Bitcoin: The Currency of the Internet
Bitcoin will change the landscape of monetary transactions across the world for those seeking increased privacy. It may even threaten elements of the existing monetary system so much in the next few years that it fuels its own demise.
This disruptive technology of the new century has the power to destroy currencies across the world if adopted by millions of users and, for this reason, is dangerous to the current monetary power structure.
Bitcoin isn’t dangerous for what it is today, but instead for what it has potential to become. Its adoption could upend the grip governments have over their citizens by opening up the world to a transparent form of money. Bitcoin costs nothing to store and is easier to use in almost all electronic financial transactions.This adoption process is what is of great concern to those in power, those who publicly downplay its significance.
The ability of being able to opt-out of our centrally manipulated monetary system is now a reality.
The control of money is by far the most important political power on earth, and those with this power will not be happy with any threat posed by a newcomer like Bitcoin. We like to think that military power dominates the geopolitical landscape, but it is in fact money that calls the shots. Bitcoin represents the insurgent rebel army in the current monetary war.
"Give me control of a nation's money and I care not who makes the laws."
- Mayer Amschel Rothschild
Born out of the ashes of the worldwide global meltdown of 2008-2009, Bitcoin is not run by a government or a company – it is run by its users. It was introduced to the marketplace on January 3, 2009. Functioning as a peer-to-peer digital currency (crypto-currency) and operating outside the traditional banking system, it was developed to handle online transactions of goods and services anywhere in the world. By its use of public-key cryptography and a block chain, the security of the payment system prevents a Bitcoin from being double-spent or reproduced.
The feature that has raised the most excitement, however, is its potential for increased anonymity. By helping maintain the privacy of those using this currency, governments of the world lose power in many areas that once enabled them to control their populations. This threat of semi-anonymous transactions is Bitcoin's blessing as well as its curse, because those that use it initially are those that may be up to things governments around the world don’t approve of (think drugs and gambling).
Bitcoin has been the greatest-performing “investment” since the global meltdown and now is entering a mania phase. What was once trading for $0.32 in 2011 has now surged above $1000. Bitcoin is dominated more by speculators than by actual people using it for transactions, which, at this point, has many people worried that it is becoming just another Ponzi scheme. Users may end up looking like Bernie Madoff victims at some point in the future. Bitcoin is a speculation at this point, not an investment. As a “new form of currency,” it has no yield, no history of utility as a currency (like gold), and most importantly, no intrinsic value.
With a current supply of Bitcoins at 12,185,575 and a current price over $1000, this represents a 12 billion dollar economic market that is growing in popularity and size each day. With the number of Bitcoins capped at 21 million by the year 2140, it presents the world with an alternative medium of exchange immune from central bank manipulations like quantitative easing and interest rate targeting.
As the use of Bitcoin spreads to more and more vendors, its stature and value will increase in the marketplace. Overstock.com, OKCupid, Reddit, Virgin Galactic, as well as over 10,000 other firms now accept payment in Bitcoin, with the number growing each day. Bitcoin transactions are easy and inexpensive, usually amounting to pennies in cost. Some in the community of users describe it as “money with built-in teleportation.” And unlike the recent credit card hacking scandals at Target, if your Bitcoins are stored on your home PC, the treat of hacking is virtually nonexistent.
Eventually, Bitcoin's growth may threaten credit cards' hegemony because of their typical 2-3% processing fees. When millions in fees are at stake, these powerhouses will most likely employ that time-honored tradition of using new laws to stifle competition rather than improve their existing product or lower their cost. You can be sure in the future K Street lobbyists on speed dial will be sent in to create some reason outlawing Bitcoin's use (probably for “National Security” reasons).
Latest figures have the number of people with Bitcoin wallets at over 1 million. This number is growing exponentially, up from 500,000 just a few months ago and up from around 100,000 at the end of 2012. The problem with these numbers is that there is a gigantic concentration of the currency in the hands of just a few people. Rather than spreading out over the users in a typical distribution curve, just 47 individuals control 28.9% of the existing market, with another 880 controlling another 21.5%. That is just 927 users with half the assets. These users appear to be speculating more than actively transacting business, which is a source of great concern.
Demographically, the average user is male (96%), 32.7 years old, and libertarian/anarcho-capitalist (32%). Bitcoin users are also a mostly clean-living group with 39% never smoking, drinking, gambling, or using drugs. In fact, just 11% have used Bitcoin for narcotics purchases, unlike the cash in your wallet which more than likely has traces of cocaine. Bitcoin is not some den of iniquity as has been bantered about by those who want to control or outlaw it. In fact, it is pretty straight-laced.
As the next few years unfold, the key for Bitcoin will be its penetration into more established retailers and service providers in conjunction with a drop in its volatility. If it can attain an “escape velocity” it can to go mainstream and become a true currency through its greater acceptance as a method of payment. For now, the public still sees Bitcoin as an emperor without clothes, but this could change very quickly just as the internet has replaced and displaced countless ways of doing things in less than a decade.
The real value in Bitcoin today for the average American is in its redefining how we as a nation view money. Replacement of the dollar in transactions, even if it is a small percentage, opens the door to the public's getting a hands-on view of how money is presently being administered and manipulated throughout the world economy. Bitcoin hopefully can spark this discussion across more dinner tables and classrooms in the future, helping to lift the veil of smoke and mirrors used by Keynesian central bankers across the globe. As for its suitability for small investors, that should probably be delayed until the volatility and adoption spread to a wider audience. The early bird may get the worm, but it is better to remember in situations like this that the second mouse gets the cheese.