Monday, October 10, 2016

Bitcoin



Bitcoin is the original cryptocurrency gaining in popularity.  It has no central point of authority, and nothing backing its redemption.  Here are a few informative videos:

How does Bitcoin work?

What are the qualities of a good currency?

Bitcoin vs. the Federal Reserve:

Now, what are some of the economic concerns?  Could bitcoin go mainstream, or is it likely to just remain a component of black market transaction?  Since there is no central authority, it could never be used to affect monetary policy.  Is having a digital 'gold standard' better than a central fiat currency?  What about legal tender laws?  Also, bitcoin will not be inflationary within a few decades; is that a good for growth, or is it likely to end in failure?

Also, I have a small amount of bitcoin I would be willing to share.  If anyone brings a bitcoin wallet to SWEET, I would be happy to get them set up with some bitcoin and start transacting!

4 comments:

  1. Economic concerns: how would it be regulated worldwide or by country? what becomes of debt when it comes to bitcoin, i feel like bitcoin is not very likely to go mainstream because it doesn't really have anything backing it and this could bring some concerns for individuals. I think it's also difficult for people to understand what is truly going on when it comes to bitcoin because it requires a lot of math and shuffling around of numbers in order to i.e figure out a transaction cost and it isn't as reassuring as the dollar system is. I think Bitcoin could be positive because it is a universal currency, but it also comes down to how much value people are willing to put into bitcoin for it to surpass the dollar currency.

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  2. Economic concerns of bitcoins center around regulations. Another concern that it brings up is how fast it gains popularity. As stated in one of the videos, the US dollar is losing is value. If bitcoins continue to increase, the US dollar will continue to lose value. Bitcoins seem to be an efficient market, but not everyone can participate. Due to the nature of the industry, accessibility is limited to only those with Internet access. There are less than half of the worldly population who have Internet access, and thus a majority of the world are unable to participate in this system. I personally think that bitcoin will not be mainstream, due to lack of centralized control. Bitcoins, as stated in the first video, work on a faith-based system. People are not always trustworthy, so this could be unappealing for those with trust issues. Other than Internet access limitation, bitcoins are not as simple as day-to-day monetary transactions. The bitcoin system requires more math skills and critical thinking. I would say that having a digital 'gold standard' is better than a central fiat currency, but it definitely has its downfalls. Bitcoins check off the four important qualities of currency, in that it stays valuable, has a limited supply, is divisible, and portable.

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    1. I think the previous posters had some good points. However, at this point, I think that arguments against Bitcoin based on “faith” don’t seem particularly germane. As far as I understand, nearly all currencies are "faith"-based. The United States' gold holdings are about 4.5% of the currency in circulation. The U.K.'s gold holdings are about 4%. In comparison, Mongolia's gold supply is 5% of its currency, and they are one of the few countries trying to ramp up their gold holdings. Even then, Mongolia's currency's value boils down to whether or not we trust it to be worth a goat, gallon of milk or a car. Given this, I see very little difference between any national currency and Bitcoin.

      As far as the idea that Bitcoin is designed to be non-inflationary, I don't really have a problem with this. Bitcoin, being digital, is divisible to the upteenth decimal place and can be divided well beyond a millionth, the current smallest division of a Bitcoin. This is important because limits on the number of Bitcoin in existence will drive up the value of Bitcoin as the currency is adopted by more and more people. It wasn't even a decade ago when an early adopter of Bitcoin traded in 10,000 Bitcoin for 2 pizzas. Currently, a bitcoin is being traded for over 600 dollars, and it continues to appreciate each year. That said, I think there are some advantages to inflation. We focus a lot on the fact that our money devalues itself in the long run, but it means we need to keep creating wealth. This is not a bad thing as it keeps money in the system and people innovating.

      The one issue I see is that the U.S. government doesn’t like the existence of alternate standard currencies. Just as the online gold-backed currencies of E-gold and GoldMoney failed after being prosecuted under a loose interpretation of the U.S. Patriot Act by the federal government, it is likely that the legal system will be brought in to suppress Bitcoin. Further, one of the basic premises of Bitcoin is the system that distributes Bitcoin is based on calculations and is limited by the cost of powering the computers which generate the answers to these calculations. However, what happens when a government decides to use cutting edge supercomputers with near infinite kW-hrs of power to mine Bitcoin? Any Bitcoin held by a hostile party can be used to create Bitcoin market instabilities, and generates doubt in the value of Bitcoin.

      I don’t know enough about Bitcoin to have a strong opinion about the currency, but I see no problem with its continued use and adoption. If anything, I think that it is an interesting test case for a future where paper currency is replaced by digital currency.

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