When reading about the Mt. Gox debacle today, it reminded me of an eponymously named character from the Dr. Seuss book, One Fish Two Fish Red Fish Blue Fish. The publication was a rhyming book helping young readers through the observations of a boy and girl and the world of oddities around them. One such oddity was the Gox who was a bear-like creature wearing yellow boxing gloves and boxing with the narrator.
I like to box.
How I like to box!
So, every day, I box a Gox.
In yellow socks, I box my Gox.
I box in yellow Gox box socks.
One of the oddities I noticed in the world of investing was the Bitcoin phenomenon, which I dare say has all the characteristics of a speculative bubble. The investing community was trying to box with a currency by turning it into a speculative vehicle. That is not the function of a currency, in this case a cyber version. Bitcoin emerged as an alternative currency to fight the declining "value" of the U.S. Dollar (USD). Clearly there has been a devaluation of the USD particularly since the inception of the Federal Reserve. This devaluation occurred through the increasing volume of USD created. Most of these USD were not created with the green pieces of paper in our wallets but rather in banking cyberspace. Without adequate controls for currency creation, the banking system and the Fed, and governments were free to expand the supply of USD to the point where inflation became an accepted part of life.
Recognizing this shortcoming, alternative currencies such as such as Bitcoin, Ripple, Litecoin, Peercoin, and Namecoin emerged. Of this group, Bitcoin was by far the one with the most notoriety. Bitcoin was to solve one of the main problems with fiat currencies (something that has value because an authority decrees it) like the USD by making the creation of each Bitcoin unit more difficult than simply generating accounting entries in banking cyberspace. There was also the feature of anonymity that made it behave more like cash notes in that regard. Another feature of Bitcoin was something known as the block chain, which is a database showing every transaction executed and its value at any point in its history. So as far as addressing some of the problems with fiat currencies, Bitcoin hit several key spots.
If the story ended there, I might not be publishing this article. Instead, Bitcoin became a vehicle for speculation. Rather than operating as a medium of exchange, a store of value and a unit of account (definition of money in E$caping Oz book), the public began to bid up its "value". I use "value" in quotation since this comparison was relative to the USD. A totally new currency would establish its value not relative to the other fiat currencies like the USD but relative to goods and services. For example, a Bitcoin user would price 100 lbs of meat at "x" Bitcoins. A laundry facility would charge "x" Bitcoins for cleaning 10 shirts, and so on. Now there are some businesses accepting Bitcoin as a medium of exchange but you can bet the price in Bitcoins would bear a strong relationship to the USD. This is not totally unexpected since it would take time for a currency to gain traction and potentially displace another.
Over the course of the last couple of years, the USD price of Bitcoins jumped above $1,100 on the various trading exchanges. A spectacular run from $200 to the $1,100+ price occurred in one month alone before falling in value by 50% in December 2013. Speculators started investing in more powerful computational devices in order to create more Bitcoins. This alone spoke to a bubble condition. Another contrary sentiment indicator I like to use is that when Joe Q. Public begins to extol the virtues of an investment, it is nearing a high in value. Such sentiment was expressed to me by friends and family alike.
Rather than being a true medium of exchange, something that takes the place of barter, Bitcoin turned into a Gox. The public tried to fight (box) something that should have been accepted for what it was. For the people creating the Bitcoin exchange known as Mt. Gox, I don't think they had the Seuss character in mind when they named the online exchange. Maybe Gox to them meant gaseous oxygen. In urban slang terms, to "gox" means to wait until the last minute, particularly if done repeatedly. I guess you can say investors "goxed" themselves by waiting too long to cash in their speculative gains on the Bitcoin exchange. Alas, this is symptomatic of speculative bubbles.
In closing, I would like to suggest that ignoring the success of alternative cyber currencies would be a mistake. These alternative mediums of exchange are not going away. In fact, I would expect them to continue to flourish particularly when credit conditions tighten once again. For all its faults, the USD remains the reserve currency of the world. More importantly, there is no other currency of which I am aware that can be exchanged for a fixed amount of precious metal. In other words, every other legal tender (fiat) currency in existence is subject to the same faults as the USD. Governments are not eager to change this since doing so would place more discipline on their spending. Hopefully the adverse experiencing of boxing the Gox, won't deter sound money from emerging again.
From there to here, from here to there, funny things are everywhere!
Jim Mosquera is the author of E$caping Oz: Protecting your wealth during the financial crisis. He recently published a special report on economic trends available at The Sentinel.