The Internet model of decentralized, networked computing to provide communications and other services fairly openly to all comers raises the question of whether a currency of its own could apply similar principles and thereby benefit users. Bitcoin is one such alternative currency, and regardless of whether it survives, it may be illustrating the future of money.
Centralized Currency: Dollars Worth Dirt
Most of us are quite familiar with standard currencies: dollars, euros, yen and so on. These currencies are controlled by governments and central banks (which organization is controlling which is open to debate), meaning their value can be, and often is, manipulated to the benefit of these organizations. For instance, a government that is deeply in debt (take your pick of western nations) has much to gain from an inflating currency, extremely low interest rates and so on. Furthermore, these conditions encourage even greater debt, compounding the problem.
In the U.S., the currency is issued by the Federal Reserve (just look on any dollar bill), which—despite its name—is a private organization. (Whatever you may think of Alex Jones, he does a humorous job of establishing this point in a YouTube video.) Unfortunately, only recently has the push for an audit of this central bank gained momentum. The lack of transparency is particularly disturbing in a regulatory environment that winds truly private financial firms in reams of complicated rules. And because U.S. residents are all but required to use the dollar as a means of currency, either by force of law or by lack of an alternative, they have few options to escape a rigged system.
These seemingly far-off dynamics cash themselves out for consumers and businesses in the form of higher prices for goods and services. No, maybe Ferraris aren’t shooting up in price, but food, energy and other products are. To be sure, not all price dynamics are the result of currency values, but the near historic highs of commodities such as gold and silver suggest that currency is a major part of the problem.
In a late-1980s song, Don Henley said, “If dirt were dollars, we’d all be in the black.” Unfortunately, if dirt were dollars, dollars would be worth dirt. Everybody would have plenty of it, so no one would want more of it—hence, it would have little or no trading value. The same problem arises when a central bank prints money and dumps it into an economy: the value of the currency drops.
Trying to Solve the Problem: Bitcoin
So, what does the Internet have to do with it? The Internet is a largely decentralized computing network. Hubs of computing power exist, to be sure, but taking down one or two hubs (say, a couple major data centers) doesn’t destroy the entire network. The more distributed and decentralized the arrangement, the less power any one group or individual has to control others. The result, ideally, is greater freedom and more transparency. Bitcoin is an alternative currency that seeks to offer these benefits.
For an introduction to Bitcoin, see this short YouTube video, as well as bitcoin.org. (For some additional succinct introductory discussion, see this and this video.) Bitcoin is traded peer to peer, eliminating the “middle man” of banks—including the associated fees and reduced privacy. The code is also open source, allowing an “audit” of the Bitcoin system by anyone with the will to investigate it. Furthermore, the lack of centralized control means that the currency cannot be manipulated for political reasons; neither can causes or organizations that lack political favor (e.g., WikiLeaks) be harmed underhandedly through blocks by government-related financial institutions (e.g., almost any bank).
Bitcoin has an ultimate limit on the amount of currency in circulation, so its supply is more dependable than national currencies like the dollar. Its value is not, however, tied to a commodity like gold or silver; some may appreciate this fact and some may balk at it. At a minimum, it is no worse off than dollar bills, which are essentially pieces of paper that have no other use. (Value may be in the eye of the collective beholder, but gold does have some uses, such as in electronics; try using a dollar bill for something other than payment.)
Like other currencies, Bitcoin has a relative value compared with dollars, euros and so on, and it can be traded in the same manner. In February, Bitcoin traded at an all-time high greater than $33, although it has a spotted history, having been valued at only about $3 in 2011.
What’s Stopping Bitcoin?
Why do you use dollars instead of, say, euros at your local grocery store? Your first thought is likely that you use dollars because the cashier would give you a funny look if you handed over euros to buy your groceries. The same problem stifles alternative currencies like Bitcoin: to be used, they must be accepted by both parties in a transaction. Bitcoin has yet to see wide acceptance, and its use in less than savory transactions makes it a target of government regulators—to say nothing about its legal status per se.
So, your company probably can’t build a data center today using just Bitcoin. Furthermore, whether this particular currency will be around in 10 years is uncertain. Nevertheless, Bitcoin’s moderate success so far illustrates a demand for a currency that avoids the problems of the dollar (and other national currencies) by offering privacy, an open system, greater freedom and no government manipulation.
Certainly, other broad alternative currencies (i.e., those that are useful beyond a single retailer, unlike Amazon’s “Coins”) will arise as competitors. A natural objection would concern how everyone should deal with all the different currencies. For one thing, this concern is less problematic in the digital realm compared with physical currencies: you don’t need to go to a trader, stand in line, then hand over one currency to receive another. The prevalence of computing power and Internet connectivity should greatly ease currency conversion, ideally anyway. Another objection is that Bitcoin and similar currencies lack government oversight. But is that really an objection? The steadily declining value of the dollar under the U.S. government and Federal Reserve provide a stark alternative to a decentralized currency.
To be sure, alternative currencies like Bitcoin have a long way to go to build a strong, lasting foundation in the economy, but their existence should pique the interest of both individuals and companies. Specifically, such currencies could offer the kind of financial privacy that has all but evaporated from the current system, where the IRS and other federal agencies are constantly snooping in citizens’ business, regardless of what the Fourth Amendment to the U.S. Constitution says. They may also be a means of avoiding manipulation by central banks, whether public or private. And organizations providing services that have fallen out of political favor would not be subject to financial sanctions that don’t involve adjudication in a court of law. The Internet has revolutionized communication, shopping and so many other things, bringing greater freedom and accessibility around the world—adding currencies to that list should be no surprise.
Image courtesy of zcopley