When you think of your financial legacy, it’s more likely to be shares of General Electric (GE) than a nascent, unregulated electronic currency that is outside the traditional banking system.
But the day is coming when investing in that currency won’t be crazy.
And that day is getting closer and closer.
Last Thursday, SecondMarket launched the Bitcoin Investment Trust. This trust will allow investors to buy and hold bitcoins without the trouble of shopping for and storing them, both time-consuming and difficult processes.
Granted, there are already two other players in this game: the Winkelvoss twins of Facebook (FB) fame, who recently launched a Bitcoin exchange-traded fund; and Exante, a hedge fund firm out of Malta, has begun the Bitcoin Hedge Fund.
But this is exciting news, at least for me.
You see, I’m kind of a fan of Bitcoin.
The fact that there’s a currency that operates outside of the governments of the world is a very cool concept. I think it’s disturbing and humbling to government leaders and central bankers.
Here’s a currency that eludes their manipulations, their taxations and their scrutiny: a private, democratic currency that is about as free market as it gets. It’s the Internet of currencies.
And it’s earning its place as a legacy for future generations.
Here’s a quick background on what it is and how it work from Bitcoin.org:
Bitcoin is an experimental, decentralized digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority: managing transactions and issuing money are carried out collectively by the network.
The original Bitcoin software by Satoshi Nakamoto was released under the MIT license. Most client software, derived or “from scratch”, also use open source licensing.
Bitcoin is one of the first implementations of a concept called crypto-currency which was first described in 1998 by Wei Dai on the cypherpunks mailing list. Building upon the notion that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.
Some of the advantages:
- Bitcoins are sent easily through the Internet, without needing to trust any third party.
- Are irreversible by design
- Are fast. Funds received are available for spending within minutes.
- Cost very little, especially compared to other payment networks.
- The supply of bitcoins is regulated by software and the agreement of users of the system and cannot be manipulated by any government, bank, organization or individual. The limited inflation of the Bitcoin system’s money supply is distributed evenly (by CPU power) to miners who help secure the network.
What’s more, the transactions are discreet. Everything is encrypted, so it’s very difficult to track the transactions or the money, or who holds how much.
Unease At The Top
As you can well understand, large organizations, like the U.S. Treasury, and even Wall Street find this kind of hidden structure pause for concern.
The top-down view is that it isn’t regulated (except for through peer networks) and the price of coins can swing wildly.
Now as far as price volatility, that hasn’t seemed to bother anyone when it came to precious metals or commodities. But then again, they’re priced in dollars, which means anyone who wants to buy gold or copper needs to hold dollars. And that’s good for the U.S. government and Wall Street. It’s an easy, predictable system that can be gamed by traders because there’s a long history of the interplay.
You’ve heard the term “the markets hate uncertainty.” Well, there are few things that are as uncertain as a brand-new cyber currency built by an unknown person or people and beholden to no one or nothing. It’s a collective store of value only relative to other Bitcoin holders and vendors.
Yes, this is wildly speculative stuff.
But it’s a lot more interesting than buying a junior gold mine and expecting that to pay off. Fortunes have already been made. And fortunes have been lost.
Governments have been trying to disrupt the market now and again to declare the dangers and instability of the system. But Bitcoin programmers have reworked the algorithms and analytics to make the system more robust.
And now there are three ways in: a fund, an ETF and hedge fund.
The first will be open only to what the Securities and Exchange Commission terms “accredited investors.” Such investors must have a net worth of at least $1 million, excluding their primary residence, or verifiable annual income of more than $200,000 in each of the previous two years.
The ETF will be open to anyone and everyone off a major exchange. Expect this to take on a much more Wild West feel, since everyone will be in looking for opportunity: individual investors, professional traders and scammers.
The hedge fund has an initial minimum subscription of $100,000 and a 0.5 percent upfront subscription fee.
However, U.S. citizens and U.S. institutions will not be able to access the fund directly. The fund disclaimer states: “U.S. Persons may not subscribe either directly or indirectly for shares.” But “directly” has plenty of wiggle room if you’re so motivated.
Your own risk profile should be enough to move you toward one or the other.
So the next time you’re eyeing Badger Mining shares or some obscure biotech, maybe give Bitcoin some thought. It may be just the kind of thing that helps inspire the next generation of investors.
— GS Early