S&P made the right declaration: AA+. Moody’s and Fitch showed relative weakness. The downgrade of US Treasurys makes complete sense given that US debt loads will easily surpass 100% of GDP within a decade. The US Treasury accuses S&P of negligence for not using their $20T vs $22T figures. I’ve heard stronger arguments from 8th grade debate teams. [Been there. Done that.]
Here I am, Joe investor, watching the markets whipsaw like mad. I braced for impact in my oh-so-slow way and mitigated perhaps 10% of the damage, but my investments have been generally damaged too.
Maximum caution lies not on either side of the coin, but on the edges. 100% “safe” investments are not safe in the same way that 100% aggressive investments are not safe. Safety should be measured in terms of the following risk factors 1) situational 2) statistical (non-monetary) 3) inflationary (monetary).
In the midst of worldwide and US market turmoil there has been similar chaos in the fledgling currency called bitcoin. It is so “new” that my spell checker suggests “bitchiness” or “bit coin” as alternatives. Meanwhile I’m thinking of a very small exposure to bitcoin as an alternative to precious metals or commodities.
I should disclose that I have I have an emotional connection to bitcoin. Bitcoin has aspects of finance, technology, and financial engineering that are intriguing to me. So please consider this factor as I continue to write.
Bitcoin is all that fiat money is not… Bitcoin is finite! The number one rule I am painfully learning about ANY fiat currency is that it is potentially infinite. (Unbounded, if you will.) The fiat currency “presses” are only bounded by the constitution and discipline of the political systems that underlie them. And these very systems have show over historically documented periods to be ultimately undisciplined. Simply put: lack of monetary discipline leads to economic calamity leads to runaway inflation.
That is one factor that is engineered against in the bitcoin ecosystem. The bitcoin “printing presses” are inherently limited to 21,000,000 bitcoins. Further some bitcoins will be forever lost into the digital black hole.
I am not here to say that there are not flaws with bitcoin (BTC). Just that very few have been discovered yet, and those are very minor so far. I am saying that bitcoin also has unprecedented advantages: 1) digital portability, 2) relative anonymity, 3) potentially fee-less transfer, 4) agent-less security, 5) inflation-resistance. I love all of these factors, especially resistance to inflation.
I am here to say that the business cycle is real. There are booms and busts. And there is government meddling with the business cycle that, in the long run, only magnifies booms and busts. And that bitcoin is one possible antidote. That said, I am sticking with stocks, bonds, ETFs, etc in a not-so-contrarian manner. I just happen to be mining a few bitcoins on the side. Not familar with bitcoin mining? Google it!
If I were to design a new currency I would design something very much like BitCoin. It is a digital currency with about 6.5 million units in circulation. BitCoin will never have more than 21 million units of currency in circulation…. ever. Bitcoin is divisible into tiny fractions of a unit down to millionths of a BitCoin and smaller.
BitCoin is digital money. Imagine PayPal but without the hassle, or the commissions. Image digital gold. Gold which is mined (by computers), but has a known maximum supply of 21 Million ounces.
Gold’s value is largely related to its relative rareness. Gold’s usefulness is pretty limited except as jewelry and a form of currency. Industrial uses of gold consume only a small fraction of gold’s supply. And gold can be mined faster than it is consumed.
Gold cannot be as easily traded or exchanged as BitCoins. Yes gold ETFs can be exchanged for cash which in turn can be used for web transactions, but this is a multi-step process. BitCoins, however, can be easily exchanged from person-to-person or person-to-business with ease.
Today each BitCoin is worth more than $13. BitCoin valuations have fluctuated rapidly. One person, according to Forbes, turned $20,000 into $3 million by buying Bitcoins early then selling them for a killing.
BitCoins may one day be worthless relics on discarded hard drives. Or BitCoins may become the E-commerce alternative replacing PayPal. Right now BitCoins seem to be priced about what the current mining cost will bear. The cost of mining is measured in 1) electricity (energy) and 2) depreciation of the graphics cards used to mine new BitCoins. This tends to put a short-term ceiling on BitCoin prices. However, the BitCoin system makes the cost of BitCoin mining escalate geometrically. Eventually, if all goes optimally, the mining cost will be come prohibitively expensive.
If BitCoins gain wider and wider acceptance I anticipate they will hold or increase in value. However if either of the following happen they will end up virtually worthless: 1) BitCoins simply don’t gain wide acceptance, and lose acceptance over time. 2) The algorithmic infrastructure underlying BitCoin is found to be flawed. There is yet another alternative: That a BitCoin-like system is created the competes with the original BitCoin. Finally one more possibility: various governments outlaw BitCoins.
In closing, BitCoin is a brilliant idea and a risky “investment”. It is riskier than gold, silver, or index ETFs. It is similar in risk to buying options, because the value can rapidly go to zero. However, it is an interesting speculative play that is potentially inflation-proof. Inflation-proof because, unlike government currencies, the printing presses (BitCoin mines), are held in check. Buying 1500 dollars worth of BitCoins is no sillier to me than buying a $1500 gold coin. Just make sure you guard your BitCoins like you would your expensive gold coin… security, security, security. Because BitCoins can be stolen, just like gold. And they can be stolen without the thief even setting foot in your house.