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At the moment I'm publishing my Bitcoin thoughts on the HappyCoins blog.

Bitcoins and a regulated market

Despite the ECB definition of Bitcoin as a virtual currency, the regulatory position of Bitcoin is far from being clear.

In October 2012, the ECB defined Bitcoin as a virtual currency with a bidirectional flow. That means that Bitcoin has a buy and sell exchange rate, determined by demand and supply in the Bitcoin market. Subsequently, Bitcoin can be used for buying goods and services in both virtual and real economy. The ECB investigated Bitcoin in relation to risk for price and financial stability in the Euro zone. However, it underlines the reputation risk of Central Banks, if security incidents involve virtual currencies. For this reason, according to the ECB, transactions with virtual currencies should be under Central Bank responsibility. 

Despite the ECB paper, legislation involving Bitcoins is still far from clear. The major concerns of Financial National Institutions appear to be the possibility that Bitcoin, due to its anonymous nature, can be easily used for money laundering. Countries like the United States or Germany have declared that Bitcoin exchange platforms are to be submitted to the Anti Monetary Laundry laws if Bitcoins are changed into FIAT money.

The existence of a legal framework gives the boundaries where an enterprise can legally operate. It can create monopolies or it can set the entry rules for markets. For Bitcoins it could mean that, due to Anti Monetary Laundry acts, currency exchanges will have to meet specific, by law settled requirements, if they want to be an active player on Bitcoin market.

Depending on the nature and the costs of such legislation, this could act as a (high) barrier for market entry and thus introduce monopolistic forces in the Bitcoin landscape. On the other hand, the uncertainty caused by political indecision, keeps potential capital investors out of Bitcoin market due to the difficulty evaluating legal risks.

In conclusion Bitcoin is reaching financial maturity. It is growing from a merely Internet phenomenon to a recognized carrier of value for the real economy. Because of the nature of its network, it is nearly impossible to shut down the system. Therefore completely outlawing Bitcoin cannot be enforced. If it was feasible for policy makers to ignore Bitcoin until now, it will become soon necessary to define a regulatory framework.

Bitcoins and currency volatility

Last weeks, Bitcoins experienced high volatility in exchange value. While this instability is bad for merchants that use Bitcoins as a currency, a different kind of activity became suddenly very profitable.

The Euro currency and its bank system is designed to keep the price level stable. This goal is to be achieved by controlling the interest on loans that the Central Bank provides to commercial banks. There is no direct control of the Central Bank on the price level or, in principle, on the money supply side. The assumption is, that only a neutral stable price can reflect the existence of scarcity or surplus in the allocations of goods and services in a free market economy. In other words, the price mechanism cannot work properly if the price level is affected by inflation or deflation.

Such a free market economy, however, is a theoretical framework. A perfect price stability is difficult to accomplish in our imperfect world. Our economy has to experience, most of the time, inflationary or deflationary cycles. Nevertheless, a price that doesn't show a high volatility in the short run is much appreciated by merchants. It allows to estimate costs and profits for the future and help thus, to reduce uncertainly.

A couple of weeks ago, Bitcoin enjoyed a lot of attention by the traditional media. Many new people entered the Bitcoin speculation market and started buying and selling Bitcoins. The price of Bitcoin was affected and showed high volatility. That in spite of its deflationary nature. This quite unnatural behaviour in Bitcoin exchange value made transactions of goods for Bitcoin and vice versa, quite difficult. Webshop merchants had a hard time setting their prices in Bitcoins because they simple cannot use a fixed Bitcoin value in relation to currencies as Dollar or Euro.

However, while Bitcoins high volatility was annoying internet merchants, a different kind of Bitcoins economic players were, supposedly, enjoying high profits. When goods or currencies are experiencing a large range in exchange value within a very short time, “day trading” is a potential highly profitable activity. Buying Bitcoins at a low price and selling shortly after, when the price turns up, can be an easy way to make money. Every cloud has a silver lining...

Bitcoins: managing an uncertain world

After traditional media gave notice of Bitcoins, many people started to buy and sell this “currency”. But the largest Bitcoin exchange was not able to manage the increasing demand and went down.  

It may sound great: Bitcoins is an algorithm based crypto currency, strong anchored on mathematical laws. Its volume development over time is a given function that predicts accurately its growing path. However, last week, the largest trading exchange of Bitcoins had to suspend all transactions due to a too high demand flux on its network. How did that happen? Was this event unexpected?

One of the few certainties of life is that tomorrow is quite unknown. Of course, we have colored graphics, mathematical sequences and long statistical functions to predict our future. But the window we can open to the time that has still to come is very small. In other words, we can expect that an event will take place, we can calculate the probability of the event itself, but we cannot be sure that this particular event will take place next week instead of next month. Managing the risk of uncertainly is a difficult activity.

A couple of weeks ago Bitcoins were, for the majority of people, a vague and unknown phenomenon. Bitcoin users were mostly computer literate and mathematics fans. The situation rapidly changed when traditional media started to report about a new internet hype called Bitcoins. Suddenly, the entire world started to search and to look for Bitcoins. A high number of new users were born. The MtGox exchange managed with difficulties the new situation and it was forced to close its doors for some hours, due to the large amount of traffics on its network. Actually quite funny, if we remember that the Bitcoin community was trying to create awareness for the new crypto currency already for some years.

MtGox clearly didn’t expect an increase of transactions in such a small time. Or better, if it was expected, it was not able to deal with it on time. On the other hand, managing risk in the Bitcoin world is not such an easy matter. Bitcoin is a mathematical creation, but it is such a different concept that it can barely be compared with anything else. Unlike gold, Bitcoin has a short history to rely on. That is the reason capital investments in Bitcoin businesses are made very careful and in limited amounts. Logically, if we think that most of the enterprises have a responsibility to their shareholders. And shareholders don’t like failures.

 

MtGox is at the moment the largest exchanges for Bitcoins. In a free market, growing profits lead to new entrants on a market. This will apply to Bitcoins too. But uncertainty is a big factor for Bitcoins and thus a barrier. Only enterprises that will be able to manage the unknown risks would be able to entry and stay in the Bitcoin market. Only managers with guts will make the choice to invest in Bitcoins services and infrastructure.

Whatever the future will bring, the coming year will be an important year for Bitcoins. In this year we will witness if the new currency is here to stay and remain.

The easiest way to send money abroad: Bitcoins

Money transfers can be really a problem if you don’t live in the SEPA or Dollar area. Bitcoins can help you to send your money in a fast and easy way.

With the growth of globalization, an increasing number of people want to experience the thrill of an adventure overseas. Some of them are looking for a job, due to the high unemployment rate in their own country. Others just want to take a brake and have a nice holiday. All of them, sooner or later, would have to deal with money transactions between different currency areas.

In the past, the only way to take money with you, while traveling abroad, was cash. However, that made you a perfect target for robbery. The same problem was present if someone wanted to send part of his salary back home. With the technological development of the last decades, different services are available for sending or receiving money in a foreign country. They all use the bank system network, so your money will need a couple of working days or weeks to reach its destination. But sometimes you need your money just right now.

If you have a son or daughter traveling the world with a backpack, you probably know what it is all about. These young people are populating the squares of Europe, Asia or Australia. They worked all year round to earn enough money for their journey and they all are well prepared for the big world. Or are they?

Most parents will not be amused, but also not very much surprised, when the first SMS from their abroad child will pop up asking for help and money. Texts like:”Mum, I lost my credit card in Florence” and “Dad, the ATM is all in Chinese and it ate my card” are not uncommon messages that are sent home. Apparently, they most likely end with words like:”I’m hungry”, “I’m thirsty” and “I need money right now”.

Typically, Mum or Dad would text back: ”Sorry, son. Money is on its way. It will take a couple of days. Keep strong; catch some fish to eat and find yourself a nice bridge to sleep under for the night”.

It becomes a different story when you use Bitcoins. Modern parents already have, or can create, a Bitcoin wallet. In a few minutes and a couple of mouse clicks they can buy Bitcoins from an established internet Bitcoins service provider. The purchased Bitcoins can then be sent to their child and they will be almost instantly in their child’s Bitcoin wallet.

At this point your traveling child will no longer need to catch fish or search for a bridge. He or she will only need to look on the internet what Bitcoin services or private exchangers are active in the area and change Bitcoins in local currency. Or, even better, he or she can take a look around for a hostel or fast food restaurant accepting Bitcoins directly.

This is a much easier, faster, cheaper and funnier way for international money transfers. 

After “Cyprus”, Bitcoin might just be the natural choice

After the ECB left Cyprus with no cash, Bitcoin value just kept growing. But can we trust this digital currency?

The newspapers of the last days show the images of a boat stuffed with Euro cash reaching the coast of Cyprus. The army is defending the harbor and soldiers guard the entrance of the banks. In a few days, Europe managed to leave a member of its Euro community in a complete state of desperation. Foreign capital left the country through dubious detours and people have just enough money for a piece of bread. If ever there was a sense of solidarity between EU members, this is fading away.

The Euro is a centralized currency where the supply side is controlled by the ECB to achieve stability of the currency value. The austerity programs that have been introduced in almost all European countries should lower government debts and discourage inflation pressures in Eurozone.  

But if ECB is putting all its effort to keep inflation under control, it forgot that a currency needs trust to survive. Cyprus may be a peculiar case. It is a country political divided between Greece and Turkey where Russian capital found its tax haven. Despite this, Cyprus became an example for many people, in Europe and outside, that a centralized currency has its Achilles heel. The monetary network providing money to Cyprus stopped working, leaving its citizens with little or no cash to spend.

But how can we defend our savings if banks cannot be trusted? The traditional way to keep capital from depreciation is buying silver of gold. It is not a surprise that silver and gold increases its value in economical crisis time. The last month, however, the market discovered another possibility. Bitcoin, the virtual currency, showed up into financial news with an incredible growth. In other words this virtual currency is winning the confidence of people worldwide.

 However, why should we trust Bitcoin, if we cannot even touch it? Bitcoin doesn’t have a centralized bank system. In this way Bitcoin can use the whole internet network to move from place to place. A network as internet is nearly impossible to put down. With the use of an encrypted “wallet” Bitcoins can be kept safe from thieves and hackers. With an expanding system of users, you can buy and sell Bitcoin in a very simple way. That enables you to reach your capital wherever you are. And finally, a very important property: Bitcoin is really anonymous: your mother-in-law will never know how much you’ve got in your “wallet”.

Bitcoin: the Black Swan on the Euro Market

The introduction of the Euro was supported by a System of Central Banks that enjoyed a high level of independency. The ECB was, in fact, designed to sustain the stability of the Euro without interferences of policy makers. The idea was that an independent institution would better succeed in building trust in this new currency for the long run.

Unfortunately, the decisions of Eurozone to tax savings accounts on Cyprus soil, was a political decision dictated by politicians, not a technical one. Maybe this choice was made to decrease the value of the Eurocurrency to more acceptable levels for domestic export; maybe it was just an attempt to tax Russian capital for the Euro-crisis. It doesn’t matter. It was a political decision and another broken promise that dropped the confidence of Euro citizens regarding the Eurobank System to the bottom level.

 But there is no such thing as a free lunch in any political decision governments may take. When back in 1992 the Italian government did put a tax on bank deposits, Italian citizens did not have many other possibilities then to keep their money under the mattress for the great joy of thieves. At that time there was no alternative. How different the situation is right now.

The hit searches of Google of last week show that the awareness of Europeans toward the so called alternatives crypto currencies is increasing. Bitcoins are becoming a serious possibility for protecting precious savings, instead of putting them under the mattress. Spanish people and other members of Euro community are now investing in this new storage of value that ensures so much privacy that nobody can tell how wealthy or not you are.

It really seems that Bitcoins may become the Black Swan of the Euro Market and governments did not expect that at all…