Recent statistics for Bitcoin peg the upstart digital currency at exchange rates of over $200 per Bitcoin – a very impressive return for those who were in the game early, and an indicator of the rapid adoption and infatuation with it. For those not familiar with Bitcoin, it’s an online currency that allows anonymity for those rightly adverse to their monetary transactions being tracked and who favor currency separation from government monitoring and control.
Unlike the standard fiat currencies issued by governments around the globe, the value of Bitcoins are determined by market pressure rather than government decree. They can only be “mined” at a certain rate, which is pre-programmed in. Thus, there is a certain scarcity to Bitcoins as opposed to the nearly limitless ability of the world’s central banks to create new money. From an interesting article by Felix Salmon of Reuters:
Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million. Like gold, bitcoins are mined; but unlike gold, no one can stumble over some large seam and make a fortune. Mining for bitcoins involves an enormous amount of computer power, and very little luck, and the global rate at which new bitcoins will be mined is both predetermined and slowing down. There were about 3 million coins outstanding at the beginning of 2010, there are about 11 million coins outstanding today, and we’ll get to 14 million in early 2014. Come 2021 or so, assuming bitcoins are still used then, the rate of growth of bitcoins will be so low that to a first approximation the money supply will be constant. This carries with it its own problems, as we’ll see. But there’s no risk that some central bank will print millions of new bitcoins, thereby diluting or inflating away the value of existing ones.
The recent surge in Bitcoin value stems from this scarcity as people flock to the digital currency in the wake of government levies on bank accounts in Cyprus, the Bank of Japan’s massive inflationary policies, and ultimately the U.S.’s own infatuation with Bernake Bucks and infinite quantitative easing. The founders of Bitcoin, who operate under the moniker of Satoshi Nakamoto even stated that this was the purpose of creating the currency:
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.
Despite (or in fact, because of) the popularity of Bitcoin as an alternative currency, the question must be asked: Will Bitcoin stay legal? And by that, I mean, will governments used to being in control of their citizens’ money allow the adoption of this currency to continue unabated, or will it become common practice globally to outlaw the exchange of standard currency for digital currency?
There would be numerous reasons for them to do this:
- Bitcoin allows anonymity to transactions, which can’t be tracked by the government for tax purposes or otherwise
- Auditing of finances would become almost impossible
- Bitcoin is utilized as currency on websites that are currently illegal in the U.S., such as gambling websites
- Bitcoin is used for other various illegal transactions, including narcotics, on sites including Silk Road, etc.
- The banking industry would never allow this to go forward unchallenged, and we all know from the hideous bailouts how powerful and persuasive they can be to politicians
Most likely governments will wait this out to see if it is a bubble fad that will pass, or if it will catch on and continue to gain in popularity. Should the second scenario take the prominent position, don’t be surprised to see legislation drafted up within the next year. It will be under the guise of money laundering, to combat terrorist and narcotics trafficking, but we’ll know that it’s not because of that. It’s because government can’t cope with a loss of complete control over its citizens, and the banks wouldn’t let our representatives forget who is really in charge.
It is difficult if not impossible for governments to directly attack Bitcoins due the inherent anonymity built into them, but the weak point is at the exchange points. Since Bitcoin is not widely accepted as direct payments for products or services, they still must first be exchanged for a standard currency of some sort to be of any use. Unless this changes on a massive scale, governments will be able to track and target the points at which Bitcoins are exchanged for other currencies.
Either way, the move towards a free market currency, even if this particular currency doesn’t pan out, is certainly a positive one. People around the world are realizing that they cannot trust the government with their money. And that can only be a good thing.