The next phase in the Bitcoin revolution will be the standardization of the exchanges where the coins are traded. Bitcoin is currently in the open West prospector days of its evolution. The world has agreed a Bitcoin provides a stored measure of value just as that silver and gold have through the entire ages. Like silver and gold, Bitcoin is only worth what the other person is willing to pay you for it. This has led to cheating since trading began. Crooked scales and filled ore all became section of the norm as both miners and the assayers sought to pad their bottom lines. This resulted in governmental oversight and the creation of centralized exchanges.
The Bitcoin dream has been to police its community and remain beyond the physical scrutiny of any global government. The Utopian dream was shattered a month ago when Mt. Gox, by far the largest Bitcoin exchange, turn off due to a security breach and theft of approximately $300 million worth of Bitcoin. Bitcoin Evolution who had Bitcoin on deposit with Mt. Gox still do not know how much they’ll get back. The issues at Mt. Gox lay bare the cyber security argument. Surprisingly, Bitcoin as a currency shows remarkable resilience. This resilience could very well be just the boost needed to legitimize the currency and the lean towards governmental involvement that could actually help this fledgling store of value soar to its mainstream potential.
The timing of the Mt. Gox incident may end up being a boon for the currency. Tera Group, out of Summit New Jersey, already had proposed a bilateral agreement to the Commodity Trading Futures Commission (CFTC) to begin trading Bitcoins through a swap-execution facility or, centralized exchange. Almost all commercial currency trading is performed through swaps agreements which explains why we follow the commercial traders in our own trading. A swap agreement is actually an insurance policy that delivers a guaranteed value at a particular point in time to protect against currency fluctuations. It’s what the commodity exchanges are founded on. The swap markets are the superhighways of the financial industry. They process massive volumes while collecting a small toll on each transaction. Therefore, the price on the individual swap is small but the sheer volume of swaps processed makes it an enormous revenue source for several of the major banks.
The CFTC has yet to comment on Tera Group’s proposal. We commented in November that Bitcoin had transcended novelty status and that the revenue pool was becoming too big for global banks to ignore. Bitcoin’s resilience when confronted with the Mt. Gox debacle is a testament to the power of a worldwide grassroots movement. Bitcoin must have plunged around the world as owners of Bitcoins tried to exchange them for hard currency. The market’s response turned out to be very orderly. While prices did fall across the board, the market seemed to understand that it was an individual company’s problem and was therefore confined to Mt. Gox customers’ ability to get their money out. Because of this, Bitcoin prices have stabilized around $585. This is well off the December high of $1,200 but very near the average price for the last six months.
The last coincidentally timed little bit of the structural transformation from Bitcoin being an anarchist, alternative store of value that exists beyond your institutionalized financial industry to being built-into that same economic climate is its capability to be taxed by the offline governments it was developed to circumvent. The Internal Revenue Service finally decided enough is enough also it wants its cut. The IRS has declared Bitcoin as property instead of currency and is therefore at the mercy of property laws rather than currency laws. This allows the IRS to obtain their share while legitimizing the need for a central exchange to see value. It also eliminates arguments with the U.S. Treasury and Congress over legal tender issues. It’s simply valued as an excellent which can be exchanged for other goods and services, barter.
Bitcoin is really a global marketplace executing transactions on an electronic network. That sounds an awful lot just like the forex markets. Industry regulators and the banking industry are likely to quickly find that the failure of Mt. Gox did more to encourage the individual resolve of global Bitcoin users rather than ending this upstart’s existence. Private users of Bitcoin will clamor for the government to protect its folks from crooked exchanges in the same way farmers were cheated in the grain trade of ancient Egypt or gold and cattle by assayers and stockyards in the Wild West. Tera Group could be in the proper place at the right time with the proper idea as Bitcoin may have proven itself to be self-sustaining at the retail level. Institutional and legal structures are being put in place to continue its evolution because the financial industry is left to figure out how to monetize it.