This article first appeared in The McAlvany Intelligence Advisor on Wednesday, November 27th, 2013:
In a dismissive article in The New York Times on Monday, the author quoted a Bitcoin skeptic who predicted: “In a matter of months you won’t be hearing about it. It will go the same way of Paris Hilton.” He failed to follow the old rule: keep your words sweet and tender because someday you may have to eat them.
Known as a “celebutante” – famous for being famous – Hilton’s garish and corrupt lifestyle contrasts sharply with the credibility increasingly being enjoyed by the Bitcoin.
Bitcoin’s credibility was polished nicely by a federal judge in August when he ruled that the Bitcoin really was money, equivalent to the dollar, the euro, the yen and the yuan.
On October 15th, Baidu Jiasule, a firewall service for websites in China, announced that it would begin accepting Bitcoins for its services. This didn’t happen in a vacuum, as Gordon Chang noted in his article in Forbes: “It is inconceivable that Baidu would permit the acceptance of Bitcoins without first clearing the matter with Beijing authorities.”
China is the major player in the Bitcoin market. At present there are nearly 20 separate trading platforms for the currency in China, including the largest one in the world, BTC China. China now accounts for more than half of all the daily trading in the currency.
That was followed by a Senate inquiry earlier this month in Washington when six federal agencies were invited to express their views on the cybercurrency. Included in the testimony was a letter from none other than the chairman of the Federal Reserve himself, Ben Bernanke, in which he expressed his opinion that the Bitcoin “may hold long-term promise.”
Perhaps the biggest jump in credibility came with the publishing of the “Bitcoin Primer” by the Federal Reserve Bank of Chicago where the author reviewed fairly accurately the basics of money and currency. He wrote:
[The] Bitcoin … aims to be itself a currency [through] a computer file….
Fiduciary currencies [like the Bitcoin and Federal Reserve Notes] have no intrinsic value, and derive their value … from the belief that they may be accepted by someone else. [Such] a currency … has value only because of the belief that it will have value….
The Bitcoin network is an automaton, issuing currency at a predictable rate….
That said, it represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions … or even by governments themselves.
It is becoming increasingly obvious that the Bitcoin’s popularity is based not only on its invisibility, its anonymity, its independence from central banking authorities and its growing credibility. It is also becoming an alternative safe haven for those who see what central bankers are doing to their own currencies. In thrall of Keynesian “solutions” to problems which they themselves helped to create, central bankers are destroying their currencies. The European Central Bank has doubled its balance sheet in just the last five years, while the Fed has tripled its own. But the biggest destroyer is the Bank of England, which has expanded its monetary base by a factor of four. People like Liam Halligan, a writer for the British paper The Telegraph, have seen what the Bitcoin really is:
This independent cyber-currency, insulated from a global banking system that many see as irresponsible, is also an incredibly sophisticated response to the ongoing problem of deliberate currency debasement by governments….
This astounds and terrifies Robert Tracinski, a follower of Ayn Rand and author of his own newsletter, who twitted: “You know we’re in trouble when Bitcoin starts to make sense.” He added:
And boy, are we in trouble. Bitcoin has no business being taken seriously as an alternative currency – except when the world’s major fiat currencies are in danger of spiraling into worthlessness.
Because Bitcoin’s exotic algorithm limits the expansion of the currency, slowing its creation steadily over time and ending altogether when it hits 21 million in circulation, it contrasts sharply with those “managed” currencies.
As Tracinski expressed it:
By creating something that has the basic characteristic of fiat currency, but which cannot be debased on whim, it tests the value of having a currency of limited quantity.
Or, to put things differently: it tests the destructiveness of having an unlimited quantity of money, as in the prevailing central banking system.
The extent to which investors and purchasers flee into the limited fiat money of Bitcoin is the extent to which they are fleeing out of the unlimited fiat money which our central bankers are vigorously debasing.
That is why the rise of the Bitcoin is so terrifying. The rise of the Bitcoin is a measure of the collapse of money.
That “rise” is something to behold. When Jeff Klee was asked by a client if his travel agency, CheaperAir.com, would accept Bitcoins in payment, Klee had to admit he had never heard of it. But once he got up to speed, and connected with a Bitcoin “wallet” manager to handle the transactions for him, he now uses this as a marketing advantage: “We expect people to come to us especially because they can use Bitcoin.” Klee is late to the game. His “wallet” manager, Coinbase, already has 14,000 merchants using Bitcoin and is managing more than half a million wallets for customers.
The rise in market price is also amazing. In August, Bitcoins were going for around $100 apiece. It had risen to $700 by the time the Senate committee met in Washington, and when Bernanke’s letter was made public, it jumped to $785. A few days later it was over $800 and is rapidly approaching $1,000. [Note: on Wednesday the Bitcoin reached $1,000.]
Thanks to the internet and a clever programmer, Bitcoin is now a credible alternative to the funny money created out of the ether by central banks. As more and more people recognize it for what it is, and the continued debasing of government currencies, the demand is very likely to continue to exceed supply. There’s no place for the price to go but up.
The question will soon become: Who’s Paris Hilton?
USA Today: Bitcoin beginning to go mainstream
The New York Times: Render Unto Caesar, but Who Backs the Bitcoin?
The Telegraph: Don’t laugh – Bitcoin is making a serious point
The Financial Times: Bitcoin hits $785 with a little help from Bernanke
The Financial Times: Ebay to expand the range of digital currencies it accepts
The Chicago Fed: Bitcoin Primer