Then a few days later on the 11th of April bitcoin went from 250 to 100 and back to 150 within a day. The pattern of a typical pum and dump scheme often seen in micro caps pushed by dodgy newsletters and boiler room operators. 

Finally got asked to do a short Skype interview with RT News.  

So what has happened with bitcoin since ? In the next few days bitcoins traded down to 50 and have now recovered on very low volumes up to 140. Why is bitcoin such a bad store of value despite its very elegant design ? Why are we not following this trend now that VCs are jumping on the bandwagon ?

1. It is similar to a Ponzi scheme : later investors monetize by their hard mining the earlier miner efforts and increase the wealth of early participants.  If that is not a pyramid scheme am not sure what is.
2. The supply side is totally inelastic - it's in essence a one sided market. Like a security that has naturally by design primarily buyers, parabolic rises followed by crashes are to be expected.
3. Shorting is possible but not easy. Along with point (2) above it makes for a "squeezy/crashy" market.
4. Its a very thin market. The total bitcoins outstanding are anywhere from 1 to 2 billion USD currently.  Compare that to the trillion dollars of FX traded daily. Thin markets are sitting ducks for manipulative speculators.
5. There is no central authority. Philosophically interesting but lets not forget the weak link here : humans. Central authorities exist because everything in finance is, bottom line, about confidence. Confidence breaks down in a crisis and that is when a central authority can step in and manage the situation. Maybe the result is not optimal but almost always better than the alternatives.
6. Bitcoins due to their perceived anonymity of transactions (something not absolutely true by the way) are to some extent used for illegal activities. Sceptic would say so is cash ! And they would be right, only problem is that cash cannot easily be outlawed unlike bitcoins where a regulator could ban them in specific countries within minutes.
7. The major bitcoin exchanges are opaque operations. This may not be problematic assuming some clarity exists to a large number of participants about the exchange's location and principals. However, it is not uncommon for internet operations to disappear overnight.
8. All of the above signal continued volatility and a wild ride for bitcoin holders. If at the end of the day the investor needs to transact or come back to traditional currencies an investment in bitcoin would be quite a risky decision. Same goes for businesses accepting bitcoins : in their case the uncertain tax treatment as well is a further negative.
   

In summary bitcoin is not a good store of value, especially in the light of multiple other real assets available for those worried about financial paper markets, capital controls or other financial anxieties. As their value fluctuates wildly there will always be investors blind to basic flaws and risk assessment. For us it remains an interesting experiment which for the moment seems to be a victim of its success.

Source : Barclays Capital

Note :All returns are in percent since 31 Dec 2010 in local currency. Sources : Reuters, Bloomberg, ICM.

It is interesting to note that there has been almost no recovery in consumer comfort levels post the 2008 crisis, even after a very substantial monetary stimulus effort. Furthermore, the confidence numbers are at the low end of multi-decade readings. Excluding the late '90s equity bull market that drove US consumer confidence to very high levels via the wealth effect of equity holdings and real estate appreciation, we are at levels not seen for 20 years.  Maybe the next chart can shed some light on why that is.

We can see that the US unemployment rate has averaged 6% since the mid '80s with the early '90s showing an increase up to almost 8% and a return to the previous levels within 5 years. After the dotcom bubble burst we had another increase - less dramatic - with a similar improvement over a period of 4 years. This jobs recovery cycle was cut short in late 2007 as the credit crisis unfolded. In both past crises unemployment increased by 2.5-3% at worst. In the current crisis we have had double the increase at almost 6% and after 3 years we are still at very high levels. This chart correlates well with the consumer comfort chart.

The above chart shows poverty levels in the US as determined by the US Census Bureau. They are set via annually revised income thresholds that can be found at : 

http://www.census.gov/hhes/www/poverty/data/threshld/index.html

It is this chart that should be the biggest alarm bell for policy makers as they not only have to think about economic growth but also about societal cohesion. The recent unrest against financial institutions in the US and globally (Occupy Wall Street and other regional similar protests) are a direct consequence of this chart.

This is the depressing and surprising bit. Unprecedented monetary stimulus efforts across the yield curve has not led to a quicker recovery but it also seems the results are worse than projections. The effect of high unemployment, increasing poverty levels and a dismal expectations set given the above chart feed into the record low consumer comfort figures. 

Low comfort = low investment, low consumption, lower growth = lower employment = Lower comfort and so on...

In the light of the huge European sovereign debt problems which threaten to accelerate this vicious circle, global policymakers need to address the problem probably from a different angle, one that attacks head on the employment problem. Most if not all of the measures taken up to now have been targeted at recapitalizing the banking system in the hope it would re-ignite the jobs engine. This has not worked yet.

The chart above shows unemployment as measured by Gallup including latest October 2011 estimates. Although the path is not dramatic it points to the right direction. What is needed at this point is the catalytic intervention of new policies targeting specifically long term job growth. A failure to address the employment problem in novel ways may mean the longest and slowest recovery on record since the '29 crash as consumers continue down the path of minimal confidence.