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.”

MoneyI 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.

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