Bitcoin Chicago and You

Bitcoin; the virtual currency touted by some as the next and inevitable step in the evolution of money and by others as a “collective delusion”. There is much disagreement over the status, the future and the uses of bitcoin, as well as other virtual currencies. Many countries (for example Bolivia and Iceland) have made transactions using this and other crypto-currencies illegal while still others, such as Germany, have given it the valid status of “unit of account”. This checkered acceptance is undoubtedly one of the reasons holding its widespread use back but being only six years old in 2015 it has already quite the stature.

Bitcoin ATM at Reggie's Place on Clark St in Chicago.

Bitcoin ATM at Reggie’s Place on Clark St in Chicago.

Bitcoin is a peer-to-peer online payment system where transactions are verified by network nodes and recorded in a huge and public distributed ledger known as the “block chain”. There is no central repository, for example the US Treasury or the Bank of England, and is a completely decentralized virtual currency. People can obtain bitcoins, primarily by “mining” for them by using their computing power to help process transactions (thus creating a “block”), but also through direct purchase with hard currency and provision of products and services.

In recent years the number of merchants accepting bitcoin as a method of payment has exceeded the 100,000 mark with many established firms such as Dell, Expedia and Microsoft are accepting the virtual currency. However despite growth in its use fewer than 5,000 bitcoins per day are used for retail transactions – a relatively paltry value of $1.28m as of the 19th March 2015. Indeed, in popular imagination bitcoin is inextricably linked to more nefarious use – as a form of ‘untraceable’ payment of goods on the infamous ‘dark web’. In fact, in 2012 it was estimated that up to 9% of all worldwide bitcoin exchanges were for drug trades on one single such website; Silk Road.

As such, bitcoin and its infrastructure have attracted the scrutiny and attention of financial regulators, legislative bodies, law enforcement and the media. This unwanted attention has also meant that many bitcoin companies have had trouble opening traditional bank accounts due to lender’s weariness of its associations with illicit activity. Co-founder of BitPay, Antonio Gallippi, has stated that “banks are scared to deal with bitcoin companies, even if they really wanted to.” HSBC has refused to serve a hedge fund with links to bitcoin and the Bank of Australia has closed the accounts of business with ties to bitcoin. Chicago ‘s major banks take such a dim view of the cryptocurrency though. Bank of America Merrill Lynch has gone on record stating that “we believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers.”

As a financial advisor, there is no way Bitcoin could be considered a viable long term investment for a portfolio. Despite all of this, bitcoin’s future is uncertain. It is an incredibly volatile currency – calculated as seven times greater than gold and 18 times greater than the US Dollar and indeed, while Bloomberg selected the Russian Ruble as the worst performing currency in 2014 it concedes that the honor would have gone to bitcoin had they considered it a ‘real’ currency. With this in mind the future of bitcoin as a viable alternative to fiat money remains to be seen.

Adam Faust, Founder, Deep Blue Financial LLC