At every news outlet I turn to, I hear more and more about Bitcoins. A Bitcoin is a unit of digital currency that is being accepted by more and more outlets and consumers. Is it backed by the Full Faith and Credit of the United States? No. Can I turn it into jewelry like silver, gold and diamonds? No. Why is it desirable? It is in limited supply, the exchange rate to US Dollars is going through the roof, and it is completely anonymous.
I don’t own any Bitcoins, but I can see how they would be attractive as a medium of exchange. Anonymity in transactions has become desirable in the internet age. I have heard the rumors that using a credit card at Massage Envy or Liquor Stores will lower your credit rating. Certainly health care providers would love to have information tobacco, alcohol and firearms purchases. Anybody unscrupulous enough to withhold child support or not pay taxes prefers to deal in cash because it is anonymous.
While people may enjoy Where’s George, the bill itself has no memory of where it has been or how it has been used. In a similar way a Bitcoin will be transmitted from one anonymous individual to another anonymous individual. The transaction will be visible to everyone, but the parties involved in the exchange will not be visible to anyone. The supply of Bitcoins is based on “mining” the limited supply. In the electronic space that means people who offer up processor space for the transactions will be compensated with Bitcoins. However it is not an unlimited supply. In fact the processing that would have earned you a certain amount of Bitcoins yesterday, will earn you fewer today and that decline is exponential approaching zero in 2040, by which time we will have come up with something new if we don’t do so sooner.
Is this another tulip bulb bubble? It is certainly possible that one morning everybody will wake up and decide Bitcoins are not worth what people are paying for them. Of course that possibility exists with any medium of exchange whether it is US Dollars or gold. Only a return to the barter system would be devoid of risk. If cows or timber are worth less tomorrow, I don’t care as I need milk and a house.