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June 28th, 2013

The Bitcoin: Theoretical, Virtual, Real or Subjective?

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Written by: Design-Engine
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pile of gold and silver bitcoins

A few years ago the jury may have still been out on the viability of bitcoin and the subject still seems to have as many opinions as people.  The financial and business media seemed unanimously skeptical, and often dismissive while the techno-libertarians, coders and IT oriented seemed to give their full allegiance often with an almost religious fervor.  This rift itself may have highlighted the distinctions between more traditional business oriented types and those with a more anarcho-objectivist mindset.

The Bitcoin itself is shrouded in a certain air of mystery having made initial  appearance in January of 2009 and were the product of someone using the name Satoshi Nakamoto who’s true identity is still for the most part unknown.  Bitcoins are created by resolving complex mathematical  problems and this term for acquiring or minting is called mining. One will generally requires a powerful computer to mine these Bitcoins and these in turn can then be used for online transactions which are anonymous and cryptographic. To limit the growth of the overall supply of bitcoins these mathematical problems are made progressively more difficult.  All online transactions using bitcoins cryptographically authenticated.
pile of gold and silver bitcoins
The fact that these are not backed by any central bank or nation state has given them an immediate appeal to the more objectivist oriented individuals who hold a special contempt for the federal reserve bank and might see nation states and central banks themselves as a form of tyranny.

In first years they were often written off by the more traditional types in banking and finance as speculative and having limited value and use and the behavior of
Bitcoin valuations in 2011 when it spiked in June of that year followed by a precipitous fall enhanced this view.  Over the past few years it’s valuation has since
stabilized and it has in recent months been on a steady uptrend. In addition over the past year it seems to have earned the grudging respect of some in the financial industry and media.  Since hitting a low of 2 dollars in November of 2011 it has trended up steadily and in March during the Cyprus banking crises surged upward and as of 3 April of 2013 was over to 140 US dollars per Bitcoin.  Whether it continues it’s uptrend or repeats it’s behavior in 2011 is anyone’s guess but it does look like a parabolic momentum caused spike that might not be sustainable.

The anonymity of Bitcoin is an attraction to many but at the same time is cause for concern whether in terms of money laundering or purchases of illegal items. It can easily be countered however, that any paper currency will be used regularly for these purposes with our own greenback quite possibly at the forefront of illicit activity on a global scale.

In what might be perhaps the ultimate irony that for the more ideologically inclined proponents of Bitcoin is the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) having recently taken enough interest to set up a framework of standards and “gasp” guidance for the regulation of online decentralized virtual currencies. While this may be antithetical to every techno libertarian out there it may well represent the ultimate expression of legitimacy.

The Bitcoin itself was born at the beginning of 2009 at a time when the global banking system (inclusive of that in the United States) had come close to complete collapse and arguably the actions of the bankers themselves were the root cause.  With this back drop as the basis for the currencies inception and the recent banking debacles in Greece last year and Cypress over the past month there is much cause for cynicism and skepticism among people about not only the credibility but the stability of these traditional financial institutions and one likes to think those in business and finance will in greater numbers begin understand the genuine value of a decentralized currency. The world of investment and finance is itself mired with numerous examples of the subjectivity of value and we need only observe boom and bust cycles in the stock and real estate market in recent years to recognize everything from irrational valuations to market manipulation and outright fraud (Enron anyone?).  The irony of those who might defend the existing institutions and casting doubt on what seems to be a valid approach to decoupling a method of exchange from a physical bank or nation state coming from a profession filled where gray area and speculation are rife cannot be understated.

Another aspect of Bitcoin that many might appreciate is the global or international reach by virtue of it being an online currency. Some years ago when I lived in Montreal it was a continual point of consternation to deal with delays and international banking fees for the transfer of money from my U.S. bank account to my Canadian bank account. The very notion of a currency not bogged down by borders bank, bank fees and exchange rates fluctuations that are associated with national currencies wil be viewed as by many as liberating.

Just under 11 million bitcoins are in circulation.  To be exact 10,952,975.   The recent dramatic spike means that the valuation has for the first time exceeded 1 billion. Other events that might single the currencies coming of age are the increasing list of vendors who now accept Bitcoin as a medium of exchange and while a mere few years ago this would have numbered in the hundreds. It now has thousands of vendors recently inclusive of notable names like Reddit and WordPress which are now accepting bitcoins and in turn one now finds numerous online sites accepting bitcoins for everything from electronics to food and one aptly named site called Pizzaforcoins.com allows for pizza delivery. Also adding to the air of credibility of Bitcoin is the Bitcoin Foundation which by it’s very existence lends and air of sobriety and stability to what some might perceive as a sort of wild west, teen hacker paradise. The organizations lead developer one Gavin Andresen who also holds the title of chief scientist.  In addition he has the distinction of being one of the few people who have communicated with Satoshi Nakamoto.  Mr. Andresen has had welcoming and positive things to say about the finCEN guidance and feels this will further enhance the fortunes of Bitcion by having a more clearly defined set of rules an governance.  As per the new guidelines Bitcoin or any other virtual currency will have to be registered as a Money Services Business.

Another recent development that may seem contradictory is that physical Bitcoins now exist and are purchasable at a site called casasius.com.  These coins are called casacius coins and are embedded with a private key and holographic seal. A good primer for understanding the mechanics of Bitcoin can be found at Bitcoin wiki.  The web has just in the past few weeks been inundated with articles and blog posts reflecting the excitement of the recent spike in price. While the current valuation may not be fully justified and we may or may not have a correction similair to the one in June of 2011 it seems unlikely that Bitcoin can now be dismissed and I would suspect that soon even skeptics in the financial industry may soon grudgingly acknowledge them as not only valid as a medium of exchange but also worthy of consideration for the speculative part of ones investment portfolio.  Subjectivity is key here and all the elements are now in place for Bitcoin to join the plethora of different currencies and investment vehicles already populating the financial universe.  Henry Blodget humself recently chimed in stating that a bitcoins fair value was between 1000 dollars and zero.  (In effect an admission that he didn’t know.) This is an example of the subjectivity that might in fact govern all mediums of exchange and in fact all types of investment. In the late 90s as the highest paid stock analyst on Wall St Mr. Blodget would often gave out astronomical targets on tech stocks without regard to fundamentals or profitability.  Maybe even back then he didn’t really know.

Written By: David J Mazovick


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