This week, I would like to share with you some thoughts of the new online currency ‘Bitcoin’. Bitcoins are strings of encrypted code which are processed and calculated by computer which are connect to each other with a specific software which does not only function as a pool of calculate Bitcoins but also as a digital wallet.
To make it simple, you can buy and sell Bitcoins to real currencies such as US Dollars or Euros. If the shop you are buying something or the person you pay for his or her services accepts Bitcoins, they function as a real currency. Instead of transferring Dollars, you transfer the equivalent amount in Bitcoins. The metaphor of a digital wallet holds true especially because you do not need to register anywhere and when you pay it just shows that it has been transferred from a certain Bitcoin account but there is no proof of identity. Somewhat like if you go to a shop and buy something. The owner sees your face and your wallet but because you pay in cash there is no way he knows who you are. This is, of course, one of the points that make Bitcoins both interesting and dangerous (according to several governments).
Bitcoins are not connected to any particular country or bank and therefore are not governed. Due the anonymity, Bitcoins might be used to pay for cyber crimes and other illegal activities. That is what our country representatives say. Then again: Isn’t it the same with cash? Using Bitcoins scares governments because they don’t have any direct influence on it. Too bad, ha? When Wikileaks is the true journalism and Anonymous is the true voice of the people, Bitcoin is the true currency of the people.
From an economic point of view, it is also very interesting but not new. A currency (even though virtual) works if trust and acceptance is there. The more shops accepts Bitcoins, the more stable will the currency be. Additionally, Bitcoin is not linked to something like Gold (compare: US Dollar) or to the US Dollar (compare: some Asian currencies) but to the mere fact that at some point there will be no new Bitcoin anymore. At the current data, you can set up serves to calculate new Bitcoins (with the ‘Waller Program’) which is like working. Your computer works and if it generates a new Bitcoin it is yours. You just spent electricity and computing power. Because it is limited, it is more stable then if unlimited Bitcoins could be generated. No inflation by overload of currency is possible here.
At that point I always like to mention the ‘Beer Economy’ which is colorfully described in one of George Soros’ books. Some Pacific island group I think, came up with a new style of economy because the currency they where using up to that point was rendered useless. So they traded everything. To have a measure what is worth how much, they linked everything to bottles of beer. For example: a sack or rice is worth 5 bottles of beer. A loaf of bread is worth one bottle of beer. So five loaves of bread are worth one sack of rice. The Bitcoin works similar even though you cannot drink a Bitcoin (beer 1:0 virtual currency).
If you ask me, I hope the currency is sustainable enough. I hope it works the way it is supposed to be and offers a viable alternative to other ways of methods of payment. Last week was a good point of getting started, when the Bitcoin dropped from over 40 US Dollars to 29 US Dollars each…