Money Morning Oct 10th

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10 October, 2013
  • Should you buy some bitcoins?
  • Why the price of silver could double soon
  • The government is inflating a disastrous property bubble
  • Yesterday’s close: FTSE 100 down 0.4% to 6,337… Gold down 1.02% to $1,305.80/oz… £/$ – 1.5954

From Dominic Frisby, in London

 

Dear Reader,
It’s a subject I’ve been asked to write about more than any other. But it’s one I’ve avoided.

However, a bit of news from last week has finally persuaded me to get my fingers tapping.

Today we’re talking bitcoin…dominic-frisby

 

 

 

Bitcoin has been remarkably successful

Long-time readers will be familiar with my obsession with our system of money. If there were one thing in the world I could change, it would be our system of money.

I believe it bears significant responsibility for many of the ills in our world, not least the horrendous gulf between rich and poor. So when something like bitcoin – a digital currency with no central bank or government to back it or debase it – comes along and presents a viable alternative, I cannot help but like it.

But it’s one thing to like what something does, and what it stands for. It’s quite another to like it as an investment. So should we be buying bitcoins?

I heard about the bitcoin story early and I liked it, but I didn’t buy in. What a mistake. I didn’t entirely understand it (I’m still not sure I do, but then again I’m not convinced I entirely understand fiat money either) and I thought it might be a scam. Moreover at the time – 2009 – I thought most of the solutions to the world’s monetary woes lay primarily with gold.

But in many ways bitcoin has started doing the things I hoped gold would do, only better. Gold’s credentials as a store of value are impressive, but it has never been a great medium of exchange. bitcoin is. Blimey, it’s even better than fiat money.

I was just paid $2,000 for a job I did abroad. It took several days for the payment to clear. By the time all the various intermediary bank charges and forex fees had been paid, I was almost 10% down. With bitcoin the transfer would have been instantaneous. There would have been no leeches, banks or forex bills to pay at all.

In any case, when bitcoin started moving up earlier this year, I didn’t want to chase it, and I ended up missing the boat. In the few months from January to April, it went from $17 to $240, with the chart action of an exploration company that’s just struck gold.

Its stratospheric rise hit the headlines briefly, and lo and behold it tanked – but only down to about $70. There was the proverbial dead cat bounce to $140 and slowly through the summer it made its way back to $70, where it held. Yes, it was a 50% fall – but it was still three and half times higher than where it began the year. And since July it crept back up to around $140 or so (I’m using round numbers).

Below is the long-term of chart of bitcoin for your reference.

101013MMNsmall1

Click on image for an enlarged version.
Source: bitcoincharts.com

The demise of the Silk Road didn’t kill bitcoin

Then came last week’s news that the FBI had shut down the Silk Road, an underground website through which people bought and sold illegal goods – it was like Amazon for drug dealers.

If you’re buying and selling illegal goods, you need anonymity. So bitcoin was the perfect currency. It’s estimated that somewhere between 5% and 10% of all bitcoin transactions took place on the Silk Road.

As the news of the site’s demise came in, bitcoin fell from $140 to $112. Here’s the chart of the action that day – it’s pretty calamitous.

101013MMNsmall2

Click on image for an enlarged version.
Source: bitcoincharts.com

I thought that the end of the Silk Road might spell the end of bitcoin. But it hasn’t. bitcoin has rebounded. It’s sitting at $137 as I write this.

If bitcoin’s a bubble, it’s got mighty thick skin.

And no wonder. There’s a lot more to digital currency and payment systems than criminality. According to Bloomberg, digital currency is all the rage in Silicon Valley. Everyone and his wife is trying to devise the new one. But it is bitcoin that has caught the imagination and caught a bid.

A good investment needs a good story – and, boy, is bitcoin a good story.

What’s more, chartists will look at that long-term chart and see a potential inverted head-and-shoulders pattern forming, which points to prices moving towards the $200 mark (if you want to trade this, by the way, put a stop somewhere in the $120-$130 area).

All of which makes me want to buy in.

Governments will not let an upstart currency wrestle their power away

But here’s the hitch.

The biggest threat to governments worldwide – to the Western large state model – is not the party in opposition. It’s not the mavericks like Nigel Farage or Beppe Grillo or Ron Paul.

It’s losing control of money.

Control of money is what makes a government’s size and power possible. You can rest assured that governments will fight bitcoin, if they aren’t already, just as they did the Silk Road – if only to protect tax revenues.

Do you really want to risk having significant capital in something that will have the full force of governments stacked against it? It’s far easier to own assets like London property or even the US stock market, that have government legislation and state-sponsored credit on your side. ‘Don’t fight the Fed’ as they say.

I do believe that the independent digital currency is the future. It will be the norm within a generation and probably sooner. But will that currency be bitcoin? Who knows?

I was given some bitcoins by a generous soul when they were worth the price of a drink. Now they’re worth the price of several rounds of drinks. I’ve made it possible to buy my book using bitcoins too. I would like to own more bitcoins.

But the horse has bolted. The big gains have been made. Like the mining company that has made the discovery, but now needs to build a mine, a long hard battle lies ahead for bitcoin as it consolidates and grows – and one of its biggest opponents will be governments. I’m not willing to risk significant amounts of capital on the outcome of that battle.

So my conclusion is this: bitcoin is brilliant. Own a few bitcoins, if only to get a better understanding of digital currency. But use speculative funds only – don’t risk the house.

It’s actually quite easy to buy bitcoins, though it looks quite daunting at first. In most cases you open an account, deposit some money and you’re off. The world’s largest exchange is Mt Gox. Blockchain lays it out conveniently for UK users. And Bitbargain also has an online tutorial. It takes a bit of getting used to – start with very small amounts while you get to grips with the process – but it’s actually wonderfully simple.

And if you want to know more about the background to Silk Road, it’s covered in the latest issue of MoneyWeek magazine, out tomorrow.

Got a comment on this article? Leave a comment on the MoneyWeek website, here.

Until tomorrow,

Dominic Frisby

MoneyWeek

Our recommended articles for today…

Why the price of silver could double soon
– The current low price of silver is truly astonishing, says Simon Popple. Here, he explains why he believes it could soon be double that. Why the price of silver could double soon.

The government is inflating a disastrous property bubble
– The only reason that house prices have not collapsed in Britain is because the government has not allowed them to. That’s a huge mistake and is likely to end in disaster, says Merryn Somerset Webb. The government is inflating a disastrous property bubble.

And for yesterday’s market update, see below…

 

 

Market update

Click here for the latest stock market news and charts.

The FTSE 100 saw further falls yesterday, slipping another 0.4% to close at 6,337.

Miner Vedanta was the day’s worst performer, down 4.7% after Morgan Stanley downgraded the stock.

In Europe, the Paris CAC 40 fell six points to 4,127, and the German Xetra Dax was 39 points lower at 8,516.

In the US, the Dow Jones Industrial Average rose 0.2% to 14,802, the S&P 500 added 0.1% to 1,656, and the Nasdaq Composite slipped 0.5% to 3,677.

Overnight in Asia, Japan’s Nikkei 225 rose 1.1% to 14,194, and the broader Topix index gained 1% to 1,177. And in China, the Shanghai Composite fell 0.9% to 2,190, and the CSI 300 was 1% lower at 2 ,429.

Brent spot was trading at $109.75 early today, and in New York, crude oil was at $102.15. Spot gold was trading at $1,305 an ounce, silver was at $21.78 and platinum was at $1,381.

In the forex markets this morning, sterling was trading against the US dollar at 1.5937 and against the euro at 1.1803. The dollar was trading at 0.7406 against the euro and 97.70 against the Japanese yen.

And in the UK, retailer WH Smith reported a 6% rise in profits. The company made £108m in the year to 31 August, despite like for like sales falling by 5%.
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