How to spot a money mania when you see it.

Today's article in the NY Times discusses the ongoing collapse of bitcoin.  I quote, "The price of Bitcoin fell nearly 20 percent this weekend to its lowest level of the year, prompting worries of a crash.".

Well,  dollar based credit deflation is not selective!  If the dollar is strengthening relative to gold (and everything else), it is clearly going to strengthen relative to another completely unbacked currency like bitcoin.  And so the question remains, is bitcoin a mania or simply "the new gold" which is having a volatile infancy?

One thing I do know: bitcoin is NOT the new gold.  There is no such thing as new gold and there never will be.  Gold was born in the hearts of exploding supernovae which have at least 10 solar masses.  It is a basic element, part of the universe.  It is eternal.  Bitcoin is just a concept.  It lives on hard disks and computer systems which could all be wiped out in an EMP.  No human ever had to work to conjure new bitcoins into existence.  Gold on the other hand takes sweat, the labor of man to pull out of the ground and to refine.  Which do you think is real and which do you think is temporary?

All that aside, there is one clear indicator that I look at in determining the state of bitcoin as a long term reality and that is sentiment.  While bitcoin's recent lows are no doubt a result of the dollar's recent surge (and thus subject to short term fluctuations which will not likely all be in the downward direction), look at what the bitcoin faithful are saying (quoted from the link above) about the move: "As the price is going down, some of us are under immense psychological stress...  Please share how you cope with it.”.

Dear Reddit commenter, you cope with it by understanding it.  While I would not sell bitcoin just yet because it is at a near term low and the dollar is about to pull back, if owning bitcoins results in stress for you then something inside you is warning you that bitcoins have no real value.  Your stress comes from your subconcious which worries that bitcoins will go worthless on you.  At the complete other end of the scale is me with my gold and silver bullion coins.  I hope for lower prices because I am still saving for retirement and I KNOW, beyond any shadow of any doubt, that while gold might trade down to $700 in a capitulation collapse, that it will never go worthless.  

Tell me this: if bitcoin continues to plummet, will people think to themselves "buying opportunity of a lifetime" or will they think "shit, this crap is another mania, destined to circle the bowl of history"?  But if gold falls to $700, the entire world will fall all over itself tying to convert paper money back into the hard currency because governments will eventually take control of their money supply from their central bankers and once that happens, all fiat currency will go worthless in short order.

Mike Shedlock is on record many times saying that US dollars will not hyperinflate anytime soon.  I believe he is right.  I believe that deflation must play out before massive inflation or hyperinflation has a chance.  As long as housing prices are falling, we cannot have hyperinflation and housing prices still have a long way to fall.  However, he also admits that if congress ever gets control of the money supply then he would reverse himself on the hyperinflation issue.  Why?  Because central bankers know that hyperinflation is the end of the line for their scam and when it happens they could get hanged in the streets.  But congress will continue to buy votes with no regard for anything else.

Unfortunately, it is destined that central banks will eventually be stripped of their powers as they prove that their game has grown beyond their control.  Look at the recent happenings in Argentina where the government just chased out the head of their central bank.  As stress in the funny money game here in the US (caused by deflation) increases, there will be more and more pressure brought to bear on the fed.  Why?  Because the fed is running this con game and they are expected to meet their impossible mandates of stable prices and full employment within the framework of a money supply which by its very nature must expand, within a smoothed curve, at an exponential rate.

Bottom line is that there will APPEAR to be dollar strength for awhile but then it will continue its eventual decline into worthlessness and the whole world will collapse at once then because the federal reserve is not just the central banker of the US but rather of the whole world.  This was proved to be the case back in 2008 when the fed provided dollar liquidity to all countries in a globally coordinated response to deflation.  The marginal players will collapse into hyperinflation first and then eventually there will be a global "currency event" which will be nothing more than the sudden and broad awakening to the fact that "money is gold, nothing else".  Credit can and will be defaulted on.  Physical gold held in your hands cannot be.  

Bitcoins are ethereal, backed by nothing.  They possess part of the requirements of real money (rareness) but they will collapse eventually because it did not take physical labor in the first place to conjure them up and thus they really are not rare.  More and more bitcoin wannabes are popping up all the time.  It doesn't matter if bitcoin itself has a limited supply, as long as creating crypto currencies do require massive amounts of physical labor to come up with the currency, they are all essentially worth what it took to implement them and that is far, far less than their dollar value today.