As for the future, our task is not to forecast it, but to enable it
Antoine de Saint-Exupéry
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Bitcoin in the news of november 2013

How does crypto-money work ?

World is always bubbling, and presently, Bitcoins are bubbling !

After the Congress hearing of November 2013 and the statement of Ben Bernanke on virtual currencies, in a casual form the whereabouts of Bitcoin

What is Bitcoin ?

Bitcoin is an Internet-currency, a "currency" which does only exist on computers.

Bitcoin does not have an intrinsic value. Bitcoin is also not coupled to the price of say energy or gold.

Through this caracteristic, Bitcoin is similar to the current official Fiat-currencies. They are called Fiat-currencies because since the presidency of Richard Nixon, they are no longer convertible to gold. Official currencies have legal tender in their country of origin. E.g. taxes have to be paid using a currency enjoying legal tender. Damages fixed by Courts are typically labelled in the currency enjoying legal tender.

Because Bitcoin has nowhere legal tender, Bitcoin is called a virtual currency.

What is the cause of the current interest for Bitcoin?

A second difference with legal tender currencies is the fact that the total number of ever to be emitted Bitcoins has been fixed at 21 Millions. The owner enjoys the garantee that the printpress will not be used to solve urgent problems… This is an major asset in the world of quantitative easing in the US and of rescue packages in Europa. Chinese capital is buying more and more bitcoins likely exactly for this reason.

A third major difference is that Bitcoin are not held in a bank-account. The bank is (typically) not the debtor to the Bitcoin holder. However, of course custody is possible.

The owner of a Bitcoin owns a coin. Negative coins do not exist. This was a fundemental design decision of Bitcoin. ( Nevertheless banks can open Bitcoin accounts as they open gold accounts. In this case, the Bank owns the Bitcoins and is on the other side a debtor and not a custodian. )

Buying Bitcoins ?

Today the greatest market is china (btcchina.com). There are markets in Europe (e.g. bitcoin.de), Japan (mtgox.com) and in the USA.

What is the outlook on Bitcoin ?

It could be excellent ! Bitcoin is a guarantee against the print press. An colossal appreciation of Bitcoin is conceptually built in the scheme. (Which does not mean it will happen again in the future ! ) Today, the smallest Bitcoin unit is the Satoshi which is worth 0.000 000 01 Bitcoin. If the price of Bitcoin would rise so that even a Satoshi would be too big a unit, additional decimal places will be provided. The 21 million Bitcoin limit will not be touched.

The second positive aspect is that the Bitcoin-owner has no debitor. So no domino effect to be afraid of !

Crypto-currencies could be a major opportunity for Luxembourg. Expect also the raise of other cryptocurrencies which will be more linked to the legal system of the host country

As Chairman Bernanke stated, virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.” This statement explains partly the last surge of Bitcoin

Indeed the price of Bitcoin has jumped in one year from around 12$ to more than 700$ through several stages and at the time of this writing seemed to stabilize at around 500 $ to rebound to 800$. As you can see there are tremendous fluctuations, including downwards. Fluctuations of far more than 50% down or up happen! Be aware !

The tremendous increase of the Bitcoin price immediately raises the question of whether it is a buble. But is it a buble or is it a Black Swan ? This question should be discussed in more depth, in a forthcoming article ;) .

A second major risk

Bitcoins are stored in the computer in so called wallets.

And today we are facing viruses, i.e. fully automated computer-attacks, specifically aiming at stealing the keys giving access to the Bitcoins owned by the computer holder. The more Bitcoins are valued, the more this problem will become relevant. (Expect to see specialized and secure hardware-wallets in the future)

Nevertheless: Today it seems that Bitcoin and other crypto-currencies are here to stay ! Affaire à suivre !

Disclaimer

This is by no way a financial advice. If you were to invest in Bitcoins or to disinvest, you are doing it at your own risk and you are strongly encouraged to do your own research. Any liability of the undersigned will be vigourously denied ! See also the Legal notice