Bitcoins are a little hard to explain. The idea of fiat currency is that dollars (or pounds, yen, whatever) have value more or less because the government says so. There’s no intrinsic value to the money. Same basic idea with Bitcoins, except that instead of being backed by a government they are backed by… nobody.
But they are set up in such a way that you can’t really forge them. You have to get your computer to solve a really, really complex problem (taking months of computing time) in order to “mine” a Bitcoin, and there will only ever be 21 million in existence. They are divisible down to 8 decimal places, however, so 21 million will be plenty for the foreseeable future.
You can’t buy a lot with Bitcoins these days ’cause most places don’t accept them, but some do. This got people all excited a while back and speculation led to a 60,000% increase in price (measured vs. good ole USD) and then a corresponding crash. But the market recovered. More recently, the FBI raided Silk Road (a black market that uses Bitcoins) and the market crashed again. But not that much. As Sam Volkering notes, the all-time high was $230 (for one Bitcoin), and the market was about $140 when the Feds shut down Silk Road. The price of Bitcoins fell, but not below $100.
Volkering’s point, and I think it’s a good one, is that if shuttering the #1 outlet for Bitcoins doesn’t totally devastate the value, they might have some real staying power. Of course, the Feds haven’t really targeted Bitcoins directly, and I’m not sure they would survive. There are a lot of advantages to digital currency, but the whole point of Bitcoins is that they are anonymous and untraceable. No government in the world is going to be comfortable with that proposition.
I am completely mystified by the allure of Bitcoin. I understand the *theoretical* excitement of working with a digital quasi-currency untethered from The Man. In practice, though, they seem like a terrible idea.
If you’re, say, the Dread Pirate Roberts, Bitcoin makes a lot of sense: you need an end-run around the banking system so as to easily and (sorta kinda) anonymously skim your cut from Silk Road’s $1-2 billion in transactions. But if you’re a drug seller or buyer, or just generally someone who doesn’t want to leave evidence of a transaction, fixed-price government-backed cash makes far, far more sense.
Here are piles of $10,000, $1,000,000, and $1,000,000,000:
https://images.angelpub.com/2011/30/9664/one-billion-in-cash.jpg
$10k weighs 3.5 ounces, costs less than a dollar to ship First Class via USPS, and can be dropped in any old public collection box/left in a neighbors mailbox/etc. PLUS (and most importantly for any functioning currency), $10k today is actually worth…$10k tomorrow! And the next week! And the next month!
The real promise of Bitcoin seemed to be that sellers wouldn’t have to interface with buyers. Of course as we’re seeing in the Silk Road aftermath, sellers still needed shipping addresses for delivery. And -completely predictably- it turns out the most prolific sellers not only kept meticulous records, but didn’t encrypt them such that they’d inaccessible to government computer experts.
But even if the sellers kept no records at all and committed religiously to security/anonymity best practices, there’s STILL the issue of sniffing out or being otherwise able to trace the origin/destination of Bitcoins between Bitwallets (Bitpurses? not sure on the lingo).
Not so with cash!
Here are some advantages of Bitcoins:
1. Untraceable and anonymous. This is good for criminals, the paranoid, and anyone who wants to evade taxes.
2. Genuine digital currency. This is actually a much bigger deal, and economist Mile Kimball has written extensively about the way that an all-digital currency could have significant economic advantages, to the point where he’s an advocate for good ole government-backed, fiat currency that is digital. (I haven’t read his stuff thoroughly, but it’s easy to see that a lot of problems created by price stickiness would go away if the money was infinitely divisible or the practical equivalent thereof.)z
3. Kind of an addendum to #2, but there’s also the idea that it would be much, much easier to actually use. Right now our systems for exchanging currency are actually rather painfully archaic, if you think about it. There’s no simple way for me to just tell my phone (or whatever) “Hey, given Galen $5” and have it happen. You can kind of / sort of do that with PayPal or credit card companies, but it’s really rudimentary and they take a slice. Bitcoins, in theory, could exist in an environment where everyone has all the premium features of Paypal / Visa / Mastercard rolled into one package and it’s free.
4. Speculation. Speculation is a big one.
So there’s a mix of good reasons and silly reasons, but some of the good reasons are actually quite legitimate.
I actually read one of Kimball’s pieces on digital currency at Quartz, and his primary argument actually isn’t about price stickiness or infinite divisibility (as I had assumed), but rather about the ability for the Fed to set negative interest rates.
Check it out: http://qz.com/21797/the-case-for-electric-money-the-end-of-inflation-and-recessions-as-we-know-it/
Since the Fed doesn’t operate with Bitcoins, that advantage probably doesn’t apply. But the idea of a digital currency is still a good one.
Oh, and I forgot to mention that some serious libertarians actuallylike the idea of more competing currencies, so there’s that too.
Yeah, I was going to say the upside of digital currency is that you can do helicopter drops…without the helicopters! Which, while way more effective, is way less cool :(
I agree that cash is incredibly stupid. It’s ridiculous that we have to trudge to a machine and take some paper out, just to fork said paper over to someone else, who then trudges to another machine and feeds it right back into the system…for a fee on both ends! And it’s all based on digital ledgers anyway!
I think Bitcoin is a really cool idea. But the wild swings in value seem like a crippling bug, and not a feature that you want intrinsic to your system of exchange. Which isn’t to say we can’t learn from Bitcoin, but rather that this just seems like such an insurmountable psychological/logistical barrier as to forever prevent adoption outside of the hobbyist community.
Then again, I guess that’s what they said about taking the dollar off gold! :)
The huge swings are unquestionably a bug in the long run, but the point of the article I posted is that it’s actually reaching something like stability. Dubious. But, if true, very important.