Silk Road + Bitcoin

[Sooz]

Hi All,

Here's an interesting piece on Bitcoin - why the demise of the underground website, Silk Road, is a good thing for Bitcoin.

Plus a bit of history and predictions for its future.

(Long-ish article but worth a read imo.)

By the way, it's interesting that a year ago when I was interested in Bitcoin, I contacted the publishers of this newsletter to ask if they would be discussing Bitcoin in the future. It was pretty much a flat 'no'. Obviously they have changed their mind, or at least Sam Volkering has persuaded them to publish this article.

Cheers,
Sooz


'Why the Demise of Silk Road Means Bitcoins Are Here to Stay
By Sam Volkering, Technology Analyst, Revolutionary Tech Investor

You may have seen in the press recently that the US Federal Bureau of Investigation (FBI) has shut down drug website Silk Road.

With this news many commentators have tied in the fact that many customers of Silk Road use Bitcoins to make transactions. Some have even suggested that now the FBI potentially has a grasp on Bitcoin it will mean the end for Bitcoin and all other private digital currencies.

But from what I can see, the Feds shutting down Silk Road is evidence Bitcoin will survive and be a permanent fixture in the global economy, whatever shape or form it might take in the future.

The biggest issue with Bitcoin is the insane price volatility and people using it in a way not suited for its intended design. Most people see Bitcoin as an investment.

Because Bitcoin is so new, people are confused about what it is and how to use it.

And that's half the issue, people are trying to pigeon-hole it into a definition, 'Oh it's like gold. Oh it's like cash. Oh it's like a stock.' In fact, it's all of the above and more.

It's a whole new medium of economic exchange.

It's most similar comparison is to gold. But it's as flexible and liquid as cash...with the potential to appreciate in value like a stock. You can't define it as anything other than Bitcoins.

You need to also remember its history to appreciate its actual current resistance to turmoil.
If You Think $30 to $230 was good, Try 60,000% in a Year

Let me take you back to October 2010. At that point Bitcoins traded at 5 cents. But just four months later on 9 February 2011, Bitcoin (BTC) hit parity with the USD: $1 = 1 BTC.

From there it steadily grew, and then climbed substantially around April/May to touch around the $6-7 mark. Then the price of BTC exploded.

On 1 June 2011, blogger/reporter Adrian Chen wrote a piece on Gawker called 'The Underground Website Where You Can Buy Any Drug Imaginable'.

His piece was solely based on the website Silk Road. Of course in writing about this, he made reference to Bitcoin, the anonymous digital currency. Until then Bitcoin was really only known to those in the know (so to speak). But following Chen's article it hit the mainstream.

Ecommerce had gone to a whole new level with this 'drugs, guns and anything illegal' website and the mysterious Bitcoin was all a part of it.

The mystery of how Bitcoin worked and who created it added to the digital intrigue. Within days of Chen's article the price of Bitcoin peaked at US$31.91. Within the space of four months Bitcoin had increased by 3,000%.

And compared to the 5 cents it had been not that long before, gains were off the chart - a 60,000% gain. Mass hysteria ensued.

But as you'd expect with the volatile Bitcoin price, a week or so later after claims that some Bitcoins were stolen, issues with the security of the BTC exchanges, and with the security of Bitcoin wallets, the price plummeted back down to around US$3 by the end of the year.

Bitcoin is Not a Fad.

With that kind of boom and bust, many said Bitcoin was a fad. They said it was nothing more than a bunch of hackers and geeks playing around with computer code on the internet. The traditionalists passed it off as nothing more than a blip on the radar.

As such media coverage faded, the general public's attention fell away and Bitcoin went back to being somewhat obscure. This was a good thing. Bitcoin continued on its merry way. But not back to the 5 cent or even the US$1 it had been.

It slowly crept forward, just doing its thing, hitting the $US20-$30 range by January this year.

Then, as you know, earlier this year trouble in Cyprus forced the security of the current money system back onto the front pages. Thanks to this Bitcoin once again captured the public's imagination.

Subsequently Bitcoin smashed through $31 (previous peak) and charged all the way to about US$230. What's worth noting is the recent peak and bust from US$30 to US$230 wasn't even close to the 2011 peak and bust in percentage terms. If it had replicated the February 2011-June 2011 run, Bitcoin would have touched US$900. But it didn't.

Source: Bitcoincharts.com (Sorry chart does not show).

Suffice to say the price came off again, but hovered around the $140 range. That was until the events of the Silk Road shutdown. This time around though, mention Bitcoin and the world is an expert.

But still, ask the traditionalists what they think and they'll pass it off as a fad and nothing of any serious concern. As far as the ignorant are concerned Bitcoin is all about money laundering and drug dealing.
Not Even the Feds Can Take it Down Now

But here's the thing. The price of Bitcoin has failed to fall below US$100, even after the Silk Road operation. Today it's over US$133. And it will probably hover around this mark for some time. At least until the next big global economic event that scares the heck out of everyone and sees them flood into the digital economy.

That tells me Bitcoin is a lot stronger than most have given it credit for. It also tells me this is one resilient piece of technology. So you can expect it to stick around for some time.

And although only 21 million Bitcoins will ever exist the decimal point moves 8 places to the left. That means Bitcoins are in effect infinitely divisible. Compare that to currency units such as the dollar which are only divisible to two decimal points (100 cents to the dollar).

Not only that but more merchants accept Bitcoin as payment now than ever before. This is a necessary trend if Bitcoin is to be widely accepted.

But what if merchants stop accepting Bitcoin? Well they'd become worthless. But what if merchants stopped accepting US dollars or Aussie dollars? Would the same happen? Of course it would.

Who can say with any conviction today that the US dollar won't be worthless in 10 or 20 years? It may still be unlikely, but I bet you wouldn't bet your house on it not happening.

The other thing is the ease with which you can get Bitcoins. For example, I just purchased 0.00324027BTC using my phone. It now sits in my Bitcoin wallet with my other Bitcoins. The cost is simply added to my phone bill at the end of the month.

Name any other currency, stock, or precious metal in the world that's so easy to purchase.

With dodgy practices like Silk Road out of the way, it paves a clearer path for Bitcoin to gain some credibility and wider acceptance. It's the beginning of change. It's early on in the process, but there's no doubt in my mind that Bitcoin is here to stay.

There will be competitors, and possibly even a better one. But at the end of the day someone's got to be a first mover and Bitcoin is exactly that.

I don't plan on selling my Bitcoins. I'll use them for their intended purpose...as a medium of exchange over the internet. If I can stash some away for a rainy day or in the hope of making some money from them, that's great.

What everyone needs to do now is take a deep breath. Accept the inevitable and take Bitcoins for what they are. It's change, its new, it's revolutionary and it's exciting.

It will help change the entire global economic system, and people who dismiss it as a fad need to appreciate that's a good thing.'

Sam Volkering, Technical Analyst, Revolutionary Technical Investor
Money Morning
Port Phillip Publishing
Melbourne, Australia