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    Why Bitcoin Boomed During the Government Shutdown

    Written by

    Alec Liu

    Contributor

    Image: Flickr

    Just two weeks after the Feds shuttered the Silk Road, the notorious online drug bazaar, bitcoin prices have touched a five-month high—with a single bitcoin fetching nearly $156 each on Tokyo-based exchange Mt. Gox.

    Bitcoin’s resiliency can no longer be denied, especially as the digital currency continued its ascendancy even against the backdrop of a US government in utter disarray. At the 11th hour of the crisis, President Obama signed a bill that ended the partial government shutdown and, more importantly, raised the debt ceiling, an arbitrary limit on the amount of money the country can borrow that would have been surpassed today. If Congress had failed to reach a deal and the US was unable to pay its bills, the results might have been catastrophic, eclipsing the bankruptcy of Lehman Brothers five years ago, the domino that could trigger the worst financial crisis since the Great Depression. 

    “We could be looking at a 10 percent decline in GDP, and a 5 point rise in unemployment,” The New York Times economist Paul Krugman wrote of the immediate consequences of a potential US default. Moreover, the sudden impact on US debt, deemed the safest financial asset in existence, would cascade across the globe fueling a crisis in confidence that would call into question the status of the US dollar as the reserve currency of the world.

    While a last ditch effort was always expected, the political farce precipitating in Washington is a stark reminder of the tenuous nature of our current financial system, where a group of ideologues could essentially hold the state of the world economy hostage simply because they felt like it. For bitcoin’s advocates, it’s simply another argument for the cryptocurrency’s relevance. Unlike fiat money, which is managed by governments, bitcoin’s decentralized model means that no one actually controls it, keeping it out of the hands of opportunistic politicians.

    Similar to the events in Cyprus earlier this year, when the threat of direct withdrawals from citizen savings account led to a surge in the virtual currency’s interest, some believe the current uncertainty in the conventional system is fueling bitcoin’s recent rise even though the ecosystem has yet to find its “killer app.”

    “The more stupid things governments do, the more attractive bitcoin becomes,” said Roger Ver, the director of Business Development at BitInstant, and long time bitcoin evangelist. “Bitcoin's strengths come from its nature. Governments can't inflate it or seize it at will.” As further evidence, Ver points to this chart demonstrating how various asset classes have performed this year:

    Governments could, of course, outlaw bitcoin outright, a longstanding fear within the community that appears to have abated as authorities have adopted an approach of acceptance and regulation. This hasn’t always been the case. The seizure of funds of Mt. Gox, the largest bitcoin exchange, five months ago for apparent regulatory violations shook the system, shutting down a key source of funding that sent prices crashing.

    And two weeks ago, the Silk Road crackdown was expected to blow another major dent in bitcoin’s armor. But prices quickly rebounded following a minor flash crash, perhaps to the surprise of casual observers as the underground dark web marketplace was widely considered bitcoin’s first true killer app. The Silk Road could not have existed without the hard-to-trace digital currency. And most people might have never heard of bitcoin if not for the novelty of buying drugs online. The link, however, has always been a double edged sword, providing the movement purpose but also plenty of bad press.

    That bitcoin has survived the shutdown not only unscathed but stronger than ever is unsurprising to Ver.

    “Bitcoin is unaffected by the Silk Road shutdown because of the numerous competitors that already exist,” he told Motherboard, citing the Black Market Reloaded as an example. And so for bitcoin, the Silk Road’s demise is only good news. It’s unlikely that the alternative markets already filling the gap will ever achieve the same level of brand recognition, allowing bitcoin to shed what has always been a PR headache, even as the demand for illegal goods online inevitably grows.

    For Ver, this means only one thing. “Bitcoin will continue to gain more and more popularity around the world as people quickly figure out that it is superior to government issued money.”

    @sfnuop

    Topics: bitcoin, cryptocurrency, congress, government shutdown

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