsurprising that financial war reporter Max Keiser, has long advocated investing in Bitcoin. He is featured prominently throughout our infographics and we had a quick chat with him to hear what he had to say on the virtual, decentralized currency. Max has in fact been touting alternative currencies for many years, and is loving Bitcoin’s current form.

“Bitcoin is money without banks that is the thing to keep in mind. Bit Torrents totally transformed the intellectual property business and is still in the process of doing so, and [like that] Bitcoin changed the banking business.”

What is it about the banking business that people are fed up with? Well, for one – manipulation of the money supply. Max Keiser believes this isn’t an issue with Bitcoin, and he sees it virtually impossible for someone to corner the market.

“It seems resistant to manipulation at the moment, because the rate of creation is somewhat slow, 75% of Bitcoin is in very strong hands. Outside of that community they would have to convince a lot people to sell at the current prices and it is in very, very strong hands. It’s well distributed, across 20,000 nodes in the network in the highest distributed computer project in the history of the world and 75% are in the possession of people who are not using it they are hoarding it. So it would be very difficult for a hedge fund or something like that to come in and capture 10% market which wouldn’t really be enough to create a price manipulation in this market… you would need to capture 50% which is, I think, that’s virtually impossible.”

The historical economics of Bitcoin

For those of you who are feel uncomfortable with the ‘newness’ and untested side to Bitcoin relax – its foundations are firmly grounded in economic theory, as Keiser reminds us.

“Hayek called for competing currencies and at the time that seemed highly unrealistic but now that is very realistic [thanks to Bitcoin].”

Hayek’s well-known 1976 proposal to separate the state and the money ‘Denationalization of Money’, calls for the abolition of legal tender laws and for anyone to be able to issue their own currency alongside central governments.

Thiers’ Law is also in effect here. Thiers Law, as named by Peter Bernholz [3](2003), finds that given flexible exchange rates, long lasting inflation will lead to ‘an ever-more far-reaching substitution of the unstable by stable money.’

Criminal currency?

The mainstream media, without fail, resort to the criminal attraction of Bitcoin’s anonymity being a reason to dislike the currency.  Whoever asks if Bitcoin is tied to criminal activity is, according to Max Keiser, either ‘duplicitous or stupid or has an agenda, other than to ask that question.’

He says duplicitous because ‘they [the mainstream media and government] have no problem with HSBC laundering $8bn, major banks commit fraud daily – they admit to it! [The Attorney General] of the USA is too afraid to prosecute them.’

Another ‘weakness’ many show concern over is a government’s ability to shut-down the entire Bitcoin system, Keiser agrees this is a possibility but gives little thought to it, “Anything can be shut down – yes there are a number of outlying risks. Like anything, like in the same way you can turn sand into gold at a fraction of the cost, yes it could happen but it doesn’t stop me from buying gold.”

Where did it come from?

For many, it may feel as though Bitcoin has appeared from nowhere, but this isn’t the case. As the glue holding the fragile Eurozone together becomes unstuck, more people are seeing the appeal of Bitcoin. Google searches for “Bitcoin mining” were high in mid-2011, after the price hit $30, but even more so now.

Look at our Bitcoin Mania infographic and you’ll see it’s been transacted long before disastrous events such as Cyprus happened.  In our infographic we show you some of the key points, and price moves in Bitcoin’s run.

And where is all this demand and chatter coming from? And it’s not just Max Keiser on his own. Moscow, Berlin and Sydney are the top three cities with the most Bitcoin trade.

As was widely reported earlier this week, Google Trends data shows Russian’s are the biggest searchers of ‘Bitcoin’ in the world. This is probably not so surprising given the $20 billion of Russian deposits held in Cyprus, the majority of which belongs to private individuals and small/medium sized businesses. Since Friday 15th March, when the Cypriot banks closed, the price has shot up from $47 a Bitcoin.

Bitcoin’s future

Is Bitcoin here to stay? We suspect so, but along with other virtual currencies, the perfect Hayekian dream. ‘Certainly’, believes Keiser, thanks to both governments and individuals. “I think we’re going to see Iran be the first government to make waves with Bitcoin because they are being unfairly penalised and embargoed. They are already trading in gold and silver anyway and they’re already apparently making inroads into Bitcoin – anecdotally they are making inroads into Bitcoin.  In Cyprus they are waking up to Bitcoin.”

“I think that countries and regions in Africa will establish a competitive advantage over countries like the US and the UK that are mired in their current systems. Competitively they will shoot themselves in the head especially if the US tries to ‘outlaw Bitcoin’ that would be a strategic and competitive blunder and that would open the way for all these other countries anywhere there is dial tone to compete with the US in a new way.”

Keiser believes wealthy Bitcoiners will soon hold immense power. “People who own Bitcoin will one day be so wealthy that they will act as a powerful lobby group – the rise of Bitcoin could create enough wealth for Bitcoin lobbyists to push out the dollar-based lobbyists. Of course Bitcoin based lobbyists would pass laws which are favourable to Bitcoin.” Does he see the Bitcoin wealth and the Bitcoin lobbyists as having greater power than the current lobbyists we see? “Yes because the dollar is collapsing.”

For many who have decided to invest in gold and silver, this may be something you don’t want to hear about, or perhaps you think it’s just a fad. For Keiser, the monetary precious metals and Bitcoin can exist quite soundly alongside one another.

So how does the relationship between them work? “They’re all hard currencies they’re all desirable, Bitcoin is free to trade; gold and silver are not [i.e. manipulation] I think that the rise of Bitcoin could free up gold and silver to trade freely because they would disempower the forces that are keeping gold and silver cheap.”

Bitcoin to beat silver’s market capitalization?

We should also take a look at Bitcoin’s market cap versus silver and gold’s. We were inspired to show this after chatting to Keiser who believes that one of the milestones Bitcoin will have to overcome, in order to be seen as a true threat to the US dollar and all who support it, will be its market capitalization overtaking silver’s. Why? Well, once again it comes down to its role as a hard currency.

“My only recommendation is silver, gold and Bitcoin as they are legitimate and, of the three, the one with the market cap that is easily achievable would be silver. I don’t think it makes sense to compare it to fiat currencies, because it’s not [a fiat currency], it’s real money. You have to look at the other real money, and there’s only two that I’m aware of.”

At present, achieving silver’s market cap – at current Bitcoin supply – looks nigh on impossible, the Bitcoin price would have to get to around $2,700 according to Keiser.

Catching up to gold, is another matter entirely but let’s take a look anyway:

Where will it go?

We hold no illusions that financial peace has come about in the Eurozone, or that the Federal Reserve has turned off the printing presses. Given Bitcoin’s response so far to such an environment, we expect the virtual currency to thrive for some time.

Is it money? Money is what the people choose to be so.

At present we suspect the influx of Bitcoiners is as a result of the media frenzy and its performance since the Cyprus ‘bail-in’, rather than a desire for a pure-play alternative currency. However there is a strong and growing contingent of investors who are looking for just that; a currency which is out of the reach of insolvent governments, misinformed central bankers and manipulation.

Gold and silver have served this cause, repeatedly, for thousands of years and we expect them to continue to do so. Some precious metal investors do also worry about the powerful tools available to our national currency issuers, to ‘manage’ gold and silver prices.

But daily life has significantly developed since past hyperinflations and the re-emergence of sound monetary systems. We now live a large percentage of our life online; Bitcoin exists in this realm, and is showing a global monetary experiment in full force right now.

Gold and silver remain safe-havens and value preservers. Central banks continue to stock up and people from all around the world will work hard to own them.

As we see it, Bitcoin could well be part of the monetary future, but gold and silver are right alongside it.

Want to find out more about Bitcoin? See who the Bitcoin Gurus are or look at our Twitter Bitcoin battle!…

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