Monday, 7 April 2014

Bitcoin – Geek’s Gold

Geeks use technology to make things better and may be close to coming up with a better form of money

The rise of Bitcoin has been as meteoric as its price.  Your Neighbourhood Economist had dismissed the phenomenon as a fad but decided to take more notice after even my recently retired father showed an interest.  The best way to describe Bitcoin to my father was like geek’s gold – a new form of money for techies who no longer trusted traditional forms of money (even though there are other reasons for holding bitcoins).  Bitcoin’s surge in popularity is a sign of a new era of abundant computing power coupled with feckless printing of new bundles of regular cash.

Bitcoin is a type of digital money where each bitcoin is a piece of complicated computer code.  The Bitcoin system operates so that bitcoins only increase at a fixed rate – new bitcoins are given to individuals who maintain a gigantic ledger which keeps tabs on the entire history of all bitcoin transactions.  This setup allows for a public record of transactions to ensure that nothing goes awry while allowing access to bitcoins without going through a central dealer.  This is all made possible through the freedom of the Internet and masses of computing power.

Boom and bust of a gold rush

The key to forming any new currency is that people believe in it as something of value.  A bitcoin was worth less than one dollar in early 2011 before a steady rise to just over 10 dollars by the end of 2012.  It was in 2013 that the price of bitcoins exploded, reaching a record high of 1,242 dollars in late 2013.

One reason behind the dramatic rise of Bitcoin has been that it is relatively difficult to track down the individuals who use it.  Users are known through a Bitcoin address which allows for a high level of anonymity compared to a bank account.  This aspect of Bitcoin makes it popular with those who obtain cash through dubious sources and wish to remain undetected.  Once Bitcoin had shown that it could at least hold its value (with a steady, if not rising, price), it attracted the attention of people with money to hide.

The relatively long period (in terms of technology fads) during which the price of Bitcoin rose sparked a surge in interest from speculative investors.  The quest for a quick buck lifted the price for bitcoins beyond what was sustainable with bitcoins trading below 500 dollars in early April.  Bitcoins are likely to continue to have a volatile price but the price variability will probably decrease over time as bitcoins are used in more transactions.

Money doesn't grow on trees

The key driver for interest in Bitcoin is as an alternative to the normal notes and coins type of money.  The relative ease and lower costs of online transactions make it popular with people that buy and sell via the Internet.  However, Bitcoin has been thought of as something more.  At a time when central banks are printing a deluge of new cash, Bitcoin is seen as a form of money that is not overseen by a profligate governing body

The number of bitcoins can only increase by a fixed amount over time whereas it is possible for a virtually endless amount of notes and coins to be produced.  For techies that are always dreaming up new and better products, the case for a new type of money must have seemed a no-brainer.  Limited and always sought after, gold has typically been the main option for investors worried about excessive expansion of the money supply.  In this way, Bitcoin could be considered gold for geeks.

While gold is an out-of-date (but still valuable) form of money, Bitcoin is a potential model of how money might be in the future.  Despite only being accepted in a few offline locations, over-the-till payments with bitcoin are now possible using mobile phones.  So digital currencies could become commonplace although Bitcoin itself may not last the test of time.  A limit to the eventual number of bitcoins could prevent its spread into the mainstream.  Yet, alternatives may be created to build on the concept. 

It just remains to be seen whether digital currencies will be the latest tech fad to go from geek to global. 

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