October 2013 | www.selectasset.com
Bitcoin: a small flash in the pan or the next evolutionary step for money?

Does your local watering hole accept bitcoins? Recently, a Tokyo nightspot popular with foreigners, The Pink Cow, began accepting bitcoin payments from patrons. With the build-up to the 2020 Olympics poised to jolt Japan’s economy, you might be wondering what place bitcoins have in the financial future, especially for wise investors.

Wait, you are not up on bitcoins? Actually, new forms of currency are not unprecedented. Perhaps it’s best to start with a quick history lesson on the evolution of money from the concrete to the more abstract and virtual realms.

In 700 B.C., the Lydians introduced the first standardized metal coins. The move from coins to paper money came about, possibly on the back of a tired horse weighed down with armor, when Kublai Khan introduced the chao as the chief currency of China. Another abstraction came with the invention of the bill of exchange, which allowed merchants to redeem gold as they travelled.

The Bank of England adopted the gold standard in 1821, with most countries following suit. Later shortages in gold triggered a worldwide economic recession. In 1871, in the U.S.A., Western Union introduced a money transfer service, which allowed customers to wire money via telegraph, a predecessor of today’s electronic transfers. Another global recession and World War I derailed the gold standard.

Birth of the world’s first crypto-currency
Yet, the march to abstract currencies continued. In 1950, Diners Club issued the first modern credit card, and by 1995 over 90% of transactions in the United States were digital. The Bitcoin was unveiled in 2009, as a crypto-currency, and that brings us to the present.

Crypto-currency as a concept, according to Bitcoin.org, was first introduced in 1998 by Wei Dai on the cypherpunks mailing list. He evolved the idea, as history has demonstrated, that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.

Today, the Internet is abuzz with commentary on the relevance of bitcoin. Content on Bitcoin.org states that bitcoin provides you with total control over your money, military grade security on transactions, and the simplest way to exchange money at very low cost. According to the site, bitcoin works anywhere at anytime, for mobile payments that are easy, and international payments that are fast and do not require the services of a bank (or the payment of their fees). And perhaps most importantly, you can send bitcoin as if it were an envelope of cash in the post, without having to reveal your identity with account numbers and sort-codes.

Total volume will be capped at 21 million
Bitcoin first made the news in 2008, when a paper published by Satoshi Nakamoto, a pseudonym, described the mechanics of the currency. The mysterious Nakamura, whoever he was, has since disappeared. On September 27, 2012, the Bitcoin Foundation was created in an effort to standardize, protect, and promote Bitcoin.

The virtual money debuted with a value of zero and traded for the first time in 2010 at a price of three-tenths of a cent. Bitcoins are divisible to 8 decimal places, and are now accepted by thousands of small online merchants. In 2013 alone, the value of bitcoin has soared 477%. As of this writing, according to bitcoincharts.com, one bitcoin is worth U.S. $126.36

However, there is a rub. Some commentators say bitcoin is decentralized because no central authority has control over it. Others say it is centralized by virtue of its cryptography and reliance on the Internet. Some say it’s safe and secure because it uses military encryption. Bitcoin volume is capped at 21 million and its rate of creation is governed by an algorithm. Others say it is volatile because it is market-driven and insecure because it requires the Internet to exist and governments to steer clear from regulating it.  Actually, bitcoin volume will be capped at 21 million and its rate of creation is governed by an algorithm.

Coming soon: a bitcoin ATM?
Nonetheless, a cash machine that accepts bitcoins was set to be distributed around the globe this summer, according to its maker Lamassu Bitcoin Ventures. The company claims the machine has the ability to change fiat currencies into the crypto-currency in just 15 seconds and accepts notes from over 200 countries around the world.

Where do bitcoins come from? Bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. According to the Tech In Asia website, currently, 11.5 million Bitcoins exist, with another 25 being added every 10 minutes or so. While the most that can ever exist is 21 million, that number probably won’t be reached until the 22nd century.   

Tech In Asia also reports that a mining system from ASICME, a Beijing-based Bitcoin mining equipment manufacturer, runs from U.S. $500-$7,500, relatively cheap compared to most other options in China. A prospective miner used to be able to soup up a desktop computer to mine bitcoins, but increased difficulty has effectively made this method obsolete.

“Many people no longer trust governments with their money.”
So, is it a new standard that will replace other standards or is it just a fad? Should you invest in it or is it too early? Should you be concerned about bitcoin regarding your own portfolio?

Many people no longer trust governments with their private money, especially after what happened in Cyprus, and this is one way to protect yourself,” says Joshua Barry, a Tokyo venture capitalist who has closely followed the bitcoin story and is himself an investor. However, he suggests proceeding with extreme caution.

“Nobody should invest in bitcoins hoping to get rich,” says Barry. “For me it’s more of an idealistic investment,” he explains. “I believe in the philosophy behind bitcoin.”

One avenue to consider, according to Barry, is Mt. Gox (https://www.mtgox.com/), the world’s largest platform for trading bitcoins. However, the site has recently run afoul of the U.S. Department of Homeland security, which seized more than U.S.$ 5 million of the company’s assets, according to Tech Crunch.com. No doubt the situation surrounding bitcoin remains fluid to say the least.  

What about mining your own bitcoins? Barry no longer believes that starting a mining company is a viable investment, as the outlay will far exceed the return at this stage in the game. But some investors may want to look into investing in a publicly traded mining company.

Is bitcoin another stepping-stone on the evolutionary path of money, or just another short-lived trend? Whether it will suit the current environment better than the old models has yet to be determined. For now it’s best to stay informed and make sure bitcoin is on your radar.