Bitcoin could screw you
There have been several attempts at creating an online-only currency, but they’ve never really taken off. The oldest electronic currency was e-gold, which took off in 1996 but is no longer an active currency. Digital Monetary Trust, 1999’s attempt, is similarly offline. To be fair, Ripple, Ven, Litecoin, Peercoin and Namecoin are all still around. Even if you’ve never heard of them. Bitcoin, however, has taken off in a big way recently.
Bitcoin got its start as a digital money system back in 2009, and is finally getting some recognition from the financial world. Just last week, the Chicago Fed put out a letter specifically on Bitcoin. Meanwhile, Ben Bernanke, chairman of the Federal Reserve Bank, lent some support to the currency in a letter to Congress, stating that although the Fed doesn’t have the authority to supervise or directly regulate e-money systems, they may hold long-term promise “particularly if the innovations promote a faster, more secure and more efficient payment system.” Essentially, as long as e-currencies remain independent, the Fed will continue to monitor them, but cannot directly affect them. However, Bernanke writes that “the Federal Reserve plans to work with other FFIEC member agencies on electronic cash and related issues such as virtual currencies, as needed, for banking organizations.”
The Chicago Fed’s letter, while similar in tone, was mostly background on what a digital currency is, what Bitcoin is, and how it works. To summarize, digital currencies are like paying real money for virtual monopoly money that you can use in some places, although you never actually have real proof that you own said monopoly money, because it exists only through the Internet. So maybe it’s more like paying real money to get video game money.
Most of the concerns about digital currencies stem from the fact that they are fiduciary. A virtual currency doesn’t exist in physical form, and therefore can easily be duplicated. Bitcoin, however, solves that problem pretty easily with basic medieval bookkeeping. Another problem with e-currencies is the ease with which one can use them to purchase goods and services that would be policed otherwise. Because this is the Internet, you can obviously use e-money to buy drugs, prostitutes and murder.
But all of the interest in Bitcoin and other virtual money systems is derived from the idea that money should not be controlled by the state, but rather, its production should be in the hands of the private sector. You can blame Friedrich Hayek for that.
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The Chicago Federal Reserve letter ends with this: “So far, the uses of Bitcoin as a medium of exchange appear limited, particularly if one excludes illegal activities.… People bet on Bitcoin because it may develop into a full-fledged currency. Some of Bitcoin’s features make it less convenient than existing currencies and payment systems, particularly for those who have no strong desire to avoid them in the first place.… Should Bitcoin become widely accepted, it is unlikely that it will remain free of government intervention…. That said, it represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions or even by governments themselves.” This is all just the Fed’s way of telling us that Bitcoin is not likely to ever take off on its own, so don’t bother buying the stock.
Stephen Foley of the Financial Times believes that Bitcoin ought to learn from the fall of e-gold, but at the same time, e-gold was at least able to reimburse users when it crashed.
At the time this piece was written, Bitcoin’s stock was at 1034.20, which is down 15.31% from Friday’s high of over 1200 points, and it continues to drop. Things are still looking alright for Bitcoin, but I wouldn’t count on that lasting much longer than the Cyber Monday sales.