Why Bitcoin is Here to Stay, Whether Governments Like It or Not.

Over at the Washington Examiner, Reason columnist and Mercatus Center economist Veronique de Rugy has an interesting column up about Bitcoin and why predictions of the decentralized currency's demise are grossly exaggerated.

Bitcoin as a "currency" may never be as popular as the dollar but no matter what happens, the technology it created isn't going anywhere. Think about it as the Napster of the payment industry. The original Napster program isn't around anymore but its innovations fundamentally changed the music industry. As the Washington Post's Tim Lee rightly notes, Bitcoin is both a decentralized payment system and an alternative currency, combining into a ground-breaking "platform for financial innovation." So no matter what happens to the trading value of my purchase after this crash, as long as Bitcoin -- or a competing technology -- provides an affordable payment system to those who need it, there is a lot to celebrate.

Read the whole thing.

Back in June, Reason TV's Tracy Oppenheimer talked with Jon Holmquist, who runs Bitcoinstore.com, about the real-world uses of this virtual currency. Take a look:

More Reason on Bitcoin.

Comments

[PowerBottom]

Why Bitcoin is here to "Say". Is is supposed to say 'Say'?

[Heroic Mulatto]

I'm DJ Bitcoin and I'm hear to say...*beatbox*...

[PowerBottom]

And of course I make a mistake in pointing out Nick's mistake. No coffee this morning.

[Hugh Akston]

joe'z law strikes again.

[Greg83]

Overstock.com's Patrick Byrne announced yesterday that his company will be accepting Bitcoins for payment sometime next year. Pretty big development IMO.

[sarcasmic]

Dang it! It was better with the typo!

[John]

There is one really funny thing about this. It seems more than a few goldbugs have embraced bitcoin. Bitcoin is an even worse fiat currency than the dollar. It isn't even backed by the force of the gun.

I don't have a problem with bitcoin since I think all currencies are effectively fiat. Governments can debase gold based currency just as easily as they can print fiat dollars. But that is neither here nor there. I can't see anyone who objects to fiat currencies could go anywhere near bitcoin.

[Greg83]

Yeah you obviously don't know what the term "fiat currency" means.

[John]

Then why you enlighten us to what it means? Last I looked fiat currency was currency based on the credibility of the government that issued it rather than pegged to a particular commodity.

And yes, you can be on the "gold standard" and still debase your currency and make it effectively a fiat one. See for example England and France after World War I.

[Greg83]

Fiat is unlimited in scope and created out of thin air. BTC is extremely limited and new BTC have to be mined utilizing processing power and electricity. There is no comparison.

[OldMexican]

Re: Greg83,

Fiat is unlimited in scope and created out of thin air. BTC is extremely limited and new BTC have to be mined utilizing processing power and electricity.

There is really no difference, Greg. People may say that Bitcoin is much more limited than other fiat currencies becuse of the way you "mine" them, but they're created entirely out of thin air just the same.

The reason gold and silver were used as currency for millenia is because those precious metals were also highly desirable by people to have and use - they are tangible. If there is ONE thing you cannot deny about Bitcoin, is that you cannot clad your teeth with them.

[Heroic Mulatto]

Maybe I'm just being a pre-social-everything old fogey about this, but Bitcoin as being constructed out of the ether just doesn't work for me. Bitcoin just isn't independent of the infrastructure of the developed world. I could never walk into a Third World dive bar/brothel and pay in Bitcoin. They would take gold and silver in any form however. As China has shown, Bitcoin is not only at the mercy of the state's control of commerce, but it's telecommunication and electricity generation as well. It is quite fitting that one of the first "hydraulic empires" would be the one to teach us this lesson.

[OldMexican]

Re: Heroic Mulatto,

Bitcoin just isn't independent of the infrastructure of the developed world.

Not only that, it is still very dependent on the current fiat currency system for convertibility, due to the very puny number of vendors that accept Bitcoin directly.

[Heroic Mulatto]

Bitcoin is very good for what it is, a crypto-currency middle-man; Swiss banking for the average Joe.

[kinnath]

Bitcoin has no meaning outside electronic commerce. So what?

Dollars bills are anonymous. I can conduct face-to-face commerce in anonymity so long as I don't breach the legal threshold for reporting.

Bitcoins are anonymous. I can conduct electronic commerce in anonymity so long as the infrastructure is in place.

I remember when my father told me that web commerce had no real future based on a news report where a test subject spent 8 hours trying to buy a CD, a pair of shoes, and a pair of jeans online.

Now amazon exists.

Bitcoin will almost certainly die, because it is the first implementation and an extremely limited implementation of digital currency.

In 15 years, the "amazon" of digital currency will exist. Governments will be fucked unless they aggressively start to ban the technology across the globe.

[Heroic Mulatto]

Bitcoins are anonymous. I can conduct electronic commerce in anonymity so long as the infrastructure is in place.

That's a half-truth.

Governments will be fucked unless they aggressively start to ban the technology across the globe.

And you don't think they won't?

[kinnath]

That's the real question isn't it?

Governments are slow and cumbersome critters. They may never be able to keep up with innovation in digital currency.

[Heroic Mulatto]

I'm still glass-half-empty on the subject, considering China's recent actions.

[kinnath]

The Chinese may actually be smarter than the US leadership.

I think digital currency will destroy the state issued currency for all 2nd world and 3rd world countries. The surviving currencies would probably include dollars, euros, and whatever China uses. The Russians already go to great lengths to avoid using rubles.

[Heroic Mulatto]

I think digital currency will destroy the state issued currency for all 2nd world and 3rd world countries.

I'm not sure how it could. In my wife's family's village, many, well, I would say homes, but they're really hovels, have no electricity, much less access to the Internet. On the other hand, I could see the currency of these countries pegged to a digital currency as opposed to the Dollar, which we would fight tooth and nail.

[kinnath]

I could see the currency of these countries pegged to a digital currency

Paper will continue to exist for a long time.

[Michael S. Langston]

US and other western societies have for years wanted to go to some digital currency as paper money allows for easier exchange of fake money.

One of the problems is older people still fear the technology a great deal.

That and those same governments are trying very hard to destroy bitcoin - as while they want digital currency, they don't want others to do it.

Last note for those scared to use it - why? It seems to me that using bitcoins is the same thing as bartering with a specific set of goods which has a known price.

IE - I don't see why bitcoin, other than current instability of pricing, is inherently riskier than any other bartering tool which isn't a current, long-term, and stable currency...

[Cytotoxic]

China's recent actions have not stopped BTC. At all.

[CE]

There is a direct comparison between bitcoin and fiat currencies: neither has any inherent value. Commodities like gold will have value no matter what happens to the ruling regime. The US dollar only has value because you can pay your taxes with it. Bitcoin only has value because you can exchange it for US dollars, as long as the government lets you. Don't count on that being forever.

[Juice]

neither has any inherent value

I don't know why people don't get this.

NOTHING HAS INHERENT VALUE.

[Emmerson Biggins]

I think he means physical utility.

[Juice]

Does the internet have physical utility?

[OldMexican]

Re: Greg83,

Yeah you obviously don't know what the term "fiat currency" means

You should dust off your dictionary, Greggy-boy. Bitcoin is a fiat currency, based entirely on the word of a few pogrammers. A true currency appears from market transactions and slow but steady acceptance. That means, Bitcoin ain't currency until market actors say it is. Right now, it is more a vehicle to transfer money but not currency itself.

[kinnath]

You should dust off your dictionary,

OK, Please define "fiat".

The nearly worthless Wikipedia gives three different definitions for fiat currency. Two I agree with and one I don't.

You appear to focused on the one definition that I disagree with.

[OldMexican]

Re: kinnath,

OK, Please define "fiat".

Means "by my word." That's the case with the Federal Reserve Notes, it is also the case with Bitcoin. Someone says it is currency because he says it is currency.

Real currency is born from the market, not from someone who says something is currency.

You appear to focused on the one definition that I disagree with.

What a happy coincidence.

[kinnath]

Glad we're clear on that.

[Juice]

Someone says it is currency because he says it is currency.

What's the reason gold is a currency?

Because some people use it as such.

By the way, I'll bet you that more people are currently trading Bitcoins for goods and services than are trading gold for goods and services.

[Michael S. Langston]

Exactly - prisoners use specific commissary items. I see no difference in using bitcoin really (aside from the obvious technical differences and anonymity) as it's just another "thing" which can be easily traded.

[kinnath]

If bitcoin has any value, it derives from anonymity and independence from any state.

[2ndClassProle]

This right here.

[John]

Yes. It does have value. It has value for simple reason that people give it value. And its anonymity is certainly one of the biggest if not the biggest reason people value it.

[kinnath]

Which is why bitcoin is not a fiat currency.

A US federal reserve note is money because the government declares it to be legal tender for all debts public and private. The fact that 90% of the population doesn't understand this does not unmake US currency as a fiat currency.

[OldMexican]

Re: kinnath,

Which is why bitcoin is not a fiat currency.

It is a fiat currency. The fact that people value it for this reason or another does not change that other fact. People today value the dollar because of its global ubiquity, but that does not make it any less or more a fiat currency.

What makes a fiat currency fiat is that the institution that issues the currency says it is currency, as in "I will accept it back" (non-fiat currency is backed by something most market actors desire.) As long as most vendors and sellers accept the fiat currency as well, the fiat currency becomes money. Right now, most vendors and sellers accept dollars as money. That does not change the fact that the dollar is a fiat currency.

[kinnath]

We settled this above.

[Juice]

Why is bitcoin a fiat currency but not gold? The only reason people value gold is because they think/know that other people value gold. This is the thing that gives ANY currency value, the belief that tomorrow others will want to trade you things for it. This is Misesean theory of money IINM.

[Emmerson Biggins]

It's purely a semantic thing at this point. But I don't think it's fiat unless a government declares it as legal tender. So bitcoin is not fiat.

[kinnath]

That is the definition that I prefer.

[Juice]

Exactly.

[OldMexican]

Re: kinnath,

If bitcoin has any value, it derives from anonymity and independence from any state.

The use is not anonymous. It can't be anonymous until most vendors accept the Bitcoin directly. Right now, most vendors don't know it or understand it or want it. In the meantime, the Bitcoin brokers have to convert the Bitcoin into something else before buying and will only accept payment in other currencies before selling Bitcoin. That's where the anonymity is lost. That's where Bitcoin's vulnerability to the decisions made by central banks resides.

[kinnath]

The use is not anonymous

Bitcoin is anonymous. Retail exchanges currently are not. Is there some hidden meaning in noting this?

[OldMexican]

Re: kinnath,

Bitcoin is anonymous. Retail exchanges currently are not. Is there some hidden meaning in noting this?

The moment you need to convert Bitcoin for regular purchases, it loses any anonymity it could have. I made that point clearly. I don't understand the insistence on hitting the same equine carcass.

[kinnath]

Then don't show up and make the same argument over and over again.

You could spend a lifetime making anonymous transactions with bitcoin. It only becomes visible when you need to convert to "real" currency.

It's probably true that the only beneficiaries of bitcoin right now are people moving goods through the black market. And as long as you can sell enough shit to buy the shit you want, you don't need to ever convert to "real" currency. But this is not a long term constraint.

[OldMexican]

Re: kinnath,

You could spend a lifetime making anonymous transactions with bitcoin.

I could spend my lifetime wondering if angels have genitalia, and it would be just as productive.

It only becomes visible when you need to convert to "real" currency.

What other possibly point would there be to have Bitcoin if not to convert it back to a more accepted currency later? You're making my point for me over and over again.

[kinnath]

What other possibly point would there be to have Bitcoin if not to convert it back to a more accepted currency later?

Your argument assumes that digital currencies will always be less desirable than state-issued currencies. Therefore, people will always have to convert back from digital to state-issued at some point.

I consider that it is not only possible, but perhaps even likely, that state-issued currency will become the red-headed stepchild of "means of conducting commerce" within my lifetime.

[Cytotoxic]

ITT, OM brow-beats us with circular logic and outdated precepts.

[Cytotoxic]

It isn't even backed by the force of the gun.

It's backed by math, which makes it arguably better than gold.

If there is ONE thing you cannot deny about Bitcoin, is that you cannot clad your teeth with them.

As true as it is irrelevant.

[Emmerson Biggins]

It isn't even backed by the force of the gun.

I think it is in wierd way. If other currencies that were backed by the force of a gun didn't exist, bitcoin would collapse. So in effect, bit coin is backed by people trying to avoid the force of all those guns baking all the fiat currencies.

[The Late P Brooks]

If bitcoin has any value, it derives from anonymity and independence from any state.

Kriminulz!

B-b-b-ban it!

[Heroic Mulatto]

It sounds better in the original Chinese: j?n zh?! j?n zh?!

[waffles]

Did I mention I like Bitcoins?

[kinnath]

As an engineer, I view bitcoin as a fascinating proof-of-concept exercise. But I don't believe bitcoin itself has any long term life, which is why I don't own any bitcoins.

But I expect that some non-state, digital currency will be in wide circulation by the time I retire in about 10 years.

[The Late P Brooks]

As an engineer, I view bitcoin as a fascinating proof-of-concept exercise. But I don't believe bitcoin itself has any long term life, which is why I don't own any bitcoins.

They have been talking about bitcoins on Bloomberg for the past week or more. It is conceptually fascinating, to be sure. Today's story was about "mining" and how the miners record and verify transactions in exchange for bitcoins. It sounds to my luddite ear as if the process of recording and verifying those transactions is nearing a point of insurmountable complexity.

I could be completely wrong, though.

[kinnath]

From memory: "mining" is doing work on behalf of the bitcoin infrastructure. It takes CPU cycles to verify transactions. You get "paid" in bitcoin to provide CPU cycles to verify bitcoin transactions.

[CE]

Sounds good, until a meteorite of pure bitcoin hits the Earth and floods the market.

[Michael S. Langston]

It sounds to my luddite ear as if the process of recording and verifying those transactions is nearing a point of insurmountable complexity.

This is true - though not necessarily true for ever... but the way it works in miners do work to support the currency and in doing so they are granted bitcoins (usually in small fractions of a coin) for that work.

The complexity of building those translations increases as more and more miners join up.

Due to the recent upsurge in bitcoin value, many more miners have gotten into the game, increasing the complexity exponentially (while simultaneously making home type mining worthless as current prices for mining "equipment").

It's still possible many miners leave at some point in the future changing that - but I think if bitcoin fails, it will be due to government pressures and not miners leaving.

Note - not sure if bitcoin will fail, but I think it's likely given the strong desire by governments with almost unlimited resources to stop them.

I would fully expect if bitcoin disappeared though that some other currency like this would pop up.

But I think their long term survival isn't set in stone just yet - though possibly it's starting to lean in bitcoins favor - what we don't yet know though is how far governments might go to stop this and whether bitcoin can survive that storm.

Hopefully they succeed, but I think we're a long ways from knowing that just yet.

[AlmightyJB]

Sounds like a dare

[HazelMeade]

I remain sckeptical that Bitcoin will catch on, because it's voltaility is a hindrance, but the fact that it is treated as commodity carries some interesting tax advantages.

If you do business in bitcoin, and get paid for work in bitcoin, you can spend the bitcoins on stuff (if you can find someone who will accept them as currency) before you sell them. Since you only pay taxes on the capital gains, anything you spend your bitcoin earnings on is effectively pre-tax. So if you could somehow manage to arrange to get paid in bitcoins and get your landlord or bank to accept your rent or mortgage payments in bitcoin, and buy your groceries in bitcoin, you could effectively reduce your legal income to only your "profit" after you sell the bitcoins. So you could get out of paying income taxes.

[Christophe]

Unfortunately the IRS is about the only agency on top of this.
Paying for stuff with bitcoins counts as barter income. Meaning you can't actually avoid taxes (legally anyway).
Of course if you do buy things with it it's not like they'll magically know, so using it in direct purchases can be a very effective mean of tax evasion.

[Canman]

Bitcoin has a new competitor:
Litecoin

[Christophe]

It has hundreds of competitors. Doesn't mean any of them matter. Only way litecoin wins out is if one of the few tiny tweaks they've made to the bitcoin codebase turns out to solve some massive issue with the original.
No one has any evidence that that's the case.

[Christophe]

People trying to get a handle on why bitcoin can act as currency should look at some of the more esoteric things that have been used as money in groups where gold wasn't available and fiat didn't yet exist:

- Prisons have used cigarettes since forever. Some prisons are banning smoking, so prisonners now use sealed mackerel pouches instead.
- Some pacific islander groups used seashells with a hole drilled in them as currency units. Seashells are ridiculously easy to get, but without access to metal tools, drilling a hole through one is a major undertaking. Incidentally, obtaining such tools from European traders quickly lead to hyperinflationary collapse.
- The Stone coins of Yap are my favorite because the actual commodity never changes hands anymore. People just announce that they've given the coin to their neighbor, and the community keeps track of ownership mentally (doesn't scale well, but it worked just fine for their small community).

Really looking at all the things that can be money, anything with a reasonable level of scarcity, and that can change hands easily, is a viable money. That's why I suspect bitcoin will do just fine at that level.