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Bitcoin and Quantitative Easing

Currencies / Bitcoin Dec 09, 2013 - 10:45 AM GMT

By: Submissions

Currencies

Brett Chatz writes: The spectacular rise in popularity of bitcoin has caused many influential people to stand up and take notice. Are alternative currencies the way of the future?


Alternative Virtual Currencies

There has been tremendous hype around bitcoin, and especially its viability as a serious contender in the currency arena. Many in media circles continue to focus their attention on bitcoin as nothing more than speculative investing, going as far as labelling it the lingua franca of the underworld. There is no doubt that bitcoin is not based upon any rare or precious commodities such as gold, silver, diamonds, platinum, or oil reserves. A few heavyweights in the economic world are focusing their attention on the need for more transparency in the currency markets. The feasibility of a tech-adaptable currency such as bitcoin may indeed have more merit than meets the eye. With the era of worldwide connectivity upon us, thanks to the Internet, perhaps the time is nigh for a more user-friendly, accessible, transparent and universal currency to take root. Proponents of soldiering ahead with this type of global currency cite many valid reasons for their position. Chief among them is the taxation process. As real holdings of assets, stocks, bonds and securities are subject to the overarching reach of IRS departments, bitcoin appears to many as a breath of fresh air.

Bitcoin and Quantitative Easing

Throughout the USA, the mood of the moment is that overreaching government control - even in the financial markets - may not be beneficial to the country. For example, the policy of quantitative easing that is taking place by which the federal government prints money to pay for the expenses incurred by the country is being looked upon with disdain by opponents of this monetary policy approach. The USA, and indeed the world, is being flooded with a deluge of US dollars. This oversupply leads to a weakening of the dollar around the world – at least theoretically – and could give rise to inflationary pressures on the economy. In the short term, interest rates will be kept low because of the oversupply. And so it is that the printing press of the Federal Reserve Bank continues its policy of quantitative easing unabated. In tandem with this policy is the fact that the Federal Reserve is purchasing $85 billion per month to keep interest rates low. But it's not only the USA that is hell-bent on printing money – the same can be said for the United Kingdom, the Eurozone, Japan and elsewhere. These measures are seen as economic stimulation, but their efficacy is not as clear.

A select group of people is now looking towards the merits of bitcoin as a way to move towards a more responsible global economic exchange. Accountability, transparency and credibility may be bolstered with the use of alternative virtual currencies such as bitcoin. There is the risk that this alternative virtual currency may be used in illicit activities, but no more than hard, cold cash. Proponents of using bitcoin feel that widespread usage of the system will render many printing presses null and void. Further, people who support the use of bitcoin argue that an independent and transparent global currency could yield financial reforms that the economy so desperately needs. Indeed the movement towards virtual alternative currencies may not be forthcoming in the near future, but it is definitely something to be kept in mind.

Features of Bitcoin

This type of currency is essentially mined by a computer. It also ascribes to mathematical principles, and it is an abstract concept to most people. As a currency, it only exists in files and programs, not in the real world. The way that it works – the method of control used to manage bitcoin currency – is by way of peer to peer protocols. There is no single computer that acts as one overriding exchange for bitcoin. Like bitcoin there are scores of other cryptography-based digital currencies available on the market today. Examples of some of them include the likes of: Namecoin, Litecoin, Primecoin, Peercoin, Megacoin, Novacoin and Feathercoin. These currencies all form part of a general blanket of currencies known as cryptocurrencies. They are all verified as secure by a decentralized peer to peer network, as mentioned.

Bitcoins are issued every 10 minutes and the rate of bitcoin creation is slated to drop by 50% every four years until there are 21 million of them in virtual circulation. The financial symbol for bitcoin is XBT or BTC. Interesting to note is the fact that there are various exchanges where bitcoins are bought and sold – like regular currency – relative to the prices of other currencies. For a Forex trader it would be the same as trading a viable hard currency against an imaginary currency. As a matter of interest, bitcoins have rapidly appreciated against major world currencies such as the British pound, the euro and the US dollar. On 19 November 2013, the U.S. Senate made an admission that virtual currencies were legitimate. At that point, bitcoin rose in value to $900. As at November of 2013, it has been estimated that some 12 million of these coins exist, raising their total market value to $7.2 billion.

Of course there is a great degree of speculation involved in trading bitcoins and US regulatory authorities have very strict protocols with regards to speculation of financial assets. Other sources of contention for the widespread adoption of bitcoin as a viable alternative currency are the black market issues, the legal issues and the taxation issues. For their part, economists have varying opinions on the viability of this virtual currency. Some view it positively such as Francois R. Velde while others are dead set against it. The only real concern within the USA is that criminal syndicates tend to use virtual currency to propagate all sorts of illicit activities such as drug dealing, tax evasion, pornography and financial malfeasance.

About the author: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Brett provides in-depth analysis and consultancy to the critically acclaimed spread betting and CFD trading provider, InterTrader.com.

© 2013 Copyright Brett Chatz - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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