Has Bitcoin Gone Establishment?

I’m not sure if this news is welcome or distressing to Bitcoin’s hardcore libertarian ideologues, but the U.S. Justice Department and the SEC are about to give the virtual currency their blessing as offering a “legitimate” financial service, according to representatives from both agencies. That news is driving Bitcoin up to fresh all-time highs north of $650.

bitcoin investing
Click to Enlarge
Of course, the U.S. government now has skin in the game. After shutting down Silk Road, an illegal drug trafficking website, the FBI walked away with the site’s Bitcoin stash, which amounted to about 1.5% of all Bitcoins in circulation.

If the government accepts Bitcoin as legitimate, half the gritty, underground appeal is gone. But for optimistic Bitcoin speculators investors, acceptance by the suits is a bullish sign of broadening demand for the anti-currency.

Demand from China helps, too. BTC China recently because the world’s largest Bitcoin exchange, overtaking Mt. Gox of Japan, and is using venture capital money to expand.

So, what’s the story here? Has the anti-currency come of age? Is Bitcoin “a thing” now?

No, it’s not. Frankly, it’s asinine, but I’ll get to that in a moment.

If you want to join the speculation party, be my guest. The “value” of a Bitcoin in dollar terms has tripled in the past month as the price has gone parabolic. As I’m writing this, it’s up by more than 26% in the past 24 hours alone. Who’s to say it can’t triple again in the next month?

But don’t put any money in Bitcoin that you can’t afford to lose. Bitcoins lost about 75% of their value in April, and at the time its price was less than half what it is today.

Furthermore, the arguments backing the currency are flimsy at best.

The Holey Argument for Bitcoin

Let’s start with its role as an anti-currency untainted by the world’s central banks and their quantitative easing.

If investors truly were concerned about debasement of the currency and a loss of purchasing power, then the prices of gold and other monetary precious metals would be rising.

They’re not.

After a brief blip this past summer, the price of gold has resumed the downtrend that started in October of last year. Gold is down about 30% in the past 13 months. Silver’s decline has been even more devastating, off about 40% since last October. Platinum? The price action has been a little more volatile, but platinum is also down about 20%. (ZeroHedge puts this into wonderful visual perspective in a recent post.)

I’m not the biggest fan of gold as an inflation and currency hedge. If I want to be out of the mainstream financial system, I prefer to buy something with tangible value, such as land or rental real estate. Gold collects no interest or rent, and in the event that all hell broke loose and society collapsed into anarchy (a perpetual Mad Max goldbug fantasy, it seems) gold would be as useless as paper currency.

The only currency that would have any value would be shotgun shells.

But all of that said, if Bitcoin were rising due to “fundamental reasons,” such as currency debasement, then precious metals should be following. The fact that they are not makes the rally highly suspect.

Furthermore, while the “full faith and credit” of the United States of America might not mean as much as it used to in the era of government shutdowns and default scares, what exactly are you putting your faith in with Bitcoin? An algorithm? The generous spirit of anarcho-libertarian hackers?

Given its anti-establishment ethos, you’re getting into bed with people with a questionable respect for the law. Earlier this month, a Chinese Bitcoin exchange “disappeared,” taking more than $4 million in Bitcoins with it. And this happened just days after a hacker stole $1.3 million in Bitcoins from an Australian online bank.

Bottom Line

Bitcoin is a bubble. Of course, bubbles can be fun, and it’s possible to make a killing in them. Plenty of speculators walked away from the greatest bubbles in history — everything from the Dutch tulip bulb bubble to the 1990s Internet bubble — laughing all the way to the bank.

So, I’m not going to wag my finger and tell you not to speculate. But I do recommend only trading with money you can afford to lose.

And take profits along the way.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.