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Digital coins gain currency

| Saturday, Dec. 14, 2013, 9:01 p.m.

The rise of Bitcoin and other so-called “cryptocurrencies” is understandable when you consider the developments involving currency and precious metals over the last several decades.

Major central banks have been debasing their currencies since 1971. Governments, under camouflage of “protective” measures such as The Patriot Act, have invaded the privacy of citizens and banking secrecy since 9/11 in an unprecedented manner.

Regulators have shown a willingness in recent years, as demonstrated in the case of Cyprus, to make depositors liable for bank failures. Today, central banks are crushing savers with manipulated low interest rates in an effort to stimulate spending and salvage reckless borrowers. The future holds the risk of exchange controls.

In the past, prudent investors turned to precious metals such as gold to protect themselves from currency issues and to move their wealth. However, ever-increasing regulations, monitoring and physical searches have eroded some key protections afforded by gold.

It's no surprise then that some investors, using the Internet, have turned to cryptocurrencies such as Bitcoin for perceived anonymity to gain some protection from governments. These are digital currencies traded by private, unregulated Internet exchanges through which physical, privately minted coin can be obtained.

A number of cryptocurrencies have popped up. Many have failed. Bitcoin, established in 2009, is the most well-known survivor with $9.3 billion invested at the market price and a projected issue limit of 21 million coins. Players include Litecoin, Peercoin, Namecoin, Yacoin, Nowacoin, Primecoin, Feathercoin, Anoncoin and Dogecoin.

As the granddaddy and largest, Bitcoin can be purchased through some 32 exchanges because of its support from New York City financial markets. Alternatively, Bitcoins can be “mined” on the Internet using sophisticated software and hardware to repeat the performance of the complex cryptology algorithm, SHA-256.

In the end, Bitcoin is not backed by anything except the agreement of merchants who accept it. Bitcoin prices have been volatile because it attracts speculators. On Nov. 29, a Bitcoin reached $1,242 in Tokyo just as gold dipped to $1,240 an ounce.

On Thursday, Silicon Valley venture capital firm Andressen Horowitz infused $25 million into Coinbase, the largest investment ever in a bitcoin company. San Francisco-based Coinbase is trying to develop simpler ways for merchants and consumers to use digital currency.

Two days earlier, JP Morgan filed a patent for a Bitcoin-style payment system. Gold has relatively high transaction and storage costs, but Bitcoin transactions are cheap and transnational. Use of anonymous email addresses offers a sense of anonymity. However, the so-called “blockchain” tracks all Bitcoin transactions covertly.

Steven Strauss of Harvard has suggested that bitcoin be outlawed. Governments, including the United States, Germany and China, remain remarkably tolerant — for now.

While Bitcoin serves as a vehicle for speculation, it remains extremely high risk as an investment.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at johnbrowne70@yahoo.com.

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