Exter's Pyramid

John Exter was an American economist and central banker who believed in sound money.

He had a theory that in a period of debt deflation, capital would flow from the riskiest of asset classes down to that which, by its very nature, is sound money. Take a look at Exter's Pyramid, below. As the global debt crisis continues to spiral out of control, the credit instruments at the top of the pyramid will begin to collapse until the bottom of the pyramid is reached. Where do you think Bitcoin would fit into this pyramid?

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Bitcoin and Conventional Business do not Mix

It's time to be truly honest about what we're up against in terms of motivating the adoption of Bitcoin.

Imagine the best-case scenario where Bitcoin exchanges accept credit cards, directly. There is absolutely no way they will be able to drop a credit card deposit fee below a very generous 2%, and that's assuming that chargebacks won't happen, which they will.

Add the additional 0.5%, or so, that you would have to pay for actually buying the Bitcoins on the exchange, and you're looking at a minimum of 2.5% in fees from the get-go. That 2.5% already negates any savings that a merchant could offer for someone willing to pay with Bitcoin. Right there, we know it makes absolutely no sense to offer a product or service for Bitcoin when the same thing can already be acquired with credit cards or PayPal. Now you understand why Cheaper-in-Bitcoins made almost no sales whatsoever, and why you'll never see Amazon adopt Bitcoin.

We also talk a lot around here about charities or non-profits that accept Bitcoin donations. Again, no one is going to go out of their way to acquire Bitcoins in order to make a donation; it just adds an unnecessary extra step. Nor are people going to acquire Bitcoins to be able to buy indy-music, make micro-donations to blogs (too bad!), or pay for shareware. Independent artists, writers, and software developers should accept Bitcoin as a secondary source of income, but it will never make up more than a small percentage of their revenue. Bitcoins will eventually trickle into their pockets, but they won't spur the actual adoption of Bitcoin.

So, if conventional online businesses and charities are out the window as motivators for Bitcoin adoption, then what will actually do the trick?

1) Illegal markets. Where there is a desire to maintain as much anonymity as possible, Bitcoin will thrive. Silk Road is what put Bitcoin on the map, and it continues to operate successfully to this day. There is no denying that Bitcoin will become the preferred method of transacting in illegal markets, because it gives an obvious advantage to both clients and merchants.

2) Virtual markets. Virtual currencies could always be purchased with credit cards, but then the user was constrained to one platform. With Bitcoin, users can move their money between different virtual worlds, assuming they eventually support Bitcoin. This is a multi-billion dollar market that can be exploited.

3) International markets. There's never been an easier way to move money across borders. Any business that can take advantage of the agility of Bitcoin will do so.

4) Online gambling. The reason why online gambling and Bitcoin make a great match is because of the ability to easily withdraw Bitcoins from a casino. Until now, it's usually been a pain in the ass to retrieve your winnings. Being able to get your money out of a casino as quickly as you got it in is sufficient motivation to go out to the bank and wire some money to an exchange.

5) Investing. If 1, 2, 3, and 4 begin to catch on, then Bitcoin will continue to be a viable investment for those looking to move their money out of fiat currencies and maybe diversify their precious metal portfolios. Given the ever-worsening sovereign debt crises, Bitcoin will become an even more attractive investment.

Between these five motivators, we're still looking at the possibility of a multi-billion dollar Bitcoin economy. Therefore, at the end of the day, we shouldn't get too worked up about whether or not Amazon or Wikipedia will eventually accept Bitcoin. Bitcoin's strength is not in the conventional.

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Bitcoin: The Best Investment in 2012

Let's look at some of the factors at play here:

1) The hacking is over with. Between Mt.Gox, Tradehill, Intersango, Cavirtex, and the other reputable exchanges, we've seen a reliable streak. Amateur night is done.

2) There are reliable ways to store your Bitcoins. With the exchanges mentioned above, e-wallets like Stongcoin, and secure wallets like Electrum and the Satoshi client, securing your investment is no longer a crapshoot. It's incredible to think how far we've come.

3) Publicity, publicity, publicity. In two days we've heard from Max Keiser, Fox, and Fred Wilson, and all in a positive light. Right there we've had three of the largest bouts of publicity for Bitcoin since its inception. What's coming in the next year? The sky's the limit, really.

4) Development. Mt.Gox is about to unleash a new round of products and services, one of them probably being their point-of-sale device, as was promised back in July. Tradehill is working bitcoin.com. Others promise easy ways to buy Bitcoins with credit cards; Crypto X Change is making it much easier, on a global level. FeedZeBirds is innovative. What's next? 2012 will be an amazing year for Bitcoin development.

5) Existing business is recognizing Bitcoin. Switch Poker was the first already-existing poker site to start accepting Bitcoin. Other online casinos have their eyes on Bitcoin and don't want to lose ground to the competition. Okpay started accepting Bitcoin deposits just recently. They'll soon be releasing Bitcoin merchant services and permitting Bitcoin withdrawals. Okpay is fairly large, with half-a-million accounts, but it's just a matter of time before even larger dominoes start to fall. These payment processors are seeing Bitcoin as another opportunity to make money, and like the casinos, they won't want to fall behind.

6) Global financial trouble. The Euro is done, kaput, over with, but it's not the only one. The Occupy movement is waking people up to the deceptive practices of banks. Financially-aware people will want to re-gain control of their money and diversify out of fiat currencies into alternatives like gold, silver, and Bitcoin. I already know a lot of people who invest in Bitcoin to hedge against holdings in their national currencies; more people will be doing it.

When you have a bubble like we've had, and then a crash, but then a definitive rise from the ashes, it's going to generate some serious publicity. Once investors realize that Bitcoin acutally ISN'T going away, they're going to pile on, and it will make the June 2011 bubble look like a speed-bump.

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Twitter, Zynga, and Foursquare Investor is Considering Bitcoin

Fred Wilson of Union Square Ventures is very interested in Bitcoin. From today's blog entry:

"So it seems to me and my colleagues at USV that an alternative currency with roots in peer to peer networks and based on an algorithm that is transparent to everyone is an idea whose time has come."

"I'm confident we'll see the emergence of currencies that are not controlled by nation states in my lifetime. Whether that is a good thing or not remains to be seen. I think it is, but there are significant ramifications that will result from the decoupling of currencies from governments. And one of them is an interesting investment opportunity that we hope to participate in."

Fred Wilson is not just another blogger. He is the co-founder of Union Square Ventures, a firm with investments in Twitter, Tumblr, Foursquare, Meetup, and Zynga, among others.

His blog has 280,000 monthly readers and an Alexa traffic rank of 6060 in the US. Needless to say, this is going to get Bitcoin a lot of attention.

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This Week's Financial Headlines (Why You Should Hold Bitcoins)

Portugal's Rating Cut To 'Junk' By China's Dagong

Fitch Downgrades Portugal To Junk On General Strike Day

EURUSD Tumbles, Italian Yields Pop After Merkel Says "Firmly Against Eurobonds"

IMF: Japan Debt Could "Quickly Become Unsustainable"

Pictures From A Latvian Bank Run As MF Global Commingling Comes To Town

Hungary 'Junked' By Moody's

Belgium Hits Record High Yields As Business Confidence Slumps

Sarkozy: Europe's "Liquidity Run" Has Begun Because There Is An Unsolvable $30 Trillion Problem

EU Demands Right to Dictate National Budgets

Who Will Bail Out the Fed?

Death of a Currency as Eurogeddon Approaches

Japan ‘May Be’ Close to a Downgrade: S&P

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Former Deputy Editor of the Wall Street Journal: Bitcoins are an Option if US Monetary System Fails

Comments from a panel at the Cato Institute’s 29th Annual Monetary Conference:

George Melloan
Former Deputy Editor, Wall Street Journal

- Jokes about what a nickel could buy during the (big Baby Ruth bar) Depression and now (a jellybean).

- Talks about post-WWII monetary policy in Britain, and how British Socialism led them astray. War in Vietnam did much the same thing in the US, leading Nixon to end Bretton Woods.

- Dollar’s primacy increasingly questioned.

- Inflation coming as the Fed creates credit to fund the US government.

- Doubts that multilateral currencies like the SDRs of the IMF would work. The Euro proves that.

- The US needs monetary reform, but we might need to fail before that comes. Gold, bitcoins, scrips, barter if things break down. Fiat currencies are liquid, barter is inefficient.

- If the US dollar goes, a lot else will go down as well.


Speaking of the US monetary system failing:

Forbes: "The next financial crisis will be hellish, and it’s on its way"

"We're raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out."

"The Fed's entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets."

"Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet. Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out."

And I will end with the last line from Ann Barnhardt's letter announcing the closure of Barnhardt Capital Management:

"Alas, my retirement came a few years earlier than I had anticipated, but there was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law."

I sleep well at night knowing I'm holding Bitcoins, because I don't have to try to predict on exactly which day the global financial system will collapse, because it's about to implode, and it's not far off.

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Bitcoin: A Harbor in a Currency Storm for Belarus and Ukraine

Two countries that have recently faced massive currency devaluation, of a magnitude that would have significantly impacted the standard of living of their populations, are Belarus and Ukraine.

Over a period of three months in late 2008, in the wake of the global financial crisis, Ukraine's currency, the hryvnia, was devalued by 38.4%. This wasn't the first time Ukraine had seen its currency crumble, with an even more significant devaluation happening in 1998, on the order of 69%.

More recently, on May 23rd of this year, the Belarus ruble was devalued by 56% in an effort by the country to address its overwhelming sovereign debt.

Is it any wonder then, when we look at the list of the top 15 Bitcoin-using countries, and divide the number of connected clients over the last 24 hours by the number of Internet users in each country, we get this?

It is very clear from this chart that a disproportionate number of Internet users in Belarus and Ukraine, when compared to other countries, are turning to Bitcoin as an alternative investment to protect themselves from their own currencies.

I believe this chart would remain true using data taken over a prolonged period of time, as relative Bitcoin usage in the top 15 countries has been consistent over the past six weeks.

If there is any proof that Bitcoin is being considered as a viable alternative to fiat currencies, this is it. As the European Union continues to collapse economically, it will be interesting to see how many more people begin to turn to Bitcoin to preserve their wealth.

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A Bitcoin Bond?

Could it be?

"You will soon be able to purchase Bitcoin through a financial instrument. I will announce it when its ready and the product is readily available to purchase online and through banks on the stock market."

"Each bond has to be denominated in some sort of a price. And if I peg a bond to the price of btc then I have to find at least some similarities between the two. I am not sure yet about how exactly the whole structure is going to look like but ill let you know once I know for sure what I want to do."

Since the "bond" (more like an ETF) would be pegged to the price of Bitcoin, the organization behind the bond would have to buy and sell Bitcoins in accordance with the interest in the bond. Got to love free markets...

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Bitcoin is Not for Sale

There is an interesting anomaly associated with the drop in Bitcoin's value. The entire time, there has never been a 24 hour volume spike greater than 220,000 Bitcoins traded.

In the stock market, this simply does not happen. When investors lose faith in a stock, a much larger percentage of shares end up being traded than what we've been seeing with Bitcoin. An example I will use is Research in Motion (RIMM), the maker of BlackBerry. Although the company hasn't gone under, it's had a very rough year. On the worst day, 113 million of its 520 million shares were traded, or 22% of total outstanding shares. On that day, the stock dropped from $35/share to $26/share, or a 26% drop:

On October 17th, Bitcoin dropped from $3.50 to $2.50, or 29%, but only 220,000 of the 7,500,000 Bitcoins were traded, or 2.9% of the total Bitcoins.

The drop in value, alone, should be driving a volume increase, since each Bitcoin is worth less and therefore easier to buy or sell.

What this tells me is that a) investors are holding on for the long-term, and b) this drop is only temporary and driven by a small percentage of Bitcoin holders. If investors were truly of the belief that Bitcoin had no future, you would see volume spikes into the millions of Bitcoins.

If you are an investor in Bitcoin, this should be looked at as an opportunity to add to your position.

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