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I’m finally buying into Bitcoins

So it’s Dec 2013 and the Bitcoin market just crashed after China banned their financial institutions from participating.  Baidu, a Chinese internet company removed Bitcoins or BTC as a payment method.  Over the course of a few days, the price of a Bitcoin went from $1250 USD to under $600.

Everyone is screaming that this is a bubble and that it’s going to pop, but from what I can tell, there’s a bright future for this crypto or e-currency.

Of course there are risks in any investment, but the benefits (both economic and social) seriously outweigh the downside.  What am I talking about?  It’s called globalization, and there’s no stopping it.

Society is moving from a siloed information model to a completely open one.  With the widespread adoption of the “internet” in the early 1990’s, individuals all over the world were able to communicate with each other as if they were all in the same place.  Ideas on one side of the globe could be instantaneously transmitted to the other and collaboration between geographically separated teams became the norm.  I participated in the growth of this through games like Multi-User Dungeons or MUDs which were the precursors to  the MMORPGs of today.  I remember how mind blowing it was to partner up with a friend in Finland when I lived in Hawaii, and together we were able to complete quests, trade items, and hang out as if we were neighbors.  Despite all of the political posturing and religious arguments, it turns out that most global citizens actually get along.  If there’s any key takeaway from these past couple internet decades, I would say that it’s the fact that we can all live in the same global society together without artificial walls and boundaries.

So what’s stopping this true globalization from taking place?  I think a lot has to do with the regulation of trade and specifically currency inflows and outflows.  As we all know from economics, prices are mostly set in the free markets through supply and demand.  Currency, that which we use to buy, sell, save, loan, and invest, is for the most part, also regulated in this fashion.  Ok, there are a ton of additional complexities such as interest rates and money supply which we will gloss over, but I can still make my point with out it.  Overall, the success of the US Dollar is due to it’s perceived stability as a store of value, widespread acceptance for transactions, and liquid nature.  So if the US Dollar is so great, then why do we need Bitcoins at all?

Well, although the US Dollar meets most of our globalization criteria, it’s beginning to fall short in a few areas.  With the US Debt at the highest levels ever and huge shortfalls in the government run defined benefit plans such as Social Security and Medicare, the historical stability is beginning to look a little shaky.  The Global acceptance of US Dollars is declining; recent shifts in US Law and policy have increased regulation and oversight and thus have created barriers on holding and using US Dollars abroad.  Extreme liquidity hasn’t changed and remains the reason it is still the reserve currency of the world.


http://markets.thegenesisblock.com/

How will Bitcoins help to fill these gaps?  As a store of value and stability, Bitcoin faces its toughest criticism.  The price volatility is too high for anyone to allocate a significant portion of their portfolio into it at this time.  As Bitcoin continues to grow in popularity and more participants join in, the volatility will naturally go down as supply and demand optimization will take place across a larger number of participants.  Over time, as prices rise, speculators will take profits and sell their Bitcoins to other consumers; this will ensure a more normal distribution of Bitcoin wealth.  We were able to see the start of this dissemination in the latest crash as speculators that were in the money emotionally sold off their Bitcoins during the drop.   New consumers were then able to acquire more.  The Global acceptance of Bitcoins as a currency is going to be it’s most powerful component.  Adoption is rising steadily with new vendors announced daily, and not just in the US, but everywhere.  In fact, Bitcoins are more widely accepted outside of the US at this point in time.  Imagine travelling anywhere in the world and not having to worry about exchange rates or foreign cash.  That is the future reality of Bitcoins.  Lastly, Bitcoins are not  a very liquid currency.  With a total market cap estimated in the low Billions of Dollars, Bitcoin has a long way to go to get to the Trillions of US Dollars in circulation as well as all of the other global currencies.  The good news here is that it’s only a matter of time as supply and demand dynamics (if current positive trends continue) should naturally increase the total value and liquidity.

So why now and not when Bitcoins were $10 or less?  Actually, I was mining them back then and did a lot of research back in early 2010 when it was just starting out.  Global acceptance was very much a joke at that point in time and the odds of it evolving into where it is today was very minuscule.  There were too many questions about the security of it as a whole, the reaction of governments and businesses to its use, and rate of adoption.  Given recent trends, investments in Bitcoin infrastructure, positive global press, and exponential price increases, the awareness and adoption of Bitcoins has, in my opinion, reached critical mass.  We are at point in the evolution of this crypto /e-currency that even if an entire country tries ban its use, global citizens will still continue to use it.  China will be an interesting case study given the extreme restrictions on Chinese Yuan export and conversion.  I suspect that if exchanges are shutdown, a local black market will emerge where locally traded Bitcoins will be at a premium.  However, it’s virtually impossible to shut down Bitcoin use and ownership as long as citizens can find a way to trade them which to me, is easier than cash at this point if you’re talking about online or overseas transactions.  To completely shut it out, all P2P Bitcoin traffic must be filtered out and all physical and virtual wallets must be confiscated.  This is an impossible task given the high demand for it as a product and service and adaptability of its consumers.

There you have it.  Let’s all vote for a free global society by participating in Bitcoins.  I’ll see you guys on the other side of this exciting adventure!

 

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The soverign debt problem

Who bears the real burden of debt? http://www.johnpemberton.co.nz/assets/images/The_Burden_of_Debt.jpg

I keep reading about debt problems around the world and how the governments around the world are going to fix them.  In focus this year is the plight of the Eurozone sparked by the periphery countries known as the PIIGS (Portual, Ireland, Italy, Greece, and Spain).  This blog is intended to be accessible to everyone so I will simplify as much as possible.

Problems:

Too much debt and too little income.  Similar to buying a house when you have a high paying job, and then getting laid off and realizing that you can no longer afford it.  This is the basis of the sovereign debt crisis.

Trial Solutions:

The current solution is based around the idea of “stimulus”.  By borrowing more now, growth is encouraged, immediate repayment of debt can be largely ignored, and hopefully future income will be more than enough to cover the additional debt burden.  Going back to my previous analogy, this is like leveraging credit card debt or going to a loan shark for some additional money so that you can keep your house; all while you try as hard as you can to improve your skills and try to get a higher paying job knowing that you are really “up a creek without a paddle.”

Other Complexities:

  • Sovereign credit scores are deteriorating so everyone is reluctant to lend additional money just to help pay off older debt.
  • “Guaranteed” entitlements in defined benefit plans such as pension retirements make the paying back new debt a very iffy proposition.
  • Politicians and their inability to convey the feelings of the masses in their legislation over those who “lobby” them (e.g.  big banks and big money).
  • Free market economics, and Adam Smith’s invisible hand of capitalism squared off against the welfare of society.
  • The Eurozone and the idea that chaos would ensue if it breaks up.
  • A hidden risk that everyone assumes but is scared talk about: the end of capitalism and the western world as we know it if sovereign default dominos start to fall in the developed western countries of the world.

Ok, so each one of these additional complexities warrants a full fledged post but this is not really supposed to be a finance and economics blog, just a record of some of my random thoughts and ramblings so if there is enough interest I will create a separate page to explain this stuff and how it affects you, otherwise just wait until I get another urge to talk about money.

My thoughts

If we compare the sovereign debt issue to a person unable to pay his/her credit card debts, what happens in this scenario?  Banks will not give additional money, instead they will send a collection agency to try and get some residual value from the unpaid debt.  Then the person will start again from scratch, albeit with a much lower credit score, and the bank will only lend additional money at a much higher interest rate commensurate with the updated default risk.  So without trying to be clever about a solution and using our capitalistic guidelines for bankruptcy, a sovereign country that cannot pay his or her debt should default and start over with a more manageable debt burden.  Now doesn’t this seem like a simple solution?

Maybe this is oversimplifying the issue, but don’t we all want to find the most elegant solution and move on?

Ok, I’m a realist too.  Here’s why will this solution will not succeed with our current socio-economic landscape in the west.  Despite the fact that we in the west consider ourselves to be democratic, we see many examples where the majority does not rule.  The truth behind our democracy is that “dollar votes” are worth more than “political votes.”  Those with high concentrations of money can vote with their dollars to ensure their own survival and well-being.

How many votes do you really have?

Lets look at the immediate  (first order) winners and losers in the standard sovereign default scenario.

Standard Scenario:

Winners:  The country which defaulted on it’s bonds and can now start fresh.  Despite a lower credit rating, they can still borrow from the free market without any additional manipulation.  They can even take additional steps to reduce interest expense by issuing securitized bonds or by targeting the lowest interest rates on their forward yield curve.

Losers:  Banks and countries that lent money to the defaulting country.

Tossup: Citizens who were owed money by the defaulting country depending on order of seniority (are entitlements such as social security and pensions super senior to sovereign bonds? Should they be?)

In the current scenario that is unfolding now, where banks and countries are getting together to give a “super bailout” and kick the debt can as far down the road as possible while requiring citizens to make concessions (decreased entitlements, lower standards of living, and increased taxes) in , look how the winners and losers change.

Actual Scenario:

Winners:  Banks and countries that lent money to the defaulting country.

Losers:  Citizens and people who were owed money by the defaulting country depending on order of seniority (are entitlements such as social security and pensions super senior to sovereign bonds? Should they be?).  These citizens also suffer the burden of the lingering debt that did not go away and will have to pay increased taxes for their forseeable future.

Tossup:  Because there is no actual default event, the debt burden continues to linger.  However, the “super bailout” facilitates free market lending at reasonable rates.  Probably great in the short term but horrible in the long term.

So normally, banks would be the biggest loser, but somehow in this new grand  ultra-deluxe bailout final 3.1 scheme, we are seeing a shift to citizens of each country taking the brunt of the burden.  I guess this is why the Occupy Wall St movement is so strong.  The goal should be to Occupy Wall St to get some voting power back and level the playing field.  The term austerity seems to be less related to fiscal responsibility than it is to reallocation of the distribution of wealth from the poor to the rich.