The Revolution of Trust

Late last night, while preparing today’s market insight, this hit my inbox from CoinDesk:

‘Bitcoin sets new record as price tops US$7,000’.

Less than an hour later, another headline came through my email, this time from the UK Express:

‘Bitcoin smashes through US$7,000 for the first time — will bubble burst?’

All year, punters have sat on the sidelines and jeered at the cryptocurrency. The incredible price rise, from US$997 (AU$1,292) at the start of January this year to the overnight rise of US$7,000 (AU$9,075) — a gain of 602% in 11 months — means every two-bit financial analyst reckons they recognise a bubble when they see one.

In comparison, the Dow Jones Industrial Average continued to mark out new highs this year. In fact, as at the end of last week, the Dow had set 53 record closing highs in the year-to-date.

Few are saying the US stock market is in a bubble. They say that it’s ‘all part of the slow recovery’. I’ve even seen the Dow referred to as Teflon a couple of times. As in, no bad news can slow down the US stock market.

Yet, to outsiders that don’t get bitcoin’s stellar rise, they swear it looks like a bubble. Are they right?

Mainstream analysts have regularly informed us that this crypto ‘thing’ is nothing more than a fad. Wagging their proverbial fingers as they type, they implore readers to not dump any money into bitcoin and other cryptos. Because, something like bitcoin, which has no physical form, couldn’t possibly stand up in our current monetary system.

Oh wait… Our modern monetary system is based entirely on thin air.

The fiat currency you use daily draws its value from central banks and governments. And you trust that your government and central bank will maintain your fiat currency’s value. That the fiat dollars you have earned will be accepted throughout the local economy. That the money you carry in your wallet — or more likely the zeroes in your bank accounts — will still have a similar worth tomorrow.

As these mainstream analysts decry the value and benefits of bitcoin and other cryptos, they forget that our global monetary system is based on the very idea of money being produced from thin air. In addition, fiat dollars are based on the idea of centralised trust.

And that, believe it or not, is exactly how the bitcoin story began.

Most people know the folklore behind bitcoin. Satoshi Nakamoto developed an alternative currency in 2009 on the back of frustration with central banks that were devaluing currencies in the aftermath of the financial crisis. 

Well before that transpired, there was something called Bit Gold, created by computer scientist Nick Szabo. It wasn’t that Szabo valued privacy. Instead, he wanted people to value computer code the same way they did gold. Bit Gold was essentially a reward for other programmers and computer scientists working on difficult algorithms. When a person successfully nutted out a computer problem, they received Bit Gold as payment.

Szabo, the driving force behind the Bit Gold project, wanted to ‘…mimic as closely as possibly in cyberspace the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority.

In other words, Szabo wanted people to trust the value of what was being offered, rather than blindly accepting a dollar value from a centralised government authority.

Bit Gold was proof of concept. Whether Nakamoto knew of its existence prior to writing bitcoin is uncertain. But the point is that the community of programmers embraced Bit Gold as an acceptable medium of exchange. The only difficulty was that it was treated as property. It had value in the holder’s eyes, but it was difficult to turn into cash. Bit Gold didn’t automatically become something useful within the economy.

Shortly after this, bitcoin entered the marketplace, and the monetary revolution truly began.

Except this time, the community was ready to embrace cryptos as something that could become money, rather than property.

Either technology caught up, or the people did.

Nonetheless, those using bitcoin accepted that its value was uncertain. Early adopters ran with the idea that the fiat-dollar value of bitcoin was entirely dependent on how many bitcoins had been ‘mined’.

It’s taken nearly eight years, but bitcoin is now mainstream. Even though bitcoin has existed within the shadows of the internet, early adopters slowly became more accepting of the fact that bitcoin’s value wasn’t fixed. Early adopters understood the biggest benefit of bitcoin was that you didn’t trust a centralised government body to decide its value.

Instead, the first movers embraced the idea that there was a revolution of trust afoot within the economy.

Bitcoin and other crypto prices are flying. And more people every day are embracing cryptocurrencies that shun the idea of centralised trust.

You can see this in the fluctuating price of bitcoin. And it’s similar to what Nick Szabo was trying to create all those years ago. A currency that derived its value in a similar fashion to gold. Something that doesn’t depend on a central power to derive its value. A monetary system where people trust its intrinsic value rather than a centralised power behind it.

Make no mistake, bitcoin is rattling the monetary system. Just last week Goldman Sachs released a report saying that gold beats bitcoin as an investment to hold. There are two problems here. First, Goldman ignores the fact that both bitcoin and gold should be seen as a ‘currency’, and not as an asset. The second problem is that Goldman Sachs has a long history of talking down gold…only to find itself investing in it at the same time.

The giants of the finance industry still don’t know what to make of bitcoin. However, Ryan Dinse, editor of Exponential Stock Investor, does. He’s been investing in bitcoin for years. Now, after months of research, he reckons he’s found a way for investors new to bitcoin to potentially profit from this industry, without having to take the leap and buy cryptocurrencies before they’re ready. Want to know more? Go here.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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