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Summary

  • Bitcoin is sinking fast, but far from hitting bottom.
  • The Bitcoin was a fad, and recent events have made it unfashionable.
  • Investors should understand the flawed foundation of the Bitcoin to understand why it basically has zero chance of success.

I recently wrote an article about eBay (NASDAQ:EBAY) that mentioned the possibility that a PayPal spin-off may be a great solution to the virtual currency issue.

I would add one additional point to the above list, PayPal could develop its own merchant centric virtual currency called a Palcoin that is designed with the merchant's needs in mind, unlike the currency speculator centric Bitcoin.

The point wasn't even the main point of the article, and I thought it was a pretty benign comment. The article however got mentioned in a front page article of Investors Business Daily.

EBay's Alibaba?

Robert Wagner, who bills himself as an independent analyst, noted in a report on the Seeking Alpha website last week titled "PayPal Could Be EBay's Alibaba" the similarity to how Yahoo's value is underpinned by its 24% holding in China e-commerce leader Alibaba, which could launch a U.S. IPO this year.

Wagner says a PayPal spinoff would make the payment king a better platform for strategic acquisitions - especially in mobile payments. He also speculates that an independent PayPal would develop a virtual payment currency tailored to merchant needs that would differ from Bitcoin, a digital currency that's a favorite of speculators.

"I imagine PayPal could (develop a digital currency product), but given that they haven't, I assume eBay either hasn't thought of it or isn't interested. An independent PayPal would likely be forced to address the virtual currency issue," Wagner wrote.

That article in turn got picked up in the "blogosphere" and triggered more discussion and featured articles.

Analyst Robert Wagner created a bit of a stir in the blogosphere recently, in an article he published at Seeking Alpha -- titled: eBay's Paypal Has The Potential To Topple The Bitcoin.

Here is an excerpt that sum's up Wagner's reasoning: "The benefit of the Bitcoin is its ease of use, security and low costs/transaction fees. That benefit however is immaterial when compared to the costs and risks involved with its volatility."

Wagner makes what seems like a logical case for PayPal, a subsidiary of eBay (NASDAQ: EBAY),being positioned to create a Bitcoin killer. But the argument only sounds logical because it presupposes benefits, and ignores the costs and risks. It is similar to stating casinos will get more business by making everyone a winner. True, but that argument won't work.

The problem is, the conclusion reached in the above article is wrong, very very wrong.

PayPal should use bitcoin to better compete with companies like Western Union and Visa.

The #1 priority of eBay and any other merchant should be to protect the consumer so that they can continue to shop on eBay or any other store. Bitcoin fails miserably at that. EBAY, or any other merchant, should not be encouraging its customers to become high risk currency speculators, it should be developing a solution that works for the customer, not against them.

Facts are the Bitcoin fad is fading fast. It was simply a very bad idea based upon the hopes and dreams of a Libertarian/Anarchist's utopian fantasy. Most consumers don't give a darn about misreadings/misunderstandings of Austrian School of Economics monetary policy. Most consumers have absolutely zero interest in dealing with a completely unregulated banking/monetary system. Most people have zero interest in taking the risk of making 10s or even 100s of percent when they can easily lose 100% instantly as those that held Bitcoins at Mt Gox recently did. The Bitcoin is simply a nightmare for 99% of the uses people have for a currency. If people want a speculative investment, Bitcoin is it, if people want a stable currency, the Bitcoin is about as far from a utopia as one can get.

The Bitcoin was built to be a currency free of government interference. No regulations and none of this "printing money out of thin air" stuff. Really!? Are you kidding me? The Bitcoin currently has nearly $6 billion in it, and once tipped $12 billion. $12 billion was once invested in a Libertarian/Anarchist's utopian/dystopian fantasy? Personally I was shocked at how many people bought into this concept. It was/is like mass voluntary delusion.

Unfortunately I see that same pattern of behavior in gold, green energy stocks and the belief in man made climate change. People simply believe what they want to believe and ignore the facts and risks. Libertarians/Anarchists wished the Bitcoin would work, so they just believed that it would, and sank $12 billion into it. 1/2 of that value is now gone, $6 billion simply vanished into "thin air." Almost $500 million was stolen, ensuring that Bitcoin will make the Guiness Book of World's Records as the largest private bank robbery in world history... by far.

The belief that a currency could be created without the government becoming involved to me demonstrated a naivety, gullibility and/or arrogance of epic proportions. The power to coin money is solely granted the US Congress in the Constitution of the United States. Counterfeiting used to be punishable by death. What made the Bitcoin enthusiasts think the laws didn't apply to them?

Sure enough, just recently the US Government stepped in and sided with the position that I've been making since I first wrote about the Bitcoin about a year ago.

1) The Government can/will/did become involved.

2) The Bitcoin is NOT a currency.

3) The Bitcoin can NOT be used to pay taxes.

4) The Bitcoin IS property and is liable for capital gains taxes.

That recent decision by the IRS should have been obvious to anyone willing to seek the truth, and the impact on the Bitcoin was predictable. The illusion of a Libertarian/Anarchist utopia/dystopia just burst. Basically the adults just returned home early from vacation and Jr's party was just spoiled.

Earlier this week, the IRS decided that Bitcoin is property, not currency, setting in place a regulatory structure that could see users of the cryptocurrency forced to keep price score in a rapidly shifting market.

Bitcoin had a rough time of it last week, as GigaOm reported, losing around 17% of its value. Part of that was tied to a rumor regarding Bitcoin in China, and part, I think due to the IRS's decision. Prices have continued to slip through the weekend.

Facts are, the Mt Gox, IRS decision and other issues are just the start. Bitcoin was based upon a flawed foundation, and it is just starting to crumble. The problem I have with the Bitcoin, besides the faulty economics is that it is a huge distraction from the real problems facing our Nation. I've been involved in politics, and for the last 5 or 6 years have watched this story evolve from a political/Austrian Economics concept to reality. My Libertarian friends were completely focused on this nonsensical "End the Fed" concept that totally distracted them from focusing their efforts towards real solutions to real problems. My liberal friends are the same with their nonsensical focus on climate change. The problem the US faces is a crippling debt and uncontrolled spending. If America goes bankrupt, saving the earth and the value of the US dollar become irrelevant. We will all be fighting for our lives. Continued focus on these non-issues simply threatens the solvency and viability of America. Hopefully with the demise of the Bitcoin the Libertarians can get back to focusing on issues that really do some good... like preserving our freedoms and reducing the debt. I may also be invited back to speak at some Libertarian events.

The important take home for investors is that companies/ETFs like the following are focusing on yesterday's news, and aren't likely to benefit much if any from the Bitcoin in the future:

Winklevoss Bitcoin Trust ETF (BITCN)
Overstock.com (NASDAQ:OSTK)
WPCS International Incorporated (NASDAQ:WPCS)
Bitcoin Shop Inc. (OTCQB:BTCS)

The Bitcoin is simply going down, and people will simply move on to the next fad. The Bitcoin is resting on critical long-term support. If the Bitcoin breaks much lower, I would say stick a fork in the Bitcoin, its days are past. The misguided monetary revolution is over. Viva la Bitcoin no mas.

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Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Full Disclaimer and Disclosure Click Here.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Bitcoin Is Sinking Fast, So Are Hopes Of Bitcoin-Related Investments