This Currency Just Crashed

Written By Briton Ryle

Posted February 26, 2014

I don’t really “get” Bitcoin.

I mean, I understand it’s a digital currency. I’ve read that one Bitcoin is created once a computer has executed an absurd amount of calculations, and there can only ever be 21 million Bitcoins made.

On that fact alone, I can see why some people are intrigued by its potential as an alternative to the U.S. dollar.

The Fed can print as many dollars as it wants to. Congress can spend more dollars than we actually have. And the Treasury can sell bonds worth more than we have, thus ensuring that the Fed will print and Congress will spend.

There’s no incentive for America’s vicious cycle of printing and spending to end.

So I get that a closed system like Bitcoin — where there’s a finite number of units of exchange and no government meddling — has appeal.

What I don’t get is why Bitcoin has value. Or rather, why Bitcoin should have a specific value…

And if it doesn’t (or can’t) have a specific value, if its exchange rate in dollars will forever swing wildly, how is it useful for anything other than speculation?

A couple of my poker buddies bought Bitcoin between $85 and $135 a few months back. They asked me to join them, but I declined, mainly because I didn’t understand Bitcoin.

Maybe that makes me old. Maybe that makes me unimaginative.

They started taking profits when Bitcoin hit $1,000. One of the guys bought a car. Still, I didn’t regret my decision to not join them and buy Bitcoin. Because like I said, I don’t get it…

Now, as I read about the $375 million in Bitcoin that was recently stolen, I sure hope my friends were able to fully cash out.

A Fiat Currency By Another Name

Perhaps the biggest knock on paper currencies is that they are fiat currencies. The dollar, the yen, the euro — they are only worth something because we believe they are worth something. If my grocer stopped believing in the U.S. dollar altogether, I wouldn’t be able to buy food. My dollars would be worthless.

If my grocer were skeptical of the dollar’s value, he might want a few more of them in exchange for a particular item. Then my dollars would be worth a little less.

I can’t figure out why Bitcoin is any different. In fact, because fewer people believe in Bitcoin, it’s worse than a U.S. dollar. I’ve watched the digital currency move by hundreds of dollars a day.

And then new digital currencies started springing up. I just Googled it, and there are now 60 digital… er, I mean cryptocurrencies. (I just discovered Bitcoin isn’t a digital currency at all, but a “cryptocurrency.” I’ve been using the wrong word, and I still don’t know the difference.)

I heard that a rapper, Kanye West, started his own cryptocurrency called Coinyewest. Clever. Maybe I’ll start my own…

Never mind — Wikipedia says the Coinyewest was issued a “cease and desist” by the real Kanye.

Apparently he didn’t start it after all, and he didn’t think it was funny. Too bad…

“Bitcoin is not broken. Bitcoin is fine.”

Yesterday, there was an article about a guy who lost $285,000 when the Bitcoin exchange MtGox failed.

He wrote this:

“Let me suggest that the lesson is not that Bitcoin is broken. Bitcoin is fine. …The proper lesson, if I may suggest, is this: We are building a new financial order, and those of us building it, investing in it, and growing it, will pay the price of bringing it to the world… We are building the channels, the bridges, and the towers of tomorrow’s finance, and we put ourselves at risk in doing so.

We are at risk from accidents. We are at risk from fraud, from corruption, and from evil. We are at risk from journalists seeking headlines and from politicians seeking power and glory. We are at risk from the very market we are trying to build — a market which cares not about our portfolio, our ambitions, or our delicate sympathies.
Some of us will be discouraged. Some will be ridiculed and insulted. Some will be tricked, or swindled. Some of us will be crushed or caged. We will be set upon by all manner of antagonists, repeatedly, for a long time.
So why do we do it? Why do we build these towers that fall down upon us? Why do we toil and strain and risk our precious time, which is the only real wealth we possess?

Because the world needs what we’re building. It needs it desperately. If that matters to you, as it does to me, then hold to that thought. You will see through the smoke, and your wounds will heal. So shake it off, brothers, for this won’t be the last calamity endured before the win.”

Pretty noble for a guy who just lost $285 grand. Personally, I’d be pissed.

Ultimately, I don’t know what this means. Why does the world need Bitcoin?

Maybe I’m just too old to get Bitcoin…

Time to Re-evaluate a Gold Standard

The whole Bitcoin saga has encouraged me to soften my stance on those that want a return to the gold standard. A gold standard is impractical unless it is done on a fractional basis. But it would still be preferable to Bitcoin.

I’m sure many of you think I dislike gold. I’ve gotten my share of hate mail for a negative article or two here in Wealth Daily.

In my defense, gold was around $1,270 an ounce at the time, and the chart was tracing out an ominous pattern. The price of physical gold would fall another 10%.

It was much worse for the miners. Newmont (NYSE: NEM) fell another 18%. Allied Nevada (NYSE: ANV) got crushed for 37%.

Then, about a month ago, the situation for gold changed. Buyers were clearly returning to gold and gold mining stocks. So I did what a good investor should do: I got bullish on gold.

On January 15, I wrote here in Wealth Daily that Allied Nevada looked pretty good at $4.60, but I liked McEwen Mining (NYSE: MUX) at $2.20 a share better. On Monday, McEwen hit $3.20 a share. That’s good for a 42% gain in five weeks.

And gold has been the best-performing sector so far this year.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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