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Bitcoin, Gold & Future Currency

It’s hard to argue that Bitcoin has taken the world by storm and even I can’t refute the possibilities of this cryptocurrency as an alternative means to our rapidly devaluing fiat currencies like the US Dollar and the Euro. A certain amount of volatility is expected with the beginning of any currency (anyone remember how the EUR started — volatility city!), but as it becomes more widely accepted, it will stabilize. It’s usefulness will be dictated by its longevity and ability to fulfill the main tenets of what constitutes money:

  1. Medium of exchange
  2. A unit of account
  3. Portable
  4. Durable
  5. Divisible
  6. Fungible
  7. Store of value

Let’s be clear: I consider Bitcoin a fiat currency as well — someone declared it currency and it has found some level of acceptance in the worldwide market. However, in my mind, Bitcoin fulfills all of the things that make it money with the exception of #4 and #7. Why is it not durable? Being a virtual currency by proxy makes it wholly dependent on electricity, something we take very much for granted. I’m not saying a country somewhere would drop an EMP bomb on us and throw us back 200 years,  but imagine a simpler situation where a city experiences a blackout. How can anyone buy or sell anything? There would be no way to properly account for settlements between entities. It’s not like when someone’s credit card is manually charged — you know, the old stick it in the machine and take an impression of your card. The anonymity of Bitcoin is a pro and a con for everyday situations like these. How often does a blackout happen? Not often. But it DOES happen and is more common in places like the Caribbean. Let’s not forget those people that stored their Bitcoin on their mobile phones… then lost it when they had a technological incident.

As for a store of value, it remains to be seen since Bitcoin is a new kid on the block. It’s volatility is symptomatic of its nascent nature. Most people still don’t understand what Bitcoin is and it will take a time for its long-term value to be determined. Bitcoin seems like an interesting speculative investment at this point. Kudos to those folks that bought them when they first came into existence and got in on the ground floor. The U$ 500 spread swings on a daily basis are very much a deterrent for me, though.

There is another interesting thing to consider for #5: being divisible. Bitcoin is actually infinitely divisible, which could potentially make it problematic since there should be a limited number of Bitcoins. It’s just a big old asterisk on the so-called 21 million bitcoin limit.

Bitcoin has a few things working for it: it’s independent and not issued by any central bank. That’s a big plus. However that doesn’t mean governments aren’t trying to get more involved, but they’re struggling to understand just what it IS. There is a limited number of them, only 21 million will ever be in existence. This point will be important to watch as the 21 million limit is reached, and how it is handled at that point.

It is very secure. Cryptography to the level that Bitcoin has been deployed is extraordinary. The peer-to-peer nature of its “mining” process creates continually expansive security measures. As The Economist article put it, it’s “mathematically elegant“. That it is. There is an issue in how they handle their batches in that, each person that uses a Bitcoin client must have a full repository of all Bitcoin transactions that have ever taken place. It was one thing when only a scant few used the system. The growing pains of having millions of users will inevitably take its toll. (Here’s the “Bitcoin for Dummies video” that I like ^_^)

There are limits though: sovereign currencies moved to and from Bitcoin are still subject to government regulation. This also means that Bitcoin to Bitcoin transactions are NOT subject to that same regulation. It’s limited, but it’s as free a market as they come. They’ve got their own pressures now that it has turned into the bee’s knees of today’s digital currency. However, with recent and expected pressure from governments around the world – particularly China – it makes things very difficult for the average person to get regular currency into Bitcoin, and vice versa. This inability to do exchange between currencies is a very huge barrier to making Bitcoin widely accepted.

There is also a bit of a ‘rush’ to mine Bitcoin to get rich. Regular people, on the hunt for riches, have purchased tons of hardware to mine Bitcoins and get what they can without spending. It’s the new boom, basically.

And what about Bitcoin versus something like gold or silver? Well, gold and silver obviously fulfill the money qualifications, including being a store of value (5000+ years of value – beat that US Dollar!). I was going to speak on it, but this infographic of the day pretty much encompasses some interesting points on both. People love to hate on this commodity, but even they can’t refute its longevity. It may be on the low end of valuation at the moment, but it’s fundamentals still remain the same.

Today’s world really demands electronic transaction use and to some extent, physical gold and silver don’t fit the bill. Given the amount of gold and silver that is available in the world — also finite — I would like to see a constructed hybrid between something like Bitcoin (the methodology by which currency is utilized) and gold/silver (the real value backing the digital currency). Once Bitcoin reaches its 21 million limit, then what? Will popular pressure force it beyond its constraints? The inability to print a Bitcoin puts limits on the available currency, certainly compared to what is available in paper. What better way to extend the flexibility of the digital currency by backing it with gold or silver? I’ve done considerable research in an attempt to understand Bitcoin further, and it is clear to me that the idea of cryptocurrency is something that the “big banks” will start to utilize themselves in an effort to constrain the market and reinstate their control measures. I’m convinced that no matter what, they want their banks to survive, whether or not it is with the dollar or any other currency at the helm.

Bitcoin, gold and silver all have similar problems: they’re generally not considered legal tender (with some minor exceptions), which limits the ability to purchase goods on the ground level — not online. This is something all three would have to overcome to be considered for widespread public use.

Unless… that isn’t what the “powers that be” want.

These are definitely very interesting times we are living in. I don’t know how much longer Bitcoin will be able to hold onto its independence. There is an equal possibility that the Chinese, with their brilliant skills at duplicating technologies, could create a competing digital sovereign currency that could end up being the de facto settlement method of the world. Who knows. Governments around the world will not allow Bitcoin to run rampant and unchecked for long. Things they cannot control inevitably face its own demise or become the catalyst for revolution. And you know what happens when either situation comes to fruition…