What is bitcoin?
Bitcoin is an alternative currency that is purely electronic. It’s distributed platform and open-source algorithms have made it popular among some who think it could be a viable way to store your savings–away from the prying eyes of the government. More trenchantly, it received a big boost when the government of Cyprus proposed to tax (i.e. confiscate) part of the wealth its citizens—down to a single euro.
Is bitcoin a threat to the government? It could be. If many vendors accept bitcoins for merchandise, there’d be no way that we now know to track those transactions. Right now there’s not that much bitcoin currency out there—around $1 billion worth. But that could rise, if the currency becomes popular.
Bitcoin’s problem is the problem every alternative currency faces: liquidity. Eventually you have to convert those bits into bucks, and the buck stops there. Dollars exist in banks and exchanges, and their computer servers can be seized and examined by the authorities.
Back in the ‘30s, pulp fiction was filled with stories of bearer bonds being used by refugees, criminals, and anyone else who wanted to keep the government’s eyes off their finances. But a funny thing happened: the government changed the redemption rules. Now a trustee won’t pay out on a matured bond unless you give them your Social Security number. So much for anonymity.
So don’t plan on bitcoin being the next substitute for money. Chances are, they’ll go the way of greenstamps.
Douglas R. Tengdin, CFA
Chief Investment Officer
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