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Eurozone Turning to Bitcoins

Cyprus Worries Send Europeans to Cyber Currency

Written by Briton Ryle
Posted March 22, 2013

Fearful Spaniards worried of government confiscation of their savings are converting their money—not just from one currency to another, but from paper to digital.

Many Spaniards have of late joined a growing number of digital-currency investors buying into a 4-year old online currency known as Bitcoins. Since they are spending euros to buy these Bitcoins, they are effectively converting euros into this digital cyber-currency.

What has prompted so many Spaniards to exchange their Euros for Bitcoins? Answers Bloomberg, “The interest in Bitcoin coincided with news that the Cyprus government planned to tax savings accounts as part of the country's bailout program.”

Bloomberg Businessweek amplifies, “Fearing contagion on the other end of the Mediterranean, some Spaniards are apparently looking for cover in an experimental digital currency.”

The reason so many people—usually the younger, hipper, thumb-your-nose-at-society crowd—have turned to Bitcoins is for security and protection. They feel that since Bitcoins are not owned by any government, they cannot be confiscated nor suffer the steady erosion of value as paper currencies. So take that, you thieving government officials.

Yes, well, perhaps it is other thieves who will now be taking their money instead. The problem with these new trustees of your money is that no one really knows who they are. It is like protecting your sack of money from your landlord by handing it to a masked and cloaked figure lurking in the shadows of your back-alley.

bitcoinsHere’s why. If you search the web for information on Bitcoins, you will be hard-pressed to find a clear explanation of what it is or how it works. One description of this digital monetary system is copied and pasted about, and regularly referred to. So let’s go there, and sure enough… it is an anonymous source. Namely, Wikipedia.

The explanation begins, “Bitcoin (sign: BTC) is a decentralized digital currency based on an open-source, peer-to-peer internet protocol. It was introduced by a pseudonymous developer named Satoshi Nakamoto in 2009.”

Alrighty-then. Right off the bat we find ourselves in a shadowy alley facing some sort of figure whose shape we think we can sort of define, kind of. The key words that unnerve me here are “decentralized”, “peer-to-peer”, and “introduced by a developer”. Never mind that no one knows who he is, if that isn’t disquieting enough. What we have here is a currency that was invented by a computer programmer.

So, now, what is all this “decentralized” and “peer-to-peer” stuff all about? Wikipedia answers:

“Bitcoin does not operate like typical currencies: it has no central bank and it solely relies on an internet-based peer-to-peer network. The money supply is automated, limited, divided and scheduled, and given to servers or ‘bitcoin miners’ that verify bitcoin transactions and add them to an archived transaction log every 10 minutes.”

Hmmm..… What?

It seems the only clear information we get out of that is that Bitcoins are not issued by a central bank, hence the previous label “decentralized”. That it “solely relies on an internet-based peer-to-peer network”, therefore, implies that all this “money” is simply floating around out in cyberspace, moving from one computer user to another.

As Bloomberg explains it, “Bitcoin removes financial institutions completely from transactions, allowing users to conduct two-party exchanges over the Internet without a middleman.”

And yet, despite its being considered “decentralized”—(which means “to reorganize [disperse] … into smaller more autonomous units” - Dictionary.com)—there does seem to be some sort of mechanism controlling it, which is alluded to by, “The money supply is automated, limited, divided and scheduled, and given to servers or ‘bitcoin miners’ that verify bitcoin transactions.”

And just who or what controls this automation, division, scheduling and distribution to ‘bitcoin miners’? Well, no one really knows. Except, of course, for that cloaked figure in the dark alley who goes by the pseudonym “Satoshi Nakamoto”.

And what of these “bitcoin miners”? Apparently, you can “mine” bitcoin, kind of like mining gold out of the ground. Fair enough. Gold is considered a currency of sorts, and many companies, even individuals, are allowed to mine gold out of the ground, effectively mining their own money.

The only difference with mining bitcoins, as explained by Beginner's Guide to Mining Bitcoins is that “Bitcoins are awarded in blocks, usually 50 at a time, and unless you get extremely lucky, you will not be getting any of those coins. In a pool [of multiple users connecting their computers together], you are given smaller and easier algorithms to solve and all of your combined work will make you more likely to solve the bigger algorithm and earn Bitcoins that are spread out throughout the pool based on your contribution.”

So you can generate your own Bitcoin money by solving algorithms. Yup, that confirms it. The system was designed by a computer programmer. And he’s managed to turn it into something of a game, too.

The interesting thing about this currency-generating game is that you have to spend real money, such as dollars, euros, etc., to buy software, computer equipment, subscriptions to clubs or pools, and who knows what else. And for all the “contribution” you are putting into it, all you ever really generate is digital coins, while the other parties that sell you all these products and services are generating real money from you.

Overlooking this game-like creation of new money in the system, what if someone simply wants to use Bitcoins as a safer store of value than their national currency, such as has been happening in Spain and other European countries lately?

Bloomberg describes just what level of safety there is in Bitcoins:

“The downside is it's a currency that has experienced price fluctuations, occasional hacking and account thefts, and is a favorite for black-market transactions, including almost 2 million a month in illegal online drug purchases at the Silk Road marketplace.”

“Experienced” price fluctuations? It’s more like “plagued by” price fluctuations. Consider the following graph showing the Bitcoin’s relative value to the USD as expressed in US dollars (blue line).

bitcoin chartSource: Business Insider

Are you kidding me? This is the currency that people are turning to for safety? In just the last 22 months, the value of 1 Bitcoin went from U.S. $1, spiking to almost U.S. $30 in a month, falling to U.S. $3 in 5 months, then up to the low teens within a year, and spiking again from U.S. $13 to $40 (300%) in the last 6 weeks. Not to mention the very recent 12.5% from $40 to $35 in just one day.

If someone asks if gold or other major currencies have not done the same thing, the answer is no, they have not been nearly this volatile. The value of commodities and national currencies is governed by policy, business activity, revenues and expenses, supply and demand, and reserves.

Bitcoin, though, being tied to nothing physical at all, is tied to the only thing remaining—emotion. It is the purest form of barter there could ever be, where people determine its value simply by their own idea of value. And this is all too often skewed to extremes in times of emotional crisis and panic.

And even though you might think, ”Well, at least the government doesn’t have a hand in it,” consider that it is nothing more than a computer program. Some humans somewhere do have their hands in it. And who is to say what those hands are capable of doing to your holdings?

Indeed, it is not volatility alone that holders of a currency should concern themselves with. It is standardization, regulation, and backing that one needs to look for in a money.

Imagine this… You purchase a car from a large, well-known leading manufacturer. One day you hear in the news that a certain part in your car’s model and year has a design flaw and your vehicle is being recalled.

Are you suddenly going to swear off of automobiles designed by all auto manufacturers and join a club of “build-it-yourself” auto enthusiasts to purchase a car built by them? Just some go-cart type machine with no doors or bumpers, no windscreen or roof, no safety-belts or airbags, no insulated wiring, and definitely no warranty?

Sure, the professionally built auto you owned had a flaw in it. But is this new “automobile” you have now purchased better? Does it even come close to what you had before? If one automobile make and model is giving you problems, there are other professionally designed and built makes and models to choose from.

The national currencies in use today have been in development for hundreds of years. Throughout this time countless regulations, policies, laws, and acts have been introduced, removed, or adjusted. It has been one very long road of continuous refinement.

Would you really now consider turning to a fresh new currency that is currently at the beginning of its road? How many years does a currency need to wait before a short-coming or major flaw is discovered and rectified through the passing of a new regulation or act?

Even if this 4-year-old Bitcoin currency really does endure for decades and truly does grow into a bonafide system earning a respect equal to the USD or British Pound, how many growing pains and regulatory fixes will it have to go through before getting to that point? Are you willing to bank on something like that?

Maybe these back-yard hobbyists really are onto something with their hip and cool new invention. But are you really going to buy one of their go-carts and drive it on the street? Are you really going to entrust your well-being to it?

As Bloomberg summarized, “That some Europeans are investing savings in Bitcoin isn't exactly a sign of confidence in European banking.”

I wouldn’t shame European governments or banking institutions for the recent surge of interest in Bitcoins. I would simply attribute it to the current fascination with anything cyber and an adventurous-zeal for anything new and innovative that breaks with tradition.

Money is only as secure as the institutions that are backing it. If one is worried that their nation’s institutions are not strong enough to protect their money, perhaps they might be better off turning to a currency who’s institutions are stronger, instead of turning to the currency of an ambiguous, abstract, cyber-spaced entity with no institution governing it, no reserves backing it, and no commonly understood rules or regulations defining it.

*This opinion is entirely mine and does not reflect the view of my publisher. Nor should you defer your right to formulate your own opinions according to your own judgement and values. – These comments mine.

Joseph Cafariello

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