Bitcoin’s Uncertain Future

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“Things are not as they seem.”

How often have you heard a variation on that line? In sci-fi movies, mysteries and spooky TV series, some character will eventually say something you’ve probably figured out on your own — that the main story isn’t the one that will produce the right answers.

The mental image that always jumps out at me when I hear something like that is the old, blind Master Po in the TV series “Kung Fu.” You know: “Ah, grasshopper … looks can be deceiving.”

And so it is with bitcoin, the virtual currency everyone has heard of, but few truly understand.

But bitcoin is the starting point — not the finale — of the story that will end in true financial freedom for you and me. Knowing why can both save — and make — money for you.

A Revolution in Trust

Bitcoin was designed by a libertarian computer programmer who wanted to free people’s financial affairs from external control.

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In the post-gold-standard world, paper currency has value because governments say it does. And governments only let banks issue new money. Every legitimate bill and coin in circulation comes from a government-backed bank somewhere. That’s why people trust and use banks.

That power gives bankers and bureaucrats control … to track, trace or even remove money from the financial system. Every dollar is owned by someone — and the financial powers-that-be want to know who it is so they can manipulate the currency if they choose. As I write, governments all over the world are working furiously on systems that would make every single transaction everywhere fully traceable. That makes us vulnerable.

Bitcoin is founded on an entirely different system of trust — the blockchain. It replaces government sanctions with a distributed verification system that makes it impossible to forge or reuse bitcoins … all while providing the owners of bitcoins with complete anonymity. It is the antithesis of government money. That’s why they hate it.

Predictably, despite their dislike of it, those in power are becoming interested in using bitcoin for their own benefit. For example, IBM and the Federal Reserve have started work on applying the blockchain concept to currencies like the dollar and the euro. This would allow people to transact electronically without going through banks at all. They could store their money in the cloud and spend and receive it directly, its authenticity verified by the blockchain.

Not so great for most commercial banks … but great for central banks, who would control the blockchain and thereby acquire absolute control over all currency everywhere.

But that’s in the future. The issue right now that is on most people’s minds is … can I make money with bitcoin?

Cui Bono?

Who benefits from bitcoin today? Fearmongers tell us it’s terrorists, drug dealers and perverts. Maybe some of them do, but far more of them use dollars right now, so it’s a silly argument.

The biggest recent growth in bitcoin use is among Chinese fleeing the possible devaluation of the yuan. Goldman Sachs analysts estimated earlier this year that 80% of bitcoin volume is exchanged in and out of the Chinese yuan. It’s easy to see why Chinese investors like it. Once their money is converted to bitcoin, they can then swap back into the dollar, euro, yen or into physical gold in a way they can’t yet do with the yuan. And they can do it in the virtual (i.e., offshore) world.

Chinese uptake of bitcoin is accelerating. In early November, two things happened to global bitcoin markets. First, the number of unique bitcoin wallet addresses — how users manage and trade bitcoin — hit an all-time high, suggesting lots of new users. Second, the dollar price of a bitcoin rose from around $200 in August to over $500 in the space of a week.

There are many theories as to why this happened. My take is that three things combined to make bitcoin suddenly more attractive to the Chinese: the imposition of official Chinese capital controls (September 29), a European Union court decision to exempt bitcoin from value-added tax (October 22) and a decision by BTCC, a major bitcoin exchange in China, to accept direct deposits from banks (November 4).

Bitcoin? For Now, Yes

All the evidence points to significant bitcoin sensitivity to developments in Chinese private capital flows. That suggests you can profit by buying bitcoin at the troughs (it’s down about 20% from its peak on November 4) and keeping an eye on Chinese currency and market developments, at which point it should surge and you can take a profit.

But in the longer term … I predict that bitcoin and similar nongovernment “crypto-currencies” have a rough road ahead as governments around the world try to re-impose their control.

So by all means, make money on bitcoin movement for now, but for the long term, make sure the bulk of your wealth is in something else governments struggle to control … gold.

Kind regards,
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Ted Bauman
Offshore and Asset Protection Editor