Bitcoin: A Driver Of Great Change
BY JARED TURKUS
Bitcoin is a decentralized, crypto currency that is revolutionizing consumers’ attitudes towards money and financial commerce. In 2009, an anonymous programmer(s) named “Satoshi Nakamoto” published the proof of concept, leaving its growth to depend on word of mouth. Mining computers called “miners”, which are engineering to exclusively solve complex mathematic algorithms, create Bitcoins. The computers with most power solve the algorithm first and are compensated with bitcoins. The rate at which a piece of this algorithm is released every 10 minutes is called the block rate. The block rate, which started at 50 bitcoins per block, halves every four years. As of 2013, the block rate is 25 and is set to halve again in 2017. Bitcoins are finite in supply. In 2140, bitcoin creation will stop after there are 21 million total. However, a vast majority of the bitcoin will/have been generated between 2009 and 2025. As of October 2013, there are approximately 11.75 million in circulation worth roughly $1.7 billion. Users can store bitcoins in wallets (accounts) on desktop applications, online exchanges or on encrypted flash storage. Every bitcoin transaction is recorded in a public ledger called the blockchain as it moves from wallet to wallet. Unlike fiat money, bitcoins cannot be forged; they are encrypted and authenticated using two industry standard encryption methods identical to those used in ecommerce purchases (that can also be used in promote your Ecommerce store too) and credit cards transactions. Inevitably, any force that tries reshaping economic commerce will invite discussion over the role of government in regulating that trade.
Why People Should Consider Alternative Currency
What gives bitcoins value is their scarcity. Bitcoin bulls bet that the demand will outpace the finite supply, inevitably driving up market value. This is not unreasonable: supply is limited and absolute trust in fiat money is waning. Concerns about the state of the U.S. dollar are completely justified. The biggest banks that caused the Great Recession through speculative mortgage backed securities trading are now 30% larger than they were in 2008. There is very little new regulation in place to prevent the overleveraging that caused the last recession. To stimulate economic growth, the Federal Reserve has been systemically devaluing the U.S. dollar by asking the Treasury to print $85 billion monthly for bond buybacks. This process is called “Quantitative Easing” or “QE”. The U.S. government has no long-term plan to eliminate its deficits and address long-term entitlement liabilities on its balance sheet. While unemployment is falling and the deficit is shrinking at the fastest rate in fifty years, these are not indicative of a long-term recovery.
Unemployment is only falling because the size of the labor force (people who have looked for a job in the past four weeks) is shrinking, not because people are actually finding jobs. According to the CBO, the unemployment rate would be over 15% factoring in discouraged workers. While the deficit is at a five year low, it is projected to fall only until FY2017, at which point several long term obligations from the Affordable Healthcare Act, Medicare and Social Security begin to consume larger portions of tax revenue. These projections indicate that deficits will continue to rise from FY2017 into the foreseeable future. The CBO predicts that by 2025, entitlement programs will consume every dollar of federal revenue. Too Big To Fail in 2008 was not the epilogue of American economic disaster; it was only the introduction. As the government fails to address the private sector’s economic woes, not to mention its own, making a bet against government backed currency becomes increasingly attractive.
It Could Reduce Wealth Inequality
No one disputes that the market price history of bitcoins has been volatile since its inception. Dismissing its potential as a medium exchange on those grounds is unfair. Investors speculate heavily on new stocks and investments, which drives great volatility. However, over time this volatility will decrease as the money supply gravitates towards a larger number of consumers. What is essential is that the distribution becomes more equitable than that of the U.S Dollar. The richest 1% of Americans own 40% of the country’s GDP, approximately $6.3 trillion. This will harm long-term economic growth since the wealthiest will hoard too much wealth.
The lack of equitable supply will stifle consumer demand to buy goods. Middle class and lower income families are the last to benefit from QE. They are harmed the most by currency devaluation as their purchasing power decreases with respect to nominal prices increases. These people stand to gain the most by storing their value in an alternative currency. As bitcoins appreciate over time, their investment could help reduce wealth inequality. Investing in bitcoin should not be too expensive for any investor of any budget: bitcoins are divisible up to eight decimals so even if each single bitcoin traded for $100,000, the smallest denomination (a satoshi) would be worth one cent.
And Much More…
The surging popularity of bitcoins forces the question: to what extent should the government control the money supply? Bitcoin represents the antithesis of any broadly accepted monetary exchange. They can be moved among people much more rapidly than traditional money. Suppose an American consumer wanted to buy a good from a vendor in Japan. Using traditional money, this transaction would be subjected to two wire transfer fees, a currency exchange fee, capital gains taxes and a lengthy waiting period. PayPal is faster and has fewer fees, but is still more expensive than bitcoin transactions and occurs in a currency that is vulnerable to a central devaluation. To incentivize the blockchain to process transactions, there are small fees to move bitcoins from person to person. Transactions also confirm faster than wire transfers, in a matter of minutes or hours instead of days or weeks. That is precisely why bitcoin is such a powerful idea: Satoshi Nakamoto has created a decentralized payment system that transfers cash more efficiently than the most powerful banks.
And it’s unstoppable. The blockchain is not hackable; the incentives to manipulate bitcoin’s limited supply continue rising as the market value of each bitcoin increases. Yet, for the four years of bitcoin’s existence, no one has succeeded. The network cannot be shut down because there is no central server or no known point of origin. As of 2013, the amount of networking power behind the bitcoin network is more than the world’s 500 fastest supercomputers combined. What matters is not who created bitcoin, but that it has the potential to become a universal API for programmable money exchange. For the first time in history, consumers can trade in a currency completely free from capital controls. Peer to peer transactions within the bitcoin economy cannot be taxed. The processing fees are approximately $1, significantly smaller than those incurred for transferring traditional money or using PayPal. While major eCommerce sites like Amazon and eBay do not currently allow bitcoin transactions, bitcoins can now be exchanged for gift cards in any denomination on either site. Bitcoin transactions are designed to be anonymous and while using this third party removes the privacy advantage; it is a positive step for bitcoin.
Ultimately, the rise of bitcoin is a repudiation of government currency and big banks’ control of it. The reasons are simple: inefficient distribution, systematic devaluation and ability to forge. Gold has historically been a great investment for solving the devaluation problem. Nonetheless, it is not highly divisible and can still be forged. Bitcoin solves all three problems, is more divisible and can be transferred even faster. Bitcoins have recovered from every crash because buyers realize that the government is an unnecessary intermediary to regulate monetary exchange. As more and more consumers realize its potential to store value, there are no limits to its future value.