The next phase in the Bitcoin revolution is definitely the standardization of the exchanges where in fact the coins are traded. Bitcoin happens to be in the Wild West prospector days of its evolution. The world has agreed a Bitcoin provides a stored way of measuring value just as that gold and silver have throughout the ages. Like silver and gold, 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 section of the norm as both miners and the assayers sought to pad their bottom lines. This resulted in governmental oversight and the creation of centralized exchanges.
bitcoin has gone 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, by far the largest Bitcoin exchange, shut down because of security breach and theft of approximately $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 issues at Mt. Gox lay bare the cyber security argument. Surprisingly, Bitcoin as a currency has shown remarkable resilience. This resilience could very well be just the boost had a need 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 trading Bitcoins by way of a swap-execution facility or, centralized exchange. The vast majority of commercial currency trading is performed through swaps agreements which explains why we follow the commercial traders inside our own trading. A swap agreement is actually an insurance policy that provides a guaranteed value at a particular point in time to safeguard against currency fluctuations. It’s what the commodity exchanges are founded on. The swap markets will be the superhighways of the financial industry. They process massive volumes while collecting a little toll on each transaction. Therefore, the cost on the average person swap is small but the sheer volume of swaps processed makes it an enormous revenue source for several 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 a testament to the energy of a worldwide grassroots movement. Bitcoin must have plunged around the world 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 seemed to understand that it was an individual company’s problem and was therefore confined to Mt. Gox customers’ ability to get their money out. Therefore, Bitcoin prices have stabilized around $585. This is well off the December most 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 being an anarchist, alternative store of value that exists beyond your institutionalized financial industry to being integrated into that same economic climate is its capability to be taxed by the offline governments it was developed to circumvent. The Internal Revenue Service finally decided enough is enough and 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 get their share while legitimizing the need for a central exchange to see value. It also eliminates arguments with the U.S. Treasury and Congress over legal tender issues. It’s simply valued as a good that may be exchanged for other goods and services, barter.
Bitcoin is a global marketplace executing transactions on an electronic network. That sounds an awful lot like the forex markets. Industry regulators and the banking industry are going to quickly find that the failure of Mt. Gox did more to encourage the individual resolve of global Bitcoin users rather than ending this upstart’s existence. Private users of Bitcoin will clamor for the federal government to protect its folks 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 right place at the proper time with the proper idea as Bitcoin may have proven itself to be self-sustaining at the retail level. Institutional and legal structures are increasingly being put in place to keep its evolution because the financial industry is left to determine how to monetize it.