Do Bitcoins Dream of Electric Currency?
In today’s age, most would not bat an eye at the idea of immaterial currency. We do it every day. We swipe our debit and credit cards routinely. Paypal has become amazingly popular in recent years, adding a strictly internet-based form of creating transactions. All of these options, however, have a single concept in common. Each is tied to a form of currency, be it the dollar, euro, yen, rouble, what have you.
Bitcoins | What are they worth?
As of now, the major global currencies have no real intrinsic value, meaning that the currency itself, it not worth anything. The paper that a dollar is printed on is worthless, but a dollar is worth a dollar, so to say. Why is this so? You may ask. We add value to these currencies based on the obligations we hold to each other in an economy. Money, currently, is a promise. When exchanging currency, we promise to fulfill our legal and monetary obligations we hold to one another. These promises are incapable of being dodged as they are regulated by governments and banks. As our obligations, as a whole, increase with our labor and production to each other. gold, silver, and other objects with intrinsic value, are finite resources. They cannot keep in step with the ever-increasing needs of a large economy.
Bitcoins | Price
In 2011 we saw the first spike in price, settling around $15. By the end of 2011 price fell to $8, then we saw incremental growth until this year. In 2013 we saw prices jump. On The Economist, this graph in a Bit expensive shows a correlation between $ per Bitcoin and Google searches for “Bitcoin” following similar trends.
What is Fiat Money?
The dollar and other major currencies are called “fiat money.” The word fiat comes from latin, meaning “let it be done” or “it shall be.” It’s fitting as it is given value from an auxiliary source. The powers that be are basically decreeing that these notes are valuable.
Confused yet? This video may help explain in better detail:
Where do bitcoins fit into this scene?
Bitcoin is a strictly intangible currency, meaning there are no bills or coins in existence and exchanges are made entirely through peer-to-peer services. As the money has no corporeal form, it is intrinsically fiat money. The large difference between bitcoin and other forms of currency lies within where the decree of value originates. Bitcoin is not regulated or printed by any central bank or government, therefore, the value of the money is determined entirely by those who utilize it. As it grows in popularity, demand increases, increasing its value. While independent from banks and governments, it is still subject to the economic principles of supply and demand. This proposes situations where people with malicious intent can request payment in bitcoins without the government being able to oversee the “money trail” and we recently saw this with a very nasty ransomware called Cryptolocker.
With no central authority to regulate the production of bitcoins, what is to stop users from printing infinite amounts of it, and therein, debasing its value?
Bitcoin uses a decentralized network of computers running what is called a “bitcoin miner.” It is a free-to-use application which keeps track of all transactions, preventing double-spending. A public record is kept, known as the Blockchain. It keeps track of how many bitcoins are in circulation, who owns them, and the participants in each transaction. Computers dedicated to solving the cryptographic puzzles created by the Blockchain are rewarded with newly minted bitcoins. The Blockchain also generates new revenue at a predictable rated, preventing miners from flooding the market with an infinite number of bitcoins.
As more bitcoins are created, the puzzles to solving the transaction in the Blockchain become increasingly difficult, requiring more and more resources (translation: expensive computers) in order to operate. The rewards for miners are also halved at regular intervals. Currently, production is set to end at 21 million bitcoins.
The benefits of bitcoins are numerous. A user’s account cannot be frozen as there is no central authority to do so. Users do not have to go through an intermediary like a bank in order to make transactions as they are done so through peer-to-peer services and there are no spending limits whatsoever. It’s something of a Wild West situation, but for money.
For more information, visit Bitcoin’s official website.