On July 2 The Wall Street Journal reported that the Winklevoss twins filed for an initial public offering which will allow investors to participate in the fluctuation of the value of “bitcoins,” which exist outside the realms of governments and central banks. Their plan involves creation of an ETF which holds only this new form of digital money. Bitcoins are:

  • A virtual currency. It is unlikely (at least at the moment) that you will be able to walk around with any bitcoins in your pocket since they only exist in electronic form.
  • Transferrable only via computers or smart phones. Don't have access to a computer or smart phone? Then you probably won't be participating in the bitcoin economy soon.
  • A payment system. Similar to PayPal, the bitcoin transaction system can be used to pay for services, providing both parties to a transaction agree to settlement in bitcoins.
  • The world's first currency. Theoretically bitcoins can be used as a primary currency to pay anyone in the world. Since bitcoins aren't issued by a government, there is no exchange rate to worry about.
  • Originated by someone? It is unknown who created the bitcoin currency (he/she is currently using a pseudo name). However, it appears likely that the originator is/was a Japanese software developer. No, I am not making that up.
  • Exchange traded by Mt. Gox in Tokyo. No, I didn't make this up either. Mt. Gox is an exchange located in Tokyo that allows participants to cash in U.S. dollars for bitcoins (and vice versa). Looking to get into bitcoins? Mt. Gox might be your only current option.
  • Limited. Each time a bitcoin transaction is processed the server updates a ledger which creates some newly minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time, no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. I'm still not making this up. Please feel free to check Wikipedia where I sourced this information.

Sound like a currency that only exists in gamer-land? That is how things might end up for bitcoins. The biggest argument against the proliferation of bitcoins is that the central banks of the world would seem to be automatically aligned against a currency controlled by an anonymous Japanese software developer. It would be hard to imagine our central bank (the Fed) ceding control of the value of the U.S. dollar and monetary policy to bitcoin.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.  Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF).   Mr. Lawton may be contacted at bob@lawtonrpc.com or 414.828.4015.

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