Can Bitcoin Last?

I’ve been following the progress of the new digital currency, Bitcoin, with interest because its virtues are woven into my new novel, The Money Tree. Nothing makes a novel seem stale quicker than a current event that runs contrary to the plot, and because Bitcoin could simply disappear from the Internet landscape, I was tempted to call it some generic name like “Digibuck.”

In the end, I went to press without changing the name, because regardless of what happens, Bitcoin is both brilliant and unique and if it does nothing else, it is a forerunner of digital moneys to come.

Can it become a useful money? Since one characteristic of money is stability, we’ll have to wait and see. Its price rise has been hectic. When I began writing The Money Tree, last January, it was priced around $25. This week it broke $1000. That’s because Bitcoins are being removed from circulation through loss (hard-drive erasure or accidental dumping), or by investors or the US government, which seized a large cache when it closed down Silk Road.

It’s also because Congress has taken notice, which is, to put it mildly, newsworthy. Various governmental organs are now trying to decide whether Bitcoin is a commodity or a currency.

Right now, it’s behaving like a commodity and for good reason. Bitcoin’s limited quantity is one of its most powerful appeals. This feature was built in to the original code and is strictly controlled. New coins are “mined” at the rate of 25 roughly every ten minutes, down from 50 for the first four years. The rate will reduce still further in the years ahead. Only 21 million Bitcoins are slated to be created.

What if the code is hacked or subverted? Then Bitcoin would be reduced to the ranks of the ordinary fiat currencies it is meant to replace. Millions, billions even, could be created and pushed out into cyberspace, causing the value to plummet.

How likely is that? I’ve no idea. Based on the sophistication of the original code, maybe it’s close to impossible.

Another appealing feature of this currency has been its anonymity, and it’s always been my feeling that this would be the first feature the government would insist on changing. If Bitcoin transactions are no longer anonymous, would the appeal diminish?  I think it would.

If governments choose to tax transactions at some point in the block chain, would that diminish the appeal? Maybe, maybe not, depending on other options.

I’ve argued in my book that competition in the field of money is needed if we’re to restore some sanity to monetary policy. Currency competition doesn’t mean the dollar competing with the yen or pound: these are all fiat paper moneys with an inability to retain their present value for more than a minute. Whether Bitcoin will provide that kind of competition, or whether it’s merely the precursor to a future digital money, perhaps one backed by mutual funds or metals, remains to be seen.

If you’re interested in more on Bitcoin, check out the Coindesk website. It’s packed with useful and entertaining information.