My Interpretation of the Explosive Price of Bitcoin

Bitcoin is an alternative form of money. It took off rather sluggishly when it was launched 2009 but it is now on steroids. Its highest price in 2010 was $0.39. One bitcoin is now valued at over $18,000 after having risen from $10,000 at the beginning of December and $6,000 at the beginning of November.

Bitcoin is a decentralized digital currency that uses open source software to record transactions in a publicly distributed ledger called blockchain. It was invented by an unknown person(s) or artificial intelligence (AI) under the pseudonym Satoshi Nakamoto.

The current monetary system is over regulated, slow, expensive and highly mismanaged by politicians and policy makers. These two completely destroyed monetary systems in Zimbabwe and Venezuela. Zimbabwe does not even have its own currency.

At the height of the 2008 recession, the human psyche figured out that something really serious was wrong with the current monetary system. Easy money from years of low interest rate policy by the Fed had created a disastrous imbalance between money supply and commercial activity. There was far too much money than commercial activity in the U.S. economy and bubbles had formed in almost all the asset classes and they were popping spectacularly with frightening financial consequences.

Naturally, someone had to come up with an alternative monetary system that works efficiently and is free from any kind of government regulation, control or manipulation. Bitcoin is free from regulation and any kind of government control or manipulation. Bitcoin payments go straight to the recipient in under five minutes and not through a bank intermediary where it picks up charges, gets paired with documents required for anti money laundering procedures and then gets remitted a few days later. Bitcoin transactions are very private. You don't have to proof source of funds or provide a reason for making any payment.

This is the reason behind bitcoin’s popularity and it is headed for mass adoption. It is the future of money. Unfortunately this could also be its undoing. When the masses dump the current monetary system for bitcoin, governments will want in. Its value will diminish if governments take control of bitcoin and digital currency markets. Government control is inevitable because the current monetary system is failing and governments will soon want their share of taxes from bitcoin transactions.

We have already seen government regulation creep in this month. Bitcoin futures have started trading on two regulated futures exchanges, Cboe and CME. The futures aspect of bitcoin has therefore been effectively captured by government regulation. The rest should be easy for governments because bitcoin runs on internet and electricity infrastructure that is controlled by governments.

Bitcoin has created a parallel monetary and payments system to that one that is run by governments through their respective central banks. Governments know that the pivot towards bitcoin and away from their highly mismanaged and over regulated fiat monetary system has gained traction. They know that the current monetary system has reached its limit for money printing and bailouts and even at the moment, it requires great effort to keep it going.

They know that the next financial crisis cannot be solved by money printing and bailouts like it happened in 2008. They appreciate that technology has overtaken the current monetary system. They recognize that the public is now much more informed and cannot buy into another war based on false premise like it was for Iraq and Libya. They have accepted that change is here.

Blockchain is the technology that powers bitcoin and it has worked flawlessly ever since bitcoin was launched in 2009 and governments have been taking notes. No wonder they have left bitcoin to compete with their fiat monetary system. Previous attempts to undermine or compete with government controlled fiat monetary systems were met with convictions and jail sentences and decapitations in the case of Iraq and Libya. But bitcoin has been left to strut about like a cock!

Governments know that blockchain technology is the future of money and bitcoin is the proof of concept. So they have let it run. Creeping regulation on bitcoin can only be for two reasons; either, governments want to capture and control it or they want to capture and undermine it through short selling in the futures market as they make arrangements to transition their failing fiat monetary system onto a blockchain platform.

That a government can facilitate a competing currency through regulation sounds more mischievous than a well intentioned act. It will be a while before governments manage to tame bitcoin because the public needs a viable alternative before they slow down on bitcoin. As per now, The Fed is continuing its monetary policy circus by raising interest rates citing strong economic growth on account of growth in GDP and employment but other complementary evidence in the form of rising inflation, trade surplus and a strengthening USD are absent.

The Fed raised interest rates three times this year but the USD lost against all the major currencies of the world. Economics requires it to be the other way round. This is upside down economics is the fuel powering bitcoin. Fed pronouncements are no longer convincing the informed public and they are buying bitcoin like there is no tomorrow.

However, governments have the capacity to crush any digital currency mania that threatens to turn tables on them. They control the internet and electricity infrastructure that facilitates digital currencies. When the plug is pulled, old gold, the real money that was used in medieval commerce will take its rightful place. The beauty of gold is that no government has the capacity to crush it. When gold breaks out, there will be no holding it back.