The Coming Crypto Currency Revolution

Lying just beneath the surface of our collapsing fiat $ currency is the Leviathan of currencies, poking out its head - ready to emerge. Of course I’m talking about Bitcoin but more importantly its numerous copies, spinoffs or variations such as Litecoin, Namecoin, iXcoin, DEVcoin (“Developers Coin” – intended to help and support developers) and several other popular ones.

The first thing an experienced or trained economist or analyst would say is: “that’s absurd, these currencies are a fad, computer geek flukes which accidentally spilled over temporarily into mainstream media, have now basked in their 15 minutes of fame, failed to gain mass acceptance or adoption and that’s the end of it.” And besides, I would add,” the dollar may be a fiat currency which has lost 97% of its original value, but the US $ is backed by gold, a lot of gold.”

It is at this point that I have to leave an economics education on the table for a moment and think more freely and openly, using everything I’ve learned in school and in the stock market only as a backdrop. This change in thinking immediately brings important questions to mind. What gold? Does anybody know how much gold is sitting in Fort Knox? Has anybody gone out to see it lately? Would all the current gold reserves in the world today, combined, be enough to support the nearly $10 trillion (that which we know of) in dilutive policies the Fed has and is still currently undertaking? If the dollar had already lost nearly all its value, before the last 5 years of massive dilution, can anybody tell me, with any certainty, its future real value?

All of a sudden these video game, play pretend, virtual, crypto – cyber – digital currencies look a lot more appealing, and in actuality may have less scary questions which need to be answered than the almighty dollar, especially when you consider a number of factors. Firstly, most of them digital currencies are not very dilutive in nature (relatively speaking, compared to many stocks and especially fiat currencies such as the dollar) as there are a predetermined number of coins being released onto the market every so often with a guarantee of only a predetermined total number of digital coins at the end of that particular coin’s life cycle. For example, with Bitcoin, there will be a gradual release of Bitcoin digital coins up until the year 2140, and at that point it will top out at a total of 21 million coins. This predetermined total supply is crucial and instrumental in the ability to accurately predict not only a potential real world value for these particular coins but also plays a key role in the reason why I believe they may prove to be incredibly successful as time goes by, and this new alternative monetary system begins to form and take shape from today’s fringe to tomorrow’s mainstream – already there are businesses which accept Bitcoins as a legitimate form of payment.

So where the dollar fiat currency finds its real value (currently 3 cents per each original $1) via its supposed gold backing, these digital coins gain value via a more original and archaic system called supply and demand. When demand for Bitcoin spiked in March-April of this year (2013) the price surged from around $15 in January to roughly $266 in March-April, followed of course by a massive profit taking selloff which dropped the price of Bitcoin to around $60 and then finding some equilibrium, albeit a very volatile one, at well above $100. What this prolonged stay above $100 proved to me is that there is real value in crypto currencies. If this was just a fad or a scam, every person out there with a Bitcoin would dump this imaginary digital coin for any real value, let alone $100+ per coin.

And to help support this theory there is additional proof – renowned Venture Capitalist, Fred Wilson, just recently announced a $5 million capital investment in a small unknown coin exchange website by the name of Coinbase. Although Coinbase currently only trades Bitcoins, the fact they just got a hefty investment by a well-known VC, to me says they will soon offer other digital currencies for sale/trade just as other more well-known sites such as VirCurEx offer. But unlike VirCurEx, Coinbase now has some serious deep pockets backing it – further confirming that Bitcoins and all of their cousins may be here to stay which may mean things are just getting started.

If that’s the case then the next thought that comes to mind is where is Bitcoin 2.0, to prove to everyone that the first Bitcoin riches wasn’t just a fluke or a scam? Which coin will skyrocket next and make millionaires out of casual gaming geeks and coin miners? That’s where it gets interesting, because unlike the stock market where there are literally thousands of stocks to choose from on each of the various exchanges, with crypto currencies there are currently only about 1 dozen of them and out of those only about half have a decent reputation and are not seen as already dead or unsafe currencies. So that really narrows down the field and makes choosing a potential winner incredibly more probable than choosing a stock, especially a penny stock, as is the case with most of these digital coins – since most digital coins are currently selling for under $1 and one in particular, DEVcoin is selling around where Namecoin was just a few months ago, at roughly $.0004 per coin. Right now, the top coins, as seen by those who mine and actively blog on the most popular and reputable digital coin sites such as, are Litecoin, Namecoin, iXcoin, DevCoin, not necessarily in that order, and a couple other coins which more recently popped up and don’t quite have a solid reputation yet.

Doing a quick search I found that just a few months ago Namecoin was trading at one-tenth of a penny ($.001) and spiked around the same time as Bitcoin to just over $1, and like Bitcoin, has found its equilibrium just below its high. So here is another digital coin which has literally blown up in value, making real life millionaires out of anyone who had invested as little as $1,000. I was just out of high school when the internet stock boom started and I clearly remember during the entire tech/internet stock boom decade of the 90’s, the best and highest returning stock was DELL with a total return, for the decade, of 54,000%. This is equal to a 540 fold return on investment, a feat even the greatest investor of all time, Warren Buffet has never accomplished even a single time in his over 50 year career, as his greatest returning stock has still to cross even the 20,000% return, not that anyone should complain with such “meager” results. I also remember watching in amazement a few years back as Sirius Satellite Radio (SIRI) ran from $.05 to $.50 in a matter of a 2 or 3 months, a ten-fold increase. How about more recent stocks showing amazing price spikes in relative short timeframes, like the unexpected sudden rebound of Netflix (NFLX) which surged from roughly $60 to nearly $200, a three-fold increase. Or Tesla (TSLA) which was trading at roughly $25 less than 1 year ago and now it’s over $70 per share with the majority of those gains booked in the last 30 days. During my entire 20 years of active involvement in the stock market I have seen many impressive stocks surge which made many people millionaires nearly overnight – stocks such as Intel (INTC), Microsoft (MSFT), Ebay, Amazon (AMZN), AOL, Priceline (PCLN), the mighty Apple (AAPL) and many others, but never have I seen any stock, not even a single fluke or a penny stock accident, which made real life millionaires so quickly and so powerfully. In addition, the fact these coins have retained the majority of their “hyped” value speaks volumes that they are not some penny stock “pump and dump” or a mere fluke.

At this point, any analyst, economist or investor has to at least take a serious look at digital currencies, and personally, no speculative investor should go without a few digital currencies in his/her stock portfolio. Namecoin, going from 1/10th of a penny ($.001) to $1 is equal to a 100,000% (1,000 fold) return and it did it in less than 90 days. Imagine investing just $1,000 and in less than 3 months walking away with $1,000,000? So then, Namecoin was actually a bigger winner than Bitcoin, and it has largely retained its value, yet I haven’t heard or read a single thing stating there are now 2 digital currencies which have outperformed most if not all the stocks during the last stock market boom and they both did it in a fraction of the time.

An additional important factor that adds potential value to these fiat currencies which the dollar, or stocks for that matter, do not have – is the fact nobody has to pay for these currencies directly, unless one chooses to do so. I can’t think of any asset in the world, worth any value, which anyone can simply set their computer on “start mining” and it will mine that asset for free (minus hardware and electricity costs) indefinitely and whatever you find is yours to keep and sell at any current or future market price. This factor is an amazing development and unique from any other fiat currency in the world and I think it will be the biggest reason crypto currencies will catch fire and go into a bigger boom than the internet era ever saw.

Another factor which has yet to take full effect is awareness. Sure Bitcoin has been in the news but I don’t know any person, personally, who currently mines, buys or plans to buy digital currencies. These crypto riches are out there, entire gold nuggets sitting in a river stream waiting to be picked up for a small price or, in the case of mining, for free, yet nobody seems to be getting it. Just like with any boom, there is always an event which sparks a mass frenzy and I think Bitcoin was just the beginning – it brought a vague awareness to the public but nobody seems to be out there looking for the next Bitcoin. The next Bitcoin came and went, and it was called Namecoin, yet nobody is even talking about it. But what would happen if another Bitcoin event was to occur and what if the next Bitcoin is even bigger and even more hyped? All of a sudden even the common, computer illiterate individual will put 2 and 2 together and think: “if not one, not two, but now three of these digital currencies made lots of people rich, maybe there’s another one?” All of a sudden the Bitcoin phenomenon will no longer be seen as a fluke but a new market, a real market and a new era of making money. Once regular Joe and your next door neighbor start looking deeper into these currencies they will find out that first of all, most are very cheap to buy compared to stocks and secondly, you don’t have to buy them if you already have a computer, which most people do, you can simply download a free mining software, click “start mining” and your computer looks for riches 24/7 while you’re at work, at the mall or sound asleep. So imagine for a second what would happen to most, if not all, existing digital coins if just 5% of the American population started actively mining and/or buying these coins. It would be an instant and massive bubble like nobody has ever seen, bigger than any internet boom stock, and that is simply due to the economic factors of these currencies. Where in any other asset the demand is equal to the desire of consumers to purchase that asset, with digital coins, the mining algorithms increase exponentially in difficulty as more and more people start to mining the same coins which in turn causes existing coins to be more and more difficult to find which automatically makes them more rare and thus, more valuable.

Therefore, even before a single American throws a single dollar at a digital coin, just their cumulative action of mining for these coins has the potential to greatly increase the value of crypto coins. Then you add the inevitable fact millions of Americans are natural and experienced investors and you’re bound to get some incremental dollar investments in these coins by many of the new market participants. And due to the fact that only a handful of these coins exist and the number of current and total coins outstanding is predetermined and limited, what you get is a perfect storm, a scenario, which when it occurs will lead to hyper speculation, mass media hype and a mad rush to get into the next great thing – for what better story can you tell or what better opportunity can you provide a people with – when they are faced with: a bad economy, high unemployment, a devalued, kamikaze dollar and overpriced stocks and commodities - than an alternative fiat currency which not only has been proven to be able to greatly increase in and hold their value but you can now, with a bit of effort and a computer, try your luck at getting some of these coins for free. You couldn’t invent a better scenario for the “next great thing” given the current economic and political environment.

Just by talking to everyone I know and as well as approaching total strangers at key, computer literate places like Frys Electronics and Best Buy, I can infer that at most, one-tenth of 1% of the current population is currently actively involved in buying or mining digital coins. Out of all the people I have spoken to over the past 30 days, I have not met a single person who has mined or bought a single coin and only 3 people heard about Bitcoin, but didn’t think much of it, with one stating it was just a scam. I also don’t think it would take much to get just 5% of the population actively involved and quite possibly, like any new market boom, in a couple of years it may be that the opposite is true, you won’t be able to find a single person who hasn’t, to some degree, tried their luck at mining and/or buying digital currencies. The hardware is there, as most Americans have laptops and desktops, and soon (in the coming weeks and months) there will also be “mining rigs” available for sale at affordable prices from the likes of Butterfly Labs, which reportedly can mine coins 100 times (and faster) than a top end desktop, which would potentially further increase the difficulty level of mining and the value of existing coins. So just a 5% active rate, would lead to a logarithmic rise in mining difficulty, actual demand and most likely also an equal increase in the prices of these various crypto coins. One can only imagine what would happen if a much larger portion of the population embraced this new booming market which I believe is here to stay and will soon (2-3 years) greatly change the way we all conduct business.

The final factor to consider is who wants these digital currencies to succeed? A great idea is not enough when you have powerful opponents trying to shut it down and likewise, even a mediocre idea can succeed if it gets enough funding and free press. What we have here is the best of both worlds – a great idea which just so happens to benefit many large and powerful benefactors. Retailers would love using digital currencies for various obvious reasons such as not having to carry cash on hand, banks would be ecstatic as moving a digital number in a computer is much easier and efficient than moving actual crates of cash and it’s pretty hard to hide your digital money under your mattress so banks would then gain access to potentially much more money than they are able to now. The biggest benefactor of all, however, is the US and other governments. This is a government’s dream, to have full access to your wallet. Just imagine, no more black markets – you wouldn’t be able to pay your son $5 or 5 DEVcoins, for example, for mowing the lawn without uncle Sam knowing about it as all coins would have to be transferred at some point. No more tax evasion, no more illegal gambling, etc. You can add other benefits to society as well, such as fighting the war on drugs or theft – someone can steal your NFC enabled phone but without the proper biometric or other various ID credentials they will not be able to steal a single dime from you. The obvious loser here is an additional loss to individual privacy – but it’s obvious to me that we now live in an era of Facebook and camera phones where we will continue to lose more and more of our privacy so this negative effect of digital currencies will not stop the inevitable avalanche which may be coming soon given there are so many entities which will benefit from crypto cash.

If my thesis is correct, and these crypto currencies do have real value - just like other fiat currencies, but for very different reasons and factors, then my prediction may also prove to be correct and in the coming months and years, once that spark occurs, it may just ignite a level of awareness and interest which may lead to a whole new market and a new way of investing, making many more millionaires in the process. My advice to friends and family is this: it doesn’t take much to start mining a few coins now and it doesn’t cost much to buy a few coins now, just in case - if nothing else, simply as a speculative play. There is enough evidence at this point to suggest that any stock investor should at least take a look at adding some crypto-currencies to their portfolio and for any speculative investor, I believe it’s a must, and I have already put my money where my mouth is.

At this early juncture the risk is small while the potential, as Bitcoin and Namecoin have already proven, can be bigger than anything we have ever seen. Many years ago I sat around and watched millions of people get rich off the internet boom because I was too young, inexperienced and uneducated. I have no intention to do the same this time around if digital coins are what they appear to be – the next great investment vehicle, and in a few years, potentially much more than that.

- Maximilian Wilhelm

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