Bitcoin; this currency is only getting warmed up
Bitcoin has been in the news allot lately. Involved in everything from space travel with Virgin Galactic, NFC with Nio Card and even Snoop Dogg's next record. As its' global awareness grows, so does its appeal. Rumours flew of it had been banned in China, and recently priced by Bank of America. You can even buy a Lamborghini or a new knee with bitcoins. Whether you like it or not, Bitcoin has captured the attention of the globe. Until recent times, bitcoin was only associated with the tech geeks and radicals. Voluntary outcasts of traditional systems and institutions . But as Bank of America puts a fair value of $1300 on bitcoin, the profile of those engaging bitcoins has also changed.
So why are people investing in bitcoin today, when it's trading with volatile fluctuations around the one thousand dollar mark (at the time of writing this), yet it's been around since 2008, and it costs less than 10 cents? The new, rapidly growing popularity of investing in bitcoin can be explained by the actions of one group: The U.S. Federal Reserve. The Fed continues pumping $85 billion a month into the U.S economy, further ravaging the dollar's value. This prompted Warren Buffett's warning to investors: "Run from paper money." The world's most famous investor recently delivered his blunt advice to CNBC, saying investors should fear the dollar because it will be "worth less and less over time."
"Paper money has a lousy future," Buffett.
Paper money has a lousy future
The price of a bitcoin has surged in recent weeks, likely driven by heavy demand in China and by public statements from U.S. financial authorities that seemed to endorse the digital currency — at least in part. Bitcoin prices topped $1,200 on Mt. Gox, which is based in Japan but is used worldwide, including in the U.S. Of course, there’s no surefire way to determine fundamental or fair value — notwithstanding the useful benchmarks for doing so in markets such as stocks — especially for something as untested as this.
We now witnessing thousands of main stream Americans dumping their dollars, in turning their backs to buying and investing in bitcoin. Yes, you heard correct, bitcoin as an investment, like its an asset class like gold or silver. In fact, as the U.S. dollar reaches a startling two-year low, its weakest since November 2011 - and with consumer confidence dropping like a rock - bitcoin is becoming a powerful force on currency exchanges around the world. Money Morning's Defense & Tech Specialist Michael A. Robinson actually went as far to described recent bitcoin popularity as " a global rebellion against the Fed, against all central banks. A harsh dose of medicine to many overblown power structures."
Analysts at Bank of America Merrill Lynch issued the bank's first research report today on Bitcoin, the virtual currency that approximates cash on the internet, concluding that the currency has the potential to become a "major means of payment for ecommerce" as well as a "serious competitor to traditional money transfer providers." Assuming crypto-currency becomes mainstream, Bank of America currency strategists estimate it is worth $1,300 a piece. But with the value at $1,000 today and increasing rapidly, it is in danger of "running ahead of its fundamentals," they write.
The report also notes that the rapid jump in Bitcoin's value — which was just $100 in August — correlates with interest in the currency coming from China. But following warnings from the People’s Bank of China, the price tumbled to $576 before correcting upwards to $860 on Sunday morning trading. Bank of America is the first major Wall Street bank to issue an opinion on the virtual currency, which has grown in prominence since it debuted in January of 2009.
The market attention is a positive sign for those who hope that Bitcoin will someday become a universal currency, but it's ironic considering the technology was designed to empower individuals over banks. The last time Bitcoin made a splash in the financial district was probably 2011, when the Occupy Wall Street protest became one of the first major efforts to accept donations in the currency. But now that the total Bitcoin economy is worth $13 billion, it seems everyone wants a slice of the new currency.
Given bitcoin has an element of scarcity built into its algorithms, the mining of bitcoins will eventually have to come to an end. Leaving only the originally designed allocations on the table for the world to trade. Sound familiar? The reduced availability of gold forced the various markets around the world, shifted the nations to 'store' gold as a means of wealth. The tendency to stockpile gold and to use it as a measurement of wealth extends back for centuries. There was a time when the global financial system operated according to what is known as the gold standard. This was a monetary system that directly connected the amount of gold in a country's reserve with the amount of currency that it produced. The logic behind this was that if the gold were redeemed, the equal value of currency should be received for it.
Could we see nations or corporations start to stock pile bitcoin?
If this were the case, bitcoin is well on its way for mainstream acceptance as an asset class. Something I'm sure its founders would quietly enjoy. But with no public founder, that could be anybody. Rest assured, the lack of a central governing institution has actually been its strength. Nicco Mele, author of “The End of Big: How the Internet Makes David the New Goliath,” would have you believe that what we are witnessing with bitcoin is not dissimilar to the collective disintermediation of other traditional institutions:
"The Internet and mobile phones—a combination I call “radical connectivity”—profoundly empower individuals in ways that spell disaster for traditional “big” organizations. Big news organizations have seen both news production and advertising revenue disrupted by radical connectivity. The entertainment industry, from publishing to record companies, is in its own death throes. Big armies face distributed cells of terrorists instead of nation-states, while ad-hoc hackers the world over look for disruptive opportunities for “lulz.” Big political parties find themselves besieged by insurgents like Tea Party candidates, while citizens crowd-source solutions to public problems outside of big government. Tenured professors at big universities are growing large audiences on YouTube outside of tuition-paying students. Even big manufacturing faces a growing challenge from desktop 3-D printers, spelling an end for big brands."
Bitcoin was always intended to empower the individual, in the face of large institutions. Let's just hope that is can stick to those morals as it grows up.
Either way you look at it, this new currency is now getting serious and yet it hasn't even it puberty yet.