Will Bitcoin Destroy Big Government?


Source: Flickr / btckeychain.

Not all of bitcoin's proponents are radical libertarians -- venture capitalist Chris Dixon, for example, is both a cryptocurrency supporter and a self-described lifelong Democrat -- but many of them are.

Last year, Overstock.com (NASDAQ: OSTK  ) made news when it became the first major retailer to accept bitcoin. The announcement was hardly coincidental: The company's CEO, Patrick Byrne, is a noted libertarian who describes money as "too important" to leave in the hands of the government.

To those who share Byrne's philosophy, the appeal of bitcoin comes from its resistance to inflation: Unlike U.S. dollars, whose supply is dictated by the Federal Reserve, the number of bitcoins is controlled mathematically. A hard cap is intrinsic to bitcoin's design, and though new bitcoins will continue to be mined into existence in the coming years, the total number of bitcoins will never exceed 21 million.

Slaying Leviathan
Jeffrey Tucker, the CEO of Liberty.me, is one of those proponents. Characterizing bitcoin as the magic bullet that will slay "Leviathan," he believes cryptocurrency is an unstoppable force, a technology that will end the age of big government.

Tucker was once the editorial vice president of the Ludwig von Mises Institute, an economic think tank advocating the work of Ludwig von Mises, a somewhat obscure economist who supported unrestrained free markets. Mises was deeply opposed to central banking and advocated for a gold standard. To Tucker, and many bitcoin supporters, bitcoin is the gold standard of the digital age. Unable to be replicated, and not easily controlled by governments or central banks, bitcoin holds the promise of truly unregulated commerce.

But Mark Spitznagel disagrees. The founder and CIO of Universa Investments (a hedge fund with around $6 billion in assets), Spitznagel is such a passionate believer in Mises' theories that they form the basis of his investing strategy. In his recent book, The Dao of Capital, Spitznagel argues that investors can beat the market by successfully applying strategies derived from Mises' work.

Applying Mises' theories, Spitznagel is expecting a major market correction -- he believes the S&P 500 (SNPINDEX: ^GSPC  ) could fall by as much as 40% in the coming months, as poor economic fundamentals finally catch up to the overvalued stock market.

In the meantime, Spitznagel thinks investors should sit in U.S. Treasuries -- not bitcoin. Despite his own libertarian leanings, Spitznagel is deeply skeptical of Bitcoin, characterizing it as "castle in the clouds." Because bitcoin lacks intrinsic value of its own, Spitznagel told me, it's not wholly different from any existing fiat currency. It may help to facilitate digital commerce, but as it stands, it's simply an extension of the dollar.

Just an extension of the U.S. dollar
Indeed, while Overstock.com may accept bitcoin, it doesn't store them -- all the bitcoins Overstock.com takes in (now worth more than $1 million per day) are converted directly to U.S. dollars. The free publicity generated by bitcoin was unquestionably a smart move for Overstock, but Byrne is clearly intelligent enough not to saddle his company with extreme currency risk (and that's putting it mildly).

The rising value of bitcoin has attracted a great deal of attention from investors -- Goldman Sachs released a report on bitcoin earlier this month, trashing it as a currency but suggesting its underlying technology could have some value. Warren Buffett wasn't as kind, telling investors to "stay away," and arguing that its current valuation was "a joke."

But with the cryptocurrency still trading near $600, bitcoin bulls remain undeterred. "Treasury officials are clueless about bitcoin," Tucker told me. For someone whose ideology centers around distrusting the government, such an asset has obvious appeal. Still, there's no consensus, even among Fed critics: Spitznagel argues that all forms of money must have underlying "commodity-value."

While there are people like Dixon out there, much of bitcoin's recent bid appears to be ideologically motivated. While the underlying technology could have some promise, I suspect those buying bitcoin out of opposition to the government are setting themselves up for failure.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 22, 2014, at 6:03 PM, dooglus wrote:

    You wrote

    > while Overstock.com may accept bitcoin, it doesn't store them -- all the bitcoins Overstock.com takes in (now worth more than $1 million per day) are converted directly to U.S. dollars

    but I think you're mistaken. The WSJ recently wrote:

    > Overstock.com has also recently started holding on to the bitcoins that it receives from customers instead of immediately exchanging the virtual currency for dollars, Mr. Byrne said. Many merchants don't keep their bitcoins because they want to avoid currency risk from bitcoin's price fluctuations.

    >

    > "It is my interest to see a robust parallel monetary institution," said Mr. Byrne, a supporter of limited government oversight.

    >

    > The company will keep 10% of its revenue from bitcoin sales in the virtual currency, with the intent of eventually offering it as payment for vendors and employees. Mr. Byrne said the company now holds bitcoins worth "tens of thousands" of dollars.

  • Report this Comment On March 22, 2014, at 11:00 PM, MotleyBurger wrote:

    Bingo Dooglus. Far be it from a journalist these days to check their facts before publishing :)

  • Report this Comment On March 23, 2014, at 1:55 PM, earonesty wrote:

    10% is a great number.... my dad's holding the same % in coin from sales on his site. it's a small investment with a large potential upsite. bitcoin *could* go 10x in the next few years.

  • Report this Comment On March 23, 2014, at 6:53 PM, MRMOTOFOTO wrote:

    One million a day?? I think you mean a million in dollar sales this quarter.

  • Report this Comment On March 24, 2014, at 2:57 PM, PatrickByrne wrote:

    Dear Fools,

    Please allow me to clear up the confusion. Everything I say here will be a reference to soething I have said publicly, so there is no new material information here. I just want to clear up some obvious confusions.

    Some days ago we did in fact reach the $1 million mark of transactions in which we had accepted Bitcoin. The WSJ reporter was mistaken to report anything about "$1 million per day".

    On the other hand, when we started taking Bitcoin, I did indeed say publicly that Overstock would not be keeping any of the risk associated with holding Bitcoin, and that we would cashing out of them continuously (or else, finding a way to hedge using derivatives). The WSJ writer was not in error to say that I had said that.

    However, some weeks into this process I changed my mind, and began thinking we should fill a small piggy bank with Bitcoin as we go, so as to make feasible the goal of starting to pay some suppliers, and maybe even some employee bonuses, in Bitcoin. Towards that end we decided to accumulate roughly 10% of our Bitcoin transactions in Bitcoin researves. Obviously, once I had changed my mind thus, I had a duty to tell the public (especially as I had originally announced just the opposite). I did so in several places, including, I think, an earnings call. Presumably the WSJ reporter was working from previous statements I had made, and was not aware that I had changed my mind (and announced that I had changed my mind).

    Peace-out,

    Patrick

    Now given that it took us 50-60 days to do the first $1 million in Bitcoin sales, any Fool can figure out roughly how much we are doing per day in Bitcoin. And any Fool should be able to take 10% of THAT number. Thus, any Fool will understand when I say that we are accumulating a bit less than $2,000/day in Bitcoin.

    Best to all,

    Patrick Byrne

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