#DigitalSkeptic: Bitcoin Becomes Investor Porn

NEW YORK (TheStreet) -- Gene C. Collins figures virtual, Web currency Bitcoin is entering its, uh Deep Throat phase.

"When I heard about Bitcoin, it sounded like a bunch of kids having fun," said the chairman of the investment committee for the University of Toledo, a $400 million endowment that helps fund the Ohio-based educational institution of roughly 50,000 students and faculty. "But now that it's passing for real money, something significant and ugly has happened."

"Bitcoin is become financial porn."

Collins and I, over coffee in his Rye, N.Y. home, were breaking down how Bitcoin uses open-source, peer-to-peer digital technology, similar to how music and desktop data is often shared, to move money around the globe. We were shaking our heads over recent announcements that sports teams such as the NBA's Sacramento Kings, carmaker Tesla and even law enforcement officials are treating this virtual currency as real currency.

Collins is my kind of currency expert. Over the half-decade we've talked, I have always admired his flesh-and-blood street smarts in growing the hundreds of millions he manages for his Toledo-based alma mater. Collins knows financial technology. Back In the mid-1980's, he was a major player in the Bitcoin of that era: He ran the mortgage-backed securities operation for A.G. Becker Paribas, to gussy it up for a lucrative sale to Merrill Lynch in 1984.

"What Merrill was paying for was the automated trading processes we developed," he explained. "We were some of the first to do that."

Collins has done tens of thousands of deals, touched billions of dollars and can talk smack about everybody from Sandy Weill back when Citibank was nothing more than Commercial Credit Co. to Michael Bloomberg when he just another hack looking for money for his nutty terminal idea. And his investment philosophy is easy for investors to love: "I am all about exactly one thing: stocks," he said. "When money is this cheap, where else can you put capital to find return?"

So how does Collins sum up Bitcoin? One word: terrifying.

"If you're mistaking Bitcoin for real currency, I have a great deal on tulips for you," he said. "Because when the liquidity evaporates for this stuff -- which let's not pretend can't happen in our post-mortgage meltdown world -- flower bulbs are going to be 10 times worth more than any pile of Bitcoins."

A commodity, not a currency
Collins' flash of investor insight is exactly this: "Bitcoin is not a currency, it's a commodity." So while the technology does allows users to move value, treating it like real money is a classic case of Information Age double-speak. In fact, for Bitcoin to be an actual currency, it must have three critical components: It must to be a medium of exchange, a way to store value and a unit of financial accounting.

"As a medium of exchange, it's a fabulous idea," he said. "But for storing and accounting for value? Are you kidding me?" There is no implied power to tax behind Bitcoin and no obligation to pay, Collins said. There is no rule of law and no army backing the stuff up. There is not even a company like a PayPal to sue. And, most importantly, there are no decades of continual use that a currency must have before it can be considered a stable enough unit suitable for financial accounting.

"I am shocked that a real auditor allows that stuff anywhere near the books. Sure, you can plug in a number of a Bitcoin transaction," he said. "But that just means somebody paid that amount for it, not that anybody will pay that amount in the future. There is nothing new about Bitcoin. It's a commodity, like sugar, wheat or oil."

"We've had wheat futures for 4,000 years, and nobody mistook that for money."

Bitcoin turns to porn
If Bitcoin speculators have the guts to look, the language of uncertainty is everywhere with the stuff. "Bitcoin is not legal tender in any country and is not recognized as an official currency by any regulatory authority," is the disclaimer on XE.com, the online currency tracking site. Or how about this nugget from the online information site for Bitcoin itself, Bitcoin.org: "Relatively small events, trades, or business activities can significantly affect the price." it says.

Collins also worries that security is a major concern -- a feat that is confirmed by leading information-age security professionals. "At the current stratospheric value of Bitcoin, miners with access to significant computational horsepower are literally printing money," concluded a report called Botcoin: Monetizing Stolen Cycles from a large group of security researchers, based mostly out of the University of California at San Diego.

But what really works Collins up is the pumped up, titillating nature of the idea of Bitcoin, which trumps the mundane, almost boring reality of real money.

"Bitcoin has become this lurid, fascinating thing that we can't take our eyes off of," he said with deep worry as our coffee went cold. "But what it is, in reality, is so far from the real experience of currency, that it's absurd."

"If that is not financial porn," he said, "what is?"

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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