Bitcoin....

[Tim Liston]

Ever wonder about bitcoin? I have, and I bet you have too. I don’t know that much about it but since when has a lack of knowledge of a subject ever stopped me from expounding on it? So here goes. Please chime in if you have something to add, which won’t be hard because like I said I don’t know that much. Maybe writing about it will help me learn….

What is bitcoin?

Bitcoin is a “digital currency” that is created electronically by powerful networked computers. That sounds easy but in reality it’s really hard to do because even the fastest computers can create (“mine”) bitcoin only VERY slowly, by design. You can mine bitcoins yourself if you know how, but if you happen to want bitcoins, it’s probably easier to spend your time and effort working for dollars, then exchanging those dollars for bitcoins. Right now it takes about $1200 to buy a bitcoin, and that ratio changes all the time. Bitcoins were first created by a rogue individual who still uses a Japanese pseudonym.

Ultimately, bitcoin is a form of money simply because there are plenty of people who will take it in exchange for their goods and/or services. You can store bitcoins in an online account sort of like you do dollars in a bank account or with Paypal, and spend them from that account. And so far, bitcoin can legally be used as a medium of exchange between two willing parties. But that of course is subject to change at the whim of government. Some countries are exploring its legal status with an eye towards making it illegal to use in transactions.

Gold trading is like bitcoin. I can legally exchange my dollars for gold in lots of places. For now. But when gold increases in value relative to the dollar, those “windfall” (!?) dollars are taxed like a collectible (e.g. art) at the higher “ordinary income” rate, not at the lower “capital gain” tax rate applied when, say, stock or real estate increases in value relative to the dollar. Government doesn’t like gold (or bitcoin) competing with its in-house “money,” the dollar. Bad optics. So for now government is reluctant to make either illegal. Bitcoin is taxed as ordinary income when it is created (“mined”). And believe it or not, in many instances bitcoin mining is subject to Social Security taxation. Ouch! And if you buy bitcoins and sell for a profit, that profit is taxed like “property” at the capital gain rate. The moral being that government can keep it “legal” but tax it into oblivion. Like bitcoin is a vice and not a wealth-preservation strategy, a la gold….

What gives bitcoin value?

This is the interesting part. Bitcoin derives its value really from two things. One, and primarily, is its scarcity. There aren’t very many bitcoins out there, and like I said they are very tedious to create. It could take a decade for the number of bitcoins to double, I honestly don’t know. Again, sort of like gold in that regard because gold is also very scarce and difficult to create. And gold and bitcoin are both inherently pretty useless. But then so again is a paper dollar and its digital representation. Think about it….

Another thing giving bitcoin its value is that it’s NOT controlled by government. So unlike the dollar, bitcoin is not subject to being exploited (i.e. wantonly created) to solve government problems. The way things are going, the U.S. is for sure going to experience a currency (dollar) crisis. Like Venezuela is now with their currency, the bolivar. That’s because our government is creating dollars pretty recklessly. Our dollar collapse is being forestalled somewhat by its reserve currency status and our war machine, but that’s fleeting too.

Probably the third thing that gives bitcoin value is that it is convenient to use in transactions (like dollars), and can be stored relatively safely (unlike gold). And it can be used anonymously, at least so far. One downside to bitcoin is that it necessarily resides on the Internet, unlike dollars.

But here’s the takeaway, and I alluded to it earlier. THE REASON BITCOIN IS “VALUABLE” IS BECAUSE THE DOLLAR IS FLOUNDERING. Pure and simple. If dollars were really a bona fide store of wealth (aka “money”), if people truly had confidence in the dollar, there would be no market for bitcoin. But the dollar is ephemeral, because for decades now, since Nixon closed the gold window, the government has had the ability to simply create dollars on a whim. And has done so. Think about it. What makes a paper dollar or its electronic representation more “valuable” than a bitcoin? Is it because dollars are “backed” by our trusted Federal government, who in fact creates more dollars so capriciously (unlike bitcoin, which like gold is well-known to be extremely difficult to produce)? Hardly….

So that’s why, if you happened to own a bitcoin this morning, for the first time in history you can exchange it for $1200 dollars. And buy $1200 worth of stuff, because it’s still easier to spend dollars than it is bitcoins. The exchange is much like exchanging dollars for other government currencies: euros, yen or yuan. And that’s why the SEC is considering permitting bitcoins to be bought and sold on traditional exchanges. Reluctantly I’m sure. But you can’t manipulate what you can’t control, so I would expect that it will soon be easier for everyday people to purchase bitcoins. Keep your enemies close….

The point here is not to tout bitcoin. Far from it. The point is to point out the vulnerability of our dollar, and the horrific corruption of central banking. If the last couple paragraphs don’t give you pause, then you’re simply not thinking. Sound money is fundamental and the dollar is not sound money. This issue is way more important than whether there is a hospital or soccer fields in the middle of Lakewood, even to people who live in Lakewood. But it’s also difficult for many people to understand. And for those who do understand, that understanding usually foments a paralyzing cognitive dissonance. So under the radar it goes….

[Lori Allen _]

Bitcoin is often used by drug dealers and money launderers.