... 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?
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