The Bitcoin Buzz
For the conspiracy theorists, anarchists, tax evaders, drug dealers, libertarians… Bitcoin is the creation of the century. It is a way to avoid taxation, payment tracking and state control of economic transactions. Bitcoin is called the currency of the future, the currency of the people for the people. However all it really is: A modern way to play the lottery.
Designed by an anonymous group in 2009, Bitcoin is an electronic currency with limited supply. It is completely decentralized with no central bank or central computer that manages it. Transacting with Bitcoins is easy and efficient. There are no costs and one can transact with complete anonymity. You can easily transfer Bitcoins from one place to another. Your bitcoins (wealth) are stored on your computer or on the cloud.
To assess the long term viability of Bitcoin we need to understand the purpose of money.
Money is primarily used to facilitate trade. It is also used as a store of value.
Paper money started in the 7th century in China. Merchants used coins with a hole in the middle so that they could link them together and wear them around their neck. Obviously, this became cumbersome for rich merchants and the ancestor of paper money was born.
Anything can become a currency as long as it is accepted by society. The future of Bitcoin thus only depends on how much people are willing to use it for trade.
For a currency to be accepted, it must have a liquid market. Moreover it must be durable and storable. Gold and silver are good examples of accepted currencies. Their inefficiencies reside in the cost of storing and transporting them.
Currently very little transactions are performed with Bitcoins. It is mostly a way to speculate. Bitcoin’s liquidity is still limited but a greater acceptance will rectify this. As for storability and transportation, Bitcoin is obviously superior to paper and gold.
There is no limit to how innovative Bitcoin can be. Technology has no limits.
It is only logical to think that the obvious evolution is from coins to paper to electronic currencies. Efficiency plays an important role in this evolution. Indeed, paper is more efficient than coin, easier to carry and store. In the same logic, electronic currencies are more efficient than paper currencies.
Bitcoin is still in its infancy and due to volatility, no one wants to save their Bitcoins for the future. So when you hear that a university in Cyprus is accepting Bitcoins all they are doing is exchanging Bitcoins for dollars as soon as received. Borrowing in Bitcoins is suicidal as value can skyrocket. Neither would anyone save for retirement in Bitcoins as it could become worthless by then.
Volatility is currently a big problem to the future of Bitcoin as a currency. The only beneficiaries are the speculators. In order for Bitcoin to be accepted as a currency and to start seeing savings accounts in Bitcoins, the buzz needs to fade away.
So why aren’t government switching to Bitcoin?
The reason is that it would be too disruptive. Control of transactions would be impossible, taxation would be unlikely and central banks would cease to exist. Economists who believe that the state should control monetary policy would agree to the dissolution of Bitcoin. Furthermore, how safe is it to store your money on your computer? And for those who do not trust bankers, why should an anonymous person be trusted with the supply of Bitcoins?
Let me now speculate on the future of the virtual currency.
Assuming the value of Bitcoin were to stabilize and it became a transactional currency, governments would never allow Bitcoins to be universal for the reasons stated above. Should Bitcoins usage grow and be used by a wide number of people to escape control of the state, governments will either ban it or make it so volatile that participants will dump it.
In the world as we know it, fiat currencies will continue to be the main transacting money. In the best of cases, Bitcoin might become a secondary currency for online transactions where high costs exist. One might argue that it is Gold and Silver that are in danger of losing their appeal for Bitcons. However, Gold and silver stood the test of time, they have a long history of being accepted as a store of value for apocalyptic times and it will be very difficult for Bitcoin to change that.
Should the world become lawless and governments fall, gold and silver (which are currently used as a store of value) will return to their original purpose, as trade currencies, and Bitcoin will be eradicated. Furthermore, as fiat currencies crash and the banking system collapses, governments will undoubtedly increase their interventions and eradicate Bitcoins to save the current system. Gold/Silver will stay the ultimate apocalyptic currency.
Usually after anarchy comes dictatorship and dictators like to handle things. They will surely not allow Bitcoins for transactions.
The future is uncertain, Bitcoin’s price might go from $1000 to $10 000 but one day it will collapse. Ask yourself, do you prefer to have Gold under your mattress or Bitcoins on your hard drive?