A lot of attention has been paid to bitcoin in the last couple of weeks. As Chinese buyers piled in to the market, a gathering of bureaucrats in the United States gave their blessing to the nascent currency. The price movements in bitcoin have been jaw-dropping, to say the least. The naysayers, looking for any reason to belittle this digital innovation, leaped on a Bank of China announcement that prohibited Chinese banks from dealing with the currency. To those that have been paying attention, China has had a ban on virtual currencies since June of 2009 so this comes as no surprise. Other investors and speculators are painting pictures of tulip bulbs for us in the mainstream news, but even the Dutch didn’t see action this intense. Like Rocky Balboa, this new invention refuses to stay down.
So after making parity with gold, retreating and immediately recovering to what still feels like rarefied new heights, the next logical question is where does it go from here? Bitcoin millionaires are being minted by the hour and they will be leading the development of the bitcoin economy. Already we’re seeing numerous retailers adopt bitcoin as a system of payment and even if they don’t want to hold bitcoin themselves. Services like Bitpay and Coinbase allows them to access a market segment commanding over $11 billion in purchasing power. The message is clear; businesses want bitcoin and they’re willing to give you stuff in order to get it.
Bitcoin’s current valuation may seem high today, particularly when compared against many corporations. A single bitcoin is worth more than a share in Apple, once the darling of the NASDAQ. But bitcoin isn’t meant to be equity. It, like gold, is a currency and should be analyzed as such. Compared to the world’s major currencies, bitcoin still has a long, long way to go before it could ever rival them.
Compared to the top 6 currencies, Bitcoin is but a grain of sand and therein lies its major opportunity. Bitcoin is destined to supplant these behemoths; it is the automobile in a transportation market saturated by horse breeders.
“Now the advent of the Information Age implies another revolution in the character of money. As cybercommerce begins, it will lead inevitably to cybermoney. This new form of money will reset the odds, reducing the capacity of the world’s nation-states to determine who becomes a Sovereign Individual. A crucial part of this change will come about because of the effect of information technology in liberating the holders of wealth from expropriation through inflation. Soon, you will pay for almost any transaction over the Net or World Wide Web at the same time you place it, using cybercash.
This new digital form of money is destined to play a pivotal role in cybercommerce. It will consist of encrypted sequences of multihundred-digit prime numbers. Unique, anonymous, and verifiable, this money will accommodate the largest transactions. It will also be divisible in to the tiniest fraction of value. It will be tradable at a keystroke in a multitrillion-dollar wholesale market without borders.” (The Sovereign Individual)
Current payment systems simply can’t compete with bitcoin’s fees, security and convenience. Why spend hundreds of thousands of dollars on bank fees per year and lose hair as money transfers bounce from bank to bank during a wire transfer sometimes taking days to reach its destination, when it can clear within minutes and for mere pennies? As a currency, no sovereign can match it. As a payment system, no financial institution can compete with it. As a distributed network, no government can stop it.
Therein lays the real power of bitcoin; by granting individual businesses the ability to instantly settle international transactions the creative destruction of the marketplace has obliterated the hold that banks have over these long-distance payments through the SWIFT, TIPANET or any of the dozens of RTGS networks around the world. As adoption of bitcoin grows, it will displace more and more of the global M2 supply and, consequently, grow exponentially in value. Below you will see the value of bitcoin in today’s dollars should it expand to a certain portion of the whole of M2. For convenience, I’ve also put in the fractional units of bitcoin; milli and microbitcoins as you will soon be denominating bitcoin transactions in that manner so best to start familiarizing yourself with them now.
Some of these numbers may seem crazy, but they don’t lie. Keep in mind that if a 25% share seems optimistically high to you, remember that China currently holds a 27.8% share of global M2 and they got there in a relatively short time span.
Banks should not fight this transition. Their core operations as borrowing and lending centers will remain unmolested by the expansion of the new Bitcoin economy. There is much they can do to capitalize on it as well as further its implementation. By granting BTC-denominated letters of credit, providing escrow services, integrating Bitcoin wallet software in to their online portals and connecting Bitcoin to existing capital markets, banks could bring new profits in to their traditional lines of business. There is a very bright future ahead indeed for Bitcoin and for us all.
*Post courtesy of the Dollar Vigilante. Chris Horlacher is a contributor to The Dollar Vigilante and a Chartered Accountant practicing in the Greater Toronto Area. Formerly an auditor to Fortune 500 companies with Deloitte & Touche, he now provides project management and consulting services to mid to large enterprises, specializing in financial institutions. His work has included helping launch a successful stock brokerage, insurance and tech company. Chris is also the Vice-Chair of the Mises Institute of Canada and an advisor to the Bitcoin Alliance of Canada. His company website is www.mycfoweb.ca.
