Bitcoin is the digital currency that thrills nerds, inspires libertarians, and incites the passions of economists who debate the value of money made from nothing but ones and zeroes. Alternative currency startups are being funded by venture capitalists while visionaries gush about the world-changing possibilities of money free from government control. Silicon Valley is the natural center for Bitcoin mania. An advocacy group named Arisebitcoin recently put up 40 billboards. around the Bay Area with messages such as: “The Revolution has started … where do you stand”.
As with an actual precious metal, Bitcoins are in limited supply—they must be “mined.” Unlike with precious metals, this mining is done purely by computer. Miners set their machines to run a series of complex calculations that tally up and certify all the transactions of other Bitcoin holders around the world. If the miner’s computers complete these calculations and solve a complex mathematical puzzle before anyone else, he earns about 25 Bitcoins as payment. It’s a nice haul: With the price of each Bitcoin nosing up near $1,000, that’s $25,000 for 10 minutes or so of work. For the moment at least, miners are the rare grunts who can also get rich. Over the past six months the price of a Bitcoin has shot up, dived, shot up again—and kept on rising, making Bitcoin mining one of the most frenzied corners in technology.
What would be the result of globally implementing a crypto-currency both in terms of the effect it would have on exchange rates as well as the effect it would have on monetary policy given that the supply is controlled only by a computer program.
Source: The Economist, January edition.
6 Comments
What makes a “currency”? – dollars after all are also in short (finite) supply. We need to think about “money” and its role. What would need to happen for something to be useful as a means of transaction? Is Bitcoin a good store of value – what is its variance relative to (say) the CPI? Could a company keep its accounts in Bitcoin?
My sense is that on all three accounts Bitcoin falls short – it is not money, merely a faddish commodity that (unlike gold) has absolutely no uses. In that it’s inferior even to paper money, which can be used English-fashion to wrap your fish and chips, or (pre-1951 Chinese fashion) to cover up chinks in your apartment.
I heard a story about someone, who bought a lot of bitcoins a few years ago, making a fortune by selling bitcoins at higher value. It can certainly be a way of making money.
I am not sure whether bitcoin can be a new global currency or not, but I am not going to use it for sure. It can be used as “internet or computer version of cash” that can be used online, but I do not think it should be used as dollars or any other forms of money that we use in real world.
Bitcoin values are way down from peak – it’s also a great way to lose money.
For my analysis see Beanie Babies for Billionaires. (Oh, and as a courtesy to the prof please follow my Autos and Economics blog!!)
Bitcoin is not the only digital currency. Dodgecoin whose wikipedia page claims is a better alternative to bitcoin since bitcoins were originally used in online black markets like “the silk road.” I wonder how many digital currencies if any the world will have in 5 years.
I think the black market point is strong. Currencies that can be used to purchase illegal things in an inconspicuous way certainly have value. One of the strengths of something like bit coin is its separation from any institutional value. So long as it promotes itself as a form of untracable form of exchange it certainly serves a facet of the economy. Whether or not there is a sizable enough market to allow the bit coin to be stable enough so consumers are willing to exchange it may be the real question.
To coincide with the prior post, a currency not tied to a person can be used in many ways but now we know this is no longer needed for marijuana in the United States. This progressive movement offers up to a quarter ounce of marijuana to non-state residents and up to an ounce for in-state residents per day. Some casinos in Las Vegas now accept bitcoin as a form of currency or cash. Its volatile nature throws many red flags but many have made money off of this faddish phenomena in recent years, though many in a furtive and illegal nature. I like making money as everyone else and if it works, it works. If it promotes business and consumption, as a fellow Las Vegas frequenter might say, “Let it ride.”
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