By Parke Shall
We all know and we have written before that bitcoin's sustainability as a global currency or a global alternate currency for years to come is going to depend on confidence that its users have in not only the currency, but the system and infrastructure with which it operates on.
Yesterday, we got a marked development in the world of bitcoin when it was ruled by a judge that bitcoin was in fact money. Reuters reported,
Bitcoin qualifies as money, a federal judge ruled on Monday, in a decision linked to a criminal case over hacking attacks against JPMorgan Chase & Co and other companies.
But the judge, like her colleague Jed Rakoff in an unrelated 2014 case, said the virtual currency met that definition.
"Bitcoins are funds within the plain meaning of that term," Nathan wrote. "Bitcoins can be accepted as a payment for goods and services or bought directly from an exchange with a bank account. They therefore function as pecuniary resources and are used as a medium of exchange and a means of payment."
U.S. District Judge Alison Nathan in Manhattan rejected a bid by Anthony Murgio to dismiss two charges related to his alleged operation of Coin.mx, which prosecutors have called an unlicensed bitcoin exchange.
Murgio had argued that bitcoin did not qualify as "funds" under the federal law prohibiting the operation of unlicensed money transmitting businesses.
We were always certain that bitcoin was a financial asset. It is difficult to say that it is not a financial asset, when it is reported throughout the financial media, commonly quoted against the dollar (and has its own exchanges), and is the subject of many headlines. We think you would be hard-pressed to find someone that does not consider it a financial asset.
However, the question of whether or not it is actually money is one that will likely remain up in the air, even after this ruling.
We have written a few articles in support of bitcoin and the blockchain. We are not sure how widespread blockchain will become, but we do definitely think that it is the next step in currencies, as denoted by several governments now looking into blockchain for possibilities. As a matter fact, news broke yesterday that blockchain is being used to share trade data, according to the Wall Street Journal,
Some big banks are applying a bitcoin-style system to another technology pain point, the identification tags attached to things they trade.
Banks including Citigroup Inc., Credit Suisse Group AG and HSBC Holdings PLC have used technology developed by startup Axoni to test a new way to share trade-reference data. They are doing so using a so-called blockchain network, the firms are set to announce Tuesday.
Such a network uses a ledger that parties involved can see to track information, rather than maintaining their own, individual records. This is akin to the kind of network that marks all bitcoin ownership and trades.
For bitcoin, we think the argument is over. Bitcoin is going to be around for a while whether people like it or not. And the funny thing is, regardless of the strides that blockchain makes in coming years, we believe bitcoin will always be the standard digital currency as it was the first to break the mold. We have been solicited to invest in other digital currencies which we are not in the least bit interested in. We think that holding some bitcoin as a small percentage of your portfolio, in the same way that you would hold gold or any alternate asset class, may be wise for the future.
We have pointed out in the past that there is serious risk with bitcoin and we have not allocated capital to it that we would not be 100% OK with losing. Not only is it a system that has not been fully vetted but it has also not been widely accepted yet. Once bitcoin scales up, we may find more loopholes and more problems that we haven't found thus far. Also, we always point out in our articles that bitcoin is reliant upon the infrastructure with which it is transacted. Unlike gold, if power goes out or internet access is lost, you really don't have a tangible claim to your bitcoin at that point.
But having said that, there is also a case for significant appreciation of the asset class if confidence continues to grow. This judge's ruling is one more step in the right direction toward spreading that confidence across investors and bankers. If bitcoin truly becomes a peer to peer system for swapping an asset class that becomes an industry standard as an alternative to centralized currencies, there is an entirely possible mathematical case that could show the price of the asset moving up exponentially from here.
We own actual bitcoin and we also own some shares of OTCQX:GBTC, which is a bitcoin trust that trades at a premium to NAV. For those that are interested in owning bitcoin, we suggest spreading out your resources across several different methods of getting exposure to the asset, especially because the asset class in and of itself is essentially going through a beta test. The success of the digital currency's future will rely upon the confidence with which people are able to place it. This judge's ruling that bitcoin is in fact money is a large step in the right direction.
Disclosure: I am/we are long GBTC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.