I don't know about you, but in the past few months I've been hearing more and more about the digital currency Bitcoin. For a quick summary, read this.
The discussion has quickly turned from the novelty of its invention to whether digital currency can act as a viable substitute for fiat currency. From a basic economics standpoint, we know that money performs three functions - medium of exchange, unit of account, and store of value. At present, Bitcoin fails on all three - it is not (yet) widely accepted by retailers, prices are not readily reported in Bitcoin, and the enormous price fluctuations experienced in the past year suggest it does not protect wealth in the same way as dollars or euros do. While there have been defenders, economists in the media seem to agree that Bitcoin is better suited as a payments system (like PayPal, for instance), than a new currency.
So what do you think? Does Bitcoin have a place in our economy, and if so, as a payments system or new currency? Or perhaps you agree with Robert Shiller, one of the 2013 Nobel laureates, who recently labelled Bitcoin as "an amazing example of a bubble." Let me know in the comments!
Bitcoins are a very interesting topic, one which I think could potentially become the worlds greatest scam in years to come, let me explain. Bitcoins are a medium of exchange which is based in a virtual world. A Bitcoin is stored in a software package on your computer and it cannot be duplicated or changed into anything other than a software version of the coin. Each bitcoin can be used to traded to the 8th decimal place, so whilst bitcoins are limited to just over 20 million in circulation (not yet at this amount), the 8th decimal place ensures there is many multiples of this 20mill available on the market.
ReplyDeleteNow, to discuss the market that is bitcoins. I believe it is a bubble also, the US department of justice came out in Nov 2013 and stated Bitcoins are a "legal means of exchange". This caused the price of Bitcoins to surge from about US$200 to $1000 in a month. The comment is quite interesting, a legal means of exchange covers just about anything that is legal. If you want to trade your mobile phone for a pizza, that is a legal means of exchange. If you collect thousands of empty cans and trade them for a TV, that is a legal means of exchange.. legal means of exchange is exchanging a good or service for a good or service, so essentially the comment means "bitcoins exist", and on that the price went up 5 fold in a month - what did we learn about investors behaving irrationally?
Now there is a well-known conspiracy theory and a lesser known one surrounding bitcoins. The well-known one is that bitcoins are traded for illegal activities as they are very difficult to trace and money can be sent between countries easily. The second theory is overshadowed by the craze that is bitcoins, let me explain.
Bitcoins are essentially "mined" via a computer - anyone can do it, but you really do need super computing power to make it viable as a standard home PC is estimated to take around 30 years to successfully "mine" a group of bitcoins (you get 50 at a time). Now, this "mining" of bitcoins is where it becomes a bit more complex. To explain it in a lay version, essentially computers run a trial-error-repeat algorithm to crack a code which the bitcoin server has available at the time. Once a computer provides the correct code, the bitcoins are released (50 bitcoins, approx $50k US). Because it takes a long time to crack the code, people join up in groups and share the "loot" if one of the teams computers is successful. Now this is where the conspiracy theory lies.. No one knows who started bitcoins, the original company who began it receives only 1 thing for their "bitcoins", these codes. These codes have the same algorithmic make up as banks and low-technological governments use to encrypt their files. The cost of setting up this "bitcoin" company is far beyond that of any small-time individual who wanted to create a new currency but the number of computers now data-mining bitcoins would never have been able to be set up in a country without questions being raised (there are warehouses the size of football fields in China solely data mining bitcoins). So that is where the theory lies, with no trace to the original source, 1 revenue in the form of codes which individually would crack 1 of the algorithms which are used by many of the worlds banks and governments, and a world market fixated upon the secondary market of bitcoins and not how they are produced, could there be a body currently using the worlds computers to hack banks or government agencies? I am skeptical, but I feel like if true, it would blow "catch me if you can"s plot out of the water.
You raise some excellent points that I think, coupled with the fact bitcoins fail to meet the basic characteristics of money, suggest bitcoins will be only passing fad. If anything, there may be scope for bitcoins to be used as an efficient platform for international payments, but the transparency of the system (like how bitcoins are generated) needs to be greatly improved before it becomes widespread.
ReplyDeleteIn regards to bitcoins being used for criminal activity, just today I came across this article about bitcoin dealers being charged for money laundering in the U.S. http://finance.ninemsn.com.au/article.aspx?id=8790242. It'll be interesting to see if someone comes up with a way of mitigating this kind of activity.