What’s up with Bitcoin?

March
02

Written by: Jon McGraw

We don’t often mention currencies specifically (especially synthetic currencies) but Bitcoin was the recipient of some unusual news last week.

The news was specifically focused on the Mt. Gox Bitcoin exchange in Tokyo, which appeared to be hacked and lost 750,000 ‘coins’ worth upwards of a half billion dollars and has declared bankruptcy as a result. It’s unclear what happened to the coins, which may have either been stolen or somehow electronically voided, although more investigation remains.

For those that haven’t followed the story of Bitcoins closely, the idea came together in 2009 as part of an online-based digital currency designed to work as a secure method of electronic entity-to-entity payment without the involvement of banks, credit card companies or other third parties. Why? Aside from avoiding the 2-3% charged by processors for typical electronic transactions, it’s presumably designed for global portability, safety (in that it isn’t carried physical cash) and secrecy.

Where accepted, Bitcoins offers the obvious benefits one would have from paying with cash, including illicit dealings (a primary criticism) and tax avoidance. For the pessimistic out there who believe the U.S. dollar, euro, pound, franc and yen are headed down the tubes, and aren’t quite ready to get on board with the renminbi quite yet, Bitcoin offers another non-country specific option for a potential store of value—much like precious metals have provided historically.

Of course, like gold, it can be and has been speculated on and has a value all its own, which has fluctuated somewhat wildly versus developed market currencies, from a value of 1 Bitcoin = $1,100 USD in December to around $550 USD more recently. On Friday, the coins fell by 10% in value, but this isn’t unprecedented—several days over the past year saw fluctuations in the +/- 20% range (!). Just when folks thought the Turkish lira was volatile…

We don’t see Bitcoins as an immediate threat to the global safe haven currencies, but the concept has experienced some popularity. Undoubtedly, online security will need to be a primary consideration, as it is with all digital information. In light of the theft last week, Vietnam joined the list of countries banning its use (China did so last December); as the technology of the currency is likely beyond the reach of some/many world regulators.

Some economists/currency strategists are beginning to track its value, so it could be worth watching in years to come. On the other hand, a few of the less optimistic in the financial world assign it a fair value of zero to Bitcoins, which obviously gives the story a very different ending.