Bitcoin “the virtual currency” as I write this is nearly $700 per coin, per unit, per digit or whatever you’d like to call it. Bitcoin that started the year at a mere $14 had risen until last week and is now going exponential the day that Congress “investigates” it. As it turns out, the DOJ, FBI and SEC. has more or less given their blessing (as had apparently Bernanke last week) during Senate hearings. This is curious to say the least. Curious because Bitcoin is an “alternative” currency to the dollar and theoretically a competitor.
One must ask “why” Bitcoin is “OK” now when in the past we heard nothing positive “officially” in the past. Is this a “if you can’t beat’em, join’em” type of thing? Have they found out that the structure or encryption cannot be broken? Have they figured out that since there are no “futures” or derivatives markets that they cannot take a short position to manipulate and knock down the price? Or even questions like “who.” “Who” benefits? Who already has a big position (percentage wise)? Lots of questions and few answers to this point.
Bitcoin is called a “virtual” currency because of its anonymity and only “cyber trades” but it is also a fiat currency although there is a cost (computer and software) to produce them. If you think about it, “dollars” are also “virtual.” Yes there are actual dollar bills that we trade for goods each day but 99% of transactions are done by debit or credit cards. You also carry balances at your bank or institution “virtually.” You either go online or to your branch to see what your “balances” are. THIS is what makes the difference between “virtual” currency and gold.
Where your bank can (in my opinion eventually will) tell you, “Sorry, we had this bank holiday because of circumstances out of our control your balance is 30% of what it was,” you cannot wake up one day to find a percentage of your gold coin missing. An “EMP” (electromagnetic impulse) could cause nearly all electronics to fail; this would obviously affect “electro” balances until (if) balances could be straightened out. The internet could be (Obama has already put executive orders in place for this) “commandeered,” shut down or taken over during a “national emergency” which would mean that access to your funds could be restricted. All I am saying is that with any fiat OR virtual currency there is circumstances where your money is not “your money” or where balances could be lost. Yes I know, gold and silver could be “outlawed” by decree but an ounce in hand would still be money, have value and probably accepted by your local farmer even though “illegal.” My point is this; a coin cannot “evaporate” whereas anything virtual can and EVERYTHING fiat in the past already has.
I want to touch on just one more topic, the wild movement (and price disparities) of Bitcoin over just the last couple of weeks. Bitcoin was just over $100 a couple of weeks ago, it had a surge to $300, then $600 and went bonkers last night where it traded to $1,000 and then fell under $700. It traded to $1,200 in China for a 20% premium at the time and then fell back. This 20% premium would, could, should be “arbitraged” by selling in China and buying in the U.S. simultaneously but this is not possible. Because there are no derivatives and no way to “sell short” Bitcoin, this arbitrage cannot be done. This also means that Bitcoin cannot be “capped” or suppressed in price like gold and silver are now. It means that 100 “paper” Bitcoins cannot be sold for every 1 “real” (can’t believe I said this) Bitcoin in existence. In essence, Bitcoin is a purely CASH market.
The price action in Bitcoin is exactly the type of action that I believe you will see in gold and silver once COMEX and LBMA default and cannot deliver metal. Once gold and silver become purely cash markets the volatility will explode. “Why” you ask? Because there are currently 100 “paper” ounces represented for every single real ounce available to deliver. Whether these paper ounces sold are reversed to “buy” or not doesn’t matter because 99 out of 100 “owners” will find out that they were never really “owners” to begin with. Another way to look at it is that all of a sudden the “supply” will evaporate, human nature being human nature will cause the demand for real and physical ounces will explode. People always want what they cannot have; the epiphany of “no gold” will create excess demand on its own. The “shackles” so to speak will be taken off of gold and silver when they become cash and carry physical markets as there will be no way to sell what “isn’t” or doesn’t exist. It will in my opinion be a wild and wooly ride.