September 29, 2013

Why should we buy? One: because bitcoins are relatively immune to inflation. (Argentinians are downloading the new currency to keep their money’s value and avoid rolling over for the government with capital controls.) Two: bitcoins are not subject to price runs. Three: They”€™re hard to obtain, meaning hard to steal. Four: They”€™re also easy to obtain, in the virtual realm, in that they can be stored in a zip drive. I could go on.

The weird thing is, this underground currency, once used mostly for illegal goods and services, is entering the mainstream and is here to stay”€”with the unlikeliest, most blue-blooded, least ghetto of champions: the Winklevi. (Lat. pl.) The bitcoin currency may have remained an insignificant underground currency had they not come along. Bitcoin would have remained an economic nonentity, a riddle, had not the Winklevi come along and set upon creating a first-starter ETF to trade the “€œdigital gold.”€

In so doing, they”€™re reaffirming what is otherwise an illusion. They”€™re also posing a provocation: Is it, or is it not, worth buying? Your answer places you on one or the other side of the digital divide.

You have to give it to Harvard: these two buff Adoni (Lat. pl.) learned something at B-school. What they have done with bitcoin is: 1. pure capitalism; 2. opportunism; and 3. creative speculation at its finest. It’s almost visionary. They saw the perception gap: oldies who think that it’s incomprehensible, that it’s funny money, yet who have a nagging feeling”€”this is America, after all, the land of Eldorados”€”that they might be missing out on something.

And nobody likes to miss out. This impulse alone will bring them to buy. On the other hand, the young hacker generation”€”the “€œdigerati”€”€”are buying and selling all sorts, in bitcoin tender, every day, more and more. If a 1% holding of the total currency is sufficiently attractive to build an ETF upon it, there must be vast, ever-growing volumes of Bit-denominated trade”€”how big, none of us know. The creators know, and one assumes the Winklepickers have some information you and I don”€™t. Or?

This is the point. They might be bluffing! If so, I tip my hat to them. It’s beautiful. Who would have thought two old-school Ivy Leaguers would settle on an underground currency in their search for prize assets? It makes great news, too. The Winklevi made a break and have become “€œdisruptors”€”€”the ultimate accolade in business today. They really stole the disruption (from bitcoin)”€”or bought it, on the secondary markets. But that is how currency works: It changes hands. Who’s the bad boy now?

Brilliantly, the Winklevoss plan was created to serve the needs of the curious, the timid buyer; again, one imagines. Give this buyer an ETF, a familiar financial instrument, so that he feels safe, and he has a ringside seat beside the Great Unknown, upon which risqué behavior he can dine out, I guess. He should”€”it’s generally agreed bitcoin will keep the value of his holdings. He may make a little fortune, then again. The currency prices may again go ballistic, as supposedly occurred during the capital flight from Cyprus in the 2012-13 debt crisis. The word was: Russians, mainly, who were unwilling to accept a 20-30% “€œhaircut”€ on their Cypriot deposits, lacking any other means of removing their cash”€”due to strict baggage, transport controls, and close surveillance”€”these offshore fat cats resorted to the virtual world instead, using bitcoin to store and to emigrate their money intact. It beats getting arrested at the airport with five million euro in your bags, only to see your cash seized by the state.

BTC’s value shot up then down, and up and down again, in a matter of weeks. Some made a quintuple profit; everybody made something. Ominously, at this week’s Winklevoss roadshow, the twins said they expected another crisis in Cyprus”€”is this a hint that we should get in there before the remaining Russian oligarchs buy up more Bits?

One more outstanding piece of news was spoken of at the presentation. The future of BTC, said the brothers, might well lie in a country taking it on as its national currency. How about that? Cyprus, maybe?

I”€™ll give you two quotes on bitcoin, then you decide. The first is from Charlie Munger, Warren Buffett’s business partner. “€œIt’s rat poison,”€ he said of bitcoin. The second opinion is Bill Gates’s: “€œI think it’s a technical tour de force.”€ Last time these two close friends disagreed, it was over the potential of the World Wide Web. Gates failed to persuade Buffett it was where the future lay. And Gates was right, Buffett admits. Interestingly, in the same TV interview quoted above, Buffett himself made no judgment either way.

Juiced-up young speculators in Brooklyn and San Francisco offices are also amassing and “€œmining,”€ i.e., creating, bitcoin. That’s their entire business model: a single play on the currency’s future. One investor with no history pegged a long-range target price of ~$3,000 per bitcoin. No doubt he see things we do not. More and more real-world problems, like controls against capital flight, can be solved by the technology that is the essence, the “€œpaper”€ if you like, of bitcoin. Or as the brothers put it: “€œthe Internet of money.”€ Pure marketing”€”and it sounds great.

One further caveat, however, speaking in my self-appointed position tonight as your financial advisor. The caveat? It’s the next new digital currency, of course”€”Litecoin”€”which has fast gained popularity in online transactions, and is not so far behind bitcoin, at least in coverage (if not transactions) that it can be ruled out. Why? As Bill Gates also said, the bitcoin will be subject to the dominion of government in the end. That is where the risk lies. And that is why people use Litecoin: in case the Fed freezes bitcoin transfers again or trumps up some scary old-world legislation.

There are rumors that President Putin is hoarding vast amounts of the currency and has subterranean workshops full of Korean slaves mining it, too.

It’s a brave new world. Welcome.

See you on the other side.




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