Unless you have been living under a rock on mars, it has probably seemed like the whole world is going a little Bitcoin crazy lately. So for those of you who have crawled out from under your rock and have just gotten back from the martian planet, I will quickly get you up to speed on the ins and outs of Bitcoin and Cryptocurrencies.
What is this Bitcoin thing?
Bitcoin is a cryptocurrency that was developed by Satoshi Nakamoto. It is called a cryptocurrency, because it uses cryptography to control the creation and transfer of money. Bitcoins come into existence through the process of mining, which you can learn about in this really informative video below
Note that you don’t have to mine Bitcoins to own some, if you want you can just buy them on an exchange by trading US dollars for them. Once you own some Bitcoins you can then trade them with other people on virtual currency exchanges, or even buy real goods and services with them.
So in short, Bitcoin is is just like normal money with the main difference being that it is online – plus a few other things that I will cover shortly.
Other Digital / Crypto Currencies
Bitcoin isn’t the only player in town. Apparently there are over 100 different virtual currencies floating around the internet. The reason why you likely haven’t heard of some of these others like Litecoin, Peercoin, Worldcoin etc etc. is because Bitcoin was first to market and has the largest market capitalisation with the largest user base.
Why Cryptocurrencies Matter?
The main big attraction to cryptocurrencies is that they are free from government control, unlike every other physical currency in the world. This has MAJOR benefits to the people of the world who want to maintain their wealth without having central banks and government rob them through massive inflation and bizarre quantitative easing campaigns. Most cryptocurrencies have a fixed limit on the number of coins that can be mined (which I personally think will be their undoing) but there are a few (like Peercoin) that have a set inflation rate that cannot be tampered with.
Now you are probably thinking – “But these virtual currencies aren’t real – they aren’t backed by anything.” And you would be right, they aren’t backed by anything – just like US Dollars aren’t backed by anything other than the government saying that it is worth something. Remember that President Nixon abolished the gold backing for the US dollar, as have all the other major currencies on the planet.
Many governments and central banks have already spoken out about not putting money into these digital currencies, but when you read things like this from the IMF, you can understand why Bitcoin continues to reach higher and higher prices.
‘The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”- a one-off tax on private wealth-as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behaviour (and may be seen by some as fair). …
‘The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away.
The tax rates needed to bring down public debt to pre crisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth. ‘
Read the whole thing here – it’s pretty insightful as to what the people in control of the money want to do to even their balance sheets. In case the quote above didn’t make a lot of sense – it essentially says that when push comes to shove the government will order the banks to close and they will take 10% of your money as a one off tax for the good of the nation… Yeah, no. Not with my money you don’t.
Then you have the new Federal reserve chairperson (Yellen) saying things like this (source – The Daily Reckoning):
–Erik Townsend, a retired software entrepreneur turned commodities trader, was at a conference where Yellen gave a speech not long ago. He explained on Jim Puplava’s Financial Sense podcast what Yellen may have in store for us:
‘She was talking in her lecture, about how if there was anything she could do to figure out a way to make interest rates negative, she would do that, because she feels that that’s what we need to do to make credit as easy as possible for the people. And I asked the obvious question that none of the San Francisco liberals were asking, which is, what about savers and investors? Doesn’t that punish them?‘
–Negative interest rates would mean savers pay interest to the bank and borrowers get paid interest. Although, by the time banks throw on their margins, it’s likely that both rates will just approach zero. Townsend continues:
‘She said, well, we’re coming to the point where we have to consider the role of people who have significant savings and their responsibility in society, that it really is selfish to be hoarding it and that we need to create incentives through government for people to spend their savings, because that’s exactly what we need in order to rejuvenate the economy.’
–Making comments about policy is different when you’re actually making the policy. But this remarkable way of thinking tells you how Yellen sees the world. And it’s a world where savers are bad, spenders are good and borrowers are great.
So with the prospect of a 10% tax on any cash savings and negative interest rates I think I will take my chances with the cyrptocurrencies. Normally I would also recommend some gold and silver to be safe, but we have seen governments confiscate that before. At least with virtual currencies the whole thing is encrypted and much more difficult to confiscate.
Where to Get Started
If you like the idea of opting out of this ridiculous money experiment happening right now (I mean the one your government and reserve bank are conjuring) then there are a few digital exchanges where you might want to get started.