A Bitcoin caution

Our suggestion: Shake your head in wonder and stay on sidelines

Keywords: Durango Herald,

Stock market investors know it is commonplace for financial firms to create new products for buyers and sellers to invest in that have no underlying value. That is because there is not sufficient value in all the publicly traded companies to absorb all the money investors want to invest.

Individuals who have no wheat or silver buy and sell as though they did. If commodity prices move as they hope, they make money without ever seeing the grain or the metal and do not want to. Other investments follow benchmark indexes, such as the equities in the Dow Jones or Standard & Poor’s 500 stocks; when the price of the S&P goes up, so does the parallel “investment.”

We know what happens to mortgages and what happened in 2008. The money that was being made from selling and buying bundles of mortgages was so great that it encouraged not-so-strong mortgages to be marketed in the same way, without the necessary cautions.

(There are limits, fortunately. Not too long ago, it was proposed that “investing” in new movies’ opening weekend theater ticket sales results would be a workable investment vehicle. No to that, said regulatory agencies; that is a little too close to what goes on in Las Vegas.)

Now comes Bitcoin, which claims to be digital currency.

Newsweek magazine, back in print last week, has created a sensation by claiming to identify the 2008 creator of Bitcoin as a physicist in his 60s who graduated from California State Polytechnic University. He denies it.

According to The New York Times recently, and others, the idea of the Bitcoin first appeared on a minor mailing list accompanied by an available set of rules. Twenty-one million Bitcoins were to be available.

Early in Bitcoin’s existence, it was priced at a few dollars, then in the $30s. Where is the Bitcoin today? In the mid $600 range.

Not unexpectedly, not all has been well with this virtual currency. A major Bitcoin exchange went bankrupt last week, claiming $500 million in unaccounted Bitcoins.

For those who bristle at federal regulations of many kinds, and especially those who are wary of the Federal Reserve and the amount of money it has printed since 2008, Bitcoin must have appeal. Created in the private sector, tied to the high-tech world and unregulated, it could be considered the ideal alternative to what government is claimed to do so ineffectually.

Some might hope they can use Bitcoin to pay less appealing bills, such as rent, gas, parking tickets or the Internal Revenue Service. But we do not know of any traditional businesses that accept Bitcoin, so far.

Our suggestion is to stay on the sidelines, shake your head in amazement and enjoy the show. Bitcoin’s success, if it can be called that, may be one of those novelties that unexpectedly takes hold. But even if it is, unlike baseball trading cards, tulips or doll collections, there is nothing but air.

Bitcoin’s founder may have good reason to want to be remain anonymous.