Gary North – December 18, 2013
Bitcoins have just suffered another huge hit. The other shoe has just fallen.
Bitcoins were selling at $1,242 on November 29. The headlines were all over the Web: “Bitcoins surpass the price of gold.” That was the peak. They are around $500 today. That is a decline of 60%.
When an investment fad ends, it usually ends spectacularly. A 60% decline in less than three weeks indicates that the Bitcoins fad is over.
What is significant is why the collapse occurred. We know exactly why. China’s government took two steps.
First, on December 5, the People’s Bank of China announced that Bitcoins posed an unacceptable risk. It banned financial institutions from using Bitcoins. The price of Bitcoins fell by 30%.
Second, on December 18, the Bank forbade any third-party exchange of yuan (renminbi) for Bitcoins. Immediately, China’s largest exchange ceased taking any new yuan deposits. That announcement has collapsed the market in China. It has collapsed the market worldwide.
When you get into a market, you need an exit plan. All of a sudden, there was no exit plan in China.
Around the world, the currency-denominated price of Bitcoins is down. That is how much clout the Chinese government has in this market.
NOT AN ALTERNATIVE CURRENCY
As I have said repeatedly, Bitcoins are not an alternative currency. They are an extension of a nation’s government-run currency, meaning a real currency. You buy Bitcoins with real money. Then, to make a profit, the Bitcoins buyer must do one of two things: (1) get someone to sell him a good or service; (2) get someone to sell him a real currency that buys goods and services.
There is no visible independent market for goods and services sold for Bitcoins as a stand-alone currency. This is the central fact of the economics of Bitcoins.
The key national currency for Bitcoins is China. Young Chinese programmers and their age peers are the dominant users. The average Chou in China does not own a computer. The Chinese who are doing the buying and selling are young adults. They don’t have much money. They know nothing about economics. They have never heard of fractional reserve banking. They are involved in their first investment mania.
Their parents may be buying apartments. That takes a lot of money. That market is also a mania, but it is closed to young adults. So, they bought Bitcoins.
Old Chinese without computers buy gold coins. Gold coins are also too expensive for the programmers. They need something that can be bought in fractional units. This is why Bitcoins has taken off in China. This is why China is the key market. It is a market for middle-class kids in a market where no one with experience is buying or selling.
The People’s Bank of China has decided to nip this in the bud. The programmers are now trapped. They own a non-currency that was promoted as a future currency. But it is not a currency. It is bought and sold with currency. The people’s Bank of China just made it more difficult to buy and sell this non-currency.
DECEMBER 5
The handwriting was on the wall on December 5. On that day, the People’s Bank of China announced its “unacceptable risk” policy. On that day, Bank of America Merrill Lynch released a report saying that Bitcoins were a currency of the future. USA Today reported this.
Bank of America’s report said the virtual currency could become a “serious competitor” to traditional money transfer providers. Bitcoin can help users avoid high taxes, capital controls and government seizures, but also is highly volatile, the report noted. Bitcoin, at its introduction in 2009, traded for less than $1. BoA placed the currency’s maximum value at $1,300 per Bitcoin and said its maximum market capitalization would be $15 billion.
On the day the report appeared, Bitcoins fell below $1,000. A week before, the price was at $1,242.
Bad timing, surely.
GREATER FOOLS
As I have said, Bitcoins are not a stand-alone currency, and they will not become a stand-alone currency. They are simply a plaything of young programmers and speculators. A Bitcoin is something you buy because someone else bought it. You cannot buy anything with it from any seller who does not sell his Bitcoins for real money.
The seller must re-supply whatever it is he sells. He can do this only with real money. That means that he must sell Bitcoins for dollars, euros, pounds, or — until today — yuan.
This is obvious to anyone familiar with business. But it was not obvious to the programmers who touted Bitcoins as an alternative currency.
If the central banks of the world imitate the People’s Bank of China, the Bitcoins market will plummet again. Bitcoins are not a separate currency. They are a speculative bubble that rose from nothing to an international fad, a fad based on selling real currencies, getting into a mania, and hoping to sell to a greater fool for his real currency.
The supply of greater fools has been slashed by the People’s Bank of China. If other central banks follow, this market will end as it began: the plaything of programmers.
CONCLUSION
Bitcoins’ future depends on the tender mercies of central bankers.
It always did.
Bernanke has said as much. He said it in a September 6 letter. He repeated this in testimony to Congress in mid-November.
Although the Federal Reserve generally monitors developments in virtual currencies and other payments system innovations, it does not necessarily have authority to directly supervise or regulate these innovations or the entities that provide them to the market. In general, the Federal Reserve would only have authority to regulate a virtual currency product if it is issued by, or cleared or settled through, a banking organization that we supervise. Given the Federal Reserve”s authority and the manner in which virtual currencies have developed, the Federal Reserve has focused primarily on a supervised banking organization’s role in the products’ sale and distribution, as well as the applicable regulations, such as Bank Secrecy Act (BSA) /anti-money laundering (AML) requirements. . . .As noted above, the Federal Reserve plans to work with other FFIEC member agencies on electronic cash and related issues such as virtual currencies, as needed, for banking organizations. The Federal Reserve will continue to monitor developments as part of its broad interest in the safety and efficiency of the payment system. We also stand ready to cooperate with other agencies in fulfilling their mandates, as appropriate.
At any time, the FED can pull the plug on what remains of the Bitcoin mania. Any programmer who thinks differently has had too much Jolt Cola. He needs to sober up.
For my background articles on Bitcoins, click here. (This may take a few seconds, as the search engine “mines” the site.)
Here is one, published on November 29, the day Bitcoins peaked.
http://www.garynorth.com/public/11828.cfmHere is how I ended it.
Whenever somebody tries to sell you an investment that is based on the economic analysis of a market — an analysis that cannot possibly be true — do not buy the investment. This is a simple rule. I adhere to this rule.
There has to be an economic justification for a capital investment, and there is no economic justification of buying Bitcoins as an alternative currency. That was how Bitcoins were initially sold, and it was impossible as an economic concept from the beginning. The Austrian theory of money shows why.
I do not invest in capital that has no economic justification other than the greater fool theory. There are too few fools to keep the scheme going.
Bitcoins are not illegal. They should not be made illegal. They should merely be avoided.
Read more HERE