The true measure of strength in any currency is the faith its users place in it. This is the definition of a fiat currency – a currency that is backed by faith, rather than hard assets. These include the Euro, the Dollar, Yuan, Canadian Dollar, British Pound, etc. A loss of faith in any of these countries’ ability to pay their debts results in devaluation of that country’s currency. The same is true if they decide to print more money to meet current needs or even if the world simply thinks their country is being run poorly.
What if I told you there’s an international currency unencumbered by entitlement programs and liabilities. This currency is not subject to governmental manipulation and the money supply is always a live public statistic. This currency neither buys nor sells any debt. Would it surprise you, given this set of circumstances that this is the single strongest currency in the world over the last year?
The currency I’m referring to is called, Bitcoin. Bitcoin is an internet currency that is traded globally for goods and services and can be cashed out in the currency of your choice. It is, “mined” on individual computers that are placed, by anyone, on the network. The mining is basically using your computer to solve an equation. The equations get harder and harder through time. This ensures that the supply of Bitcoins grows at a stable rate. The publicly validated equations place more Bitcoins into circulation by the people who’ve mined them. The number of Bitcoins, currently stands at 6.6 million. The next equation and number of coins in circulation are all publicly available in real time.
The value of Bitcoins is tracked on trading sites that look just like foreign exchange trading sites. There are quotes in Dollars, Pounds, Euros, Francs, Rubles and most any other denomination. There are bids and offers to buy and sell as well as the amount that is up for trading. Bitcoins can be actively traded across currencies just like any other currency. Currently, one Bitcoin is worth approximately $14. This equals a U.S. market value of more than $90 million dollars.
Without getting too technical, faith is being placed in the mathematical equations that regulate the supply. The supply can be verified, from the equation through circulation by anyone on the network. While the equations require lots of computing power to solve, they can be checked very easily, just like any math problem.
The demand is built up due to the freedoms and low cost of use. Bitcoins have no transaction fees. There are no middlemen. There are no PayPal, Western Union, wire or, credit card processing fees. The coins can be spent online anywhere that accepts them, including, Ebay, Amazon and other merchants as well as online poker sites and other places your credit card company won’t let you spend your money. Bitcoin is gaining traction and now processes more than 10,000 transactions per day. A survey of Cragslist even turns up business opportunities including one with a Stanford PhD looking for a technical lead developer in Bitcoin mining.
I am not promoting Bitcoin and I haven’t used it. Personally, I think it may be the most forward thinking and libertarian store of value yet developed. The idea that the fundamental supply is always known and that it isn’t subject to government budgets and political elections combined with the fact that it is stored with each individual participant rather than any banking system makes Bitcoin a revolutionary endeavor of the electronic age.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
