John Robb: The End of Money Part II

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John Robb

Bitcoin Reborn: As a Financial Wire Service for the $10 Trillion System D?

As a store of value or an asset Bitcoin’s shady.  Here’s why:  since the supply of bitcoin is limited and knowledge/use of it is growing (potentially virally) it’s the perfect breeding ground for a speculative bubble.  In a world awash with scams and financial speculation (a defining characteristic of our time), it was only a matter of time before the pump and dump mobsters moved in. So, for those of you with the stomach to take bets with eastern european mobsters and US financial boiler rooms or if your willing to bet on the fickleness of viral adoption, you might be interested in taking a look at bitcoin as an asset.

The Bitcoin Bubble  June 2011, when Bitcoin was trading at nearly $20

Naturally, the Bitcoin bubble collapsed.  It hadn’t found a true use yet and the entire rise was based on mania.  Also naturally, (when the tide goes out you get to see who is swimming naked) the collapse also revealed a large number of scammers.

Click on Image to Enlarge

When the price hit ~$2 a coin or ~$18 m in market capitalization, the big question was: would it recover because it had some intrinsic value or would it collapse to zero.  My call was that it would hit a bottom and that’s exactly what it did.  It’s now trading up around $4 a coin.  This bounce might actually be the answer to its use as a currency:  does Bitcoin have any intrinsic value?

The Currency Test

My friend Doug Casey points out that Aristotle once defined the 5 essential elements of currency as:

  1. Durable.   Yes.
  2. Divisible.   Yes.
  3. Convenient.   Yes.
  4. Consistent.  Yes.
  5. Valuable (intrinsic)  Who knows?
  6. Doug also adds that a good currency shouldn’t be arbitrarily inflatable.  Yes.

Aristotle’s test is still the best way to test the viability of a currency.  Both Doug and I have looked at Bitcoin using this test and the only test it failed was:  is it intrinsically valuable?  Did it have any intrinsic value, like gold’s use in jewelry/electronics or the value the dollar derives from protection afforded it by the US government?  Until last month, that was an open question.  Now, it appears that the answer to this question is, drum roll please…

YES.  Bitcoin appears to have intrinsic value as a P2P transaction system.

A P2P (person to person) transaction system can be used to for many different things, least of all as a currency for retail transactions.  One of the more interesting of these uses is it growing use as a wire transfer system like Western Union for the $10 Trillion and rapidly growing System D, the world’s shadow/black economy.  Why is a P2P transaction system perfect for this?  It isn’t reliant on trusted third parties to run/operate the network (which is good, since in today’s environment, they are impossible to find in government or finance).

Bitcoins future?

Bitcoin may never be worth much as a speculative financial instrument.  Since the bitcoin system is both highly decentralized and a free market (two attributes that are in short supply in today’s environment), it’s likely that bitcoin will remain efficiently priced at between $3-4 for quite a while.  A price just over the cost of providing transaction verification (servers cost + electricity).  That’s a good thing.  This price stability will make building an open source wire service for System D, much easier to do.  There’s a big entrepreneurial opportunity here.