Tuesday, June 7, 2011

Bitcoin as an Electronic Currency

v 0.3.5

Since I started posting about Bitcoin, the traffic through this Blog as increased substantially.  Obviously this reflects the interest in Bitcoin, but I can't help thinking it is there for the wrong reasons.  I could almost compare it to what I've read of people's reactions to Gold Rush Fever, as it were.

Now, a Gold Rush is famous for making people rich, however all too often those being made rich were the merchants, rather than the prospectors, and it is looking the same today.  My most popular page, by far, is the description I wrote as to how to set up solo mining on Windows 7 and an ATI 6970 video card.  Yes, you will make a couple of hundred bitcoins a year with a medium setup, but that will not make you rich.  I'd classify it more as an entertaining distraction.

Another thing that concerns me is the rapid rise in the value of a bitcoin.  That has all the hallmarks of a bubble, and people are going to get burnt.  Hoarding the bitcoins for speculation CAN work, but can also burn you seriously.  If bitcoins become common as a currency then yes, over time they will inevitably rise in value, however once people start hoarding them, the "Bitcoin Landscape" becomes distorted and the instability starts again.  This instability is the opposite of what people are looking for in a currency.

Now, where does Bitcoin fit in to the money definitions?  If you read on Wikipedia as they talk of "Fiat Money" and "Comodity Money", then Bitcoin has characteristics of both.  It seems to be closest to a Banknote in definition, which then means that the stability of the Bitcoin network and encryption are the make or break characteristics.

Now, I readily admit I know little about the Bitcoin setup and I don't have a finance background, however it seems to me that Bitcoin, whilst a good concept, and apparently well thought out for the moment, still has a way to go before it can be considered a success.  It is essential that its network integrity is maintained, and it is readily apparent that its encryption needs to keep pace with the times.  What is unbreakable today is not tomorrow.  It needs continual work to stay secure and trustworthy.

So to those who think this is the magic bullet that will solve their money worries - no it is not.  You can make a substantial amount of money from Bitcoin, but only by working at the business like any other.  Yes, speculation MIGHT make you money, but more probably it will lose your money.

So there you have it, Bitcoin MIGHT work but it is early days yet and lots of holes to jump over ....


Later ..

Update:
Here is a discussion on Slashdot about Bitcoin, including just what I was concerned about above .. "the Bubble".  It appears that there was perhaps a bit of manipulation of the value over the last couple of weeks ..
Slashdot on Bitcoin

Update 2:
Bitcoin Price Crashes (Slashdot)

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