Why I’m ‘buggish’ on bitcoin

Stocks down yesterday. Gold too.

But at least Tim Geithner has found a job. Now, he can give up the food stamps and get off the unemployment rolls. The cronies are taking back one of their own. He’s back on Wall Street, at Warburg Pincus.

“When they approached me, they clearly wanted me to play a substantial role in running the company”, Geithner told the Wall Street Journal.

What does he know about running a major private equity house? Nothing. But sometimes who you know is more important than what you know. It won’t hurt Warburg Pincus that its new CEO knows his way around Washington. And it didn’t hurt the bankers, when the bad debt hit the fan in 2008, that they had their man Tim in the Treasury Department. The record shows that Goldman chief Lloyd Blankfeld got on the phone to Mr Geithner, a former Goldman employee, no fewer than 18 times in one 24-hour period. Apparently, those were calls well worth making. Geithner came to the Street’s aid almost overnight with $700bn, plus federal guarantees worth, according to the former Inspector General of the TARP (troubled asset relief programme), $21trn.

Where does a government that is already running in the red, and whose elected representatives are dead set against raising taxes, get that kind of money? Ah, dear reader, where have you been? We live in new era of experimental money. The supply of cash and credit can be expanded easily and almost infinitely – making it possible for the feds to do this kind of thing.

But now, here’s the remarkable story: the experimental money of 1971-2013 is now threatened by another monetary experiment. We explained it to our 94-year-old mother.


Bill Bonner on markets, economics & the madness of crowds

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“What is bitcoin?” she asked.

“It’s a new virtual currency. You know, it was created by someone on the internet. You can use it to buy things.”

“Who created it?”

“Nobody knows. He is said to have been a Japanese programmer.”

“Do you have a bitcoin? Could I see it?”

“No, it only exists in cyberspace.”

“Where does it come from?”

“You have to find it in cyberspace, using a computer program, which limits the supply.”

“Oh. Well, I guess everyone with a computer is looking for them. How much is the new money worth?”

“It depends. It trades freely in cyberspace.”

“But what makes it valuable?”

“Nothing, except that people are using it. We’re going to begin using it in our business.”

“But why would a merchant trade his valuable merchandise for something that has no value?”

“Well, that’s what we do with the dollar.”

“But the government guarantees the value of the dollar. They may not always do a good job of it. But at least they stand behind it. Who’s guaranteeing the value of the bitcoin?”

“Nobody.”

“You mean, nobody knows where it came from. Nobody has ever seen it. Nobody knows what it is worth. Nobody knows where to find it. And nobody stands behind it. Seems crazy to me.”

Yes, dear reader, amazing things are beginning to happen.

When bitcoin first came along, we didn’t know what to make of it. We dismissed it as a silly fantasy perpetrated by techie dreamers. Money you can’t see? Money you can’t hold in your hand or put in your safe? Money with no precious metal backing that no one stands behind? It sounded crazy.

At least the paper US dollar has the full faith and credit of the United States of America backing it, for whatever that is worth.

The euro has the ECB and Brussels more or less behind it.

The pound sterling has the Bank of England, Parliament and the crown.

What has bitcoin got? Nothing.

And yet, what currency has outperformed all others? Bitcoin.

Hmmm. What to make of it?

We don’t know. Our friend Max Keiser tweets that “Bill Bonner is bullish on bitcoin.” But we’re not bullish on the new money,we’re buggish. That is, we like bitcoin like we like gold. Only less. Will it go up in price? We don’t know.

But what we like about bitcoin is the same thing the feds don’t like about it. They can’t control it. So, they can’t use it to steal from people. And they can’t use it to bail out their friends, support zombies, or finance pointless wars.

Nor can they use bitcoin to cover their deficits or to manipulate the economy.

But wait. Why can’t the feds put their enormous computing power to work mining for bitcoin? That way, if bitcoin becomes the coin of the realm, they could still control it, with a huge reserve of their own.

Are they too busy spying on people?

Are they too thick to see the potential?

Are we missing something?

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5 Responses

  1. 21/11/2013, markopoor wrote

    Bill is so astute, Respect.

  2. 21/11/2013, MRSC wrote

    They couldn’t control it, just mine it, like gold. They would be competing and might end up with more than anyone else but they still couldn’t confiscate from anybody else what they already have. It would seem more likely that they will put to work the best brains they can find in the world to break it, or find a way to control the internet. Only trouble is – the best brains are busy mining for themselves. Why would they work for dollars?

  3. 21/11/2013, Coach Bobski wrote

    Twenty years your mother’s junior but still lost! A young friend advises that “only” 21 million Bitcoins will be “issued” so what worries me is what happens when someone else issues “Son of Bitcoin”; “Bitcoin II”, or perhaps then, “grandson of Bitcoin” with “only” a further 21 million allowed to come into existence. Or am I missing something as well?
    Bobski

  4. 21/11/2013, CodingInMySleep wrote

    Bitcoin isn’t backed by nothing, it’s backed by math. The whole point of Bitcoin is to eliminate the need for trust in a third party, to allow people to exchange value without the need for a bank, credit card processor or government standing in the middle (and usually taking a hefty fee).

    Bitcoin is backed by strong crypto, a branch of mathematics. With the dollar you have to trust the government’s ability to handle its money supply as well as their ability to create a bill that’s difficult to counterfeit. With Bitcoin both of those tasks are taken over by simple mathematical rules. You don’t have to trust the government, you don’t have to trust the other person in your transaction, you just have to trust that 2+2 is still 4.

  5. 21/11/2013, Warun Boofit wrote

    “But what we like about Bitcoin is the same thing the feds don’t like about it. They can’t control it. So, they can’t use it to steal from people. And they can’t use it to bail out their friends… support zombies… or finance pointless wars.”

    I am not certain any of this is true , yes the feds are not in control yet but at around $8bn dollars worth plus or minus 50% they are not motivated but when it gets to $1 trillion dollars worth they will feel compelled, the speed at which its taking off that could be months away rather than years. Bitcoin works like a real gold mine, the easy treasure has already been mined, botnets are burrowing away mining using borrowed computing power, most of it wasted effort , it would be easier just buying them and watching them rise. We will know the market has reached maturity when Somalian pirates begin requesting ransomes be paid in bitcoin rather than dollars and Kim Jong- un realises he can stash the entire wealth of North Korea on his smartphone then does a bunk with it. I like bitcoin but I can also see that the dictators and scallywags of the world are going to love it even more.

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