Bitcoin Thoughts:
This is an interesting little article, and points out a lot of the potential advantages to bitcoin being accepted as a viable currency, but it really doesn’t talk about some of the real downsides that are likely to keep the currency a novelty used by fringe elements rather than a truly accept global means of exchange.
The article in particular doesn’t really explain how mining works, or what happens when mining is no longer viable. The article does point out that bitcoins are effectively highly (potentially infinitely) divisible, but there does appear to be an upper limit built into the system. From what I have read, that limit is twenty two million bitcoins, of which about thirteen million exist as of January 2014.
With thirteen million bitcoins in existence, and a current exchange rate of bitcoins to dollars of eight hundred dollars, the total worth of all bitcoins in the world at this time is less than fifteen billion dollars. For a global currency this isn’t even chump change.
At this time bitcoin remains highly volatile from what I can tell. But that led me to wonder about how the heck you can in fact translate bitcoins into other currencies. Since I am an American, and the dollar really is the current benchmark fiat money, I focused on how a merchant would transact his bitcoin transactions, and then turn said transaction into dollars
Here’s where part of the magic of bitcoin disappears. Sure, if you have bitcoin to bitcoin transactions they can be very low cost, but if you want to trade bitcoins in for U.S. Dollars, you have to pay a transaction fee, assuming you can do it at all.
There are a number of bitcoin exchanges, but the largest one (at least until recently), and almost certainly the oldest one is a place called Mt. GOX. Now that is an odd name, and I was curious just how it came to have that name. Now in my mind, it made me think of Fort Knox, which gets its name from its geographical location. MTGOX it turns out was an acronym though, for Magic The Gathering Online Exchange.
Now this leads to some fascinating speculation in and of itself, regarding Magic the Gathering, the psychology of trading cards, and the creation and management of Bitcoin itself. But with that aside, my main question still remained, what if I wanted to get dollars for my bitcoins, or vice versa?
If I used MTGOX, I would have to use a wire transfer. Now that entails a cost, so as a vendor I wouldn’t want to settle with MTGOX on a daily basis unless I had a relatively large value of bitcoin transactions. Given Bitcoin volatility though, at this stage smaller companies wouldn’t want to hold onto bitcoins even overnight because of volatility concerns. What this really means is that Bitcoin middlemen take the place of credit card issuers and can charge more competitive rates percentage wise because they are accepting volatility risk as opposed to chargeback risks. For their model to be viable, they currently have to undercut credit cards sufficiently to make it worth the merchant’s effort to set up a bit coin acceptance model.
Now the overhead for setting up a bit coin acceptance model isn’t very high, so if you are a merchant you have to face a certain reality that unless you are in an ecosystem where you will have to translate your bitcoin sales into some other sort of value, and that generally means currency, and that will mean a middleman, and you have to consider whether you can trust that middleman and what sort of risk is represented by that middleman. You also have to ask yourself just how much of your clientele wants to spend bitcoins? If you can improve business by accepting bitcoins, you might want to ask yourself if you can improve business by accepting foreign currency of any sort. In the U.S. you are pretty much relegated to using dollars, but if you travel with U.S. dollars, there are lots of countries where a large number of vendors that get significant tourist trade and accept U.S. dollars quite happily. It is important to note here though that in order to effectively transact in bitcoins, you need uninterrupted internet access. There simply is no way to manage a bitcoin transaction without an internet connection. If you do business primarily through the internet, then that works fine, but if you are brick and mortar that becomes a question you need to manage. With that said, if you already accept credit cards and require an electronic verification, you pretty much have the required infrastructure to accept bitcoin. Finding a vendor to settle your transactions into dollars at the end of the day may take a little more work though. And then there is the actual accounting overhead that you will have to engage in to manage a separate reconciliation of accounts for your Bitcoin account.
Okay, so let’s consider this from the point of view of who else should get involved in the bitcoin economy.
1. I am a speculator, and I hope that the value of bitcoin will go up from here.
Well buddy, I would say you have probably missed the boat, although I would say that the real question at hand is what sort of return and time frame are you hoping for. If you are hoping for a double in a year or two, then I think you have something like a 10-20% shot of making your score. There is a chance that you will wind up taking a major loss as well though, but my guess right now is that bitcoin is primarily a silly currency that has a particular market, and potential, but the same could be said of fine art, or baseball cards, stamp collecting, or coin collecting. Nobody seriously considers any of those as viable currency.
2. I am interested in having untraceable money in order to keep various agencies from learning about my transactions..
If you are reading this, odds are you just aren’t that person. Bitcoin is trying to shed its image as the currency of choice for Silk Road, which is really where it made it’s first real ieconomic impact. But the idea that bitcoin is itself untraceable is a joke. If you want to make untraceable transactions over the internet though, bitcoin is the way to go, but you will have a lot of other overhead to truly make it untraceable. And if you ever want to turn your bitcoins into dollars, I have no roadmap for how to do that. I am sure it is possible, but there are going to be substantial overhead costs for doing that which for the overwhelming majority of people will really be prohibitive. Better to just pay your taxes and don’t try to avoid them.
3. I am a philosophically opposed to the banking system, and see Bitcoin as a viable alternative to the evils of big banks.
This is a libertarian position, and this market segment is likely to be one of the most likely drivers of potential growth in the bitcoin economy. But if you are choosing to join the bitcoin economy, there are a couple of things to consider. First off, do you really believe that the bitcoin economy is somehow better than existing banking models? How much of its security are you taking on faith, and how much do you really understand? And just WHO controls the bitcoin economy anyway? How is bitcoin wealth distributed amongst its user base, how is it created, and how was it created? Are there alternatives to Bitcoin? Who can create future bitcoins, and are those bitcoin creators transparent to you? Seriously, do you believe that bankers are blind to bitcoin, or that they may already hold strong positions in the bitcoin economy such that they could manipulate the currency to their liking?
If you are a part of some smaller group that wants to manage transactions amongst your group and you have sufficient technological savvy and backup, then you may want to create (or adopt) another form of cryptocurrency. While the news talks about Bitcoin, and makes it sound sexy, mysterious, and there are real stories about people making huge gains (as well as the allure of the potential criminality of the currency), alternative “currencies” of various types have existed for years. Barter has never gone away either (note that the IRS will tax barter exchanges, and expects you to pay taxes on such exchanges. I am unsure as to how they investigate barter transactions though).
4. I am what is known in the parlance as a “Whale” and I see significant profit potential with Bitcoin such that I want to be able to manipulate the bitcoin market as I see fit.
If you are seriously reading this, I would love to meet you and discuss these options further. The problem though with Bitcoin is that it really is thinly traded, so someone with deep pockets and substantial bitcoin holdings could manipulate the markets, and afford the overhead to make the game pretty untraceable. But if your pockets are that deep, you may consider other ways of gaming the system. Starting up a bitcoin exchange (or buying one out) is a real consideration. Creating a bitcoin middleman for vendors might be a better choice as well, and is also a legitimate business model. Just remember you will need to pay attention to regulatory issues as well, or you could just get shut down. From what I have gleaned so far, it seems that the U.S. regulatory mood is in favor of bitcoin, which in a way makes me think that the banking system is already essentially in control of it, but there is still a market space open to early innovators and adopters. If you have connections to large vendors, say a QVC network, or somesuch, you may have a substantial lever to profit both speculatively and through processing systems.
There is a fair chance of there being money to be made using bitcoin, but for most folks out there the opportunity for profits to be made, but it’s not going to be as easy as just buying a few thousand bitcoins and hoping for a ten bagger.
