There’s gold in them thar hills!

Uh, not really.
Sometimes it’s fools gold and that’s todays lesson.

This story goes back a few years and will help you understand why I tell people to stay away from Bitcoin and all its permutations.
While on the trading floor, one of my co-workers had purchased a PC to “mine Bitcoins”. I was curious and wanted to understand it a little better and he gave me a thumbnail sketch of the process. There is some mathematical formula that someone developed and your job as a “miner” was to solve that formula and receive a Bitcoin. As these Bitcoins were being “mined”, they became their own ecosystem that through blockchain technology (more on that later) owners of Bitcoin could transact business directly with another participant in this ecosystem. You just needed to have the right software and some computer savvy.
It took my friend took three days to “mine” his first Bitcoin. A week to mine the second (mind you, his computer was running 24/7 trying to solve this formula), and 26 days to mine the third. He realized that the formula got harder after each Bitcoin was “mined” and that his advanced PC would not be able to do any further calculations.
He watched that informal marketplace to see how these Bitcoins traded and decided to sell them. If I recall correctly, he sold them for around $300 a piece. Not a bad profit but nothing to write home about.
The ecosystem of Bitcoin took on several different permutations and one of the more nefarious incidents was Silk Road.
If you don’t remember Silk Road let me give you a quick synopsis. Silk Road was founded by a couple of college kids that believed with the total anonymity of Bitcoin transactions, there is the possibility to deal in illegal items. Guns, drugs, you name it. It could be bought with Bitcoin and the government couldn’t trace it. Until they could and that ended that chapter of Bitcoin.
The attention that incident garnered changed everything for Bitcoin. Businesses saw a value to allowing people purchase things legally with Bitcoin.
Banks and other financial institutions looked into making it available to their customers (eventually deciding against it). Exchanges popped up allowing people to trade it. The price started skyrocketing.
With that skyrocketing price, investors saw a need to “mine” Bitcoins and created computer farms packed with supercomputers specifically designed to “mine” this wisp of an idea.
Considering that the price went from $600 to over $19,000 per Bitcoin in less than 18 months, people jumped all over it and bought Bitcoins or partial Bitcoins on these exchanges. Everyone and their cousin were creating new ICO’s (Initial Coin Offerings) and it was the talk of every business show and network news show.
What people at that time didn’t think about is what were they actually buying? A number, backed by no institution that has no value other than what some computer model says its value is. You could not redeem it for anything. You could only trade it in a marketplace that has no oversight.
It was trusting old school money to new fangled technology.
The other problem with Bitcoin is its DNA. The idea behind it is seamless transactions that only the two parties are aware of. Uh, did anyone say “non-taxable transaction”?
The US Government does certain things better than the private sector. Defense, Social Services and maintaining the sanctity of the money supply.
That money supply and the strength of the dollar has helped create the greatest economic engine in history and trust me when I tell you, the last thing the US Government wants to do is cede that strength to some digital form of currency.
The Federal Government will never allow transactions to go on that cannot be taxed.
While the ecosystem for transactions with Bitcoin is minute, Bitcoin acolytes believe that all transactions someday will be done via Bitcoin and the government will have no choice but to accept it and deal with it.
Sorry, that will not happen. Period. End of story.
If they can’t tax it, if they can’t follow the flow of it and if it is not backed by something tangible, it will not succeed.
What will succeed however, is the technology it is based on, blockchain.
Blockchain simply is the direct connection between two interested parties performing a transaction.
That transaction does not have to be money. It can be property or ideas and while technically, direct transactions can potentially be done without government oversight, the two parties involved have transacted something so one party has a property lets say, and one doesn’t. The ledgers of the two parties change and they change simply, without five or six other parties getting involved.
It will eventually be the standard by which all securities transactions will take place and eventually all financial transactions.
The difference between these transactions and a Bitcoin transaction is that I believe the government will be directly involved with developing this blockchain payment system and that will be transformative in so many ways.
I also don’t think this is going to happen any time soon. While banks are transitioning over to some form of blockchain technology, pushback from other areas where this technology could be used is substantial.
When it comes down to it, if companies can save money by investing in new technologies, they will.
The Federal Government will eventually get involved and that’s where the real changes will happen.
So, be wary of Bitcoin salesman that shows up at your door but be aware of his bag of technology he holds, there is gold in there somewhere.

Keeping it the same

50% Stocks
25% Fixed Income
25% Cash