Let’s be honest: While we are fascinated by the notion of an internet based currency (an iCurrency to go with our iPads, iPhones, etc), we view it as a bubble just waiting to burst.
The photo of a bitcoin is a clear nonsense – bitcoins have no physical presence.
We think as the gold price continues to melt, bitcoins will gain traction and media attention through 2014. In our last Report we introduced you to Alibaba, the emerging Chinese online mammoth business. In this Report we introduce you to bitcoins.
Be mindful that believing something is a bubble is not saying it will go down. It could go to $US500 or $US1,000 or even $US10,000. That’s the inherent nature of manias. There is nothing keeping bitcoins being a thing except everyone’s faith that it is a thing. You erode that faith and poof, like a house of cards or a tulip nipped in the bud, it’s gone.
Bitcoin is what is known as a crypto-currency. Believe it or not, there about 40 competitor currencies including Litecoin, Peercoin and Namecoin. There can only be 21 million bitcoins in existence with already half in circulation. Every single bitcoin transaction is recorded on a distributed public log (this is the key innovation). Owners transact using a public or private key encryption and you hold them in your bitcoin wallet (eg on your PC or on a hard drive and for goodness sake don’t lose them!).
The creation (or ‘mining’) of new coins is where it gets complicated / techy. Bitcoin miners have to solve complex mathematical problems before a new coin is successfully mined. The mining is sequential, i.e. someone has to solve one problem, others have to agree the problem is solved, a new coin is created and then mining can start on the next coin. The solution for the last problem is part of the solution of the next. Once they hit 21 million bit coins the supply of bitcoins is supposedly fixed (what happens then is anyone’s guess). Confused? Don’t worry, you’re not the only one.
Normal currencies are backed by a government’s ability to honour its value. Governments, unlike businesses, can levy taxes and so are a relatively safe bet. Bitcoins are backed by nothing except faith by investors that it’s worth something. Bitcoins are popular with drug dealers and criminals as an easy form of storing wealth.
In late 2013 China’s government banned financial institutions from trading in bitcoins while the FBI seized $28m in a bitcoin wallet held by Silkroad (an online black market offering 340 varieties of illegal drugs). We recommend you avoid bitcoins or, if you must, stay safe and have fun gambling!