EDITOR: | February 26th, 2014 | 3 Comments

Anyone for Bitcoins? A bump in the road to virtual currency.

| February 26, 2014 | 3 Comments
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BitcoinGot a bar of gold sitting in your safe deposit? Well, if so, it is worth (as this was being written) $US1,340/oz. You know where you are. You know that you can take that bar anywhere in the world and its value will be recognised.

But what about Bitcoin? After this week’s events, one cannot be quite sure. The price of Bitcoins tumbled by more than 20% on Tuesday after one of the largest exchanges of the virtual currency abruptly halted trading. Tokyo-based Mt Gox’s website went dark and customers feared the loss of nearly $400 million worth of Bitcoin.

Now, 20%, let’s see what that would mean in gold terms. That would mean gold tumbling in one session from that $1,340 to $1,072/oz. That would signal panic, the markets would be in turmoil, gold miners would go out of business and so on.

But today, with a full-blown Bitcoin controversy, the world financial system trundles on seemingly untroubled. Wednesday trading in Asian stock markets is on an even keel (Japan down a small fraction, the Chinese exchanges up a small fraction; nothing in it really).

However, before we get to the Bitcoin situation, here are a few key facts about the virtual currency:

1. What’s Bitcoins value? Ha! Like, somewhere between $30 and $US1,100 (which was its movement range in 2013). After Tuesday’s fall, it was priced at $521. If gold had moved from its 2013 highs in line with Bitcoin, it would be worth $795/oz. According to Reuters, much of this retreat is due to “fears that Bitcoins could be more susceptible to fraud than previously thought”. With gold you can, of course, adulterate a bar but you can’t whisk that bar out of a safety deposit box with a few keystrokes.

2. Where can you spend Bitcoins? Actually, nowhere much. A few small operations accept it as payment but, to quote Reuters again, “critics say Bitcoin is too volatile to be widely adopted and warn of its lack of regulation and its use to pay for illegal drugs and other nefarious transactions”.

3. What do you need? Well, apart from a good deal of faith, a very powerful computer to use the software for cryptographic calculations.

4. How secure? Well, it has been reported by Reuters that 744,000 Bitcoins went missing at Mt Gox. And you have been warned by no less an authority than the U.S. Securities and Exchange Commission (and the European Banking Authority), and on several occasions, of the risks of fraud and losses in virtual currencies.

As the Nikkei news service reported Wednesday (Tokyo time), “adding to fears among bitcoin investors, Mt. Gox also deleted all online information that it had posted on its website, micro-blogging site Twitter and elsewhere. ‘I have no idea what actually happened and will happen in the future,’ said a strategist at a European-affiliated financial institution”.

As the weekly letter from the Sydney-based financial advisers Rivkin Securities noted, “it doesn’t quite have the romance of a Ronnie-Biggs-style train robbery. If there are colourful characters involved, they’ll probably remain anonymous forever …. The very premise and appeal of Bitcoin is that it is not regulated, transactions are encrypted, and the receivers in a Bitcoin transaction are identified only by a number. Thus, even in metaphorical form, the ‘paper trail’ that exists following a Bitcoin transaction would be better investigated by a 12-year-old Chinese hacker than Columbo. The laundering process for Bitcoins is apparently known as ‘tumbling’. If you spot any cyber-geeks with a suspect disposition akin to one who tumbles bitcoins, make sure you report them”.

According to The Financial Times, two protestors turned up at the Mt Gox office in Tokyo demanding back their Bitcoins.

But the adherents are unshaken. As the FT notes, many have voiced their faith and belief that they are building a new world order.


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Comments

  • J. Best

    I enjoyed this article Robin but at the end of the day this seems to be an attempt at an underground economy which inevitably will involve a criminal element. Be careful what you wish for ..

    February 26, 2014 - 12:04 PM

  • Asher Berube

    It seems silly to claim that the bitcoin is an underground currency when physical cash has a similar reputation. That said “do I think that the current bitcoin will achieve mainstream use as currency?” I think that is unlikely. A digital currency does have potential value and may be able to be better regulated than our current cash system. I am not inclined to believe that structuring the currency as a fiat one is is wise idea, although using digital currency could make the fiat currency system far more manageable and productive. I do believe that the adoption of digital currency is inevitable, but will it be bitcoin? Time will tell…

    February 26, 2014 - 12:45 PM

  • Dave Glover

    Central banks and G20 Gov’t seek to smash Currency competition. Bitcoin shall overcome The Market will decide next step. If they feel this source remains valid BitCoin will survive. Alternative just not acceptable given propensity for rigging.

    February 26, 2014 - 3:07 PM

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