Financial, Economic and Social Mood Update (January 1, 2018)
Happy New Year to all of you! The US stock market continues to be very robust – the Dow Jones 30 Industrials Index reached a new record nominal high of 24,876 on December 18, 2017. The NASDAQ Composite Index hit a new record nominal high of 7,004 (on December 18), as did the S&P 500 Index at a level of 2,695 (on December 18) and the Wilshire 5000 “Total Market Index” at the level of 27,870 (on December 18).
My good friend and fellow William & Mary MBA Class of 1989 Edward George “Ted” Kaufman had a comment to last month’s financial update. Ted is a broker with Scott & Stringfellow in Norfolk, Virginia (a subsidiary of Branch Banking & Trust Company out of North Carolina). After reading my post about the huge historical fluctuation in foreign exchange rates, Ted said that I should say something about Bitcoin and other similar electronic cryptocurrencies. Bitcoin was introduced to the world on January 3, 2009 and began trading in April 2010 at the value of USD $0.003 per one Bitcoin. Bitcoin is a cryptocurrency, a worldwide payment system and a decentralized digital currency. Its critics claim that it is not backed by anything, but in all fairness, neither are the fiat paper currencies of the world ever since the gold standard was abandoned. Fiat paper currencies have the taxing authority of governments behind them, as well as the ability of quasi-national “central banks” to issue ever more credit out of thin air – giving us the horrendous credit inflation of the last 3 centuries.
There are now many more cryptocurrencies in addition to Bitcoin such as Etherium, Ripple, Litecoin, Monero, Etherium Classic and more than 1,300 others. Some national governments such as those in China, Russia, Venezuela, Switzerland and Sweden are preparing to launch their own digital currencies backed by commodities such as gold, silver and crude oil reserves. Some countries are already moving away from the US Dollar as a main medium of exchange, in particular away from the US Petrodollar as a required method of payment to buy and sell crude oil across any national boundary. These countries include the likes of the BRICS nations (Brazil, Russia, India, China and South Africa) as well as Venezuela, Iran and Qatar.
Fiat paper currencies will eventually implode in value due to the reckless policies of national governments (spending and especially promising far more money mostly for social welfare benefits than even exists to confiscate by means of taxation), and some other governments are already withdrawing physical paper currency from mass circulation (such as in India and Sweden). The world will eventually be forced back into forms of currency backed by gold (gold has been the only true global currency since the start of recorded human history) and digital currencies must eventually replace costly and archaic physical paper and coin currencies. These digital currencies will have to be backed by gold and/or other commodities of high value – which of course brings us back to Bitcoin. Bitcoin and other digital currencies are merely filling a necessary vacuum.
How much has Bitcoin increased in nominal value since it commenced trading in April 2010? If you had purchased one US Dollar of Bitcoin in April 2010, that same holding would be worth a whopping USD $5,017,062.67 today. The price of one Bitcoin stood at USD $2,756.60 on July 13, 2017. It closed at USD $15,051.19 on December 29, 2017. The upper “resistance level” for one Bitcoin stood at USD $49,879.54 on December 19, 2017. The record actual closing price was USD $25,875.08 on the same date. How high can prices go? Who knows? The highest price for one unit of any corporate stock or commodity was USD $300,000.00 per share of Berkshire Hathaway (the company owned by Warren Buffett) on December 29, 2017. One share of Berkshire Hathaway was worth just USD $7,100.00 on June 1, 1990 – 28 years ago.
Can Bitcoin or other digital electronic crypto-currencies crash? Of course they can – just like any other asset class, be they stocks, bonds or the value of your own home. If digital electronic crypto-currencies end up replacing paper fiat currencies, and if they are to be backed by commodities with true value (i.e., especially gold bullion) then their value can continue to skyrocket. Gold is the only true global currency, as it has been since the beginning of recorded human history on earth. But it makes no sense for everyone to carry physical gold on their person and to conduct everyday financial transactions in physical gold. At the same time, both paper currency and coins are out of date – their time has come and their use will continue to diminish………they represent an obsolete technology.
