A Forex Traders Guide To Bitcoin And Its Resurrection

It's Back

Many Remember Bitcoin’s Dramatic Rise & Fall of 2013. However, the Recent ~400% Rise Off the 2015 Low Is More Impressive. Getty Images

Talking Points:

  • What Is Bitcoin Again? A Beginner’s Primer
  • Why Would Bitcoin Rise Now? Let’s Count the Ways
  • Does Bitcoin Have a Future?

“What If I told you, the Blockchain (the technology making Bitcoin possible), could disrupt…everything’”

                -Goldman Sachs, 2016 What If I Told You Report

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

-Satoshi Nakamoto, November 1, 2008

What Is Bitcoin Again? A Beginner’s Primer

I hope you are sitting down. When you first are introduced to Bitcoin, it is hard to find a mental compartment that the concept can fit neatly to help comprehend.

Bitcoin is a digital currency that was created by a pseudonymous person by the name of Satoshi Nakamoto in late 2008, and Bitcoin was publicly introduced in early 2009. Understanding how, and the philosophy of why Bitcoin was created is helpful in understanding its likely longevity. First, the philosophy behind Bitcoin is really centered around the lack of a centralized authority that controls the quantity and flow of Bitcoin (BTC symbol used interchangeably.)

Instead of a central authority like a central bank or national treasury, the bitcoin network depends on the community of bitcoin owners that are interested in upholding the integrity and validity of the book we market.

The midpoint itself is a cryptographic algorithm as opposed to a paper currency that we are accustomed, and to be explained later there is a fixed amount in circulation. However, the divisibility of BTC allows for a lot of flexibility even if the number of Bitcoin’s are fixed.

A Sample Transaction Between You & Me

 If I was interested in buying something from you online, and you are willing to accept that point instead of your common paper currency we could use bitcoin. I would just access my digital wallet with X number of BTC, enter the amount of that point in your address and then ask for the network to validate the transaction.

The bit going network is typically comprised of 20+ individual parties to confirm I have the money in my account to send you, and that you have the goods that I am requesting an order for the transaction to be valid. The network individually receives a very small fee for their service and validating the transaction. Our transaction is then recorded on a public digital ledger known as Bitcoin’s block chain (because the pages of interactions on the ledger are “blocks” of data), and because it is a public ledger it can be referenced at any time by anyone.

Goldman’s Faith in Blockchain

To be fair to Goldman Sachs, who is quoted above, they are explicitly more interested in the implications of the block chain (sometimes known as the pipes underlying BTC)  than Bitcoin itself. Many companies have sprung up, most notably Blythe Masters’ Digital Asset Holding company who is looking to begin using the blockchain on a grand scale of bond trades, stock trades, and other financial markets.

In the same spirit as BTC, the capital market transactions would be recorded in a public ledger and confirmed by the network that is purported to be cheaper and help eliminate financial market loopholes like insider trading in front running large block trades from institutional clients.

One More Thing About the Amount of Bitcoin’s & Asymmetric Encryption

“A fixed money supply, or a supply altered only in accord with objective and calculable criteria, is a necessary condition to a meaningful just price of money.”

—Fr. Bernard W. Dempsey, S.J. (1903-1960)

Too many Bitcoin aficionados, the controlled supply of Bitcoin at 21 million in the year 2040 is one of the most endearing traits. The current supply is just north of 15,750,000 and is expected to grow up to 21 million as new blocks are discovered by Bitcoin minors.

In addition to the fixed supply, you can think of the algorithm underlying the bitcoin as a piece of the digital real estate. Real estate is a helpful image because every bitcoin wallet has a public and private key. The public key is much like your public resident address that anyone can access whereas the private key is much like the key that unlocks your front door that only you have access. Just like somebody that is not supposed to have the key to your front door could access your house and take anything they wanted, someone with your private Bitcoin wallet key could easily steal all of your money. Another simple example would be someone with your checkbook or access to your online bank account could easily transfer funds out of your bank to theirs if they had the right information.

Why Would Bitcoin Rise Now? Let’s Count the Ways

While some argue the Bitcoin was simply the opening act, it’s fair to say that the environment is ripe for an alternative currency. The qualifications would be a currency that isn’t subject to the devaluation at the hands of a central bank engaging in quantitative easing to hit economic milestones to help political parties remain in favorable eyes or to try and force the economy to grow beyond its natural cycles.

By no means do I think Bitcoin will be the one currency and governments will forfeit their rights and ability to control the money supply. However, a digital currency that has no borders and is very easy to transact internationally with no central authority potentially devaluing it could mean that Bitcoin’s time has come.

The initial meteoric rise of BTC happened alongside central banks finding their way out of the great financial crisis of 2008 and 2009. However, we have since seen the British exit from the EU also known as the Brexit, the devaluation of the Yuan from China that rocked central banks and global markets, and we now struggle with the realities of zero and negative interest rates which have led to unintended consequences that continue to confound central bankers.

Given the perceived failure of people trusted to put the economy back on the right track it makes sense that a decentralized cryptography-based currency that cuts out the middleman or trusted intermediary is seeing a revival. Since January 2015, the price a Bitcoin has risen over 400%.

As you can imagine, no developed market or emerging market currency has risen more than 30% over the last few years. In 2014, we saw significant strength from the US dollar that sent shockwaves across global commodity markets. From 2014 through 2016, we have seen a breathtaking decline in the British pound that only accelerated on confirmation of the EU exit from Britain. In 2014-2015, we saw the euro drop in value by nearly 40%. At one point in 2015, the Japanese yen had fallen over 60% from a high of ¥77 to the US Dollar to a low of ¥126 to the US Dollar.

Central banks have aggressively been working to limit the strength of their currency so that the export component of the economy can remain competitive. Such aggressive weakening across the board is known as a ‘beggar thy neighbor monetary policy.’ Unfortunately, we have seen few central banks willing to allow the market to determine the rate without a head governor acting or talking to influence currency values.

Given what happened in the global economy of higher volatility in the perception of desperate central bankers, the 400% plus rise in the value of BTC is significant. Gold has also had a significant rise in many see BTC as a form of digital gold because in an economic depression the ability to barter with bitcoin is perceived in a similar fashion as that of physical bartering with gold.

Does Bitcoin Have a Future?

You have been introduced to the potential impact that Bitcoin could have on the current monetary system if the wide-spread adoption took hold. The increase in cross-border transactions and the ease and low cost of bitcoin transactions appear to make Bitcoin an alternative worth considering given high wire fees that banks charge. Additionally, we have seen hundreds of thousands of credit card files stored at physical retail stores accessed through hacks, which would be similar to someone having access to your bitcoin private key.

As a form of money that can be used interchangeably internationally, bitcoin appears to be durable, the visible, and outside the hands of authorities that can devalue everyone’s assets at least and go. It was virtually impossible in the early 90s when the Internet was getting started to imagine Facebook, Twitter, Google, and thousands of other companies are now become a mainstay thanks to the technology of the Internet.

In similar fashion, it's hard to say what would or could take Bitcoin to the next level of mass acceptance. However, we have seen the framework, philosophy, and usability appears stable and available for broad adoption.

While an explanation on Bitcoin may seem unusual in a Foreign Exchange Trading forum, our global economic system based on money. As Bitcoin appears to have the promises of holding value over the long-term, and we contemplate the potential destructive actions taken by central bankers worldwide it is likely premature to label bitcoin as a fad or unable to be adopted on a large scale.

Surprisingly, as referenced by Goldman Sachs and a large consortium of banks known as R3CEV, Bitcoin may have a significant future thanks in large part to the block chain. A distributed database that is fully public and validated could allow new uses for bitcoin that have yet be thought of or put in practice. Either way, continue to keep an eye on the price a bitcoin to look for price stability or a continual uptrend.

Currently, the efforts by central bankers have yet to bring about significant inflation. Should significant inflation arise, we could see the strongest case for bitcoin yet because of its ability to hold its value, and rise should conditions should warrant. Many think of inflation as an increase in the price of goods, but history has shown us very vividly that inflation is a decrease in the value of the home currency. Therefore, it makes sense that a large-scale devaluation of conventional currencies in many countries could bring a move towards the advancement of bitcoin and its underlying technology of the block chain.