Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

My Thoughts

Bitcoin Price was the Most Important Economic Story you missed in 2016

The most important economic story of 2016; was one that most of the mainstream media did not see: bitcoin’s incredible price increase. Interestingly few people; including most investors and economists, saw this coming even though they should have.

The price of a bitcoin more than doubled over the past 12 months. Back on December 26, 2016, a bitcoin was trading for $417.22, by Christmas Day 2016, one was worth $878.51, by Boxing Day (December 26) it had reached $901.58, Coindesk’s Bitcoin Index indicates. To further excite speculators the bitcoin price briefly hit $917.63 on Friday December 23.

The exciting and disruptive thing about this price growth is that appears to be organic rather than speculative. The last time bitcoin broke the $900 mark back in 2014 the price surge was driven by speculation.

This time the growth is organic it is driven by increased demand from real people using bitcoin to buy real things. More importantly the price increases are being driven by ordinary people and investors rather than speculators or cryptocurrency geeks.

A Perfect Storm of Dramatic Events

The cause of the price increase is a perfect storm of dramatic events in 2016. The most important of these was Indian Prime Minister Naranda Modi’s demonetization in which he declared 86% of the cash in the country worthless on November 8. That spooked a lot of people far beyond the subcontinent.

Other events driving bitcoin’s growth included Brexit, hyperinflation in Venezuela, the collapse of oil prices, the collapse of gold prices, inflation in China, inflation in Mexico, the strong US dollar, the weak Chinese Yuan, the decision to stop printing the 500 Euro note, currency restrictions in Spain, growing tensions between Russia and the United States, the failure of reforms in Italy and the election of Donald J. Trump in the United States.

All of these events had many people looking for alternatives to traditional currencies. Many of them including Chinese investors and Venezuelan entrepreneurs ended up turning to bitcoin.

Venezuela is becoming a center of bitcoin activity because of hyperinflation; and President Nicholas Maduro’s strict currency controls, he’s even closed the borders to keep money in. Many of the country’s residents are using bitcoin to pay for food, medicine and other essentials ordered online.

Incredibly Maduro made the situation worse in December by declaring the nation’s biggest bill the 100 bolivar note worthless even though no replacement currency was available. The result was rioting and looting that ended only when Maduro reversed his plans.

Is Bitcoin Replacing Gold?

The obvious lesson from this situation is that bitcoin gains value in times of economic turbulence. The digital currency, like gold, is increasingly seen as a means of preserving value in the face of inflation and political turmoil.

It even seems to be replacing gold in such a role, possibly because bitcoin is easier to move, hide and exchange. A person can transfer bitcoin with a keystroke and convert it into currency at the push of an app. Another advantage is there is nothing physical for the local gangster or secret policeman to take at gunpoint.

You can also use it to make a wide variety of online transactions including the purchase of gift cards that can be used to buy from online retailers like Amazon (NASDAQ: AMZN) and There are even some online retailers such as Overstock (NASDAQ: OSTK) that allow direct bitcoin purchases.

Interestingly enough the price of gold has been falling in recent months, dropping from around $1,300 an ounce on November 16 to $1,133.45, on Christmas Day. One has to wonder if the two are connected, is the money that would normally go into gold, flowing into bitcoin instead?

Is this the Beginning of a Financial Revolution?

It is probably too early to tell but this might be the beginning of a financial revolution. The upheaval would be the replacement of traditional financial markets and currencies; that are dominated by governments, speculators and elites, with digital solutions over which average people have more control.

A good analogy for this would be the replacement of traditional media in which corporate executives make content decisions with digital media where users pick the content. An example of that is Facebook (NASDAQ: FB) where average people; rather than editors or producers, control news content. Another is Netflix (NASDAQ: NFLX) where viewers “program” their entertainment by buying shows or movies directly.

Such a movement is potentially far more disruptive than social media; because it might take away or lessen Central Banks and politicians’ ability to control or influence the economy. Demonetization of the currency would be an empty gesture if every citizen had the ability to use her bitcoin app to buy groceries with. Currency controls would be useless if everybody were able to move their money straight out of the country at the press of an app.

A Paradigm Shift in Finance and Economics

These changes would represent a paradigm shift in economic behavior rivaling the creation and adoption of paper money. Paper money was a profound change because it allowed almost anybody to easily participate in the economy. Widespread adoption of cryptocurrency would allow everybody to participate in the national and global economies.

One radical aspect of this development would be the ability of Central Banks and governments to directly transfer money straight to citizens. The People’s Bank of China (PBOC) is already trying to develop a digital currency for that purpose.

Another development would be to allow a Central Bank in one country to control the economy of another. For example the PBOC would be able to stimulate economic growth (and demand for Chinese-made products) in the US or South Africa, by making cryptocurrency payments directly to residents of those countries. That raises serious questions about national sovereignty and economic regulation.

A long-term development that cryptocurrency and app-based payment might make possible is a World Central Bank. That entity would use digital currencies to manipulate the global economy in the same way the Federal Reserve tries to control the US economy.

As you can see bitcoin is far more than just a digital currency. It represents a paradigm shift in the economy that we should all pay attention to. Those who pay closest attention to bitcoin’s rise will be in a position to profit from this paradigm shift.

The rise of bitcoin should also teach investors to ignore the mainstream media and look behind the scenes. The real news is often occurring in places reporters and analysts ignore.