By Aaron Hoddinott

Managing Director

Pinnacle Digest

Dear member,

The story of Bitcoin, the world's largest decentralized, peer-to-peer fiat currency, which today outranks many sovereign currencies in liquidity (and also overall market value), is indeed a fascinating one in both investment trends and distrust in government. The only reason this digital currency even exists is because of broad frustration in the global monetary system.

What was once a currency traded amongst your neighborhood anarchists online, Bitcoin is now blowing up in popularity. So called 'Bitcoin Millionaires' are starting to pop up.


The early adopters of this currency, which started back around Halloween 2008 (near the climax of the subprime meltdown), have seen their holdings in Bitcoin skyrocket in value over the last few years.


In just the last few months, Bitcoin's value has increased roughly 500%. It is completely unrelated and untied to any government or the unpredictable bearish market that has left many currencies and assets gasping for life.

Bitcoin Value:

With that said, the chart above tells me one thing: Bitcoin has gone parabolic and could soon collapse. Given how new the currency is, its historic volatility and the frenzy surrounding Bitcoin, a crash wouldn't shock me.


In addition, in order for a currency to gain stability, it needs an active trading market and to be widely used in commerce. But wait! Bitcoin does have an active trading market and is being used more and more for daily commerce; this is why I am now interested in the impact of Bitcoin. It is starting to behave like a real currency.


Major Bitcoin exchanges include Mt Gox, CryptoXchange, and Intersango. These exchanges allow people to buy and sell Bitcoins using local currencies.


This week, Bitcoin's most popular exchange, Mt Gox, suffered its worst hacker attack of all-time. Service was disrupted in the latter half of the week. However, Mt Gox is seeing record usage. It is now in the top 8,000 most popular websites used by Americans. It is the 15,363rd most used website globally, according to Alexa.


Despite crashing a few years back and being written-off by analysts, the decentralized currency (Bitcoin) is building momentum like never before. A social uprising is taking place in the currency realm.


Fed Up With the Fed

Many citizens of the world are disgruntled by the way this debt crisis has been handled. It is clear that the true victims of the credit crisis were the disciplined savers.


While most people have sat around and complained about how badly the government or central bank is screwing them, some have taken action in what I like to refer to as: currency anarchism.

Just last week the entire value of all bitcoins in circulation exceeded $1 billion - that's a higher market cap than 20 sovereign nations' currencies.


QZ.com reported on Wednesday:

The largest market for trading bitcoins, Tokyo-based startup Mt. Gox, went down for about an hour today, after the alternative currency's value swung more than 20% this morning. It's clear as day in the charts above, and Mt. Gox confirmed its downtime in a statement: "Due to high volume trading at the moment, there is a lag in trading and order cancellation."

Fox News reported that:

Between that, bitcoin's anonymity, and worries about conventional currency, bitcoin demand is as high as ever, according to Alan Safahi, who runs "Zip Zap" - a company that facilitates cash deposits at stores like CVS and Wal-Mart for transfer to a site that can convert the money to bitcoins.

"We're processing millions of dollars a month. We've seen tremendous surge in activity," he said.

Before I elaborate on why Bitcoin's surge is vitally important to investors, whether they own the new digital currency or not, let me explain some important details about how it works.


What is Bitcoin?

Bitcoin, as mentioned above, is a decentralized, peer-to-peer fiat currency. It's a digital currency that you can send over the internet. The words 'decentralized' and 'peer-to-peer' signify the absence of central authority when transferring/minting currency. Matter-of-factly, Bitcoin does not have a centralized database. It isn't controlled by a Ben Bernanke, Mario Draghi or Mark Carney. It isn't subject to reckless government spending. It is a currency for the people, by the people (which in itself can be dangerous).


Bitcoin uses a decentralized database that is spread across a large number of servers worldwide to record transactions, and uses digital signatures to ensure that the bitcoins are spent only by the person who owns them.


The fact that it is decentralized, peer-to-peer and has no central body makes it nearly impossible for any governing authority to regulate the amount of bitcoins in circulation, thereby making it the only independent, anonymous and consistent digital currency in the world.


The value of a bitcoin is based on the frequency in which it is accepted for trade. Like any fiat currency, it has a perceived value. What someone will give you for the bitcoin determines its purchasing power. However, the difference between Bitcoin and other fiat currencies is that new bitcoins are generated at a predictable and limited rate viewable to anyone in the public (and there will be a cap at 21 million bitcoins issued - there are 11 million bitcoins in circulation right now).


Bitcoin is not subject to new surprise rounds of quantitative easing that increase money supply for no other reason but to prop up government interests. This makes Bitcoin somewhat of a commodity. And this is why the gold bugs and currency anarchists are so attracted to it. Will it be adopted by a broader group of people? There are arguments that it is starting to be.


BITCOIN IN CIRCULATION:

60 Second Bitcoin 101 Video - click image below to watch:

So that sounds all good on paper, but how is it working in the real world?


Not too bad actually, but it is going through some serious growing pains. And as I mentioned, the value of bitcoins in circulation is now equal to roughly $1 billion. More importantly - and the foundation for all currency - is that it is being used in commerce.


A man in Alberta, Canada is selling his house for bitcoins. Many online stores allow you to buy appliances, tablets, phones, precious metals, table wear, prepaid wireless cards, domain names, food, video games and a ton more with bitcoins. There is a pre-existing commerce infrastructure to pay with bitcoins online and it's getting bigger by the day. No merchant was required to accept bitcoins, they are doing it by choice! In Finland, there is now a dentist accepting bitcoins for regular checkups. There is even talk that Cyprus may get the world's first Bitcoin ATM.


Look at the staggering increase in Bitcoin transactions since May of last year - monthly transactions are up 600% in less than a year.

Click here to learn more about the Bitcoin consumer market, it's growing rapidly.

For some people, buying and selling bitcoins is a business, where investors book profits by getting on the good side of Bitcoin's arbitrage and pull off big trades that categorically impact the valuation of the Bitcoin's economy. For others, Bitcoin has become just another currency to use online - one that has seen its purchasing power increase 500% in a few months.


The point of this piece is not to promote Bitcoin as an investment, currency or anything really. I for one do not own any bitcoins and don't intend to purchase any. It's volatile, has been used to purchase and sell drugs anonymously, is susceptible to hacks and if its popularity declines, merchants may refuse to accept it. From there it's just a matter of time before devaluation begins.


However...


Since Bitcoin is not controlled by any nation or country, it can be used as a global medium of exchange. Bitcoin only looks at the transaction, it leaves everything else to the participants. It does not care about who the participants are or what it is used for. That is the true nature of neutrality - a characteristic of freedom and one of the principles of the internet. Many other sovereign currencies are not neutral and seek to impose their will on users. Bitcoin is neutral and has the characteristics of a single global currency.


While writing this piece, the value of 1 Bitcoin exceeds $120 (give or take $20 per day - it has been extremely volatile of late). Three months ago, it was valued at approximately $30. Six months back, the value of one Bitcoin was close to $10. Thereby, in the last seven-eight months, the value of a Bitcoin has grown by a staggering 1200% as it becomes more widely accepted.


What can we take away from this little case study?


Investors and savers are frustrated. Years of currency abuse by central authorities is starting to get under the skin of many, and a small group are taking action. While Bitcoin is still an obscure currency, which is susceptible to tremendous risk, its growth sends a very serious message to central banks and the monetary world. Currency manipulating, of the likes we've seen over the last 5 years, will have great consequence if movements like Bitcoin continue to grow.


If you want to gauge the trust in fiat currencies, carefully watch the volume of transactions and value of Bitcoin over the coming months.

~ Aaron

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