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Maxe Paul
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I adopt a highly cynical yet humorous view of financial markets. I am a firm believer that you can never ask too many tough questions in order to obtain the answers that really count.
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Maxe Paul
  • The Bitcoin Bubble. 1 comment
    Jun 11, 2011 5:00 AM

    What is the best performing currency in 2011?, if you answered the Australian dollar or maybe the Norwegian krone you would be wrong on both fronts, its actually the Bitcoin which has risen from a US dollar exchange rate of  $0.06 on 10/07/10 to $31.00 odd dollars on Friday 06/10/11 before crashing up to 30% back towards $20.00 and recovering at the end of the day to around $24.00, making the Dow Jones -1.42% look pedestrian in comparison.

    So what is Bitcoin?, Bitcoin is an Internet currency that uses a P2P architecture for processing transactions avoiding the need for a central bank or payment system.
    According to wikipedia,

    "Bitcoin is a digital currency created in 2009 by Satoshi Nakamoto. The name also refers both to the open source software he designed to make use of the currency and to the peer-to-peer network formed by running that software.

    Unlike other digital currencies, Bitcoin avoids central authorities and issuers. Bitcoin uses a distributed database spread across nodes of a peer-to-peer network to journal transactions, and uses digital signatures and proof-of-work to provide basic security functions, such as ensuring that bitcoins can be spent only once per owner and only by the person who owns them.

    Bitcoins can be saved on a personal computer in the form of a wallet file or kept with a third party wallet service, and in either case bitcoins can be sent over the Internet to anyone with a Bitcoin address. The peer-to-peer topology and lack of central administration are features that make it infeasible for any authority (governmental or otherwise) to manipulate the quantity of bitcoins in circulation, thereby mitigating inflation."

    Bitcoin is infact a virtual currency in which comparisons to eGold and its failure most likely come to mind, Bitcoin though has gained huge traction lately as a legitimate online currency in which to purchase real goods and services over the Internet, and it would appear the latest spike in Bitcoin value was fueled by an article in which Google released an open source Bitcoin client adding a certain level of legitimacy and new awareness to the once obscure currency.

    So what caused yesterdays large fall in Bitcoin value? It would be easy to point out that given the large increase in Bitcoin value over the last year that this was a bubble waiting to be popped and the news that surfaced on Friday was indeed "Bitcoin Bearish" with reports published by several media outlets that U.S. Senators Want to Shut Down Bitcoins labelling it "the Currency of Internet Drug Trade". This aggressive stance by US authorities appears to have come about by revelations that celebrity hackers "Lulzsec" are funding their hacking of targets which include amongst others Sony, PBS, FOX and (ironically) the FBI by Bitcoin donations.

    Although most likely near impossible for US authorities to actually shut down Bitcoin due to its virtual nature and wide global reach US authorities could certainly wage a protracted media campaign against its use which undoubtedly would lead to a further selloff in Bitcoin value going forward.

    For those interested in Bitcoin the largest Bitcoin exchange is MtGox which recorded its largest ever volume with Fridays peak record price and the ensuing sell off that followed that day resulting in the 30% decrease in Bitcoin price from the days earlier peak value, according to their website MtGox plan to introduce margin lending, options trading and even the use of dark pools for advanced trading in Bitcoins. There are now many numerous exchanges operating in the Bitcoin marketplace and charts of Bitcoins remarkable rise in value over the past year can be viewed at bitcoincharts.

    At this point we can safely say that trading or investing in Bitcoin is not for the faint of heart, It is probably to early to say whether Bitcoin will go the way of other virtual currencies and prove nothing more than a complex Ponzi scheme albeit very well designed, or whether Bitcoin can survive and thrive as an alternative online currency beyond the manipulation of the worlds central banks and governments.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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  • minorman
    , contributor
    Comments (245) | Send Message
    I've also written a piece on bitcoins here:
    15 Aug 2011, 12:32 PM Reply Like
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