Monday, January 22, 2018

Bitcoin Tuna!

Fore-note: Tuna! is a metaphor for the buying and selling of everything without concern for the consequences. There is much coverage of this concept here in this Blog as well as in other media under the moniker of "It's All Tuna!"

Bitcoin. That ubiquitous intangible currency which is all the rage in speculative investing circles. The proponents all claim an investor can become fabulously wealthy with 1000%, $2000%, and even 10000% gains. What they do not say is the buying and selling of Bitcoin is a game of musical chairs where everyone keeps circling the available seats until the music stops. Then is when someone loses.

Another attribute of Bitcoin is any gains you make equals the losses of one or more unfortunate investor. When the stated price goes up it is because other investors are willing to pay the higher price while hoping the price will go even higher. No one is "setting" the price. As with all pyramid, or Multi-level Marketing schemes the people who get in (and out) early make all the money while the rank and file investors fret over the volatility and massive losses the value can present.

When the highly secretive inventor of Bitcoin first employed blockchain data principles to make a crypto-currency it ostensibly was for the purpose of buying and selling tangible goods and services, not the currency itself. In those early formative days of sub-hundred dollar prices, one could buy their morning Starbucks coffee with the touch of their smart phone. Vendors would accept the value from customers' digital wallets to their vender digital wallet. From there the vendor could use the stored value to buy other supplies, or get the value paid to them in Dollars. Mostly the customers obtained their Bitcoins by either buying them for Dollars or by accepting a payment with it.

It Costs Money To Spend Money

Well actually to be more accurate, it costs money to accept money. There is an entire supply chain to follow which diminishes the value of the cash. It takes time to receive the cash from the hand of the customer, then return any change. One must deposit the cash in a drawer and register the transaction. One must watch the cash drawer and the cashier all day. At the end of the day the cash must be collected, counted and aggregated into a single pile for transport to a bank. A small store might just drop the bag in a Night Depository while a big-box store will have an armored truck come to get it with armed guards. This process repeats every time a large enough pile of cash is created. Stores will segregate out of its daily receipts sufficient cash to stock the cashier drawers for the next day. Accountants, bookkeepers and managers are all needed in order to handle cash.

Paper checks have their own procedural chain to follow which likewise costs money, a small fraction of the daily receipts.

Credit cards and Debit cards reduce the demands of the handling of cash but themselves require a fraction of the daily receipts. The bank which sponsors the cards charges a fee to the vendor to accept and process the cards. Unless the retailer is huge and can negotiate a better deal, the typical fee is 30 cents plus 3 percent of the total. There remains the cost of card scanners, computer networks to connect them all up. And a staff of people to keep the whole thing running.

On the other side of the Credit/Debit card transaction there is another entire process needed to route the transactions to the correct customer and actually bill them for their purchases. All of the 16-digit card numbers+vendor id+date/time+amount+other coding must be transmitted to one or more card processing hubs and distributed to their respective destinations. This cost is part of the service fees charged by the account holding banks. Hundreds of millions of such transactions are processed each day.

Bitcoin sidesteps a lot of that process by making the transaction peer-to-peer. Without a bank at the center of the hub there is no central processing, per se. The underlying technology of the Blockchain allows for thousands or even hundreds of thousands of small private providers to process the Bitcoin transactions on their own computer hardware, with their own software and most importantly their own labor and electricity.

This paradigm shifts the cost of processing away from a bank and the currency and to hopeful entrepreneurs who invest their funds, time and resources to earn a share of the global pie metaphorically referred to as Bitcoin Mining. It's a pretty good deal if you can get it. For the Bitcoin crypto-currency system, that is.

Bitcoin started out as a means of purchase in the real world. Introduced in 2009 it gained value to $0.08 by 2010. By the first quarter of 2011 it had reached $1.00 and by mid-year exceeded $30.00.  The price fell to a new low of $2.00 by year's end.  While Bitcoin prices stayed in that two-digit range it was reasonable to actually use it to buy stuff. At $0.08 anyone who used Bitcoin at a Starbucks for a $4.00 coffee used 50 Bitcoins for it and paid the equivalent of more than $800,000 to $1m for it (at top 2017 prices.) This is not to say Starbucks accepted Bitcoins while the price was below a Dollar.

Today with the ever optimistic chatter about the future value of a Bitcoin one would be foolish to relinquish one in a frivolous transaction. But just as likely as the price continuing to increase, there is the possibility of an implosion.

As soon as the trading marketplaces get firmly established, short selling can be implemented. Short selling is a process of margin trading where one borrows the equity shares rather than cash and selling the shares, in this case Bitcoin, in anticipation of the price going down. The transaction is complete when the lower priced Bitcoins are bought back and returned to the brokerage. In this process one extracts value from the investors who bought as the price went up. Such a system is ripe for panic and manipulation.

If you are inclined to get involved, good luck, you will need it. BTW, buy my eBooks at, I accept Bitcoin.