|July 28, 2012||Posted by dan under Money|
Bitcoins are a new species of money developed by the mysterious Satoshi Nakamoto (likely an alias) who has remained anonymous. Through my assessment of Bitcoins I can only conclude that Satoshi Nakamoto must have been a genius as I would venture to say Bitcoins are as close to the most perfect form of money we could currently expect to have based on our current state of consciousness.
Bitcoins themselves are not physical and they are not backed by anything, why then can (at time of writing this post) you exchange 1 BTC for £5.8 or $8.9? One reason is that there is only a limited supply of bitcoins currently 9.5 million and so basic supply and demand for the coins determines its price. So why is there demand? this is due to the unique quality’s and benefits of bitcoins over traditional pounds euros dollars and yens.
These quality’s include:-
- The ability to make instant local or international transactions at zero fees.
- Carry’s no counter party risk (not debt based)
- Make anonymous transactions if you chose.
- Store and control your own currency rather than be reliant on a third-party such as a bank and still have the option to use a third party if you chose.
- Secure from having your funds frozen or seized as this is an impossibility when holding your own bitcoins.
- Safe in the knowledge that the value of bitcoins cannot be inflated by some central authority.
- Enjoy generous returns on your holdings.
Those are the personal benefits and I am sure there are some I have missed but in terms of the macroeconomic benefits they are similar to those described in this previous post, as the money supply of bitcoins is very stable currently at 9.5 million which will reach a maximum of 21 million in some years to come. People may consider this number too small in order for Bitcoins to serve as an alternative international currency, but what they fail to see is that Bitcoins can be traded in smaller and smaller denominations as time pass’s and the value of BTC’s increases, so money supply is always adequate for the trade of goods and services, furthermore by using smaller denominations it doesn’t penalise those holding BTC’s by reducing BTC purchasing power as the mechanism of inflation currently does to standard forms of money creating that upward spiral of wealth creation that is so dearly needed.
The true genius of Bitcoins is that it is completely decentralised, a peer to peer network that no one authority can ever control.
This chart shows the price of Bitcoins in dollars since 2010 (click to enlarge)
As you might notice early on in May of 2011 there was a rush into bitcoins which quickly crashed, people use this as an example of how it is unstable, But what can be expected of a new currency that is just starting with a mere £55,000,000 market cap of course it will be volotile at first, but as you can also see it has maintained a $5 baseline for many months of which it has recently risen to $8-9 within a few month giving people excellent returns. Bitcoins will likley see more drastic price moves but as the volume of users increases overtime price stability will likley follow and as Bitcoins are completely unmanipulated natural demand means price can only go up, but this is only a potential dependant on if people chose to embrace it or not.
A Critical Mass
As it stands faith in the value of Bitcoins among most users is dependent on its ability to be exchanged into fiat money, however the true potential and value of Bitcoins can indeed surpass this in that when the use of bitcoins amongst people hits a critical mass lets just say 10% of the population and the transactions of goods and services amongst people with bitcoins has drastically increased this will cause a phase shift where the value of a bitcoin is no longer dependent on its ability to be exchanged into fiat as it has now become a self sustaining currency of value as their is enough faith it will be accepted as payment meaning the necessity to exchange it into fiat has gone. This of course is not an event that is going to happen anytime soon but being optimistic lets say maybe in 5 years time.
On a side note if this was to indeed happen the early users of bitcoins will be doing very very well indeed.
Heres how to get started.
2. Transfer money to your exchange account
3. Buy bitcoins on your exchange account at current exchange rate.
You can now chose to either leave your bitcoins in your exchange account (in the trust of a third part just like a bank) or you chose to withdraw your bitcoins into your own bitcoin wallet. To get a bitcoin wallet on your computer go to the official bitcoin page at http://bitcoin.org/ and download the client software. This software will give you a unique address specific to your wallet which becomes the number you provide people in order for them to pay you in bitcoins. If you chose to store your own bitcoins you have to keep a backup of your wallet for if you lose it it is similar to losing cash in your wallet or a gold coin as you will not get it back.
Here are some sources for more information:-