The next phase of the Bitcoin revolution will be standardization of the exchanges on which the coins are traded. Bitcoin is currently in the Wild West prospector days after its development. The world has agreed that a Bitcoin provides a stored measure of value in the same way gold and silver have through the ages. Like gold and silver, Bitcoin is only worth what the other person is willing to pay you for it. This has led to cheating since trading began. Lopsided walls and filled ore all became part of the norm as both miners and assays tried to lay their bottom lines. This led to government oversight and the creation of centralized exchanges.
The Bitcoin dream has been to police its own community and remain beyond the physical control of any global government. The utopian dream was shattered a month ago when Gox, by far the largest Bitcoin exchange, shut down due to a security breach and theft of approx. $ 300 million Customers who had a Bitcoin deposit with Gox still do not know how much they will get back. The questions at Mt. Gox lay on the cyber security argument. Surprisingly, Bitcoin as a currency has shown remarkable resilience. This resilience may well be just the boost needed to legitimize the currency and the prone tendency for government involvement, which can actually help this new store of value rise to its mainstream potential.
The timing of the Mount Gox incident may prove to be a boon to the currency. The Tera Group, out of the New Jersey Summit, had already proposed a bilateral agreement with the Commodity Trading Futures Commission (CFTC) to begin trading Bitcoins through a swap execution facility or central exchange. The vast majority of commercial currency trading takes place through swaps, which is why we follow the commercial traders in our own trading. A swap agreement is basically an insurance policy that provides a guaranteed value at a specific time to protect against currency fluctuations. That is what the commodity exchanges are based on. The swap markets are highways in the financial sector. They process large amounts while collecting a small toll on each transaction. Therefore, the cost of the individual swap is small, but the large amount of processed swaps makes it a huge source of revenue for all the major banks.
The CFTC has not yet commented on Tera Group’s proposal. We commented on it in November Bitcoin had exceeded news status and that the revenue pool became too large for global banks to ignore. Bitcoin’s resilience to Mt. The Gox debacle is a testimony to the power of a global grassroots movement. Bitcoin should have thrown itself across the globe as Bitcoin owners tried to swap them for hard currency. The market response proved to be very orderly. While prices were dropping everywhere, the market seemed to understand that it was an individual company’s problem and therefore limited to Mt. Gox customers’ ability to get their money out. As a result, Bitcoin prices have stabilized around $ 585. This is well off the December high of $ 1,200 but very close to the average price for the last six months.
The last randomly timed piece of Bitcoin’s structural transformation as an anarchic, alternative store of value that exists outside of the institutionalized financial industry to be integrated into the same financial system is its ability to be taxed by the bricks and mortar governments, it was developed to get around. The Internal Revenue Service finally decided that enough is enough and it wants its cut. The IRS has declared Bitcoin as property rather than currency and is therefore subject to real estate laws rather than currency laws. This allows the IRS to get their share, while also legitimizing the need for a centralized exchange to establish value. It also removes arguments with U.S. Treasury and Congress in dealing with legal supply issues. It is simply valued as a commodity that can be exchanged for other goods and services, barter.
Bitcoin is a global marketplace that performs transactions on an electronic network. That sounds a lot like the forex markets. Industry regulators and the banking industry will soon find out that hostile Gox’s failure has done more to encourage individual solution to global Bitcoin users rather than ending this upstart existence. Private users of Bitcoin will fight the government to protect its people from crooked exchanges, just as farmers were cheated in the grain trade in ancient Egypt or gold and cattle by assayers and stocks in the wild west. Tera Group may be in the right place at the right time with the right idea, as Bitcoin may have proven to be self-sustaining at the retail level. Institutional and legal structures are being set up to continue its development as the financial sector is left to figure out how to make money from it.