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Bitcoins: The Future of Money or End of the World?

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... Or it neither or both?

A couple of weeks back my friend James Williams had an interesting Tweet.
James is the kind of person you follow if you are interested in the technology information that really matters. If technology information to you centers around the release of the white iPhone, you might as well just continue watching your local news. James Tweet was:

"Reading: Bitcoin P2P Currency: The Most Dangerous Project We've Ever Seen /me lots of FUD in this post"

It should be painfully obvious where I got the sensationalism in this post. I'll give the author credit, it certainly got my attention. If you are like me, you haven't heard of Bitcoins. So here is a little introduction:

If you don't have video handy, you can think of Bitcoins as digital currency, a little like Paypal. People can use it to barter goods and services, just like money. So what makes it different than money? The money moves directly from person to person, so there are transfer fees are extremely small (what I like to call the Paypal tax). Bitcoins aren't specific a particular country, so you don't have to worry about converting them to pounds or lira. The flow of Bitcoins can't be tracked like that money is when you move it in and out of banks. Finally, governments can't freeze Bitcoin account. Some may say this is simply cash. In some ways it is similar, but cash is limited to a physical exchange.

From a technology point of view, I think Bitcoins have incredible potential. They solve a number of problems that annoy people when dealing with money. Here's one example from my own life. Since I make much of my money on the Internet, much of my income comes in via Paypal which takes a percentage every time I receive a payment. I'd much rather cut out the Paypal Tax and moving to a Bitcoin currency would allow me to do that.

There-in lies some of the difficulty with Bitcoins. It's got the classic chicken-and-the-egg problem. No one wants to be the first to accept Bitcoins, because they want to be able to spend them elsewhere.

The other problem with Bitcoins... the End of the World problem... is taxing them. Bitcoins then move in that shady territory of tipping waitstaff in cash... it's a bit on the honor system.

Here's the other thing with Bitcoins. They are limited in number. What this means is that if people want them more, the value of them are going to go up. I found one article that said the value has already gone up more than 1000-fold in the past 14 months. Think about that for a minute. If you bought $1000 in Bitcoins 14 months ago, you'd be able to convert your money back to cash and have almost a million dollars. (Don't hold me to this, I'm putting a lot of trust in that article.) Before you move all your money in Bitcoins like the guy in that article, I suggest you look into the term Economic Bubble.

Lastly, there's a danger in holding Bitcoins. If your hard drive gets erased, so do your coins (though I think you can back them up). There's the aforementioned economic bubble. There's also the potential for companies that convert Bitcoins back to real world currency to be shutdown. Governments aren't going to like this currency that they can't control or regulate. They aren't going to like those that aid convert Bitcoin currency to their own monetary system. You could be stuck with something very illiquid that no one wants.

Bitcoins open up a Pandora's Box of questions and problems. I been trying to wrap my head around them for a couple of weeks now and I still can't tell you whether they are the future of money, the end of the world, neither, or both.

What are your thoughts?

Posted on June 1, 2011.

This post deals with:

... and focuses on:

Economy, News

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20 Responses to “Bitcoins: The Future of Money or End of the World?”

  1. Less says:

    Your article was the first time I’d seen the word Bitcoin. Figured it would be of most benefit to criminals. Then I see a link to this article on my twitter feed:

    http://www.wired.com/threatlevel/2011/06/silkroad/

    So, yeah, Bitcoin is popular with criminals.

    I suppose it could eventually become legit, but not sure I’d risk my real money on it.

    • Lazy Man says:

      I guess I timed that well. Would have been nice to write about it the day BEFORE Wired, ugh.

      Yeah, the criminal aspect of it is certainly something to keep an eye on. I touched on a tangent of that by mentioning that accounts can’t be frozen. This would, unfortunately, be helpful for terrorism, I imagine.

  2. Mike Z says:

    First of all, if this idea ever takes off, I see hackers doing something to steal bitcoins.

    Second, who creates the bitcoins and what is stopping them from creating trillions of them (increasing the supply and therefore reducing the value of any coins you would currently hold)?

    Third, is anything backed up with the bitcoins? Can you turn them in for something tangible? These coins seem to be just as worthless as US Dollars…except far more people are drinking the kool-aid on the idea that the dollar is actually worth something.

  3. Greg says:

    I’ve thought that the bitcoin system seems much like a bank in the 1820s issuing its own currency. Sure, you can bank there, but are you sure that the money will be good where you’re going?

  4. anon says:

    last i checked cash is popular with criminals too.. whats the difference?

  5. Arnold says:

    The people who think Bitcoin is dangerous are exactly and precisely like Dr Lexus in ‘Idiocracy’.

  6. Jeff says:

    This is an interesting concept. Though I don’t see how this replaces current money since it takes some kind of currency in the first place just to buy the bitcoins.

    Seems like a circular argument to me.

    • Lazy Man says:

      Bitcoins are generated by minors so it doesn’t actually require money to create the currency in the first place. You can start mining come coins on your computer right now (don’t hold your breathe, it will take a years before you make too much money doing it).

  7. I’m going to go out on a limb and say they’re probably going to be neither the end of the world nor the future of money. My main reasoning: Charles Schumer is already calling out the Silk Road website Less mentioned, and Bitcoins are being mentioned rather prominently (not the sort of publicity the creators of Bitcoins would want, I’m guessing): http://nyconvergence.com/2011/06/schumer-calls-for-silk-road-online-drug-marketplace-shut-down.html

    Given this reality, I’m guessing that the government will intervene in Bitcoin production/use in the not too distant future, with sizable regulations if not an outright ban on Bitcoins. So, probably not the future of currency, then, and if the government has anything to say about it, not the end of the world, either.

    (Side note: While we’re on the subject, Bitcoins are probably not as anonymous as their reputation would indicate; one of the members of the core development team has gone on the record as noting that with the techniques currently available, law enforcement could easily track down the average Bitcoin user (http://gawker.com/5805928/the-underground-website-where-you-can-buy-any-drug-imaginable look near the bottom of the article). If Bitcoins do end up as a common type of currency, it might end up being reasonable that the IRS expects you to include any Bitcoin-related income you derive on your next tax return.)

    • Lazy Man says:

      I don’t think the government could do too much to ban Bitcoins and I highly doubt that they’d be able to intervene in their use. I agree that it does seem like they can be tracked, but that could lead to another version that has more privacy.

      Let’s allow for some flexibility of the implementation and presume the concept is technologically possible at some point in the near future, if not already here. I think it could change the future of money.

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  10. SMC says:

    I want to include my two bitcoins. Bartering has been around since the stone age. The draw back for expansion has always been the “limited exchange power”, number of vendors,and difficult conversions. Bitcoin offers a solution precisely because of the internet capabilities. Example:I own a vacation rental business. I need a substancial paint job done. Finding a local painter to stay at my vacation rental is unlikely. Instead, I open my vacational rental to a bitcoin client (when I do not have a cash client (slow season). I then can pay the painter in the bitcoins i have accumlated. Now here is the genius in the system. If no local painter accepts bitcoins I have the option of taking them to the exchange and cashing them for dollars. I can then pay the painter in cash from “revenue generated when no cash customer was avaiible (slow season). It works beautifully, and it has nothing to do with taxes for me. I pay my taxes, I am a legitimate business, intent to be in business for many more years, and this is a low risk, precisely because I dont have to keep a large balance in bitcoins, I can convert them to cash when I choose, and I create business I may not have had without the ability to barter. Personally, it is precisely te option to cash conversion flexibility the is the brilliance to me. It fixes the “barter limitation of where to use barter credits and what to do with barter credits when the limited participants do not have something to offer that I need. And, the fact that it works “worldwide” is perfect for my vacation rental business. It is not just about taxes or drugs, people that “cheat” cheat. Cash is a great medium for cheat, however, it is not limited to cash. Just look to the banks and this ugly real estate market to see the “many faces of cheaters”, bogus fees, fake apprasials, creating phatom equity, resulting in higher insurance and property taxes on non-existant equity, need I go on???

  11. […] Lazy Man and Money – Bit Coins: The Future of Money or the End of the World? – Wonderful and funny look at a topic we’ll likely be reading about a lot more in the […]

  12. Daniel says:

    I have been reading about bitcoins for a week.
    As it is a peer to peer network all clients have agreed upon the same coin creation formula and transactions are processed by computers solving a problem with varying difficulty(called mining because of the current reward per transaction(block) which place the currency into circulation) This means any currency produced in any other way would be rejected by any legitimate client and not added to the record of transactions.

    The different miners and clients trust the record with the most blocks at the greatest difficulty, which is verifiable by checking the calculation. The computing power is currently equal to the top 50 supercomputers in the world.
    So to simplify it the only vulnerability of the network would be for a client with bitcoins to spend them on a product and then take back the transaction minutes later. This would require at the current difficulty computing power equal to the top 50 Supercomputers in the world competing to rewrite the past few transactions by becoming the longest hash chain at the greatest difficulty.

    The biggest danger to bitcoin would be regulation making exchanges impossible. When it is no longer possible to exchange bitcoins for local currency it will cease to work as a barter currency as new people will have a hard time obtaining bitcoins without working for those who have them.

  13. 3lijah says:

    i have looked into bitcoins and found one big issue.. it seems that the coins are produced from mining, and this involves using a lot of ‘energy’ (computer power) to produce coins. right…
    now the more people that want coins, the more miners there will be.
    Now if this whole bitcoin takes off, the amount of people running massive computers as miners and the greed of us ‘humans’ will lead to a massive waste of energy.. that will only snowball – poor planet!
    there needs to be a better way of producing these coins.

  14. Koichi Ito says:

    Bitcoins are great idea since Benard von Nothaus’ NORFED Liberty Dollar. This could make Bitcoin the world’s reserve currency. In fact Bitcoins are tax free and no bank fees, make people richer and freer than other currencies which are issued by government. This must be the great idea since sliced breads!

  15. no thanks says:

    I just wanted to point out a small error in your article. Bitcoins are not realy limited in the amount they will produce. Sure bitcoins themselves may only produce 22million but there are lightcoins and feathercoins and many to follow. Virtualy there is no limit to the number of coins that can be made. The only difference is the network they are produced on. A bitcoin is a litecoin and a feathercoin, its just a bitcoin is on the bitcoin network and a litecoin is on the litecoin network, they are the same technolgy but have a differnt name. A rose by any other name would still smell as sweet and would be the same.

    • Lazy Man says:

      So any network that takes bitcoins automatically takes feathercoins and lightcoins? I don’t really know anything about the later two coins, but the network is what matters. I can make some LazyManCoins, but unless others agree that LazyManCoins have value it’s insignificant. The thing is that people are agreeing on bitcoins having value. Maybe they’ll agree feathercoins and lightcoins, but maybe not.

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