The Future of Money is Digital – BitCoin Introduction

By now most people who read or listen to the news know something about Bitcoin (BTC). Most people have the perception that it is either the currency of crime or speculation. Put aside the perceptions and consider this. When is the last time you saw someone write a check in the grocery store, especially someone under 60? Today’s kids will shop with their smart gadget, not with a credit card, and certainly not with folding money as my grandfather called it.

Apps to move money digitally are exploding. Chase Bank offers their customers simple checking transfers from an website or mobile app. Square’s SquareCash allows no-fee transfers by email from any ATM account up to $xxx per day. Convenience is a non-reversible trend and a lot of investor money is backing companies that want to disintermediate the Payment Gateway. In other words friction-less transfers both private and commercial are inevitable. The only question is which mechanism prevails.

Valuation
Somewhat like Gold, BTC is a fiat currency – the valuation is purely market driven. Some people predict BitCoin will someday be worth $0.000001 or $1,000,000. Usually these people have made large investments in BitCoin related startup companies. Here’s one line of thought: The US M1 money supply (cash + checking accounts) is ~$2.5T. Replacing M1 with 21M BTC would equate to equate to 120,000 $/BTC. Alternately, If the world’s Gold reserves were replaced with BTC the rate would be somewhere between $250K and $1M. Speculation can spike valuation by orders of magnitude although spikes usually correct.

Optimistic BTC backers may taut those values but it seems naive to think that the Federal Reserve would yield control over a significant portion of the money supply. China and now Russia have taken that stance recently.

The legal status of BitCoin in the US is “under contemplation” by several State and Federal government committees. There is a Libertarian argument to let frictionless currencies compete with electronic dollar transactions. The FBI is concerned with concerned with anonymous currency funding illegal drugs, weapons or sex trafficking. In contrast, the US one hundred dollar bill is the currency of choice for criminal activities. And there is no block chain record for the ~10B Benjamin’s in circulation around the world.

BitCoin Commerce
A bitcoin miner can sell coins through an exchange. Mt. Gox has been the primary exchange but new ones are emerging. [Mt. Gox suspended withdrawals on Feb 7 due to technical issues that have not been resolved as of today]. Several new exchanges are operating around the world. Russia and China have closed their domestic exchanges.

The BitCoin ecosystem is growing dramatically with more than 300 companies and growing. They provide trading information, brokering services, secure digital wallets, merchant services, etc. Adding a BitCoin payment button to your eCommerce site is as easy as adding a PayPal button.

Bitcoins transactions can be very small (one hundred millionth of a Bitcoin or <1 millicent at today’s valuation) with no transfer fee. That has profound implications for monetizing intellectual property – think songs, graphics, video, online articles, etc.

Bitcoin is the first digital currency to gain a foothold. But it could be supplanted by something better. There are many contenders but none have the traction or momentum of BitCoin at the present. [e.g. Ripple XRP, Namecoin NMC, Litecoin LTC]

The Future of Money is Digital
The success of Bitcoin hinges on the use of the digital currency for buying and selling legal goods and services. The price gyrations of the last few months and the recent shutdown of Mt. Gox on Feb 7, 2014, makes that a daunting challenge. Similar to the problems with runaway inflation, how much does an item really cost if the dollar basis is fluctuating by 30% to 90%. And that leads to the second problem – lack of merchants that accept BitCoin. At the end of the day, the rent has to be paid in dollars (or the local currency).

Commercial success requires a more stable and efficient marketplace. Farmers hedge against price drops in crops on the Futures Market. Traders hedge again stock drops (or pops) with options. If people can make money regardless of the price movement direction, the forces that accelerate bubbles are diminished.

Ultimately the legal status will determine the future of BitCoin. The US Treasury will control the money supply regardless of the form, and control requires traceability with security. Hopefully frictionless transfers survive. Some form of “dark money” will persist, like barter, for avoiding taxes, laws, scrutiny.

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