5/29/11

Some links about Bitcoin

Bitcoin is a digital currency created in February 2009. It is based on peer-to-peer networking, and as a result it has no central authority or issuer, is anonymous, and is free of transaction and transfer fees. There is a fixed number of Bitcoins, with deflation built into the system. According to Wikipedia, "As the supply of more bitcoins runs out and the 'Bitcoin economy' grows, the value of a single bitcoin increases." Bitcoins are also practically impossible to counterfeit.

I like the idea. A lot. But we already know what banks, and therefore governments, will think of it, given user anonymity and lack of third party meddling. The chief problem that I see with Bitcoin is also one of its appeals: it is independent from government. As almost anything can be money, it's usually government enforcement, through a taxation system (e.g., "you can only use x to pay your taxes"), that gives the medium of exchange its legitimacy. Bitcoin lacks this and has the potential for the opposite--government hostility, which can result in criminalization, and so on.

Another problem is that Bitcoin is backed by demand only. There's nothing to stop a competing digital currency from becoming more popular. As demand shrinks, so does the purchasing power. Paper money (note that this is a small percentage of our money supply) has some worth even if it's defunct. As something physical, you can at least use it to wipe your butt, burn it for fuel, and so on. It can become a collectible. For example, "worthless" Zimbabwe trillion dollar notes are being sold on Ebay for a few US dollars each. Defunct coins can be melted down and the metal sold off or traded for whatever currently has purchasing power. Digital currency, on the other hand, simply vanishes.

There will be an all digital currency in the future. But it probably will not be Bitcoin. It'll be issued and controlled by whoever is in charge. All your transactions will be monitored and recorded. Anonymity will be eliminated and various transaction fees and taxes will be automatically applied. There will be all sorts of fraud, and life will be the same or worse.

But one can dream of a freer world:
  1. Wikipedia article on Bitcoin
  2. What Bitcoin is, and Why it Matters (Technology Review--an MIT publication)
  3. Bitcoin, Digital Currency of the Future? (The Atlantic)
  4. Why I'm Putting All My Savings Into Bitcoin (Falkvinge) 
  5. Bitcoin.org
  6. Bitcoin Wiki
Regarding the title of article 4, I wouldn't do that with any asset. It always pays to diversify.

Update: As expected, here's some grandstanding by a government official (my senator and Wall Street lackey) who doesn't know what he's talking about. There will be more, I'm sure. Money laundering? Really? If anything, it's a ponzi scheme.

Update 2: Maybe they'll continue going up in dollar value, but I say Bitcoins are finished. Today there's an article about them in SmartMoney. That article made it to the Yahoo! front page, where all the stupid news for the unwashed masses goes. I bet that marks the bursting of the bubble.

Update 3: While Bitcoins are themselves secure, Bitcoin holders are only as safe as their computers. Check out this article from PC World, World's First Virtual Heist? BitCoin User Loses $500,000.