Bitcoin “flash crashed” on Monday by 80% and traded very briefly at $102 before recovering…all the way back to $600. This $600 is about half of the $1,100-$1,200 that it reached back a month ago. Quite the ride huh? Went from $100-$1,200…$700…$100…$600. I’d like to look at this from a couple of different standpoints and some of what I will write will only be what I’ve written before.
So why the flash crash? Mt. Gox, one of the Bitcoin “exchanges” shut down much as a bank that closed its doors. I am not a computer whiz by any means and do not understand what actually happened and how they were supposedly “cyber attacked” but they are not completing transactions. “Not completing transactions” meaning you cannot get “dollars,” euros or anything else for your Bitcoin. It has been said that a whopping 6,000 Bitcoin sales caused the 80% drop; I will get into that shortly. What prompted this “massive” (sarcasm intended) sale is anyone’s guess. Did they know that Mt. Gox was going to “go dark” or an ignorant sale or a fat finger nobody knows…but it shouldn’t matter?
I am and have been of the opinion that Bitcoin is a dry run or trial balloon for what will come after the current system collapses. Whatever it’s called, it will be “cyber” in nature. I also find it highly unusual that JP Morgan sent out a “hit piece” prior to the flash crash. Are they a part of this? I would be shocked if they were not. But here is the problem as I see it. Bitcoin, though it’s supposed to be limited in quantity to 21 million “units” is not “backed” by anything. And we just saw the “flaw” that is so in your face that it’s dumb. What if there are NO exchanges open…or the internet is down? These “wallets” cannot transact and basically have no “value.” Yes I know, Bitcoin cheerleaders will scream bloody murder at this one but if you cannot “get to” or use your “money,” what value does it have?
I know that Bitcoin is still “new” and many will say that it is experiencing growing pains…which is why all the volatility and this is partly true. Others will say that “gold has been very volatile” also… Here is how I see it. Bitcoin is an alternative currency yes but IT goes up and down versus the dollar. Gold is not really an alternative “currency,” it is alternative “savings” which is very different. In reality gold does not “go up and down,” the dollar does! This is the big difference as I see it. Bitcoin yes is an “alternative” but it is absolutely not something to “save” the family wealth in…because it is so volatile. This volatility is also a problem for any business that accepts it, you finalize a sale today at a “20%” profit margin yet tomorrow you don’t even enough capital to pay your suppliers? Anyone who has ever run a business knows that they must know the surrounding “conditions” in order to have their business grow, flourish AND continue into the future. The most important “surrounding condition” is the currency itself; one must know how much they are paying for what they are selling to know what’s left over as profit. Any currency that can lose 80% of its value in the course of 1 minute…??? Sorry, this does not fit the bill for any bricks and mortar type business in my opinion.
Some will say OK, the dollar is devaluing versus gold but what happens if gold becomes “illegal?” I would ask you this, will it be “illegal” all over the world? Have you stored ANY of your metal outside of the U.S.? Even if it’s “decreed” illegal, will it ever be worthless? Do you need electricity? The internet? Or even banks open for your metal to have value? “Value” as in “utility?” Utility such that you can exchange it for eggs, toilet paper, gas or any other necessity?
There are other potential problems with Bitcoin, the biggest being that it is “man made” and if the original code can be written it can also be hacked. The technical aspect is above my pay grade and a first year computer science student could run circles around me but when push comes to shove I firmly believe that if it’s not in your hand or safely stored outside of borders…in a “real” form…you don’t own it. Call me old fashioned if you want and intimidate me with as many “digits” as you’d like, you’ll never convince me that if you cannot stand face to face with a “trader” under any conditions (including power outage, internet killed switch or the aftermath of an EMP etc.) and “make a deal” then what you have to trade is not “money.” “Money” in my opinion, (and here is an add to its definition) must be something that is accepted during even the most adverse conditions.
“Trust” is the most essential element when it comes to a currency. It is necessary when any currency is introduced and must be maintained or else the currency vanishes as all “fiats” have done over time. I have no doubt that a “cyber currency” is where we are headed for many reasons. It will be “government sponsored” for the simple reason that governments will not want to give up “control.” I say this because a truly independent currency cuts them out. They wanted “in” to begin with which is why they’ve tried to demonetize gold and silver. It worked quite well for a spell but gold and silver are coming back into the system rather than away from it. It is for this reason that I believe any cyber currency will have to have at least some backing either ratio or fractional to anything introduced. Will this also become a fraud? Of course it will as any and all man made currencies throughout all of history were.
To sum this up, I highly doubt that “Bitcoin” will be “it.” “It” is meaning the new global currency that is sure to arise. The currency will look similar and many “promises” will be made as to safety, security and “backing” to create confidence but…just as it has always been, you are best to save Mother Nature’s money and you spend man made money. This is what is meant by “good money drives out bad.”
I wrote all of the above Wednesday and then back burned it because so many people were running around with “Yamshita’s gold syndrome.” I am glad that I didn’t immediately send this because since Wed., Mt. Gox has reopened but their pricing is about $150 off from the other exchanges (arbitrage anyone?)…AND another exchange Silk Road 2 has apparently been hacked for $2.7 million worth of Bitcoin. I wonder “who” will make good on this pilferage.