Currency isn’t exactly the most exciting topic of conversation – you know that guy at the dinner party who loves to talk about inflation and interest rates? Yeah, he doesn’t get an invite to the next party. That being said, there is a new form of currency that has been making waves on the internet… and some are predicting that it will be the killer-app for online transactions.
Enter Bitcoin. Bitcoin is an experimental, open-source, peer-to-peer, decentralized currency. You may have heard those buzz-words in the context of music and file-sharing, but when they’re applied to money, things get a little weird. Will Bitcoin replace cash as we know it, or will it go the way of the 8-track player, Laserdisc, and Segways? Decide for yourself with these 5 differences between bitcoin and traditional currency…
Bitcoin is Decentralized
The key aspect of bitcoin is that the system is completely decentralized. The ‘coins’ themselves are cryptographic units of virtual currency and are kept in ‘digital wallets’ secured by passwords. Transactions are processed over the internet by a distributed network of servers called ‘bitcoin miners’. The system lives entirely on the network of users’ computers – there is no central authority. The net result of this is that there is no government controlling the supply of money, no banks to monitor or freeze transactions, and near instantaneous worldwide exchange. Get ready for the post-scarcity libertarian utopia, everybody! Nothing could possibly go wrong with this plan!
Bitcoin Has No Intrinsic Value
Bitcoin is unique among currencies in that its value is derived entirely from people’s willingness to accept it for trade. Traditional currencies have always had some form of intrinsic value backing them up: Gold is valuable because it’s, like, super shiny. Paper money has value because the government says it does (and they have, like, the army and stuff). But there is nobody out there saying that you have to accept bitcoin as money, and you definitely can’t make jewellery out of it. Even still, the people have spoken: As of this writing, 1 bitcoin is worth about $100 US and a growing number of online retailers, including OkCupid and WordPress, are accepting it as payment. There are even some venture capitalists getting in on the action – Peter Thiel, famous for founding Paypal, and the Winklevoss twins, famous for not founding Facebook, have each invested over a million dollars into the fledgling currency.
Bitcoin Has an Inflation Cap
Without getting too technical, one quirk of bitcoin is that there is a limited and predictable amount of new coins that will be ‘minted’ every year – up to a maximum of 21 million coins circulating in the year 2140. If you know a bit about economics, this seems to be a bad idea for a functional currency: people would just start hoarding money instead of spending it, and the economy would grind to a halt. They get around this by allowing each coin to be subdivided into 100 million ‘cents’ – leaving about 2.1 quadrillion units of flexibility in the system. Don’t worry about the math, if the value of your Hello Kitty collection skyrockets in the next 127 years, you should still be able to cash out.
Bitcoin Brings Anonymity
Bitcoin is just about the only form of online payment that is comparable to paying with cash; quick and relatively anonymous. Unfortunately, since transactions are anonymous, they are also irreversible. Don’t go around buying rare Pokemon cards from a guy named Roscoe, who promises to ship them from the Cayman Islands just as soon as you transfer the cash. It’s early days yet, but so far, quite a bit of the bitcoin economy has been in the so-called ‘black market’. Perhaps that is no different from real cash, but the community will have to clean up this image if they want the currency to hit the mainstream.
Bitcoin Has No Transaction fees
Without banks or services like Paypal mediating the payment, you also don’t have transaction fees. This sounds like a great way to cut out the middleman and save some dough, but it isn’t all sunshine and roses. Without a bank, there is also no insurance policy to replenish your funds if you get hacked. Also, much to the dismay of many users, ‘no transaction fees’ does not mean ‘no taxes’; someone will have to come up with an open-source, peer-to-peer, distributed form of government before that happens. (Maybe call it ‘Bitcountry’?)
Traditional money isn’t going anywhere soon, but bitcoin brings with it some interesting ideas about how our economy can function more smoothly. It remains to be seen whether this experiment is a viable currency or just a flash in the pan. Either way, it makes for great dinner party conversation.