Bitcoin Is Defeating Governments (and Making Investors Rich)

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The world's two fastest-growing economies came down hard on Bitcoin in recent weeks.

Dips followed, but ultimately the virtual currency began to slough off the news and continued to gravitate toward a loose, but tightening, trading range.

And as a former senior advisor to a Silicon Valley venture capital firm, I've seen a lot of opportunities to make a killing on technology over the years.

I'm talking about everything from ultra-fast semiconductors, to advanced sensors, to the rise of the Internet and today's mobile revolution.

But in all those years, I've never seen anything reach critical mass as quickly as Bitcoin.

Consider that less than three years ago, few but a small cadre of hardcore tech geeks had even heard of this new crypto currency.

Today, however, this virtual money is traded on roughly 80 global exchanges. It's also accepted at thousands of retailers throughout the U.S.

And it has handed some savvy investors gains of 1,000% or more in as little as a few months' time.

Yet, skepticism persists. Predictions of Bitcoin's imminent demise by a wide range of so-called "experts" have proved premature at best.

Fact is, Bitcoin to date has met every challenge thrown at it and come back stronger.

For Bitcoin's backers and investors, that's great news. Because Bitcoin is now defying a growing list of global governments doing their best to stop its advance...

Central Bankers Are Worried

You can see why central bankers and finance ministers from around the world are so worried. After all, Bitcoin presents a major challenge to their fiat currencies.

Just look at what recently happened in India. Traders there had been investing in Bitcoin as a hedge against the declining value of the Indian rupee.

Over the Christmas holidays, the nation's central bank came out swinging. It warned citizens not to invest in Bitcoin. The authorities said users of virtual currencies faced "potential financial, operational, legal, customer protection, and security related risks."


But India's leaders didn't stop there. Finance ministry officials then forced several exchanges to close. The government also raided several offices, seizing information about the exchanges and detaining several people.

This was the second big government to target Bitcoin in less than a month – it followed a similar move by China in early December.

China's leaders want to stop the advance of the dollar, which accounts for the bulk of the $3.6 trillion they hold in foreign exchange. Chinese citizens were using Bitcoin as a back-door way to convert the Chinese Yuan into greenbacks.

So, China banned the nation's commercial banks from trading in Bitcoin in early December. They then prohibited third-party payment platforms like Alipay from doing business with Bitcoin exchanges.

After China's crackdown, the price of Bitcoin promptly fell by more than half from around $1,045 to a recent low of $445. Since then, the currency has remained volatile but has climbed back to trade in a range around $900 on Mt. Gox, one of its leading exchanges.

In other words, Bitcoin bested the world's two largest developing economies…

Governments Are Backed into a Corner

And it's not just big governments that want to block the world's most popular form of virtual money.

Join the conversation. Click here to jump to comments…

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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  1. John Thul | January 16, 2014

    Good article, where can I be confident buying maybe $250.00 of Bit Coin to get started?

    • Barbara Kennedy | January 16, 2014

      How do we get started buying Bitcoin?

    • Travis | February 3, 2014

      Would you be interested to get on the phone with us and discuss your options as we look to the future possibilities? Email me and let me know when the best time to reach you is. Have a great night.

  2. Peter Tryde | January 16, 2014

    A newsletter had this report on Jan 15:

    "At 3:00 AM on January 9, a mining collective known as GHash.IO accounted for 45% of all Bitcoin computing power. A mere six percentage points more, and the collective would have controlled a majority of the computing power – effectively hijacking Bitcoin as a result.
    With more than 50% control, they'd have the ability to confirm all Bitcoin transactions on their own. And suddenly, the potential for manipulation and fraud would immediately exist.

    Quartz's Chris Mims describes the situation as such: "Imagine that tomorrow, a single corporate entity gained the ability to clone all of its dollars, and then immediately went on an asset buying spree. To say that it would undermine trust in the U.S. dollar would be an understatement. That's what could happen to Bitcoin."

    Double spending. False confirmations. Reversing transactions. They all become possible in the hands of a nefarious collective.

    Close Enough
    Of course, Bitcoin fanatics swear that a collective would never be able to obtain a majority and thereby (technologically) break Bitcoin. Didn't their mommas ever tell them, "Never say 'never'"?
    GHash.IO got shockingly close to a majority. Close enough to prove that it's a distinct possibility, not a remote one. By no means was this an anomaly, unlikely to ever occur again, either. In fact, last spring, the BTC Guild pulled off a similar feat.
    Heck, research out of Cornell suggests that hijacking Bitcoin with as little as 33% of the global computational power could be possible. "

    Due to its open-source nature, I believe Bitcoin's infrastucture will continue to improve so the above cannot happen but comments would be appreciated.

    • David Zeiler | January 16, 2014

      While what you say is theoretically possible, a collective with malicious intent would quickly kill the golden goose. In other words, as soon as people saw such things as double spending and reversed transactions, the Bitcoin ecosystem (and the price) would collapse. There's much more to lose by taking such control than there is to gain.

  3. Nick Zappia | January 16, 2014

    Coinbase is pretty easy and safe if you live in the US

  4. Tony B | January 16, 2014

    Funny, the writer, as in every other "pro" article I've seen, conveniently never mentions the great flaw of Bitcoin:…the increasingly enormous computational power that is needed to "mine" Bitcoin which has already caused several entities to become collective miners and begin the inevitable road to monopoly control.

    And, who but governments can eventually create the super-computers to monopolize mining? Until these flaws are fixed or another flawless "virtual" currency is used…stay away.

    • Jeff P. in Canada | January 16, 2014

      I agree with Tony. I am convinced that Michael must be heavily invested in Bitcoin and he is trying to sell everyone else on this. I think that it would only be fair for him to disclose his interest/investment in this Bitcoin scam. There are so many holes in this scam, and I have seen several commentators to Michaels bitcoin articles enumerate them. And yet he continues to push this scam. If you really want a currency that is not a fiat currency, then buy gold or silver coins. There is absolutely no possible way to guarantee that bitcoin is reputable. There is no way to ensure that more bitcoin won't be made available, or that it won't just one day disappear. And when it does disappear, who will be held responsible? There is nobody that I can find who is in control of all of this. So who goes to jail when it all fails?

      • David Zeiler | January 16, 2014

        Bitcoin is not a scam. It's a digital currency controlled by an algorithm. No one is "behind it." Bitcoin is a newform of money and a more efficient form of payment, which is why it keeps gaining traction. And Michael isn't advocating anyone dump their life savings into Bitcoin, but just to make a very small investment because the potential return is so high.

        • Jeff P. in Canada | January 16, 2014

          Of course it is a scam. When you cannot find the persons responsible for its innevitable collapse, so that they can be jailed, it is a scam. There are so many holes in this scam that I could drive a truck through them. And what happens when we are hit with another coronal mass ejection, like what happened in Quebec in the 1980's, that wiped out the power grid to millions? What guarantee is there that bitcoin will survive that?

          • educatedron | February 7, 2014

            Its not a scam based on your reasoning. A scam is when there is ill intent from the get go to defraud someone or an institution out of money illegally. If you buy a bitcoin. You can make purchases of physical goods. The bitcoin itself is not a scam. Is it possible for someone to manipulte eventually like current currencies are? Its probably would be harder to but yes. But its like you saying that the US dollar is a scam. The dollar itself is not.

        • Henry Pierson | January 16, 2014

          Bitcoin is a ponzi scheme. To think that it is useful as a stable currency considering the fluctuations in price is absurd. It is no different from any other fiat currency — there is nothing to back it. It is a reflection of the fantasy world in which a great many people exist and the something for nothing attitude that is pervasive in our society.

          • Ken Danagger | January 16, 2014

            I originally thought the same thing. What backs it?

            But then I asked myself – what backs gold? Or what backs any paper currency?

            The answer is exactly the same for all:

            1) The productive capacity of the economy.
            2) Public trust

            Without a productive economy, no currency has value. Ultimately, the only things that have direct value are things that your can use in isolation from the economy. Gold, Fiat dollars, and bitcoins are all equally useless. You can't eat any of them. They won't shelter you from the elements, and they won't keep you warm in the winter. (Well, paper fiat might do that for a few seconds.)

            The same goes for public trust. Without it, they are all valueless. The vulnerability to debasement is the biggest factor controlling trust. Fiat paper scores very low here. Gold is much better, but not perfect. I'm sure you have heard of gold rehypothecation. You've probably also heard of gold plated tungsten bars.

            OTOH, there is no way to counterfit or produce bitcon beyond the design specification, because of the self verification it imposes on itself through the entire network. Also, there is no need to make physical representations of bitcoin to facilitate easier handling. Any such representation could then be stolen like paper money or coins. Bitcoin is infinitely more compact, easier to transport, and more resistant to theft than any other currency ever created – if the owner protects their private encryption keys.

          • Robert Donnell | January 25, 2014

            How is Bitcoin any worse than the fiat currencies of the world where
            we know who the culprits are… and still these criminals behind them
            are never prosecuted or jailed…go figure! At least, a challenge to the
            ultimate Ponzi scheme is being waged!

      • Ken Danagger | January 16, 2014

        How to know the answer to your questions? Read and understand the source code. Many people do – and then they compile it themselves so they know exactly what they are running. These people also know that – by design – it is impossible to make nefarious changes that wouldn't be instantly rejected by the network.
        You don't trust it because you don't understand the beauty of it's design.

        That is not meant to be a negative comment.

    • Raja Srinivasan | January 16, 2014

      Tony.B. @ Your apprehension and point is legitimate.,

    • Peggy | January 16, 2014

      I bought Michael's Nova X Report and even set up a Bitcoin wallet. But then I read a report on the collective miners and addressed that question to Michael. This report still doesn't address the technical issues with Bitcoin. So I continue to sit on the fence. If I do decide to buy Bitcoins, it won't amount to much. But I'll be interested in the long-term outcome…who will win out…

      http://www.wallstreetdaily.com/2014/01/15/bitcoin/?utm_source=gplus&utm_medium=content&utm_campaign=features

  5. Dan | January 16, 2014

    I like the idea of Bitcoin, and I hope it takes off. However, the (currently necessary) places where it interfaces with the real world seem to be the choke points that governments will use to regulate and strangle bitcoin.

    If Bitcoin becomes adopted widely enough, then once you get your money into Bitcoin you would never need to get it back out, and the exit point wouldn't be a target anymore. But it seems like the entry point, changing money from a "real world" currency into bitcoins will be where Bitcoin can be killed.

    Will it be super taxed or relegated to a black market activity, deemed illegal by governemnts, meeting with a stranger at a Starbucks to get your dollars changed into bitcoins? If so, I don't think Bitcoin will be able to take off in America. However, for a lot of other (freer) countries I think Bitcoin could become a standard currency.

    As [Tony B] alluded to:

    The last few days, I've read Bitcoin naysayers who say that a particular Bitcoin mining pool came very close to controlling half the mining capacity. Supposedly this would mean they could validate bogus transactions and manipulate the system at will? Is this true?

  6. David D. | January 16, 2014

    I've read a litany of scathing reviews about Coinbase on the web. I was about to buy Bitcoin until I read these. A little wary now…..

  7. H. Craig Bradley | January 16, 2014

    NO BITCOINS @ DAVOS ( World Economic Forum 2014 )

    No doubt BiTCoin is gaining greater use and acceptance around the world in record time. However, it is not a subject on the agenda at the upcoming annual World Economic Forum in Davos, Switzerland in 2014. Mind you this is where the world's leading corporate, banking, and political leaders meet each year to network; a kind of " Who's Who of the World".

    Not to be left out you might also find various celebrities and literati on a quest (Liberal cause) such as Global Warming, Widening Gulf Between Rich and Poor Nations ( Income Inequality ), and "Gender Goals" ( more power women). Strangely, BitCoin and digital currencies seems a complete non-starter at this year's conference in Davos. Why is this ?

    • Henry Pierson | January 16, 2014

      Mr. Bradley,

      Might it be because Bitcoin like Tulip Mania, Bre-X and other schemes to create wealth or something from nothing deserve no recognition? It is without a doubt that people seem not to learn from past mistakes. All that is required to fool most people is to change the packaging and you can sell the same line of garbage to a new generation of fools; seems there’s no cure for stupidity.

      There is a degree of irony here since Bitcoin is being touted as gold 2.0 and as a replacement for the corrupt existing fiat currencies. Libertarians are ready to jump on the Bitcoin wagon just as they were willing to jump on Von Nothaus Liberty Dollar wagon and for the same reason — their hate of government. There seems to be an endless supply of the gullible. What is amazing — this “currency” is even more fiat than the dollar since there is absolutely nothing to back it — nothing.

      I am sure of one thing, this “ virtual” currency will become virtually worthless. There seem to be an endless number of greater fools promoting Bitcoin and why not, like any ponzi scheme if one can just get in and make money before people figure out the Emperor has no clothes what’s the harm. But ask yourself this question, will you be one of the last fools? What is needed is a digital currency backed by gold and silver which cannot be created from nothing unless of course some of you would like to finance the new technology that has allowed me to turn lead into gold — any takers?

  8. H. Craig Bradley | January 16, 2014

    SPECULATORS DESERVE WHAT THEY GET

    I think BiT-Coin did in in about two years of growth what it took Apple to achieve in about 14 years ( peaking at $705.0/share ). Now, obviously, Apple is not a speculative commodity or commodity surrogate, but a real company producing real products which are wanted around the world. It made investors rich, but the old fashioned way. I am deeply suspicious of anything that grows at a "parabolic" rate right out the gate. You should be too, its just common sense", as they say.

    The difference here is investors like me don't chase every rabbit they see. That's not investing, rather its how you get poor or stay that way. The time to get in on BitCoin was in its infancy when it was brand new and nobody wanted it. Now, the cat's out of the bag, so to speak. Everyone wants it. That usually means its time for the early adopters to cash-in some profits. The fact you are hearing about it daily means it is probably being manipulated. Follow the crowd and get your "head handed to you".

  9. Henry Pierson | January 17, 2014

    There seems to be no way to reply to Ken Danagger’s letter above so I will reply here. Bitcoin is not like other faith based currencies which are at the very least backed by governments and of course governments are supposedly representative of the people. The dollar, a fiat currency once backed by gold and silver, is backed only by the credit of the American people. While that may not be saying much considering the $17.2 Trillion dollar Nation Debt and trillions in personal debt, the dollar is still legal tender. Consider as well that Bitcoin is purchased with dollars and other almost worthless fiat currencies.

    Mr. Danagger missed the point, gold and silver have always been money they have always been convertible to fiat money systems. Gold and silver are “real” while Bitcoin exists on hard drives and servers all of which are vulnerable, all of which can crash. What is worse, while the dollar has lost much of it’s value due to the fact it is no longer backed by gold and silver and that it is and had been manipulated by the Federal Reserve, Bitcoin can fluctuate, as it has, loosing almost 50% of its value in a matter of days. Bitcoin is not money it is an investor’s wet dream, a ponzi scheme that will leave “investors” who come in late holding the bag — the bag of course will be empty.

  10. Lance | January 18, 2014

    Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a "normal" level. They believe that in the process of doing so the Federal Reserve has enormously increased the supply of money and they believe that the USA is on a fiat money system.

    All three of those beliefs are incorrect. One benchmark rate that the Federal Reserve has absolute control of is the rate paid on reserves deposited at the Federal Reserve. That rate is now 25 basis points, after being zero since the inception of the Federal Reserve in 1913 until recently. If the Federal Reserve had left that rate at zero t-bill rates would now be even lower than they are now. The shortest t-bills rates would now be probably negative.

    Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA. Already, Bank of New York Mellon Corp. has imposed a 0.13% charge on large deposits.
    An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case and that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.

    Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.

    Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.

    Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and was $2.535 trillion in May 2013. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, When the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.

    The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the clams of Ron Paul and Rick Perry to the contrary, the effective or true money supply has fallen drastically over the last few years…."

  11. Jean-Francois Morf | January 20, 2014

    Is Bitcoin not a Ponzi system?
    People also exist having loosed wealth with bitcoins, but you speak only from the winners, never from the loosers…
    A looser.

  12. Scott | January 23, 2014

    Wife has her own hair salon. 9% of her customers use bitcoin. She purchases product from a wholesaler 51% less than retail using that bitcoin.

    Point A to point B
    So far so good.

  13. Judy Lawson | January 23, 2014

    The more I read about Bitcoins, the more confused I get. I'm on a fixed income. Can I invest a small amount of US dollars in Bitcoins and make a little profit or not? How?

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