The next phase in the Bitcoin revolution could be the standardization of the exchanges where in fact the coins are traded. Bitcoin is currently in the open West prospector days of its evolution. The world has agreed that a Bitcoin provides a stored measure of value in the same way that gold and silver have through the entire ages. Like gold and silver, Bitcoin is only worth what your partner is willing to pay you for it. This has led to cheating since trading began. Crooked scales and filled ore all became area of the norm as both the 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 gone to police its own community and remain beyond the physical scrutiny of any global government. The Utopian dream was shattered per month ago when Mt. Gox, undoubtedly the largest Bitcoin exchange, turn off because of security breach and theft of around $300 million worth of Bitcoin. Customers who had Bitcoin on deposit with Mt. Gox still do not know how much they’ll get back. The issues at Mt. Bitcoin Revolution lay bare the cyber security argument. Surprisingly, Bitcoin as a currency has shown remarkable resilience. This resilience may be just the boost had a need to legitimize the currency and the lean towards governmental involvement which 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 NJ, 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. The vast majority of commercial currency trading is done 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 little toll on each transaction. Therefore, the price on the individual swap is small but the sheer level 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 in the face of the Mt. Gox debacle is really a testament to the energy of a worldwide grassroots movement. Bitcoin should have plunged across the globe as owners of Bitcoins tried to switch them for hard currency. The market’s response ended up being very orderly. While prices did fall over the board, the market appeared to understand that it was an individual company’s problem and was therefore confined to Mt. Gox customers’ capability to get their money out. Subsequently, Bitcoin prices have stabilized around $585. This is well off the December high of $1,200 but very close to the average price for the last six months.
The last coincidentally timed piece of the structural transformation from Bitcoin being an anarchist, alternative store of value that exists outside the institutionalized financial industry to being integrated into that same financial system is its ability to be taxed by the brick and mortar governments it had been 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 enables the IRS to obtain their share while legitimizing the need for a central exchange to see value. In addition, it eliminates arguments with the U.S. Treasury and Congress over legal tender issues. It’s simply valued as a good that could 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 going to quickly discover that the failure of Mt. Gox has done more to encourage the individual resolve of global Bitcoin users instead of ending this upstart’s existence. Private users of Bitcoin will clamor for the federal government to protect its people from crooked exchanges just as farmers were cheated in the grain trade of ancient Egypt or gold and cattle by assayers and stockyards in the Wild West. Tera Group may be in the proper place at the right time with the proper idea as Bitcoin could have proven itself to be self-sustaining at the retail level. Institutional and legal structures are being put in place to keep its evolution as the financial industry is left to determine how to monetize it.