Will Bitcoin change the money landscape?

btcstashIn a recent email, a friend of mine who is into currency speculation, especially the Iraki Dinar, made little of Bitcoin and said the current money system is just fine. I had tried to make him aware of the existence of this new kind of currency by sending him links to articles.

Now I am no friend of Bitcoin, I have no investments in it. But I do believe that something important is happening, and so I wrote an explanation, in simple terms, of what Bitcoin is and why I think it is going to change the money landscape.

This is not for Bitcoin veterans, but for people who are not quite sure what Bitcoin is and why there is so much talk about it. Here is the letter:

In my opinion Mike, money as we have known it is dead.

With the avent of cryptocurrencies, we will see a whole different ball game developing.

Bear with me for a while here. No one is saying to take money away, or to make it all electronic. I see no such move anywhere.

Bitcoin, as a currency independent of any state authority, is going to attract current money towards it. The magnet that is being used is a guaranteed scarcity, not unlike what Gold, used as money, has given us for a good long time.

The scarcity is guaranteed by having a finite number of bitcoins ever to be created. That means, the more request for them, the more the price goes up. That is what’s attracting all those investors. And indeed, the thing does seem to work. Apart from up and down swings, the trend of Bitcoin’s exchange rate to the dollar has been rapidly rising. It’s an exponential rise that has been going for four years. After a very slow start of being worth next to nothing, at the beginning of this year the rate was $20 for 1 Bitcoin. Right now, the price is somewhere around $800 for a Bitcoin. And there is no end in sight to that trend.

Let me explain a bit of the mechanism of a cryptocurrency, and what makes it so different from the national currencies. There is no bank behind it, no central control mechanism. What we have is the software working on lots of people’s computers, and a community of programmers who can make adjustments in case a flaw comes to light with continued use.

The currency comes into being through a process called mining, which is like a race. Computers solve a complicated mathematical calculation and when they do, they confirm a transaction, to be added to the public record, which is called the block chain. When successful, there is a reward paid in Bitcoin. The calculations are performed by specialized computers that are optimized to do those kind of calculations. The combined computing power used by the Bitcoin community is huge, greater now than 50 of the world’s most powerful supercomputers combined. (I see it is actually much more according to this article)

It would take the power of at least 51% of the participants in the network to make any changes, both to the program itself and to the public record of transactions. So there is pretty much a guarantee of non interference … there just isn’t sufficient computing power out there that could be dedicated to it.

Now that was the scarcity aspect of it, which makes Bitcoin such a magnet for investor money.

The other interesting characteristic of Bitcoin is that it can be used to send money from one user to another without any intermediary. Instant transfer of money from anyone to anyone over the internet. Probably bankers are sweating over that one, because they just can’t seem to make it work with sufficient ease with their system of traditional money. That feature of ease of transfer and (almost) anonymity is attracting a large base of users who want to have that ease of payment.

What will that mean for national currencies? For one thing, it means there is one more kid on the block. A currency that exists and functions but that is not linked to any country. A currency that is an excellent investment vehicle. A currency that makes moving money as easy as clicking a button on your computer.

National currencies won’t cease to extst because of it, not for some time at least, but they now have competition.

What probably will happen is that legislators will wake up to the fact that the bankers’ money may not be the best thing that ever happened. Someone may figure out that the banks should perhaps operate in a different manner, giving their community a real service, rather than gambling with its money.

Now this is all developing right now and I’m not saying it is good or it is bad.

I am simply reporting that it’s happening, that the money landscape is changing…

1 Comment Will Bitcoin change the money landscape?

  1. Pingback: Will Bitcoin change the money landscape? | Mone...

Leave A Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.