The new media darling in the financial world is Bitcoin, the 9-year-old digital currency that has been given a degree of legitimacy by virtue of being listed in the futures market this week, with the listed price of a single Bitcoin rising from an opening value of $15,000 to $18,545 for a January contract.
What this means is an investor can purchase a contract guaranteeing a price at some future time, as in this case, January. If the actual price of a Bitcoin has risen to a value higher than the contract price, the contract owner will realize a profit. However, if the price is lower, the difference has to be made up.
This is a simplistic example of how futures contracts work. The difference being, with other commodities that are traded on the futures market, at the end of a contract period, the owner of the contract can take possession of the item: gold, silver, lumber, whatever. But in the case of Bitcoin, there is no physical item to possess.
I read a cute article the other day about a long-time collector, who, when asked what was hi…
In reality, most investors who trade in the futures market never take possession of the commodity, they just book their profit or loss, but the option to obtain the commodity is there.
If you think you are going to read this article and expect to fully understand what a Bitcoin is at the end, I am going to disappoint you, because I don’t fully understand Bitcoin, but I am going to give my take.
First, as I stated, there is no physical item called a Bitcoin, it is digital and exists in the web. I can’t help but think of the term web as relates to spiders who weave them in hopes of capturing prey, but I digress. Bitcoins are “mined” through the use of computer servers that solve complex problems. For a better understanding of this process, look up Bitcoin on Wikipedia.
Now, a couple of issues arise in this approach. First “mining” to me is a pick and shovel in the ground to find a tangible object, and second, if more Bitcoins are being “mined," how come the price is rising, not falling?
A front-page article in Monday's Wall Street Journal titled “U.S. Mint Makes a Mint Selling …
Transactions in Bitcoin can be done, person to person, with no central control such as a bank or clearinghouse. Therefore, all transactions are anonymous, lending to the concern that they can be used to facilitate terrorist activities and drug transactions. But there seems to be increasing acceptance in some retail areas. However, if someone enters my store and offers me one Bitcoin for 15 ounces of gold (about the current exchange rate), that person will be quickly shown the door through which he entered.
And another question comes to mind: If Bitcoins are to be used in commerce, how do you make change? Go to Starbucks and order a latte. If you pay with a Bitcoin, you may have just given someone a humongous tip, albeit not something they can put in their pocket.
If I sound negative about Bitcoins, it is because I am and admittedly don’t understand them. I am old-fashioned and want to be able to do a financial transaction with real money. This whole thing reminds me of the old children’s tale about the emperor with no clothes. There is just nothing there.
For a full, unbiased explanation about Bitcoins, Google Bitcoins and look at the aforementioned Wikipedia article. They do a better job than I can. In the meantime, buyer beware.
Douglas Keefe is the president of Beachcomber Coins Inc. He and his wife, Linda, operate Beachcomber Coins and Collectibles, formerly in the Shore Mall and now at 6692 Black Horse Pike in the old Wawa building just beyond the former Cardiff Circle in Egg Harbor Township. They have satellite offices in Brigantine and Absecon. Between them they have more than 70 years of experience in the coin and precious-metals business. They are members of the American Numismatic Association, the Industry Council of Tangible Assets, the Numismatic Guarantee Corp., the Certified Coin Exchange and the Professional Coin Grading Service.