The next phase in the Bitcoin revolution will be the standardization of the exchanges where the coins are traded. Bitcoin happens to be in the Wild West prospector days of its evolution. The planet has agreed a Bitcoin provides a stored way of measuring value just as that gold and silver have through the entire ages. Like gold and silver, Bitcoin is worth what the other person is ready to pay you for it. It has led to cheating since trading began. Crooked scales and filled ore all became portion 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 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, undoubtedly the largest Bitcoin exchange, shut down because of security breach and theft of around $300 million worth of Bitcoin. Customers who had Bitcoin on deposit with Mt. Gox still have no idea how much they’ll get back. The problems 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 prove to be 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 with trading Bitcoins by way of 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 inside our own trading. A swap agreement is basically an insurance policy that provides 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 volume of swaps processed makes it a huge revenue source for all of the major banks.
The CFTC has yet to touch upon Tera Group’s proposal. We commented in November that Bitcoin had transcended novelty status and that the revenue pool was becoming too large for global banks to ignore. Bitcoin’s resilience when confronted with the Mt. Gox debacle is really a testament to the energy 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 coincapcentral did fall across the board, the market appeared 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 piece of the structural transformation from Bitcoin as an anarchist, alternative store of value that exists outside the institutionalized financial industry to being built-into that same economic climate 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 will do also it wants its cut. The IRS has declared Bitcoin as property instead of currency and is therefore subject to property laws instead of 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 an excellent that could be exchanged for other goods and services, barter.
Bitcoin is a global marketplace executing transactions on an electronic network. That sounds a lot like the forex markets. Industry regulators and the banking industry are likely 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 in the same way farmers were cheated in the grain trade of ancient Egypt or gold and cattle by assayers and stockyards in the open 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 increasingly being put in place to continue its evolution as the financial industry is left to figure out how to monetize it.