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WONDERFUL TECHNOLOGY AND A BUBBLE READY TO POP

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The other day my boss asked, “what do you think about Bitcoin?” The next day at breakfast an old friend asked the same question. Is the most recognizable brand of crypto-currency finally making inroads into the consciousness of Las Vegans, after its price has soared from pennies, when it was created in 2009, to over $4,000 as I write?

So what is Bitcoin? It’s a digital currency “mined” by using computers to solve complex math puzzles, by way of what’s known as block-chain technology. Currently, a winner is rewarded with 25 bitcoins roughly every 10 minutes.

Millions of acres worth of computers around the world are constantly computing to create bitcoin. But, ultimately only 21 million will be created. The government isn’t involved. The central bank has no crypto-monetary policy. It’s Free market money. Nobel prize winner F.A. Hayek’s dream of competing currencies has come to pass. With Bitcoin’s success, has come 864 other cryptocurrencies. The long departed Hayek must be smiling.

Libertarian and Bitcoin evangelist Jeffrey Tucker writes,

It is all the more wonderful to consider the glorious way in which Bitcoin has outsmarted the experts, including me. And this is precisely why I adore market forces so much. No one is in charge of them. No one can consistently outthink them. Markets keep us humble. They constantly remind us that even the most astute and prescient observer can be surprised, even shocked.

While libertarians are cheering on the cryptos and declaring victory over the monetary mandarins in Washington D.C.; I believe they are celebrating too early. The idea that governments will leave Bitcoin and the other crypto-currencies alone flies in the face of thousands of years of history.

Plank number five of Karl Marx’s Communist Manifesto calls for the government to “Establish a national bank where all money and loans are owned by the federal government and constitute a monopoly.”

When the FBI took down Silk Road four years ago, arresting and ultimately jailing, Ross William Ulbricht, they seized the site’s assets which were primarily the currency of choice on the anonymous online drug bazaar: lots of Bitcoins.

Fortune reported on October 2nd,

The $48.2 million total proceeds means the government sold the bitcoins for an average of $334. In retrospect, the sale appears to be a matter of bad timing for the government: the price of a bitcoin was as high as $1,000 at the end of 2013 before the digital currency went into a prolonged slump until mid-2016 when it began to soar. The current price is around $4,400—meaning the Justice Department would have made around $630 million had the sale taken place today.

The investigation that brought down Silk Road was marred by two corrupt agents from the Drug Enforcement Agency and the Secret Service, who posed as criminals in order to steal bitcoins.

JP Morgan Chase CEO Jamie Dimon called Bitcoin a fraud recently. Warren Buffett says the crypto-currency is a mirage. Investor Bill Fleckenstein calls it a chain letter and cryptotrash. James Grant says, “Cryptocurrencies are tech stocks and casino chips doing business as money.”

So what do I think of Bitcoin? The block-chain technology is infinitely valuable. Governments will not leave it alone. And, anything which rises in price from $125 to over $4,000 in four years with virtually no corrections, and its adherents believe it can only go up–is a bubble.

Investors, be careful. Economic historians, take note. LW

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