Jamie Dimon, CEO of JP Morgan Chase Bank, went on the campaign trail this past week bashing BitCoin, the now popular digital currency accepted around the world. Are his criticisms legitimate? Or is he fearful his bank, and other money-center commercial banks like Chase, are at risk of being replaced with a better alternative?
What Is BitCoin?
In a word, BitCoin is like digital gold. It is a form of money, but completely based on the internet. If you have an internet connection, you can buy & sell Bitcoin, and use Bitcoin for buying and selling things. In any large city, there are probably BitCoin ATMs already near you.
BitCoin does NOT rely on a centralized banking system. Instead, the governance of the digital currency is dictated by the software code, which is distributed across millions of computers that work with the currency in a peer-to-peer network. The larger it gets, the more fixed it becomes, and the more difficult it gets to crack or prevent it. In a nutshell, it is more secure in handling transactions than your credit card!
BitCoin is based on public/private key digital cryptopgraphy used to secure the internet, AND a concept called “BlockChain” where transactions can verify and “trust” themselves based on prior transactions in the chain. When you buy something, you are spending money you received from somewhere else. This chain of possession is verified through cryptography in the digital code.
Why Use BitCoin?
Operating on a peer-to-peer basis, BitCoin is exchanged over a cell phone just as if I were to hand you a $10 bill, or an ounce of gold, for something. There is no bank involved. There is no government involved. Finally, the most appealing aspect is that transactions are anonymous, because there is no central recording of transactions! BitCoin is fully convertible to nearly all major currencies, and can therefore be used across international borders. There is no government that can control it, although some…like China…have recently tried to pass laws shutting down exchanges. While exchanges can help facilitate BitCoin usage, they are not needed. To that, I would tell China….”good luck” in trying to control BitCoin!
Why Is Jamie Dimon Talking Smack About BitCoin?
Mr. Dimon’s first criticism is that BitCoin is in a bubble. Because of the advantages of BitCoin, the price has increased nearly 10-fold in the past 2 years from about $400/BTC to $3,661/BTC as of this blog post. Frankly, I find it ironic that Mr. Dimon is calling BitCoin a bubble, yet he failed to recognize the even larger real estate bubble, when he was a key participant in that debacle! Quite frankly, Jamie Dimon is no expert on bubbles!
BitCoin has increased in value due to increased demand for an alternative currency to the dollar. It should come as no surprise to anyone that the dollar is on its last legs since the gold standard was abandoned by the United States over 40 years ago. All fiat currencies (currencies not backed by something real) eventually fail due to the lack of discipline on the part of the governments and banks managing the currency.
BitCoin, unlike government-sponsored currencies, is governed by computer formulas which are not out to win elections or keep enormous paychecks. It’s value is completely and purely based on supply & demand, and cannot be manipulated by anyone. Nor can the computer logic be changed at this point. So is it in a bubble? The rapid rise suggests that demand has suddenly increased, but that increase recently began unwinding, as it should. When gold rises too far too fast, miners get busy mining more gold, which increases the supply, which balances supply and demand back out. The same occurs for BitCoin. So the natural processes that govern currency appear to be working as expected.
Mr. Dimon’s second criticism was leveled Friday when he called BitCoin a “novelty”. BitCoin can hardly be considered a “novelty”. It has been around for 7 years now, and is becoming more and more accepted. Overstock.com was one of the first major companies to accept it as payment. Microsoft accepts BitCoin as payment. It is increasingly being accepted as payment by restaurants and retail stores. Other companies accepting BitCoin include Subway, Wikipedia, Whole Foods, Bloomberg, JC Penney, GameStop, Intuit, Expedia, WordPress, and MANY others. BitCoin has moved well passed the “novelty” stage.
I believe Jamie Dimon is most concerned about BitCoin because it renders our current banking system useless! With BitCoin, the banking system as we know it is no longer necessary. BitCoin has boiled currency management down to a piece of software which control the rules and security of the monetary system. Without control over the banking system and the money, our government and commercial banks lose all control and the ability to monitor transactions.
By far, BitCoin and digital currency is probably the most significant technological creation of our lifetime. It is world changing. And if I were running a traditional bank that is about to be decimated by innovation, I would certainly feel nervous too!
How to Get Started With BitCoin?
Getting started with BitCoin is easy. The only thing you need is a BitCoin wallet to secure your digital tokens. These can be downloaded free at https://bitcoin.org/en/choose-your-wallet.
You can also utilize a BitCoin exchange which makes it easy to convert dollars to BitCoin. BitCoin exchanges exist around the world, but I prefer to use one based in the United States. Therefore, I prefer a company like CoinBase (https://www.coinbase.com). Coinbase can connect with your dollar-based bank account, and perform all the conversions to/from BitCoin. Additionally, CoinBase supports two other popular digital currencies, Etherium and LiteCoin.
While the price of a single BitCoin is currently $3,661, BitCoins can be bought in smaller fractions. In fact, you can buy as little as 1/100millionth of a BitCoin, an amount smaller than a penny. This amount is called a “Satoshi”, named after the mythical inventor of BitCoin, Satoshi Nakamoto. I should note that Satoshi Nakamoto is not the real name of the inventor of BitCoin, and that nobody really knows who that person is. Some speculate that Satoshi Nakamoto may even be a group of people.
Word of Caution!
While BitCoin has been established for 7 years and is a legitimate currency, its value relative to the dollar can fluctuate rapidly, not much unlike gold. As BitCoin matures, this volatility will see a reduction, but if you place value in BitCoin, you may lose money. Or, you may gain. For the folks who bought BitCoin two years ago, they have seen a nearly 10-fold increase in their buying power. I don’t believe this type of rapid increase can continue, and BitCoin may see a decrease in dollar price over the near term. Nonetheless, I believe most people should explore it, given that this is the future of money.