I don’t think the US dollar is about to become worthless, I am not worried about hyperinflation in the near future, and I don’t have a bombshelter filled with canned goods in my backyard – but, nevertheless, I have become interested in Bitcoins, the electronic currency which first was issued about 3 years ago, and I think it is fascinating. Here’s why.
So writes Mike the PhD Guy (http://investmentquant.com) in edited excerpts from his original article* entitled Bitcoins and Gold.
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The article goes on to say in further edited excerpts:
Basically the idea is that:
- there are only a small number of Bitcoins in circulation,
- the number is never increased
- the currency is not controlled by any national government, so there is no incentive to use monetary policy to achive any goal.
While gold always suffered from a number of drawbacks, including the fact that it is hard to carry around, and its use as currency detracts from the ability to use it for other purposes (e.g. jewelry), Bitcoins face no such obstacle. So assuming you don’t believe monetary policy to be a useful activity for stabalizing the economy (I do think it is useful, but that’s irrelevent here), then Bitcoins could actually be a good idea. Nevertheless, it seems to me that since there are a fixed number of Bitcoins, as awareness of the currency grows, you face the same problem that you do with all other investment assets; namely instability in the value of the asset.
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Bitcoincharts.com shows the value of bitcoins over time, and it appears to be accelerating which may suggest that Bitcoins are entering a valuation bubble. This bubble need not burst right away, nor does it matter that the Bitcoins by themselves have only the value others assign to them (for example, the Dutch Tulip Bubble was relatively long lasting and built on assets with virtually no value other than that assigned to them), so the point is that Bitcoins may end badly for those who aren’t smart enough to get off the Bitcoin train early. Bitcoins should in theory only rise in value at the rate of growth in the money supply, but currently they are rising much faster.
The other interesting thing about Bitcoins, from my point of view, is the security involved there.
- Can hackers simply go online and counterfeit additional Bitcoins?
- Can they break into a Bitcoin “bank” or exchange and steal other people’s Bitcoins? Presumably the institutions trading in Bitcoins lack the resources of major US banks, and so in theory they should be much easier targets. Yet, just yesterday Wells Fargo announced that their bank website was attacked and the site went down for hours thereafter. Similar attacks have crippled many other banks and financial institutions in the past.
- How can a small institution with a very limited IT budget protect the Bitcoins it trades for others?
- For that matter, what’s to stop someone from hacking into my personal Bitcoin account and stealing my Bitcoins?
I’m sure there are answers to… [the above] questions, but I haven’t seen the issues written about anywhere yet. If there are no answers, [however,] I hope whoever is “in charge” of the Bitcoin monetary regime is thinking long and hard about these issues.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
Bitcoin is the first peer-to-peer (P2P) digital currency and payment system to gain significant interest. This month its marketcap surpassed $1 billion. [Below is a description of what Bitcoin is, and isn’t, and why it has caught on to the extent it has.]