Bitcoin inflation hedge: The new gold and silver

Here are 4 reasons why I believe bitcoin will serve as a better hedge against than gold or silver in the years to come.

Here are 4 reasons why I believe bitcoin will serve as a better hedge against inflation than gold or silver in the years to come:

1) Limited supply. We know exactly how many bitcoin will ever be mined. As of this writing, there are 11,956,400 bitcoins in existence. New bitcoins will continue to be “mined” until we reach 21,000,000. Once we hit that number that’s it. No more bitcoin. Nada. Zilch. That, of course, stands in stark contact to gold, silver and fiat currencies.

2) Simplicity. Buying bitcoin is as easy as transferring money between say your checking and savings accounts (check out my guide on How to buy bitcoin). Buying gold or silver requires some knowledge. You’ve either got to buy physical coins or bullion, mining stocks, ETFs, a stake in a trust or you need to pay someone else to buy and hold gold or silver for you. With bitcoin, you’re responsible for keeping your private security keys safe. That’s it.

3) Liquidity. There is no practical limit to how much or how little bitcoin you can buy. Want to buy $0.25 worth? Go for it. Want to buy $1,000,000? You can do that, too. Think of it like going to the currency exchange counter after flying to Mexico. You hand someone some dollars, they give you pesos. If you’re trying to sell an ounce of gold that’s worth $1,300 on the other hand, you might have to search quite a bit to find a buyer near you.

4) Speed. We’ve already seen how quickly the price of bitcoin can move. That’s particularly true in the midst of a crisis of confidence or currency problem. Take the example of Cyprus. Earlier this year, the tiny island country announced it was confiscating a portion of the funds foreigners held in the country’s bank accounts as part of a bailout package. In a rush to withdraw their cash from Cypriot banks, investors poured their money into bitcoin pushing the price of the digital currency up twofold in a week. Similar currency problems in other countries could accelerate bitcoin’s phenomenal growth.

How high could bitcoin go? Check out our post: The case for bitcoin at $100,000.

The Winklevoss Bitcoin ETF: How it works

The Winklevoss Bitcoin Trust will issue Winklevoss Bitcoin Shares, which represent fractional ownership in the trust and therefore part-ownership in the trust’s bitcoins. Under the current plan, each share will represent 0.2 bitcoins.

The Winklevoss Bitcoin Trust issues Winklevoss Bitcoin Shares, which represent fractional ownership in the trust. The trust itself owns bitcoins and will try to match the ETF’s market cap with an equivalent fractional holding in bitcoin. Per the revised prospectus in October, each share in the initial baskets will represent 0.2 bitcoins (BTC). That means each basket of 50,000 shares will hold 10,000 bitcoins. That’s subject to change.

Security is a major concern for the trust, and the plan is to store the trust’s digital wallet private keys in segregated vaults. I presume that means a few private keys per vault spread across the U.S. to lower the risk of loss, damage or theft of all of the private keys at once.

The trust’s net asset value (NAV) will be published on the trust’s website at the conclusion of each trading day. Fees for managing the fund haven’t been published yet. In the event that the trust were ever shut down, the trust’s liabilities would be paid and cash proceeds would be distributed to shareholders.

Top 10 risks of investing in the Winklevoss Bitcoin Trust:

1) The trust could lose it’s private keys (and therefore lose access to its bitcoin).

2) Governmental regulation.

3) Bitcoin could get shut down or usurped by another virtual currency.

4) Bitcoin speculation can lead to wild price swings that could impact the trust’s share price.

5) The source code for the Bitcoin Network could get amended, changed or “forked” by the bitcoin community.

6) Bitcoins could get manipulated.

7) Miners could stop mining bitcoin (particularly if it doesn’t make economic sense to do so).

8) Bitcoin miners could start charging higher transaction fees, which would make bitcoin less attractive.

9) If the trust grows too large it could impact the global market for bitcoin.

10) The trust’s bitcoin could get stolen.

As of August 31, 2013, approximately 11,636,000 bitcoins have been created. The plan is to create no more than 21,000,000 bitcoins, so more than half of the world’s global supply is already on the market.

Here’s a copy of the full amended Winklevoss S-1 filing from October:

If there’s anything that could create a true bitcoin mania, I think it will be the launch of the Winklevoss ETF. There are just too many “cool” factors going for it:

1) The intrigue around the Winklevoss twins themselves.

2) General excitement over bitcoin.

3) The use of bitcoin as an inflation hedge (one that works even better than gold or silver).

On top of that, daytraders won’t care about the underlying commodity. They’ll pile into both up and down trades, which will make bitcoin even more headline-worthy. That’s part of the reason I’m hoping this ETF doesn’t come to market anytime soon. I’d like to see everyday Americans using bitcoin before it becomes the trade-of-the-day for wall street bankers and bots.

How to buy a bitcoin ATM

There are at least three companies around the world selling Bitcoin ATMs at the moment with prices ranging from $2,000 to $18,500+.

buy-a-bitcoin-atm

There’s a popular saying when it comes gold rushes: the ones who get rich are the people selling the spades. Why get your hands dirty, when you can make money off the speculators themselves? That’s the appeal of a bitcoin ATM. When the first bitcoin ATM in the world opened in Vancouver two weeks ago, the machine did $100,000 CDN worth of transactions in a week (source). Take a 2 or 3 percent operating fee, and you’re doing pretty well.

There are three companies that I know of offering Bitcoin ATMs to buy at the moment:

1) Lamassu Bitcoin Ventures. Lamassu, which I believe is based in New Hampshire, says they’re working on their next batch of ATMs for shipment “early” in 2014. The price? $5,000 USD for one unit. $4,500 for 5-9 units. $4,000 for 10 units or more. Price does not include freight.

2) Robocoin. A company based in Nevada that produced the Vancouver bitcoin ATM. The site’s got an application form, but doesn’t list prices here. According to one news source, the Vancouver ATM cost $18,500.

3) BitcoinKiosk. Click the “info” link at the bottom of the site, and you’ll see a message from an ATM manufacturer who claims to have built a bitcoin ATM that weighs 25 pounds and will retail for around $2,000. There’s contact information on the site.

A forth company called BitcoinATM has been trying to get a bitcoin ATM off the ground in the U.S. for more than a year (source), but they haven’t had any success yet. Apparently, the governmental hoops required are onerous – including the requirement that ATM operators have a $25 million “insurance bond” since they’re deemed “money transmitters” in the US. I suspect we’ll soon have some entrepreneurs who jump through all the hoops to open an ATM in the U.S., but look for more to open in foreign countries first. The Land of the Free’s gotten bogged down by regulation!

Bitcoin price predictions

From $0 to $1 million, here’s a look at some of the current Bitcoin price predictions out there and the logic behind them.

When you look at a chart showing Bitcoin prices, it’s hard to argue that the crytocurrency isn’t in a bubble:

Over the past year, the value of Bitcoin has risen from $10.95 to more than $340. That’s more than 3,000 percent! A gain like that screams bubble. Unless, of course, Bitcoin is here to stay… That’s when charting the future value of the currency becomes a lot more difficult. It’s akin to guessing how the internet would evolve in 1990. You just can’t do it reliably. But that doesn’t mean we can’t try.

Here’s a look at some of the current Bitcoin price predictions out there (and be sure to check out my post on How to buy Bitcoin):

  • $0: Let’s take on the bear case first. The single biggest threat to Bitcoin is regulation. While the currency doesn’t rely on a centralized authority to operate, it does rely on Americans and other investors around the world who convert their dollars, euros and yuan in and out of Bitcoin. Should governments around the world move to ban or restrict commerce in cryptocurrencies, then Bitcoin’s value could easily plummet. Economist Simon Johnson from MIT argues that’s exactly what’s going to happen since governments would lose some control over their own currencies if they don’t regulate Bitcoin.
  • $1 million: Over at Business Insider, Henry Blodget writes that “There is no limit to the price that Bitcoin could attain. There is no theoretical difference between a price of $1 per Bitcoin and $1 million per Bitcoin.” He also believes that Bitcoin is in a bubble and that it won’t ever be widely accepted. His underlying thesis is that there’s nothing backing Bitcoin. I disagree since the supply is finite and will always be finite. That’s an advantage Bitcoin has over dollars, euros and yuan.
  • $1,820 by 2020: Radoslav Albrecht, co-founder of peer-to-peer Bitcoin lending platform Bitbond.net, offers up a balanced look at the Bitcoin supply, and tries to extrapolate a future price based on those numbers. He bases his prediction of $1,820 on the fact that there will be 18 million Bitcoins in circulation in 2020, and on two main assumptions: 1) that electronic Bitcoin transaction volumes catch up with PayPal volumes, and 2) that Bitcoin investments capture 1 percent of gold investments. Albrecht’s careful to say he’s naming a “potential price,” not making a prediction.

Unbiased Coinbase.com review on buying Bitcoin (BTC)

My guess is that Bitinstant is furiously trying to catch up with Coinbase.com’s streamlined process. Coinbase has proven that buying Bitcoin via MoneyGram will soon be a thing of the past.

Coinbase is a breath of fresh air. It’s by far easiest of the Bitcoin-buying platforms I’ve tried so far. Here’s how it works:

1) Create an account by entering your email address and a password.

2) Link a bank account with your Coinbase account.

3) Place a buy order:

4) Confirm the buy order:

4) Wait four days for your Bitcoin to be deposited in your account.

There are two options for linking a bank account with your Coinbase account:

1) You can electronically sign into your bank account through Coinbase’s website (which is what I did).

2) You can let Coinbase deposit money into your account, then you must confirm the amounts of those deposits. This approach, of course, takes a few days. By electronically verifying my account, I was able to buy Bitcoin online in minutes. Keep in mind that no matter what approach you use, you’ll need to have your bank’s account and routing number:

Another great aspect to Coinbase is the fact that you can enable two-step security authentication on your account. That means you sign in with your email address and password, then you’re prompted to enter a text message code that gets sent to your phone while you’re logging in. They really have covered all the bases:

I recently wrote a post on how to buy Bitcoin (BTC), and I stumbled upon Coinbase.com as part of that process. In the past, I’d used Bitinstant (which is undergoing a site upgrade) to buy Bitcoin, and it definitely wasn’t an easy process. It required printing a voucher and sending cash to California via MoneyGram at my local CVS.

My guess is that Bitinstant is furiously trying to catch up with Coinbase.com’s streamlined process. Hopefully, buying Bitcoin via MoneyGram will soon be a thing of the past. As I’ve written elsewhere, I think we’re nearing the tipping point where transactions done via Bitcoin will become just as easy as using cold hard greenbacks. When that day comes, look for Bitcoin’s popularity to grow exponentially. If you like this post, and you’re considering Coinbase, please use my Coinbase.com link to throw me a kickback! Otherwise, be sure to check out my post on how to buy Bitcoin (BTC) for other ways to buy BTC.

UPDATE: When you first sign up for a Coinbase account, your account will be limited to buying or selling 10 BTC per day. Shortly after I verified my bank account with Coinbase, the company increased the number of BTC I could sell in a day to 50:

All in all, I’ve had a terrific experience with Coinbase, and I plan to check out their developer tools next.

Bitcoin Bible: How to buy Bitcoin

Here’s my regularly updated compendium on how to buy Bitcoin, and well as a look at the Bitcoin investment opportunities that are on the horizon.

Buying Bitcoin (BTC) isn’t easy, but that’s part of what makes it appealing. If the value of the digital currency is rising despite the hurdles, imagine how well Bitcoin will do once the barriers to entry are lowered. Here’s my regularly updated compendium on how to buy Bitcoin, and well as a look at the Bitcoin investment opportunities that are on the horizon:

1) Visit Localbitcoins.com and find a face-to-face or online seller. I live in Dayton, Ohio, and at the time of this writing, there are five face-to-face sellers who are offering Bitcoin within 30 minutes of my home. Here’s their cheapest offering at the moment:

2) See if there’s a Bitcoin ATM in your area. As of this writing, Bitcoiniacs has an ATM installed in Vancouver. The company has plans to open a second ATM in Toronto.

3) Trade Bitcoin on an open exchange like Bitstamp.com. Bitstamp is based in the EU, and you’ll have to wire funds to the exchange before you can start trading. I haven’t personally used Bitstamp. Major competitors include MtGox.com (a Japan-based company that’s been experiencing some delays handling withdraws since July), and BTC China, which apparently took over as the world’s largest Bitcoin exchange earlier this month. That said, BTC China doesn’t look all that user-friendly for Westerners.

In the past, I’ve used BitInstant.com, but their site is down for an “upgrade” at the moment. When I did buy Bitcoin through Bitinstant, I had to schedule a purchase through their website, then print out a voucher to send them a MoneyGram payment at my local CVS. Hopefully, that process will become easier in the months to come.

4) Add Bitcoin to your IRA through SecondMarket. This requires some real cash, though, with a minimum investment of $25,000 at the moment. The trust is managed by Alternative Currency Asset Management LLC, and I have to give SecondMarket props for coming to market with an IRA solution so quickly. Quite impressive.

5) Buy physical Bitcoins by Casascius.com. Casascius is the leading manufacturer of “physical” Bitcoin. Of course, you can’t really have physical Bitcoin, but Casascius gives you the next best thing: a tamper-proof code that can be deposited into your digital wallet. Casascius makes the process even cooler by integrating their codes on gold and silver coins (as well as cheaper metals). Note that you will pay a premium, both for the work involved in the creation of the coins, and the underlying precious metal if you’re buying gold or silver. You can occasionally find good deals on Casascius coins on eBay.

6) Link your bank account to a digital wallet using a service like Coinbase.com. I haven’t tried them yet, but I’m planning to soon.

If you know of any other ways to buy Bitcoin, please list them in the comment section below.

UPDATE on 11/9: I just signed up for Coinbase.com, and I wrote a detailed unbiased review of Coinbase with photos here. In a word, it’s the simplest and most straightforward process I’ve found for buying Bitcoin.