Bitcoin made a fresh all-time high in Asian trade this morning of $US445 up $US17 from the overnight high at $US428.
Proponents of the digital currency see this as a good thing and of course they would, each dollar that Bitcoins rises is a dollar per Bitcoin they are richer – and there are now some seriously rich Bitcoin owners out there.
But for all the hype around Bitcoin and the sequential new all-time highs we have seen over the past two weeks there are some genuine concerns about this market that the proponents seem unwilling or unable to deal with.
Broad acceptance is unlikely and for a means of exchange to become viable en masse it must be seen by a wide audience as a means of exchange that has, well, some currency.
Bitcoin fails this test – it is a tightly held, hard-to-get, ephemeral means of exchange in cyberspace that seems more attractive to traders like me than those in the real economy.
Can you really imagine the average worker on the minimum wage in Australia, the US or anywhere else shopping in Bitcoins? No.
With a purported fixed number of Bitcoins ever to be produced the only inevitability for Bitcoin if it ever gains acceptance, even in a toe-hold of the global economy, is that its price will become inflated.
Fixed supply and increasing demand means upward price pressure.
So those who are spruiking Bitcoins are at the same time really also marketing their own positions and talking up their value. It reminds me of many of the campaigns that Jesse Livermore wrote about in Reminiscence of a Stock Operator in 1923.
But Bitcoin has other problems that are starting to emerge. Hacking and fraud, to name two. Over the past couple of weeks we have heard of a Bitcoin Bank being hacked in Sydney while one in China simply disappeared – the investors in both enterprises lost all their money.
Overnight Bitcoin entrepreneurs Tyler and Cameron Winklevoss seemed to see this lack of transparency as a strength for Bitcoin.
But if you can lose all your money with no recourse because your account gets hacked, then that would be a pretty big barrier to mass acceptance.
Recently retired Detective Superintendent Colin Dyson was, until a few months ago, the Commander of the Fraud and Cybercrime Squad in NSW and sees huge potential for frauds and rip-offs in the system. He told Business Insider:
The major risk in my opinion is that Bitcoin is not traceable. In very much the same way that regular cash is not traceable, once Bitcoin is gone, there is no audit trail. Even cash is recoverable if the police can act quickly because it is tangible; it has substance. There are no mechanisms to recover Bitcoin. These risks are also advantages to criminals, which is why Bitcoin is becoming the virtual currency of choice for money launderers.
And Dyson is dismissive of the supposed safeguards within the Bitcoin system to prevent this.
Money can be laundered by taking advantage of its untraceable nature and the anonymity afforded to the Bitcoin account holder. With the demise of Liberty Reserve, which operated virtually unregulated, laundering requires a new vehicle. There are those who say cashing out Bitcoin, which can be done with a variety of exchangers, Mt Gox being one of the most popular, requires proof of identity. But hey, we’re dealing with online criminals adept at using the identities of others, and the shady disposition of some exchangers (Mt Gox excepted). Funds taken from accounts by cyber criminals can be exchanged for Bitcoin, the user of the Bitcoin is allocated a number, which affords anonymity. To launder, the crook needs only to buy drugs on the silkroad, and sell them on the street, or if they aren’t into that, cash out.
Being a vehicle for cleaning dirty money is another barrier to success of Bitcoin as a currency.
Don’t get me wrong – I am a currency trader it’s what I do and in many ways who I am. I love Bitcoin as a result and I think in time it goes much higher, but I just can’t see it going mainstream.