Bitcoin - Some Thoughts

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A couple of weeks ago, I chanced on a reference to "Bitcoin", perhaps in a Slashdot article.  I remembered that I'd seen something about it a few months ago and started to read some more.  Whilst it took me some time to "get my head around it" what developed was an interesting comparison with conventional money concepts.

Gold is next to indestructible and whilst you can find some, there is still a finite supply and it cannot be counterfeited.  Gold is gold.  By itself, gold is worthless - just metal - though useful for some industrial applications.  Gold's value comes from our collective decision to have faith that someone will provide us with trade for it.  It has developed into a universal currency because we have decided that it is reliable as a medium of exchange.

Bitcoin is the digital equivalent of gold. It is run by an open-source peer-to-peer network.  It can be transferred by email and that transfer registered with the network.  It has finite supply and can be manufactured (or mined) in accordance with the rules set by the network, and as a reward for taking part in the network.  As time goes on, and the supply approaches the pre-determined limit of 21 million bitcoins, then it becomes harder to manufacture a bitcoin, and reward for participating in the network will move to transfer fees.

Is Bitcoin destined to become the defacto currency?  Perhaps, perhaps not.  Whilst it has no intrinsic value, it is certainly secure and a convenient way to transfer funds over the internet.  As more people accept bitcoins, I can see that its use could easily develop such that people simply use bitcoins as normal currency and never bother to convert back to conventional currency.  Certainly over the last six months, the value of a bitcoin has rocketed from a few US cents, to nearly US $10.  Now, this rise in its value is almost certainly driven largely by speculation, and we've all seen what wreckage a "bubble" leaves behind.  HOWEVER, as a medium of exchange, a bitcoin has value and in the short term, I see people buying some bitcoins, sending them as payment and the merchant cashing them in.  As confidence builds, then people other than speculators will have more confidence to keep their bitcoins in their digital wallets for spending.

Time will tell.


Next post, I'll talk about my experimentation taking part in the network and setting up a mining test.



Later ........