When a group is in nextsensing mode, it often has a feeling of being stuck or being lost. I liken it to driving off a main rode into wilderness on a moonless night. Sure, you have headlights and you’re moving; but you can’t be sure you’re moving in the right direction. Many of those in the financial world right now are wondering if they’re moving in the right direction. The problem, mainly, is the on-again-off-again Bitcoin bubble. If you haven’t heard much about this phenomenom, CNN addressed its up and down modes in a post last week. A quick excerpt:
Early Friday, Bitcoin prices traded as high as $136.43 before pulling back to $119.36. That’s more than double this week’s low of $50.
Trading volume doubled in just two hours.
The price of the virtual currency, which was created by an anonymous hacker just four years ago, has increased almost 20-fold this year. It gained particular attention in the wake of a mini-bank run in Cyprus, which had raised concerns about the health of government-backed paper currencies like the euro and the U.S. dollar.
As traders and investors jumped on the bandwagon, prices spiked to $266.
Why should this matter to anyone? There is one enormous reason: Bitcoin and other virtual currencies are not controlled by any central bank. You don’t have to be a financial whiz to know that the global financial marketplace — the buying and selling (and managing) of currencies — is now done by so-called Central Banks. Wikipedia’s definition is succinct and will do nicely: “A central bank, reserve bank, or monetary authority is a public institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries.”
At the moment, central banks have been famous (or is that infamous?) for altering stock market norms by direct interventions; many say the FTSE, the DAX, the IBEX and the like are as high as they are only because of central bank actions.
And you may have heard, very recently, that a possible “currency war” is afoot in the world because central banks have quite intentionally been lowering the value of their currencies. Why might that matter? A country or region with a high-value currency will also have goods and services that cost comparatively more than what they would in a lower-valued country or region. Case in point: Japan and the lowered value of the yen; by contrast, things cost more in Europe. So, from where would you buy equivalent goods and services right now, if you are operating on a global basis?
Thus, you will not have to go far to read reports like this, from DW: “Eurozone countries are beginning to seriously worry about an overvalued euro currency. France, in particular, is concerned about its export industry should the euro become too expensive. French Finance Minister Pierre Moscovici insisted there should be coordinated action against erratic currency fluctuations as they endangered growth.”
I first became interested in these parallel money universes when Matthew Lynn on MarketWatch wrote about the possibility that Amazon.com might introduce its own money! He raises this altogether preposterous (yet still might happen) suggestion. What should central banks be most worried about in the future? His view: “But in the long term what they should perhaps be most worried about is losing their monopoly on issuing money. A new breed of virtual currencies are starting to emerge — and some of the giants of the web industry such as Amazon.com Inc. (NASDAQ:AMZN) are edging into the market.” Lynn also notes that a virtual Web currency already exists in BitCoin, that there are currencies in the gaming world of Second Life and Farmville and that Apple and Google may be dabbling into generating currencies. Says Lynn:
For investors, this matters. As a general rule, investing in the right currency matters far more than what stocks or bonds you choose. If you’d invested in Swiss francs (ICAPC:USDCHF) in the 1970s, for example, you’d have done very well over the next four decades, regardless of whether the stocks you picked were any good or not. Likewise if you’d invested in gold (COMEX:GCJ3) — a quasi-currency — during the 1990s you’d have done better than most other investments.
Right now, what the virtual currencies need is a major company to make them universally acceptable. Amazon may be the one, or it may be an iCoin from Apple, or G‑Dollars from Google (NASDAQ:GOOG) , or some new company we haven’t heard of yet. But the potential is surely there. If a virtual currency can be just as good as a medium of exchange, and a better store of value, it will start to gain traction, taking its place alongside traditional currencies. And perhaps even replacing them.
I don’t say that all this is likely. But I would stress that when “value” is exchanged virtually, who needs paper and coins? Is the existence of BitCoin a weak signal on the periphery or a modern day eventuality? As I have observed so many times, sometimes nextsensing revolutions start as a kind of hunch: small, speculative, and not particularly important. But when they catch on, one can come on like a freight train and rattle a lot of widows in the process. G‑Dollars from Google may never have the official backing of a country or region; but if the world starts to use G‑Dollars — widely — then, in fact, central banks have much to fear.
When should you take all this very seriously? As Lynn wisely notes, watch for central banks to try to squash a virtual currency in one way or another. If that happens, will they be successful? I side with Lynn’s view: “But the online universe is very hard to regulate. Governments haven’t managed to stop spam, or pornography, or terror chat rooms, or any of the other online activities they don’t like. There is little reason to imagine they can prevent virtual currencies circulating either.”
Meanwhile, there are two major Bitcoin conferences happening this year, both centred on the future of how people will pay for the goods and services they buy. One is in San José, California, in just a few weeks; the other will take place in Vienna in November. The financial world has become a new world.