by Callum Newman / on November 30, 2013 at 10:00 am

What was the best investment of the last five years? You could have spent hours analysing industries, credit, supply and demand, capital flows, P/E ratios and dividend yields, or you could have saved yourself the trouble and bought Bitcoin. As Bill Bonner noted this week, if you had put $10,000 in it a few years ago, your stake would be worth over $75 million. Bill crunched his numbers when Bitcoin was US$754. Its now over US$1,000.

Your editor tried to buy some Bitcoins about six months ago. We got as far as a setting up a digital wallet. Then it was necessary to register with an exchange. The easiest option seemed to be Mt Gox, the one based in Japan. From memory Mt Gox accepted Aussie dollars, others didnt. They told us to send in a copy of some ID. We tried our drivers license. They said it wasnt enough. Bah! We thought, whats the point of this hassle? We forgot about it, and cant even remember what the Bitcoin price was then. We dont want to think about it now. Who couldnt help but feel a twinge of regret not to be part of the ride so far?

But we take comfort in the fact we are not in the position of frantic IT worker James Howells over in the UK. Sipping our morning brew yesterday we read how he obtained 7500 Bitcoins in 2009. left them on an old hard drive and forgot about it. He threw the hard drive in the bin. Unfortunately the Bitcoins on that hard drive are currently worth 7.5 million US dollars. His only hope is finding the hard drive amongst a massive landfill site. We dont like his chances.

Such is the peril of this new type of money. Maybe the parabolic rise will collapse tomorrow. Maybe it will keep going. Who knows? What exactly are its benefits, weaknesses and risks? Dan Denning is suspicious that it has an inherent flaw. Heres what he wrote in Scoops Lane on Tuesday:

Without electricity, there is no Bitcoin either. Its money that only works when the network is up. If the network is down sabotaged by terrorists or fried by a coronal mass ejection from the sun then Bitcoins will remain forever trapped on a hard drive the way the Pharaohs were trapped in their tombs. Except the Pharaohs were actually in their tombs. Whereas Bitcoin isnt anywhere. If the lights go out, youre broke. That doesnt sound like real money to me. It sounds like a convenient way of paying for things. But thats the real question isnt it: does money have to be a commodity (some tangible thing) to have utility?

If you take in all the things used as money throughout history for example gold, silver, leather, feathers, beads a lot of them often came first as some form of human adornment. Bitcoin adds a new twist to that in the tech age. You cant even touch it, let alone wear it. But probably one thing throughout history will repeat: the State wont sit on the sidelines for long. It will want its piece of the action.

Do we have to have money at all? The answer is no, according to David Graeber, an anthropologist who reaches the conclusion in his relatively recent book Debt: the First 5000 years. Money as we know it isnt necessarily a given in human affairs. Thats if you look back as far as he does, which is a long way. He starts from about the year 5000 BCE and makes his way to the present. He subverts the conventional take that barter came first, followed by money, then credit. He says economists have blithely and foolishly followed this assumption despite evidence that every human civilisation began with credit with barter very rarely in the picture.

So where and why does money come into existence? Graeber doesnt know, but says the evidence points to war.

Say a king wishes to support a standing army of 50,000 men. Under ancient or medieval conditions, feeding such a force was an enormous problem On the other hand, if one simply hands out coins to soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you [to pay taxes], one would, in one blow, turn ones entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with the things they want.

Money comes to town alongside violence, or at best strangers. The State stamps its seal on something to finance its warmongering. Suffice to say there are plenty of examples of societies that got by without money at all, in the absence of the State. They were close-knit societies that dealt with members of the community through a complex web of favours, obligations, credits and power relationships.

But one thing is clear. This is a good book for any investor because it shows how conventional economists lead themselves down some horrible garden paths because of their assumptions. As Phil Anderson likes to point out often, most of them actually have no idea how the economy works. If our investment plan follows their outlook, well end up where they do: clinging to assumptions that sound plausible but actually dont reflect reality. That means questioning everything.

All this will no doubt be a fruitful topic at the Port Phillip Publishing conference World War D: the Battle for the Next Global Money System . We hope to see you there. Dont hang about if youre considering it. Half the seats are gone and you only have a week to claim the $300 early bird discount .

The premise of the conference is that there is a new financial system coming. Thats the same conclusion Graeber reaches. Throughout history, the cycled has always turned. The only question is whats coming. Stay tuned.

Regards,

Callum Newman+

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