Bitcoin - Be Careful What You Wish For

Bitcoin or, as some call it, Bitcon.

What is it?  Currency ... Ponzi ... scam ... gold for geeks?

Anonymous?  No.  The supposed security of Bitcoin is that each can be traced not only to the current owner but to all previous owners.  In that sense, it is the ultimate dream of fascists, police and tax collectors. 

This same security feature also necessitates a 10-minute wait, at minimum, before the authenticity of someone's Bitcoin can be verified.  That time will shorten in the future, if Bitcoin is still around, but imagine the implications for the business - does the customer have to wait 10 minutes before they can leave with their coffee paid for via Bitcoin, or does the business run the risk of being defrauded while allowing the customer to leave immediately with merchandise?  Many allege that Bitcoin is used for illegal transactions.  Do you stand around with a drug dealer on a corner waiting for verification?

Sure counterfeit cash exists, but millions of dollars worth can't be created at the click of a mouse.  Insert Central Bank snark here.  Some will argue that counterfeiting hasn't happened with Bitcoin, to which we reply "perhaps" and "not yet".

A greater risk for businesses is tax risk.  If you sell something for Bitcoin when it's worth $200 you owe taxes on your profit, but by the time you pay the taxes the Bitcoin may only be worth $5 and you eat the effective loss by having to pay the tax out-of-pocket with real currency. 

Sounds far-fetched, because Bitcoin is touted as being stable?  It's anything but stable. 

Consider that over the past two days the "value" of Bitcoin crashed 75%.  It would've happened faster, except the major Bitcoin exchanges crashed along with it.  Rather, they claim to have closed voluntarily for awhile to let the action cool. 

Upon re-opening, Mt.Gox - which handles 80% of Bitcoin trading - promptly went offline yet again.  A couple hours later, everything was finally back to normal. 

Wait ... "normal"?  Perhaps "unreliable" is a better term?  One might think so but the fact is that this is all very normal price action when a mania booms and busts, as long-time readers of this blog should know by now. 

Here's the chart:

That chart looks like every other parabolic greed-frenzy in history, and the ending will be the same.  The top was marked with the usual clues - Bitcoin was being discussed on all news programs, and the internet was full of stories such as the one about this kid trying to sell his family home for Bitcoin.

Human nature is constant with respect to fear and greed, as are the results.  Here's a longer-term look at it, in case the parabolic nature is not readily apparent in the chart above:

Keep in mind, it's had massive crashes before so this volatility is also arguably normal.  Today alone it opened around $80, popped to around $110 and was most recently around $60.

Some say it is the currency of freedom.  Is it not subject to restrictions?  Whatever it's "worth", can you at least reliably access your "money" even if the exchanges are down or the Bitcoin price is crashing?  Nope! 

One of the main touts is that Bitcoin is free of government oversight and intervention (for now), however per this notice at Mt.Gox you can see that turning Bitcoin into real cash has its own restrictions. 

At best it's currently a video game and likely that's all it ever will be until governments get involved as they'll be more than happy to be able to reliably track everything we earn or spend. So, fans of e-currency, especially all those who wished they'd put their life savings into Bitcoin over the past few weeks, be careful what you wish for. 




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