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Bitcoin: The New Face Of Banking

by Chris Clothier on May 21, 2014 · 59 comments

  
Bitcoin

If you don’t have a clue what Bitcoin is, you’re not the only one!

It’s not particularly new — Bitcoin was first mentioned in 2008 in a paper published under the name Satoshi Nakamoto.  In 2009, the technology was unleashed upon the world and the first bitcoins were used.

Apart from those deeply invested in technological and financial news, this went largely unnoticed by most people until very recently.

After all, what’s the significance of virtual money any way?

More germane to our conversation, is there any future for using bitcoins to purchase real estate?

In December 2012, the first listings hit the market where the property was listed in bitcoin.

There are numerous articles on the internet since the end of last year of houses being bought and sold in the U.S. using bitcoins.  There are even investment companies that allow you to invest in real estate using bitcoins.

So, as it turns out, there may be more of a future than you might think for Bitcoin.

What is Bitcoin?

Bitcoin is, in the simplest terms, a virtual currency system that exploded in value at the end of 2013.  Right now Bitcoin is not widely used nor widely known — but it’s definitely beginning to make waves as a new form of payment as a currency that is decentralized and exclusively digital.  It isn’t controlled by a bank or individual and is considered a peer-to-peer payment system.  “Bitcoin” with a capital B refers to the systems and technology itself, while “bitcoin(s)” refer to the actual currency.

There are no third parties to go through to exchange and transfer bitcoins to another user.  In that respect, it’s a lot like email — free (or in the case of Bitcoin, usually free) and solely an exchange between recipients.

Like most currencies in the world, bitcoins can be broken up into smaller units, as with our quarters, dimes and so on.

What’s the Advantage?

Bitcoin bypasses the bank.

It can be used from web browsers, tablets and smartphones.  It’s easier to use than a credit or debit card and any business that accept Bitcoin aren’t required to register any merchant accounts (as with other online payment systems like Paypal, which deal in existing currencies and through banks) or pay hefty fees for said accounts.

While there still aren’t many Bitcoin transactions taking place today in comparison to the tens of thousands per second that major credit card companies experience, this technology could very well turn global banking practices on their head.

Bitcoin could particularly be of value in poor countries where banks are few and far between.  In these emerging markets, people may have better access to smartphones than to bank accounts.  That bodes well for Bitcoin’s ability to compete on a global level.

If Bitcoin is so Great, Why Haven’t I Heard of It?

Even though Bitcoin exploded in value last year, it’s still in its earlier stages of development and is only recently getting more coverage in mainstream financial news.  Not only that, but it’s not a system without its fair share of criticism.

Critics Say…

  • Bitcoin prices are too volatile.  The sudden increase in value isn’t necessarily a good thing — the value of a bitcoin jumped from an exchange rate of around $13.00 USD to $1,200.  Of course, Bitcoin isn’t designed to be traded in for U.S. dollars.  But… To avoid the volatility, one just stays within Bitcoin.  Unlike national currencies, which are vulnerable to inflation and manipulations, there is a set number of bitcoins to be put into circulation: $21 million.  That’s it.  No more. As of April 2014, just over 12,650,000 bitcoins have been mined (meaning that they are in circulation).
  • Bitcoins are used for illegal activity. Unfortunately, that’s the reputation Bitcoin received after the FBI took down Silk Road, an online store for drug trade.  Why?  Bitcoin transactions are anonymous — but only mostly.  All transactions are public and, in theory, could be traced to an individual.  The anonymity isn’t foolproof compared to that of cash, and those look to use bitcoins for illegal activities are finding that out.

So How Do I Use Bitcoin?

If you’re interested in Bitcoin, getting started is relatively easy.

Get a Wallet

Blockchain.info is the most popular wallet servicer for Bitcoin.  They have both Android and iPhone apps.  For payments, you’ll be given a unique address (like an email) and a QR code for mobile transactions.

Get Bitcoins

There are three ways to get Bitcoins: buy on an exchange, buy from individuals, or mine them yourself.  Mining, however, will require additional hardware for your computer.

You can read more about it here.  For exchanges, you’ll give your Bitcoin address as funds will be directly transferred.  Similarly, for individuals, you can open your wallet on your smartphone and have the seller scan your QR code for a transfer.

Spend!

The Bitcoin wiki includes an extensive list of businesses that accept and use Bitcoin.  Other lists are available online and are easily found with a quick Google search.  Websites such as Overstock.com, for example, have started accepting Bitcoin payments.

While Bitcoin is still getting started, it has the potential to revolutionize banking and the face of global economic trade and possibly, jsut maybe revolutionize the way we buy real estate as well.  Keep an eye on it in the financial news!

What do you think about Bitcoin?

 Do you see this as having a future in real estate?  

Tell us about it in the comments below!

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{ 59 comments… read them below or add one }

Adrian Tilley May 21, 2014 at 12:19 pm

Very informative article. If I’d bought $1000 worth of bitcoin back when they were worth $.05 (a few years ago) I’d be sitting on a beach right now… One other reason not to use bitcoins is that you can use dollars with the same ease – from your tablet, phone, etc. with no fees, and you’re working in a currency that everyone understands and accepts.

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Chris Clothier May 22, 2014 at 8:30 am

Hey Adrian –

Thanks for the comments! I agree on the ease of options that are coming with technology like paying for things through apps on your smart devices. We will see if those advances lead to more uses of online currencies.

Chris

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Ben Howard May 21, 2014 at 12:27 pm

I would add to your list of things critic say what are arguably the two most critical problems with bitcoin:

1) Bitcoin faces an uncertain future with respect to regulation. Many nations are investigating whether Bitcoin exchanges should be regulated with some nations already passing overly restrictive legislation. The uncertainty in the potential for regulation means an even more volatile potential future.

2) Bitcoin exchanges are frequently attacked leaving the average consumer of bitcoin with no recourse in the event their bitcoins disappear. The current lack of regulation makes trading in bitcoin risky as the exchanges have few, if any, requirements to meet security standards similar to what banks and regulated exchanges must.

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Chris Clothier May 22, 2014 at 8:31 am

Ben –

Both great points and spot-on with the challenges any on-line currency is going to face. Thanks for sharing your thoughts in the comments.

Chris

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Sharon Tzib May 21, 2014 at 12:29 pm

My experience is the subject of Bitcoin is very polarizing – people either love it or hate it. I find it unnecessary for my personal needs – I have nothing to hide and easy access to a world-wide accepted currency (USD).

I don’t care for the volatility of Bitcoin, like after the Silkroad fiasco (history shows people are not real good at holding their positions in bad times), and the thought of losing my wallet, like this guy http://www.forbes.com/sites/kellyphillipserb/2013/11/30/from-treasure-to-trash-man-tosses-out-bitcoin-wallet-on-hard-drive-worth-9-million/, is quite unnerving.

To each their own, but it’s not for me.

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John Cas May 21, 2014 at 12:46 pm

Hey Sharon,

You shouldn’t think of BTC in such a polarizing way. In business we must always adapt and innovate according to market demands. The biggest push nowadays is for an electronic version of everything including money. Now we have online transactions but we are charged anywhere from .9% to 5% for banks to merely update their electronic ledgers for these transactions.

Wouldn’t you like to avoid these fees and increase your bottom-line by using a bank-free exchange such as BTC?

Simply think of it as another payment option in for your business and settle in dollars instantly. Those who take advantage of the BTC option actually save you money with reduced transaction fees.

But, like you said, “to each his own”

You also mentioned Silk-road in relation to BTC as if one has a relationship to another. But to show how ridiculous of a connection this is I”d like to give you another analogy.

Bernie Madoff.
He transacted in DOLLARS and ripped off his investors out of BILLIONS, does this mean dollars are unsafe to transact in? Of course not…

People will get ripped off in dollars, pesos, euros, BTCs and any other denomination that has value. SO you shouldn’t disregard BTC just because someone used it for illegal activities.

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Sharon Tzib May 21, 2014 at 12:53 pm

Hey John. My reference to Silkroad was that when that whole fiasco went down, the value of Bitcoin nose-dived. Sure, it recovered, but it demonstrates Bitcoin’s volatility,and this isn’t the first time that has happened. I honestly don’t have a problem paying bank fees – it’s just a cost of doing business and I budget for it. Yes, like I said, to each their own, but I am very uneasy about the way Bitcoin operates – simply not my cup of tea. If it works for you though, awesome :)

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Sharon Tzib May 21, 2014 at 1:08 pm

Oh, and btw John, it’s not me that thinks of Bitcoin in a polarizing way, rather it is my observation that when the subject of Bitcoin comes up, it tends to polarize people into the love it/hate it groups. This is based on my residing in Belize for the last four years. I’ve seen the subject of Bitcoin discussed more than once in the expat forums and message boards I belong to, and inevitably, the conversation ends up being quite polarizing.

John Cas May 22, 2014 at 10:04 am

Interesting comment.

“I don’t mind paying bank fees”

– So you would rather continue supporting the system where there are private ledgers held by the biggest financial players who have proven they will sell investors securities that are junk and then bet against them? http://www.nytimes.com/2009/12/24/business/24trading.html?pagewanted=all&_r=0

Wouldn’t it be better if there was a PUBLIC ledger, completely free from a central control that can be manipulated by the power of its responsibility?

I suggest researching a little more what Bitcoin is before tossing it in the trash.

Volatility is a growing pain of EVERY single currency. Before the US instituted a central bank (Government agency which oversaw a budget surplus and one of the greatest period of American economic stability in our young history, later replaced by the PRIVATE corporation – The Federal Reserve) dollars were considered the “Bitcoin” to the much more stable and established spanish silver dollars (pieces of eight) and later the pound sterling.

Look at where dollars are now…

Bitcoin is financial democracy and many people fail to see why it only hurts central bankers by EMPOWERING people and the ability for them to completely bypass PRIVATE ledgers.

I think this is why you say Bitcoin is so polarizing, it destroys the paradigm of the need for central bankers, and the people who understand this have a hard time explaining it which inevitably results in name calling… thankfully this is BP and a much more educated community =)

Sharon Tzib May 22, 2014 at 10:24 am

John, as an expat living outside of the U.S., I have researched Bitcoin pretty extensively, actually, and have formed my own opinions about my participation in it. As with everything, it comes down to risk/reward with something like this, and for me the risk far outweighs the reward. I would much rather pay banking fees and sleep at night. This is a great article on all of the reasons why Bitcoin is volatile:

http://www.investopedia.com/articles/investing/052014/why-bitcoins-value-so-volatile.asp

And you are proving my point about this conversation being polarizing. For some reason people who believe in Bitcoin can’t stand it when others don’t – it’s like some crusade to convert people. Who cares if I don’t like it – all the more coins for you :)

John Cas May 22, 2014 at 10:45 am

You do have a point, why am I trying so hard by explaining BTC and its values…

I guess my reasoning is that BTC is fighting for survival, is it safe and risk free? no… but should we work towards supporting a currency which does all that I have stated already? Why wouldn’t we…

BTC gets its power from the size of its community, the more we convert the stronger it becomes.

How did the Dollar get to where it is?
America has a military and forces all OPEC nations to only sell in dollars. Interesting that Quaddafi, Saddam and al-Assad threatened/started to transact in their own country’s currency, look at them now –

You also mentioned risk and reward. But what is riskier? Storing all of your net worth in dollars? or diversifying into other currencies to hedge against dollar inflation/collapse/etc…

I don’t think you really understand the position the US economy is currently in, we are in a dangerous state of debt building in order to pay our bills… eventually that building of debt will collapse, will you be prepared?

Sharon Tzib May 22, 2014 at 11:01 am

Hey John! I’m really trying to play nice here, but then you keep zinging me. Actually I am very aware of the current status of the U.S. economy. I actually subscribe to http://pragcap.com/ and understand that a lot of the information that is out there right now is based on political ideology and has no understanding of economics at all. But I’m not here to have a debate about what the U.S. is and isn’t doing right.

Bottom line, I’m just not willing to be a ground breaker and champion a new currency with my personal capital at risk. I wish you luck, however.

John Cas May 22, 2014 at 12:14 pm

Hey Sharon, did not mean to Zing! And here is a great trove of METRICS NOT IDEOLOGY to prove my point. After all, this is all math not conjecture…..

“Would you loan money to this person?

Imagine you are a loan officer and a new customer approaches you for a loan. As a responsible bank employee, you ask the customer for information on his current finances and here’s what you are told:

Annual income: $29,020.00
Current budget/expenses: $38,034.00
Debt: $167,012.50

You point out that the customer’s spending exceeds his income by more than 30 percent and his debt is 575 percent more than his income. As such, the customer can’t qualify for a loan.

Upon hearing the bad news, the customer offers to reduce his spending by 10 percent. You note that even a 10 percent reduction won’t help since the customer’s spending would still exceed his income and he wouldn’t have the ability to repay his loan or reduce his debt. Disheartened but persistent, the customer’s final request is to increase his credit card limit so that he can spend more. You shake your head no and suggest the customer seeks credit counseling.

Now consider this: with the exception of 7 zeros, our hypothetical customer is in the same dire financial condition as the U.S. government:

A Fiscal House Beyond Repair?

U.S. Tax Revenue: $2,902,000,000,000
Federal Budget: $3,803,400,000,000
National Debt: $16,701,250,641,109

As columnist James Pethokoukis wrote for the American Enterprise Institute, the government’s assets versus liabilities “is the balance sheet from hell.” This balance sheet looks even worse when you consider the United States’ fiscal gap, which is the difference between the present value of all projected future spending (e.g. Medicare, Social Security, interest on government bonds) and future revenue.

Professor and economist Laurence Kotlikoff, writing with columnist Scott Burns in Bloomberg, calculated the fiscal gap to be $222 trillion. To close this gap, the federal government would need to increase all federal taxes by 64 percent or permanently cut all federal spending by 40 percent.

Noted commodity trader Dan Norcini recently warned the United States’ addiction to debt and unrestrained devaluation of the dollar is a recipe for ruin:

“[I]t is my belief, and a rule of Mother Nature, that the Fed cannot fight reality indefinitely. It simply won’t work, even as the Fed doesn’t learn a single thing from their previous attempts at resuscitating popped bubbles. The Western nations are sinking into an abyss of indebtedness. How this massive build in government debt is going to be dealt with in the years ahead is something that few if any seem to be the least bit concerned about… nearly the entirety of the investing world is all sitting on the same side of the USS Titanic, the floating juggernaut of steel, which “God Almighty could not even sink”. No one saw the iceberg then, and those few who see it now are quickly dismissed as frustrated market bears, rather than voices of reason and sanity. If we could truly print our way to permanent prosperity, without any pain, without any side effects, without any ramifications, then these central bankers will have become magicians, for they will have suspended the laws of economics and completely redefined the very concept of ‘money’ itself.” ”

— This from a newsletter I follow – http://www.advisorperspectives.com/

I fought your argument with hard math, hard to run away from numbers. The dollar is teetering and every major institutional investor is hedging their exposure. Its always the rats who jump ship first.

At the end of the day I am not advising putting all of your capital into BTC, I don’t. But just like my portfolio.. I am diversified and should everything play out the way it is currently set, I will be transferring more of my “capital” into more stable values aside from BTC and Dollars. I love metals =) and cheap farm land.

Sharon Tzib May 22, 2014 at 12:27 pm

Oh no, John, you are one of those poor uninformed people who tries to equate the Fed to a U.S. household or business. Read Pragcap and you will understand that the government is a currency issuer, not a currency user. Additionally, the U.S. issues all debt in USD, its own currency – you can’t default on your own currency.

Don’t worry, the U.S. won’t bankrupt itself anytime soon, but that doesn’t sell as well as the fear mongering gobbleygook the press and media misinforms the U.S. public with, so trying to argue w/ anyone about this is a waste of time. I’ll allow you to educate yourself, or not – at the end of the day, it really makes no never mind to me….

John Cas May 22, 2014 at 1:06 pm

Sharon,

Notice how I gave metrics to my argument… cold hard numbers, and you responded with a personal attack. sigh… I guess our debate has ended.

I wish you luck in all endeavors and enjoy beautiful Belize, you truly are lucky to live in such an oasis… just recently traveled there.

FYI … you last sentence, ” Additionally, the U.S. issues all debt in USD, its own currency – you can’t default on your own currency.”

I guess your right, we are safe from default since we own the printers! or until no one else outside the US wants dollars… but what do I know, I am a gobbleygook =)

Sharon Tzib May 22, 2014 at 1:21 pm

Now John, let’s not be passive aggressive. You said you were giving me hard, cold numbers to “fight” my argument, but then I simply told you that you were misinformed because the basis of your argument is fantasy created by the media and not at all how things work in reality. I also accused the press and media of peddling gobbleygook, not you. I don’t feel that was an attack, but if you did, then my apologies. In any case, yes, I feel our debate has ended as we are getting nowhere, since both of us have, and are entitled to, our own opinions.

I’ve very much enjoyed my time in Belize, but I am soon headed back to the States. Thanks!

John Cas May 22, 2014 at 1:46 pm

Its actually quite funny that you say that because I hate mainstream media, there is always a corporate agenda.

So what is the “basis” of my argument that you find was made up in fantasy and the media?

All I stated were the current revenues, liabilities and assets of our government and simply asked the question, would you loan money to a person based on those metrics. Its actually quite relevant to the argument at hand since the US’s ability to “issue currency” as you put it is by also issuing debt.

So in fact we are not currency “issuers’ but “debt issuers”, which then goes hand in hand with my analogy.

Also, FYI … Russia and China just signed a 400Billion dollar gas deal, I hope they are paying in USD for your sake.

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Sharon Tzib May 22, 2014 at 6:55 pm

John, I already told you why the basis of your argument is faulty. You cannot equate the government with a person, which is what your example tried to do, since one is a currency issuer and the other a currency user. Yet you see the media and economic blogs doing this all the time. If you want to understand this concept further, go to http://www.pragcap.com and on the right, read “Understanding the Modern Monetary System.”

As I said before, I’m not interested in continuing this debate with you. It must be exhausting for people like you worrying all the time about if and when the U.S. dollar and economy will crumble. I’m not at all worried about it, so don’t feel like you have to hope for anything for “my sake.”

Chris Clothier May 22, 2014 at 8:39 am

Hey Sharon –

Thank you for sharing your comments and the linked article. I thought this would be a good topic to address since technology and advancement are such hot topics and things are trending and “improving” so quickly. I do not use Bitcoin and can’t imagine using it to purchase real estate…but you never know what may be happening in the future!

Thanks again for your input!

Chris

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Chris Clothier May 22, 2014 at 10:44 am

Hey Sharon –

I was not aware you were an expat. I would love to explore your experiences at some point. As far as this article is concerned, I think your comments are correct. It is like actually investing in real estate. There are many ways to invest and many different levels of involvement for investors, but when you try to discuss something that one investors agrees with and another does not – like Turnkey investing for instance – the conversation can become polarizing. Some people are open to new ideas and others are not and either way, that should be no big deal!

Thanks again for all of your comments!

Chris

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Sharon Tzib May 22, 2014 at 10:50 am

Hi Chris! Yes, I’ve been in Belize for four years. One thing is for sure, you can always count on BP for a good debate :) Shoot me a PM and I’d be happy to discuss my experiences with you. Take care.

Chris Clothier May 23, 2014 at 12:56 pm

Sharon –

I just want you to know that I checked out many of the links being shared on here by everyone and I personally found pragcap.com to be excellent. I like the way Cullen Roche writes and think anyone interested in getting a good grasp on our monetary and fiscal system should read him. Granted he does not subscribe to the same theories as John Cas, I found it interesting that they both argue against the media’s portrayal of how the economy works.

Thank you for sharing that link. – Chris

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John Cas May 21, 2014 at 12:33 pm

Hey Chris,

Love to see BTC (BitCoin) getting some attention on BP =) but….

Whoever is actually considering using BTC as a payment option, I would suggest a merchant account such as https://bitpay.com/

This way you are not subject to BTC volatility and/or aren’t dealing with anything other than dollars.

How?

Merchants such as the one I use (bitpay) allows me to settle all transactions in dollars instantly.

Why is this significant?

Now you can transact in BTC withOUT needing to really understand it.

Just think of it as being able to offer your clients/customers another option to paying, in addition to credit card, check, money order, etc…

IF you would like to hold BTC and not exchange it for dollars instantly, I DO NOT RECOMMEND EVER NEVER FOR WHATEVER REASON, storing your BTC on a server where a 3rd party holds the key to you vault. Then you open yourself up to theft from hackers and are depending on that companies security to keep them out… yea right. MT GoX anyone? https://www.youtube.com/watch?v=eyfWFiMsYic

I only keep BTC in those exchanges when I am transacting and then immediately transfer it to an offline wallet where I am in charge of its security.

Heres a video for those seeking more info…

https://www.youtube.com/watch?v=Lx9zgZCMqXE

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Chris Clothier May 22, 2014 at 8:54 am

Hey John –

Thanks for jumping in with some great info. for people reading the article. Bitcoin is something that most of us know very little about and are getting our info. from the evening news. I thought it would be a great topic for a site like BP that gets so much traffic and is really cutting edge for real estate.

Having comments like yours are helpful because it allows us to gather some more data and get both sides of an issue or opportunity.

Thanks again for sharing. – Chris

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John Cas May 22, 2014 at 10:10 am

I agree that BP is the cutting edge in real estate, and as such should have informed landlords leading the tech revolution by offer another payment option to their customers.

As long as they use a merchant which settles the rental payment for $750 or 1.457 (BTC) in dollars, they never have to deal with Bitcoin.

But on that rental payment they just saved themselves 2%… Now your pro-forma sheet can show an additional 2% on that bottom line.

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Anuj Sharma May 21, 2014 at 12:39 pm

Good article. Couple of years back no body could have ever imagined that one day you might have capability to even think about buying real estate using virtual currency like bitcoin. I have a big concern with bitcoin especially in real estate. The govt hasn’t started interfering or regulating this virtual currency so far. Whenever govt will start playing its role more in regulating bitcoin, this currency’s value might take nose-dive or become more volatile. Unlike yuan, I hope govt has more control here. In general real estate industry is highly regulated. Some of the rules which I think are very tricky to follow is these days – most of banks do not give any HELOC on investment properties. If you are trying to buy 5th condo or townhouse (from 5-10) , you gotta put 30% down and list goes on….. In such a highly regulated industry, I am not sure if I want to buy any real estate using bitcoin – whose future is still up in the air. I wouldn’t use word NEVER because as saying goes “NEVER SAY NEVER”. Main turning point which I am waiting to watch is how does govt or someone control the value of this currency. That situation whenever will come will be very interesting and help us in making decision if someone wants to buy real estate using bitcoin. Again very interesting topic

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Sharon Tzib May 21, 2014 at 12:47 pm

Very good point, Anuj. When you say government, I assume you mean the U.S. government. There was a time when no one thought governments could interfere with offshore asset protection either. Now, with the FBAR and 8938 forms on your tax returns, and FACTA going into effect in July, as a U.S. citizen you are not allowed to have more than $10K out of country, in either assets or bank accounts, without having to report it or face big fines. FACTA has gone so far as to require Foreign Financial Institutions to cooperate with reporting U.S. account holders, and if they refuse, they will take 30% off the top of any transfers over $50K.

Trust me, the U.S. will find a way to regulate Bitcoin – it’s just a matter of time.

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Anuj Sharma May 21, 2014 at 12:51 pm

Yes I meant US govt Sharon. Hmm good to know about govt’s reguation on even 10k, did not know about that much regulation of US govt on foreign transactions. Thanks for sharing that info

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Sara Cunningham May 22, 2014 at 4:01 am

Didn’t know that regulation Sharon. Interesting. Still I recently stopped keeping money off shore probably a good thing.

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Sharon Tzib May 22, 2014 at 8:49 am

Well Anuj, it appears the U.S. government has already started regulating Bitcoin. They have declared virtual currency as an “asset” or “property,” which has tax ramifications:

http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance

This means when you do use Bitcoin for purchases, you will have to track what the market value of it was at the time you made the transaction, which is an administrative headache. This IRS ruling has also led to volatility issues for Bitcoin, since many see it as a precursor to more regulations to come.

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Chris Clothier May 22, 2014 at 8:56 am

Anuj –

Great points! Thanks so much for sharing them here on the BP blog. I think your stance is one that many of us are taking right now. It is a big step to get involved using a currency that is so new and unregulated and the last thing we are looking for is a wild-wild-west scenario.

Take care – Chris

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stephen May 21, 2014 at 1:19 pm

Bitcoins are essentially nothing so far as I am concerned. Yes; all fiat money is essentially nothing but faith – but most of it has a country and banking system with a well vested interest in maintaining it. Bitcoin does not have either. All Bitcoin has as ‘value’ is faith in it’s worth – and call me overly cynical; but I’m not buying it.

stephen
———–

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Chris Clothier May 22, 2014 at 9:02 am

Stephen –

Thank you for your comments. I would argue that many if not all currencies are really nothing. We give them value, trade them, use them to transact and in some cases, the only difference between our currencies today and Bitcoin is that you can physically hold a dollar bill. Beyond that, when you really think deeply into how currency works, it raises questions…

Again, thanks for your input.

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John Cas May 22, 2014 at 10:24 am

Stephen,

Your actually quite wrong, there is a STARK difference between BTC and all other FIAT currencies.

BTC has a limit of how many can be mined… 21 million.

FIAT currency and the inherent issue with it, is that whoever controls the printer can keep printing until their hears content… hyper-inflation issues?

BTC is the electronic version of GOLD, in which you CANNOT PRINT INDEFINITELY.

The next problem is battling “counterfeit” BTCs, since it is electronic how can anyone trust that the BTC they are receiving is not a replica.

This is when the PUBLIC LEDGER comes into play and the reason why EVERY transaction a BTC does is LOGGED on it. So we can theoretically trace all BTC to their “mining birth”.

This is the power of BTC, the more users, the stronger it is.

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Kyle Hipp May 22, 2014 at 8:18 pm

I think Stephen nailed it pretty good. For example the US Dollar is “backed” by the productive capacity of the US economy which is quite productive producting 20+-% of the entire world’s output. Bitcoin on the other hand does have unique features but is not backed by anything more than function and demand. Quite similiar to Beanie babies or tulips :)

Also you speak as if printing currency leads to hyperinflation. Hyperinflation is not caused by printing more or too much currency but rather printing too much currency is a symptom of hyperinflation. Historically hyperinflation has been caused by a couple events. A government regime change, major loss in productive capacity, owning debts in something other than the currency in which they are the monopoly supplier of (for example US debt is in the form of US Dollars, trouble could be if it were in gold or Bitcoin for that matter).

Throughout this thread you have espoused a variety of fundamental misunderstandings of the function of our monetary policy. Your example of imagining the US asking a banker for a loan is the biggest example of this. A better analogy would be asking whether it would be a wise move for the bank in the game of monopoly to take money from the players so the game can continue. There is no reason for the bank to take back the currency in the game of monopoly as the currency is simply the means to play the game. The US Dollar is and was created as a means of exchange for the benefit of economic prosperity for the US economy created by the instituation of the federal government. Every single Dollar was created out of thin air for this reason and is backed by the productive capacity of the US economy. To say it would be wise for the federal government to dimish the productive capacity of the US economy for the purpose of having a strong balance sheet as if it were a person is counterproductive to the reason it is in existence.

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John Cas May 23, 2014 at 9:34 am

Hey Kyle,

What you stated in your last paragraph is equivalent to the US govt pulling a gestapo like grab of Americans savings account (similar to what Greece did to their citizenry).

“A better analogy would be asking whether it would be a wise move for the bank in the game of monopoly to take money from the players so the game can continue.”

This argument has no standing in the scenario of the USD losing its reserve currency standing. We are now a globalized business/market economy and if “players” see their domestic money rapidly losing value we can potentially see a systemic abandonment of the dollar to safer currency’s which store value better.

http://www.truthandaction.org/23-countries-now-abandoning-us-dollar-2/

http://moneymorning.com/ext/articles/bitcoin/36-cities-in-20-states-abandon-the-dollar.php?iris=183550&from=oo

Your monopoly analogy would be correct if the The Federal Reserve was the only Central Bank in town… its not.

I understand its hard for people to swallow the end of American Hegemony but please, take a look at the articles at least… everything I have posted on this blog I have backed up with reputable proof. All I get back in response are outlandish remarks about how I understand nothing, and yet I come up with articles to prove my point every time.

Chris Clothier May 23, 2014 at 12:32 pm

Jon –

I really appreciate that you are so engaged and leaving so many comments. I try to keep my thoughts neutral – trying to keep from thinking I am too smart or have all of the answers. When I start thinking I am pretty smart, I do dumb things!

So I read a lot and try to educate myself from as many sides as possible. My only concern with everything you have posted is that much of what you have shared with the links are to sites that clearly make money off of fear. I have read them and I have followed their links and looked at their advertisers and read what they are posting and, like I said, fear is the common denominator to everyone on those sites making money.

It is good to read and consider and think about, but never lose sight of why they exist – they make money off of scaring readers and encouraging them to click on the links at their sites and buy something. Buy the latest and greatest way to protect yourself. So for me they lose credibility at that point. I may still read certain articles on the site to get another perspective, but they are designed to really make money off of fearing the common person into spending – ironically – dollars!

None of this has anything to do with Bitcoin. Bitcoin will have its day and we’ll see if it grows in use. I do not think that it will ultimately replace any world currencies, but the concept itself I think is here to stay. Investors and regular users are going to wait. Early adopters may do very well and make a lot of money, but I don’t see Bitcoin doing much more than opening the conversation and bringing the idea of using online currencies to the forefront of peoples minds. I think it will be followed by other options that people will pay more attention to. I could be wrong.

Kyle Hipp May 23, 2014 at 6:13 pm

John, Greece has a different monetary system as Greece has relegated itself to a currency user by joining the EU and giving up control of its monetary policy. I study manydifferent theories and economic analysis. I believe that it is likely that the US Dollar will lose the reserve currency status but as of right now their is not a capable replacement. Regardless when it does happen the US still has a highly productive economy. I would agree with you completely and did in the past when I thought that the US federal government must operate like an individual or business but as I studied further I realized it is not the case.
Chris made a fantastic about the fear based theories out there Looking to profit off of this fear. The one thing I find very interesting is that the programs and packages sold on these sites all ask to be paid in US Dollars. If the Dollar is crumbling and one simple act away from collapse don’t you think they would ask for payment in another form.

RonRolland May 21, 2014 at 1:51 pm

The biggest barrier to using Bitcoin is that if you read all of the articles and perform your due diligence before making the decision to invest your real money into a trading medium that is not formally recognized, then I believe any honest sensible business person will stay away from Bitcoin. There are numerous documented cases of Bitcoins disappearing from people’s accounts, and when the authorities are contacted they simply cannot help because Bitcoin has no legal value. If you have sufficient money that you can risk it in a manner that if stolen, you have no legal recourse, then go ahead and play with it like Monopoly Money and have fun.

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Chris Clothier May 22, 2014 at 9:04 am

Ron –

Thanks for taking the time to read and leave your comments. I agree that Bitcoin comes with a lot of questions and obviously, many are shying away from using Bitcoin until they can get a few more answers and gain more comfortability. To your point, the last time I checked, Monopoly money does not get you very far in the real world.

Chris

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Seth Wilson May 21, 2014 at 3:39 pm

I buy real estate because it is easy to understand, real, and stable. Bitcoin is none of these….and because of this I am out.

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Chris Clothier May 22, 2014 at 9:05 am

Seth –

Thanks for leaving your thoughts. You stated that pretty short and simple!

Chris

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Dennis Lanni May 21, 2014 at 10:39 pm

Would someone whos own bitcoins pay a premium to purchase real estate? If so I have property to sell.

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Chris Clothier May 22, 2014 at 9:06 am

Hey Dennis –

Thanks for your comments. There are probably a lot of investors who share your feelings!

Chris

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stephen May 22, 2014 at 12:07 pm

Let us not forget that the difference between legal and illegal is just some person’s signature on a piece of paper. One day you are running a profitable brewery and the next you and all your workers are unemployed.

You tell me that bitcoin is limited to a total issue of 21 million. Oh OK; by who? And for how long?

Just a few years ago humans on wall street sold the public massive amounts of fraud-backed securities – with triple A credit ratings no less. And then bet against (shorted) them besides. Isn’t the bitcoin deal run by humans? Hmmmm . . . . maybe I will remain bitcoin-cautious.

stephen
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John Cas May 22, 2014 at 12:42 pm

Good point stephen, how can we prevent BTC from being mined after 21million BTC are reached? Well its in the source code which is 100% public and open to view. So it is limited by the community, again, the whole point is that no ONE person/entity has full control of ANYTHING.

Your other points do not apply directly and are a stretch to compare to BTC.

Bitcoin IS illegal in some countries. (I am guessing your brewery line is in response to prohibition?) Anyways… we all know how that worked out. Liquor went to the black market and empowered the criminal element, funny how history repeats itself. War on drugs?

It is also not that simple to completely destroy a market which has millions of funds pouring into it, certainly not as easy as “signing a piece of paper.”

Your wall street analogy is the ENTIRE reason WHY we NEED BTC. I am not going to repeat points already made. But to answer you, no BTC is NOT run by a C-suite of executives looking to profit through manipulation and corruption.

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Ben Howard May 22, 2014 at 12:59 pm

Technically, there’s no reason why the 21M BTC limit couldn’t be lifted. It’s not the community at large that controls the limit, but rather the miners. I agree that it’s unlikely (as in, approaching zero and so insignificant as to not really waste time considering), but if a sufficient percentage of miners, or miners who control a sufficient percentage of hashing power were to collude on this, they can change the block size used in the program in order to extend the total number of available bitcoins.

There’s a non-zero probability of such a change occurring as long as there’s the potential for making money from making such a change. In addition, as long as there are malevolent actors in the world, there is a non-zero probability of one or more actors maliciously making such a change.

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John Cas May 22, 2014 at 1:18 pm

Hey Ben,

Thanks for the response but miners have no say in Bitcoin protocol.

The Bitcoin protocol was originally defined by Bitcoin’s inventor, Satoshi Nakamoto, and this protocol has now been widely accepted as the standard by the community of miners and users.

Though the developers of the original Bitcoin client still exert influence over the Bitcoin community, their power to arbitrarily modify the protocol is very limited. Since the release of Bitcoin v0.3, changes to the protocol have been minor and always in agreement with community consensus.

Protocol modifications, such as increasing the block award from 25 to 50 BTC, are not compatible with clients already running in the network. If the developers were to release a new client that the majority of miners perceives as corrupt, or in violation of the project’s aims, that client would simply not catch on, and the few users who do try to use it would find that their transactions get rejected by the network.

There are also other Bitcoin clients made by other developers that adhere to the Bitcoin protocol. As more developers create alternative clients, less power will lie with the developers of the original Bitcoin client.

As such… a majority of the users in the community would need to agree and accept the hew protocol of increasing the amount of BTC, which if it only benefits a small minority… I don’t think anyone would agree.

Jerry May 25, 2014 at 9:44 am

Expect change. The US has maxed out all its credit cards and is forever requesting to have its credit limit increased – raise the debt ceiling. The US financial statement is an atrocity. The nation’s DTI doesn’t look very good to say the least. Entitlements are impeding growth. The government is flooding the monetary system trying to print its way out of a mess – a.k.a. Quantitative easing. It is always questionable whether there is inflation or a continued devaluation of the dollar – movement is all relative to something else. But, without debate we can agree that you have to pay more for less year over year, and wages are not rising to meet the shift (especially minimum wage). Confidence in the dollar continues to deminish worldwide. China is soon to be the largest world economy. If you do not think all of this is a problem, you simply are not keeping your eye on the trajectory of the US dollar. Since the early 70’s when it was taken off of the gold standard and became fiat currency it has lost 90% of its value. It is backed only by faith and confidence, which is slipping as it should be based on the math/facts. I am not an economist, but It doesn’t take one to be able to tell that my income has increased but my lifestyle and discretionary income has not. I am not saying the Bitcoin is going to be the answer. I AM saying… Expect change!!!

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Kyle Hipp May 25, 2014 at 12:56 pm

The US has run a deficit for roughly 98% of its entire history. When is continuing that trend from inception gonna stop working and bring it all to an end. It doesn’t seem likely that the historical trend would all of the sudden bring collapse.
The US federal government balance sheet is poor if it was an individual but it is not and when I understood that it was a huge revelation.
The US has been fighting deflation more than inflation from my view. I don’t see quantitative easing as money printing but rather an asset swap.Change is too be expected as our economic conditions continue to eveolve but I do not see the dimise of the US in any substantial way on the horizon.

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Jerry May 25, 2014 at 3:10 pm

This is an unpresidented time in the nations history. Just the fact of the baby boomers exiting the work force, retiring and collecting SS checks is a game changer. The system is a Ponzi scheme.

I don’t see how a households balance sheet is any different than a nations. Both should be running at a profit and accumulating wealth over time not stacking up liabilities. Maybe you could explain this better.

As for quantitative easing what asset is being swapped?

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Kyle Hipp May 25, 2014 at 3:49 pm

http://pragcap.com/the-best-of-tpc
Jerry, My understanding of our macroeconomic position took a very large turn over the past few years. I am a young man and I love numbers and analysing financial data. I saw no positive path forward for our economy and nation. My views where extremely similiar to yours at one point. I searched and searched to learn more. I saw political talk on economics was not based on economics but rather to score polotical points. I have linked a site, pragcap.com, and its recommended reading list. It covers a great deal of information. It took me months of reading to finally be able to speak about it because it puts so much of our common economic thoughts on their head. I recommend that you invest some time in reading this information. Worst case is that you have some insight into an alternative achool of thought. Best case is that like me it changes your life, allows you to invest better and with more confidence and just sleep better at night knowing that some of these major worries that we both shared at one time are not as devastating as you now think.
Thanks for your time and I hope you can carve out some time to read some of this information. I visited the site daily for many months. Cullen Roche, the site’s author is tireless in explaining the fundamental and does not push a political agenda which is extremely refreshing.

Jerry May 25, 2014 at 9:25 pm

Thanks Kyle. It would have been nice to get an answer to the questions I posed, but nevertheless I will look into the resources that you plugged.

Kyle Hipp May 25, 2014 at 9:43 pm

A simple explanation from me would be that the federal government cannot mathematically make a profit without the private sector suffering. Private sector savings is equivalent to public sector deficit less trade deficit. So if the US runs a $300 trade deficit then the federal government must run a $300 billion trade deficit minimum for the private sector to maintan stability, more if it wants to reach its desired savings rate. This is why countries like Singapore can have a federal surplus and their private sector can grow, because of their trade surplus.
The asset swqp is that the quantitative easing simply provided liquidity to an existing asset which just transitioned an immediate maturity asset to a longer term maturity asset.
The articles I mentioned will describe it in better clarity than I can in this state of mind around a bond fire.

Sharon Tzib May 26, 2014 at 8:07 am

Jerry, I got introduced to PragCap about six months ago in the BP comments as well (it might have been Kyle that posted about it too, can’t remember), and I have been subscribing to Cullen’s site ever since. It is well worth your time to go through all of the articles, white papers, and videos at your leisure so you can get an understanding of concepts like currency issuer vs. curency user; private sector vs. public sector, what QE really is, why it’s not money printing, and the real reason it failed. This is also a great video with lots of visuals by Ray Dalio that puts things together nicely in terms of how our economy operates:

https://www.youtube.com/watch?v=PHe0bXAIuk0

I certainly had my eyes opened, and like Kyle, now sleep great at night knowing the U.S. economy isn’t going to tank any time soon. It’s refreshing to get your economic news without the political and fear mongering nonsense that is so common place these days.

stephen May 25, 2014 at 1:02 pm

Yes; China is growing at a prodigious rate – no question about it. They are also squandering and killing their land and people doing it. Their one-child-per-couple family-planning adventure will also cost them dearly in the coming decades. They kept all the soon to be old people and killed off the future generations. Hardly a brilliant empire-building move.

And also: humans tend to vote with their feet. Immigrants are the perpetual well-spring of a dynamic society. So I also like to check the lines at the borders – and note on which side they are the longest. And the lines outside China’s borders – trying to get in – are zero. China has virtually no immigrants and the very tiny amount that do get in tend to be illegal. This, I think, is why the Chinese spend so much time trying to steal ideas and technology – their cloistered society produces very little in-house.

And I well remember the doom & gloom of the 1980’s – when the Japanese were going to buy up all of America. That didn’t work out so well and I have some sense that the Chinese Juggernaut may well end up being somewhat of an inflatable monster.

Oh course it’s just my opinion; I could be wrong.

stephen
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Jerry May 25, 2014 at 1:36 pm

If you haven’t heard, China is doing away with the one child gig.

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stephen May 25, 2014 at 1:58 pm

Well; a lot of my horses Have run away – I guess I will fix that darned latch on the barn door.

The Chinese initiated the one-child policy in 1979 or 1980. That is 35 years that it has been having at least a slight effect on their population – and more recently the impact has been quite large. Already there is a huge male/female ratio imbalance which will continue to negatively impact Chinese birth rate. It will require decades to correct and they still don’t and won’t have the benefits of immigration.

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Jerry May 25, 2014 at 9:29 pm

I wasn’t saying that I agreed with China’s methods of doing business, just pointing out the news about their growth and their path to becoming the dominant economic superpower of the world.

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