Bitcoin and Other Digital Fiat Currency is Less Sci-Fi Than You May Think

Steve Kanaval |

Bitcoin.jpg

Since 1971, all currency became backed by nothing more than the good faith of government. There is no underlying metal to back global currency – it is simply the word and good faith of the government itself.  I need to repeat this over and over to myself so I fully grasp the concept.

This change by the Nixon administration in 1971 allowed global exchange rates to exist, and thus created Forex Trading. Eventually, this evolved into the largest trading market in the world, dwarfing global equity trading by comparison. 

Indicative of its importance, trading in foreign exchange is by far the most active of any market; the latest accounting by the Bank for International Settlements puts daily trading volume at more than $5 trillion. Exchange rates are a part of daily life, though most don’t realize it until they travel, or have exposure to currency fluctuation. But in general, most investors do not watch currency as part of their daily observations. It is background noise, unless you get a collapse or major move in a global currency. However, in today’s marketplace, you have other forms of payment arising which are in infant stages – very much like currency rutures and options were in the late 1970’s at the Chicago Mercantile Exchange. At the time, very few understood these derivatives, and even fewer used them.

Enter Bitcoin.

This digital currency has had an interesting start, and it’s a great story for a journalist. It has all the important components of a great story: intrigue, volatility and a cloak and dagger backdrop – which makes it sexy. Investing in it has been risky, but so have equities in general. Having your money stolen by a hacker is little different than having your broker steal money from you, but it happens, and it’s the downside of capitalism. Don’t get me wrong, no one likes to be stolen from - it undermines the integrity of the marketplace. But Bitcoin (BCOIN) will overcome all of this because a future digital fiat currency will eventually be backed by the “Greater Good Faith” of the crowd. This is the underpinning of everything internet from crowd funding to Wikipedia, and some form of digital currency (it may not be Bitcoin) will someday dwarf out current Forex Markets.

Understand that you are already using digital currency with ApplePay from Apple Inc. (AAPL) . If you read the homepage for ApplePay, this is what you see; “Apple Pay will change how you pay, with breakthrough contactless payment technology and unique security features built right into the devices you have with you every day. So you can use your iPhone, Apple Watch, or iPad to pay in a simple, secure, and private way”. 

Apple has $160 billion in cash in its coffers, and I trust the good faith of Apple more than I trust the good faith of the US Government debt machine. Once the consumer digital wallet gains acceptance, many forms of payment and barter will exist…didn’t everyone see “Waterworld” with Kevin Costner when he utilizes his currency and trades a small plant for water, booze and the girl? Sure, it won’t be exactly like that, but the concept is far from novel.

Digital currency will be volatile, and will have many turns over its lifetime…making it well worth covering.  Keep in mind also, in the 44 years since fiat currency became a global reality it is a very small sample size, and for comparison’s sake, we are in the 2nd inning of a nine inning game as the world changes the way we pay for goods and services.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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