If you’ve had your head under a financial rock lately or just returned from a St. Tropez vacation, then you have reason not to have seen the news, heard the boasting or for some — the razzing about a new medium of financial transactions. It’s called the “bit coin.” The most exciting thing to hit popular economics since the ‘sub-prime bubble,’ the Internet Sock Puppet or the Dutch Tulip Bulb Mania.
Believers Or Leavers
There are doubters of course even in the face of the irony: That while the Internet has affected almost every part of our lives as promised, it has done little to affect the traditional assets of commercial exchange.
This is not the place nor the space to explain how bit coins have come to be, how they’re mined, the complex math algorithm behind their control or how they have both skyrocketed in value one day and plummeted the next. Leave it to be said, with the likes of Bank of America Merrill Lynch calling bit coins a potential “major means of payment for e-commerce (a sizable market in today’s commerce) and that it may even emerge as a serious competitor to traditional money transfer providers,” that Dick Bove at Rafferty Capital Markets claiming in a note to clients, “It is not the last and there will be other more refined approaches, but make no mistake one or many digital currencies, which are not controlled by governments are coming,.” I wish I would have said that!
Enter JP Morgan
One of the largest banks and asset management companies in the world has applied for a patent eerily similar to bit coins. You have to take some notice and as Bove adds, “It will be a factor in valuing certain banking products related to the payment system.”
Bit Coin Prices
In 2011 the value of one bit coin rapidly rose from about $0.30 to $32, before falling back down to $2. Then on 19 November 2013, the value of bit coin on the Mt. Gox exchange soared to a peak of $900 USD following a United States Senate meeting where it was announced that virtual currencies were a legitimate financial service. There are roughly 12 million bit coins in existence as of November 2013.
Pizzas And ATMs
There are already some pizzerias in New York willing to take bit coins for a 10″ pepperoni and ATMs that ask if you prefer your funds in cash or coins – bit coins. The market for these is growing everyday. Even the Winklevoss twins, those boys involved in the brush-up during the founding of Face Book have taken a major position in the coinage.
But Not My CPA Friend
No. He absolutely believes it’s a scam. I point out to him that his tech abilities hardly extend beyond Skype, nor has he a Twitter account to call his own, but “The technology be damned” is his opinion. And yet it is both, the public opinion and the economic meaning of what constitutes money that will determine bit coins’ acceptance.
Any article, coin, gem or device that is broadly accepted as a form of a ‘third party exchange’ — meaning other than direct barter — and has the means of ‘holding value’ constitutes money. Now the value may rise or fall as we often hear of foreign and domestic currency manipulations, but the “money,” be it the US dollar, the euro, gold, etc. has acceptance among an array of users harking back to prior transactions. As an example:
The purchase of Manhattan Island from Native Americans for glass beads worth $24 Dutch guilders in the 19th century, a value of $24 USD then and $1000 today.
So Who’s Right?
It will be some time before we find out if Dick Bove, Bank of America, JP Morgan and all the thousands of speculators are right or if my CPA friend ends up with the last laugh. Meanwhile I’m reminded of the song by Johnny Mercer (1940), sung by the likes of Frank Sinatra, Elvis Presley even Ricky Nelson… “Fools Rush In”
“Fools rush in where wise men never go,
But wise men never fall in love,
So how are they to know.”