By now you know what Bitcoins are and how to spend them. For our third and final installment of the Setuix Bitcoin Series, we’ll look at some of the public, legal, and international concerns the digital cash has unearthed.
Bitcoin, at its core, is an open-source protocol that pairs with scripted possibilities. Techies and optimistic futurists see a lot of potential in the peer-to-peer system as they realize it turns the status-quo financial system upside down. Lawyers and corporate elites likely take a different stance, viewing the new currency as a cumbersome, unregulated haze or simply detrimental to future profits (as a number of high profile institutions earn revenue from transaction costs). In this article, we’ll try to outline some of the worries haunting both sides.
Volatility
Probably the biggest concern for traders and short-sighted investors, the Bitcoin revolution is rife with risk and roller coaster moments. Blurred legal lines fuel speculative Bitcoin bubbles, allowing investors to treat the coinage as a currency and commodity at their convenience.
If you are risk-averse and prefer stability, Bitcoin is not a wise investment just yet. However, if you take a long-haul stance and like the idea of Bitcoin potentially eliminating banks altogether…perhaps you have found a golden ticket. Just as the Euro and other currencies experience high levels of instability during infancy, trade values should level off as more individuals use and accept them as payment.
Security
Aside from a slippery taxation/regulation issue, security is the number one anxiety impacting all parties involved. Paramount to Bitcoin’s success is the need for patrons and merchants to trust the security of their wallet. Just as your computer can be hacked and compromised, so too can your digital locker full of money. Encryption, backups, offline signing, hardware wallets, “hot” versus “cold” storage, and additional anonymity layers all attempt to solve the pressing insecurity needs of Bitcoin.
Less of a concern is an intrinsic Bitcoin fallibility that allows the entire system to be fooled if one has enough computing strength (an increasingly unlikely event as more and more nodes hop on the network). Similarly, the code itself will likely never turn malicious since all persons on the network must agree to any changes.
Accessibility
The number of online venues and even physical locations accepting BITs is steadily growing alongside the coin’s popularity. However, Bitcoin is not very accessible for the general public, and even less so for disadvantaged populations. Readers of this site and those in well-to-do socioeconomic conditions likely have a personal computing device and sufficient enough education to [vaguely] grasp the decentralized cash system. But the expenses and technical know-how required of this ubiquitous digital currency should not be underestimated: those at the margins will be left behind if we don’t take strides to ensure everyone enjoys access to the economy. If humanity is going to transition to this globally accepted e-currency, it is critical that Bitcoin advocates both inform and encourage others to become adopters also—you can begin with your hair dresser, grocery store clerk, a family member, and/or political representative.
Decentralization
Bitcoin has no government backing and no single or private entity controls it. A FAQ wiki notes,
“Every currency in the world (other than Bitcoin) is controlled by large institutions who keep track of what’s done with it, and who can manipulate its value. And every other currency has value because people trust the institutions that control them.”
Without a central agency to manipulate volume and only a public key ledger to validate transactions, control is shifted away from traditional institutions and toward individual users. A person can now ‘send’ millions of dollars across thousands of miles without ever needing to register the transaction with a government or bank. This has some sovereign nation security implications as well, as many fear anonymous e-cash encourages money laundering and other illegal transactions. Yet, the idea of a banking held accountable entirely by peers, rather than elites, is appealing and empowering to many in the Anonymous age.
Deflation
Lastly, long-term anxiety over Bitcoin relates to a dreaded “deflationary spiral.” Current economic thinking aligns with the idea that inflation is good because it encourages consumption, but deflation is bad because it encourages hoarding. Why purchase something today if you can buy it for 50% off next week, due to your same dollar being stronger? Deflation woes stem from Bitcoin’s capped but predictable supply, and coins vanishing from circulation (e.g. due to crashed equipment or lost keys). This trend will lead users to hold-on to their increasingly valuable electronic gold rather than spend them in the Bitcoin economy, stagnating growth.
Once we abandon the notion of fixed prices, however, and instead think of something’s value as naturally flexible, then no proverbial spiral results. A Bitcoin wiki summarizes:
“There isn’t any fixed incentive to holding Bitcoin other than speculation. If the economy that uses Bitcoin grows, the per-unit value of Bitcoin proportionally increases also. Everything is the opposite of the popular fractional reserve banking system (because Bitcoin isn’t a debt but an asset). Bitcoins only deflate in value when the Bitcoin Economy is growing”
Conclusion
In short, if we abandon a get-rich-quick speculation scheme (betting on future Bitcoin success or exchanging the coins to use native currencies instead), everyone benefits from the plenty. This is no small feat, though. In order to achieve a true fiscal overhaul, more buy-in is required from small businesses, individuals / shoppers, and even sovereign nations who can each request or demand Bitcoin be used as a valid form of payment. By the same token, computer programmers and newly minted intermediaries will need to ensure trustworthiness with an increasingly skeptical public. For more technical reading on the subject, we recommend “Bitter to Better – How to Make Bitcoin a Better Currency” or perusing the Bitcoin FAQ wiki.
