Bitcoin is a new currency that has taken the web by storm.
There are many touting and decrying it, and most doing so are missing the point entirely.
This new currency based on ancient ideas will win the world, and here's why.
There have been many currencies that have risen and fallen throughout history; they all rise and fall for the same reasons.
No currency has intrinsic value (due to all market value being subjective);
in every case money is only an easy to carry placeholder for something of real value*.
Throughout time, that was usually some commodity; eventually gold was settled on due to its easy subdivision and high scarcity.
However, these placeholders were (and are) always done in by fraud.
Many (banks, usually) would issue more placeholders than were warranted by their wealth on hand, and somebody would get wise.
Such would result in a hiccup in the economy whilst all goods are revalued;
Or if such is disallowed, thanks to price controls or other coercion, the whole system would collapse in a crisis of confidence.
The reason this fraud (fractional reserves) occurs is because people forget that money is not wealth.
An increase in the amount of money in circulation does not make you wealthier, as such is simply a claim on said wealth.
More claims just means the share of the wealth is now redistributed towards the party which holds the new claims.
So, keeping this in mind, why will bitcoin succeed over the modern fiat currencies?
First, there is no technical reason that the transfer of bitcoins will be any more difficult than that of the other modern currencies.
All modern currencies are effectively digital currencies, as most of their outstanding supply is but digits on a ledger, which is no different from bitcoin.
This will allow bitcoin to achieve the high velocity needed to facilitate global trade; the volume of trades achieved in this early stage already reflects this.
Bitcoin can be used in personal transactions.
Bitcoin has Escrow services.
Second, it has many excellent advantages over the other modern currencies.
As all modern currencies are controlled centrally by governments through their quasi-private "central banking" cartels, the people have as much power over monetary policy as they do over their government (which is laughably small, even in the most advanced democracies).
As such, the government is capable of treating the savings denominated in that currency of said people like a piggy bank to be looted at the stroke of a key.
Bitcoin, being generated by the users themselves, and having a strict cap on the number of coins which can ever be in circulation, is immune to such depredation.
Supposing that bitcoins themselves continue to be traded (rather than markers representing bitcoins on deposit at some bank), we will not see bubbles and their resultant collapses.
Furthermore, due to being a cryptocurrency, it is trivially easy to evade income and wealth taxation using bitcoin.
Since bitcoin "wallets" are easily held and secured by individuals, one needs but to avoid banks and baliments to escape levies.
Furthermore, due to the transactions being encrypted, and the amount changing hands being known only to the transacting parties, valuation by a taxing authority is effectively impossible.
"Following the money" in bitcoins is practically impossible, due to the trivial ease and untraceability of laundering said bitcoins.
Like in Elizabethan Brittania, "every man will be master of his own valuation"**; and that sort of rules out the sort of leviathian states that are all the rage these days.
Finally, due to being peer-to-peer and encrypted, the ability of governments to shut down trade in bitcoins is severely limited.
There are only 2 ways that governments can expect to completely stamp out bitcoin usage.
The first is by forcing goods shipped in that country to verify it was purchased using their highly surveilled money; good luck doing that without world government, and even then the increase in transaction cost would be crippling to the economy.
Secondly, they could just shut the internet off forever. Such a remedy would be needed, due to the following factors:
- domain seizure of vendors (such as SilkRoad) can be circumvented by not using domains at all
- bitcoin traffic is indistinguishable from many other common online communications, so outlawing it is not feasible
- the needed software to use bitcoin will not be able to be suppressed, as it is open source, and the internet has a way of keeping such things around
Even then, those few nations that value free trade religiously (like Singapore) will not outlaw this, as they see it is a clear benefit to them.
The government will have to resort to extremely tyrannical and intrusive measures which will have very deleterious economic effects if it wants to stop bitcoin.
I see this as a plus, as there are several other methods of raising revenue that the government can resort to that are not obsoleted by bitcoin (such as poll taxes, tariffs and excises). Of course, the internet and globalism has struck a serious blow to both tariffs and excises, and most governments are loath to return to poll taxation (as it must be payable by all, and ergo must be low).
So, many governments will resort to such repression; but they will be overcome eventually by those that accept the fact that the days of huge revenues via coercion may be over, and shrink their government to a size that can be sustained by poll taxes and/or donation.
Now there are some speed-bumps and other hazards that must be avoided if bitcoin is to live up to it's full potential.
First, there is always the risk that the encryption algorithm protecting it from counterfeit (and hence it's scarcity), SHA 256, is broken at some date in the future.
Due to the projected computational difficulty of such a task, we do not expect such to be done anytime in the near future; but such will eventually become a concern.
Now, it is possible to simply add new and stronger algorithms to the bitcoin network; but the holder of bitcoins would be wise to upgrade to higher grade encryption at the first opportunity;
As when the lower grade encryption gets broken, transactions in bitcoins that have not yet been converted will likely not be accepted save for by the extremely foolish (probably a government).
Next, due to the convenience of escrow services and banking, we will likely forget once again that money is not wealth.
As such, we may start trading in markers representing bitcoins, rather than the coins themselves; then we will fall into the same banker-trap we find ourselves in today.
Finally, (and most importantly) the currency has not yet gained widespread acceptance.
Until a vast array of merchants accept it, it will remain but a speculative commodity;
However, due to the pros listed above, I think most will come around in short order.
We must always remember that "good money" always beats "bad money" in the competition for who gets the highest velocity of money, supposing no exchange controls.
Good money has the following qualities, while bad money does not:
- Easily subdividable
- Man portable
- Difficult to destroy by man and nature
Bitcoin has these qualities, and in ways that beat existing fiat currencies.
As such, it will quickly gain such momentum as to make the governments of the world tremble in fear, and the people of the world rejoice.
* Sometimes money is also something of real value, like gold. Then it's more of an extension of barter
which eventually becomes money.
** See Adams "For good and evil" pp 242-245