Sunday, 2 March 2014

Bitcoin Crisis, What Crisis?

Mt Gox was at one time the largest Bitcoin exchange. With its recent demise many have been bringing to the forefront the issue of regulating Bitcoin. I knew this would become the centre piece of discussion as Bitcoin became more prominent. Its important we all remember how regulation in our current financial system works; not only does if fail to prevent fraud but it creates a form of crony capitalism that we should all be rallying for its removal. 

Mt Gox was big. It had a market cap of around 7-8% of the entire Bitcoin economy. One thing I have noticed during its collapse is how little effect it has had on the network. The price of Bitcoin has remained remarkably stable. Other exchanges, businesses and the whole payment network are all working as normal. There are no taxpayer bailouts. There were no bonuses to "claw" back. We didn't have to hear superficial Government hearings where CEOs and Directors on multi-million dollar payouts give empty lip service along with their false apologies

People have lost money with Mt Gox. We all must remember that is the choices we make in life. Holding cash in bank, under a mattress, in stocks and shares; you name the choice, they all have risks. All those people who lost funds with Mt Gox will in the future realise the risks and will ensure a safer distribution of their funds. Exchanges in the wake of the collapse may wish to prove they are solvent to their customers. The Bitcoin ledger is public. All they need to do is prove their public addresses by moving money and publish such information (Mt Gox did years ago when they were the market leaders). New security mechanism will be created. People will realise if they don't own the private keys to their funds, they don't own the money.

Contrast this to the 2008 Financial Crisis. We had mountains of regulation but still, it happened. We had trillions of dollars of taxpayers money to bailout everyone. The incompetent were not punished; many empty apologies and false promises that it wouldn't happen again. State coercion forced taxpayers to protect deposits for all banks, including the weak ones. We all guaranteed loans for people who had been irresponsible, wreakless and spent like there was no tomorrow. Tomorrow came; unfortunately people who had been prudent were instead punished in the form of negative interest rates on their savings. The Government and Regulators have been actively promoting bad behaviour prior to the crisis and post crisis. Bad Bank? The Government will bail it out. Consumers choose a Bad Bank? The Government will bail you out. More big bank bonuses? The Government encourages reflation, so go nuts. Flipping Homes? Its the policy. Be prudent and save? The Government will punish you.

With all the Regulation we have in place another financial crisis will happen and they have ensured it will be much worse. The same signs are there again. It feels like we have rolled back the clock and I'm thinking the same thoughts I had back in 2005/2006. Flipping of houses encouraged by the Government is happening yet again. The Government continues to spend like there is no tomorrow, despite the liabilities they have taken on. Banks are being reckless once more. Interest rates are at rock bottom with people once more taking on huge debts. 

Regulation. Nothing has been learnt. In fact its history repeating once more only we won't have any more bullets to fight the next crisis. Reflation works; until it doesn't. It always fails in the long run. History has proven that. 

Back to Bitcoin. Mt Gox collapsed. The only people who lost out were the ones who voluntary took the decision to hold funds with them. The crisis lasted days but is now over. Contrast that to the 2008 banking calamity that is taking years to subside. I say 'taking' as its still ongoing. Bitcoin users have all learned a valuable lesson; diversify your funds and have the majority of your money stored with keys you control. Mt Gox was not Bitcoin. It was a business that failed and under Capitalism and free markets it has been liquidated. Resources have been relinquished to the more competent. Consumers have learned some valuable lessons. All this ensures a far healthy market moving forward.

Bitcoins big game changer is the very fact that it liberates finance for individuals. There are many other innovations in Bitcoin; transparency and secrecy (your choice); low transaction fees; amoral; deflationary; lightening fast payments, but personal finance is the big one. People own their money in the purest sense of the term. It can't be a ponzi scheme for this very reason. I am the only person that can access my bitcoins. I'm not dependant on another 3rd party to release my funds, therefore I can always access my money, whenever and wherever. You may think you own the money in your bank but in reality you don't. The bank owns it. If you wish to withdraw your money you have to ask the bank for permission. The Bank can dictate how you transfer your funds. Bitcoin fundamentally changes that. With Bitcoin you can own your private keys to your funds. 

Bitcoin works on public/private key cryptography. With conventional banking  your public key is your sort code and account number. We all give these out if we wish to accept payment. Your private key is your bank number (in reality the bank holds another private key, the ability for you to withdraw your money. Ask the public in Cyprus to hear about this). Bitcoin works on the same premise; public and private keys. You publish your public key to accept payment and keep your private key under your ownership. In this system the private key is really completely under your control. No one can stop you transferring money. No one can confiscate those funds. No one can really know you own those funds if you wish for that to be the case. It really is Gold 2.0. The catch? You are the sole gatekeeper to those funds. If you loose the keys there is no one to help you (In reality if you think Bitcoin will never take off due to this, think again. People are already talking about multi-signature transactions where you and a trusted 3rd party could access the funds. If one lost the keys then the other could recover them. If thats what you want, similar to old banking with more permutations). 

A limit of 21 million meaning your money will gain value; not loose it as we are all so indoctrinated to accept. A boarder-less currency; no more exchanging money for holidays. Funds that you alone have spread among as many wallets as you wish. Funds that can be taken with you if political tyranny is a problem. A currency that has no political liabilities; backed instead with Mathematics. Divisible down to 10 to the minus 8 (and potentially more). A ledger that is public for all to see and unlike the closed ones of your standard bank can't be hacked. From that list everyone will value at least one property; hence Bitcoin has inherent value. It takes a long time for the majority of people to see that value. Think of the Internet, electricity, cars. Members of the public took years to see the value of such creations.

Currency Crisis? Bitcoin has only been on the scene for 5 years yet I've seen many so called "collapses", the death roundabout of Bitcoin. When I started reading up about it in 2012 I read about the 2011 panic; people said it was doomed. I witnessed the April 2013 panic. And now another in 2014. It won't be the last and I look forward to them; it gives a good point to buy and in my opinion is a once in a lifetime startup type investment; only this one is affordable for us all. The difference between a Bitcoin Crisis and the conventional banking crisis we see is timespan and how efficient the free market is, when left alone. Its gone in days, not years or decades. With the crisis comes a more resilient and efficient system. The Mt Gox Crisis? Less than a week gone and Bitcoin veterans are already saying, what crisis?