Wednesday, February 26, 2014

Bitcoin Up 37.7% in Two Days

Encryption We Trust

You may have seen some news reporting a "crisis in bitcoin", but that is very far from the truth.

At its lowest point, bitcoin was worth $430 (02/24/2014 @ 11:30 PM PST). One dollar was worth 1/430th of a bitcoin (.00232557 BTC).  At the time of writing this post, 12:25 AM PST 02/26/2014, the dollar had fallen to 1/592nd of a bitcoin (.001689189 BTC). Bitcoin gained $162 or 37.7 percent.

BitcoinWisdom.com graph:



Why Did The Price of Bitcoin Fall?

The price of bitcoin was driven down due to problems at one of many exchanges. Exchanges are like stock markets where you can exchange bitcoins for other coins or fiat money like dollars. ObamaCare consultants might have been used on this Japanese based exchange called GOX (Magic the Gathering Online Exchange). The exchange either overpaid people due to bad programming, was bought off by a government entity or stole peoples bitcoins. Whatever the case, the people responsible are now in hiding. There is no "problem" with bitcoin as a technology or as a investment.

Another exchange BTC-e released this statement in regard to the GOX problem.
We confirm the Bitcoin system operation and its exciting prospects, and MtGox bankruptcy has not been caused by any underlying technical problems of Bitcoin. Bitcoin international peer-to-peer network and cryptocurrency are independent of actions of a single market participant. Bitcoin protocol continues to function exactly as it should. The cryptocurrency maintains its stability and the network will continue to develop and exist as long as required by its users.
People who used the problem exchange were put at risk and sold their coins cheap to "get into a court recognized currency" in order to file suit. This strategy came out of nowhere and was promoted as "legal advice." For all I know, it was a scheme to incite panic selling.  Bitcoin is obviously an asset and theft of valuables is not delineated specifically by various courts to my knowledge. Maybe you know better.

How Did Bitcoin Recover So Quickly?

During the panic sell, other investors, who were not at risk, purchased bitcoins ... and ... hopefully.... you acquired some at the discount. If you put $100 into bitcoin at that time, that investment would now be worth $137.67 minus about .2% in fees. Of course this does not represent a full return to value, but it a base of recovery.

By the time you read this, the price of bitcoin will probably over $600. So, if you are wondering if you missed the big opportunity, let me comfort you with some timely advice....

When to Buy Bitcoin

We released an entire post regarding this subject, but to summarize. buy on market dips:

  • over 800, normal market price
  • under 800, consider buying
  • under 700, strongly consider buying
  • under 600, if you don't buy, there had better be a good reason
  • under 500, if it is at all possible, buy!

The current situation represents a major opportunity for new users to get into bitcoin

Why Might Bitcoin Continue to Gain Value?

Good question. There are many reasons people believe in bitcoin.

Political Risk Associated with Fiat Currency

The US government represents the world's reserve currency. Due to an agreement known as Bretton-Woods, this has been the case since 1944. At the time, the US dollar was tied to gold, so other currencies tied to the dollar via Bretton-Woods were also considered fractional reserve notes based on gold. In 1971, the United States untied from gold and became a fiat currency. It effectively dragged the worlds currencies with it.

Since that time, the dollar's reserve currency status has been based on faith in the American government and people. Recent events have concentrated power in the US's executive branch of government, which essentially changes that system. 

The tea party, occupy wall street and other movements have arisen due to a lack of faith in America's new political system. Concentrated power increases the likelihood of bad decisions being made and carried out. For instance, ObamaCare was sold as if it would save American $1 trillion over 10 years, but recent CBO estimates reveal a cost of $2 trillion over that same period.

Bad decisions, like ObamaCare will continue to be made because neither Congress nor the Supreme Court have the power to stop them. Concentrated power's effective replacement of Separation of Powers in the American government is a fundamental economic threat to the world economy. This is a fiscal and political policy crisis.

The alternatives are precious metals, which can be confiscated, and bitcoin which is easily transported and encrypted.

The Federal Reserve (Fed) Lack of QE Exit Strategy

Monetary policy has been a stalwart of America's economic stability. Recently the Fed as reduced interest rates to zero in an attempt to spur the economy. Specifically, they hope a "wealth effect" will spur people into feeling "richer" because stock and home prices are artificially inflated through the massive printing of money known as Quantitative Easing (QE). The Fed is printing around $75 billion per month.

The problem with this approach is that there is no known exit strategy. Every time the Fed moves to increase interest rates, the stock market collapses and home sales plummet. Confidence in this system is extremely low. 

Step back and look at the combined monetary policy crisis, the fiscal policy crisis and the political crisis in America. Europe, China, Russia and South America are conceptual alternatives, but they do not inspire the confidence of the U.S. when it is governed faithfully according to the U.S. Constitution.

Technological Superiority 

Bitcoin is technically better. It is fundamentally more secure. It incorporates the Blockchain, which is like an accounting system. There is no credit card account information to be stolen when bitcoin is used.  It is expandable and can be updated. It is easy and inexpensive to buy good and services across national boundaries without converting currencies... (no currency risk). The "wire transfer" fees or transaction fees are extremely small or free. Bitcoin transfers in minutes instead of days like bank money transfers. 

There are simply too many advantages to list. It is the next evolution of money. 

Consider Major retailers. Walmart would save billions in currency exchange fees, wire transfer fees, accounting costs and possible fraud loss by switching to bitcoin.  Target would not have been liable for all the stolen credit card information in 2013. 

Decentralization of Money

Many of us believe money is too important to be left in the hands of government. Government is generally incompetent due to competing goals. Trusting in government seldom proves to be wise and for the first time we have an real alternative. 

Math vs Military

The US Dollar, and fiat currency generally, is backed by military and police power. Bitcoin is backed by math, computer geeks and some very bad men (like Chuck Norris). America's military is strong, but math is stronger.  Recent events surrounding GOX might be an opportunity to judge which justice is more effective.

Other reasons

Everyone has their own ultimate reason to move to a secure, internet-compatible currency. This is a little like listing why people use email instead of snail mail.. Instead of trying to list everything, lets leave this area open and add to it based on comments. Let us know your reason below.

Alternative Coins (Alt Coins)

The big question is whether bitcoin is the ultimate winner in the arena of crypto currencies. LiteCoin, DogeCoin, UltraCoin, Vertcoin, NameCoin, or another may someday prove to be even better than bitcoin. 

These coins can be quickly converted between bitcoin. So, this may lead to a situation like the precious metals market. Bitcoin may be a store of wealth, while another coin might be the day-to-day alternative. They will coexist just as they do currently on multiple exchanges.

2 comments:

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