Why Bitcoins Have Doubled in Value

At $43 US, the Bitcoin has more than doubled in the last twelve months. According to Zero Hedge, this mainly relates to a 55 page report the European Central Bank published in October, expressing concern that the bitcoin’s popularity represents a potential threat to the reputation of central banks. Besides greatly increasing public awareness about the bitcoin, the report vastly increased it credibility among currency traders.

Market analyst Max Keiser is probably the best known supporter of the bitcoin revolution. Keiser uses them to fund Pirate this Film, his crowdfunding (see * below) site for documentary filmmakers and investigative journalists. He initially planned to use PayPal, but they refused to offer a business account to an entity with the word “pirate” in its name.

Besides saving Keiser and the users of his site thousands of dollars in currency exchange fees, PayPal commissions and credit card charges, the use of bitcoins also protects Pirate This Film from the “Wikileaks effect.” This is the term coined to describe the power major credit cards and PayPal have to shut down political sites they disagree with by refusing to process their donations. In fact, Keiser set up a bitcoin Kim Dotcom legal defense fund for the New Zealand folk hero the Obama administration is trying to extradite for alleged violations of copyright law (see The FBI’s Misadventures in New Zealand).

The video below is Keiser’s forty minute presentation to the 2012 Bitcoin Conference in London. In it, he explores the relative merits of bitcoins, gold and silver as a hedge against inflation, economic collapse or outright fraud by the banks that control Wall Street.

The presentation begins with a general discussion of the risk of investing in the current Wall Street bubble, which he believes is about to burst. Because a bank CEO’s pay is directly linked to the amount of debt they create, there is a powerful incentive to create as much as possible. All debt bubbles eventually burst. Because each bubble is bigger than the last, the recessions they create keep getting worse – at least for everyone but the bankers.

Keiser also explains the Martingale Principle, a strategy used by both roulette players and investment bankers who engage in speculative derivatives trading. Because the banks have a virtual guarantee the government will cover their losses with bail outs, it’s like a casino giving them an unlimited supply of free chips. They get to keep all the winnings, and the taxpayer covers the losses.

Bitcoins as an Investment

Keiser begins his discussion of the merits of bitcoins at 23 minutes. He asserts bitcoins meet all four conditions Aristotle set out for a currency: portability, fungibility (i.e. it can be divided into smaller units), intrinsic value and durability. I’m not sure I agree with the last two. Bitcoins have no intrinsic value in themselves. Gold, on the other hand, can be melted down for other uses. Durability could also be a major issue if a grid collapse caused the Internet to go dark. While it’s possible to trade virtual bicoins for metallic ones, the latter only have value if local producers and suppliers are willing to accept them as currency.

*Crowdfunding is the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations. Crowdfunding is used to finance a wide variety of activities, including disaster relief, citizen journalism, political campaigns, startup company funding,documentary production, software development, scientific research,and civic projects.

photo credit: Stacy Herbert via photopin cc