The electronic crypto-currency
known as Bitcoin is the new hot topic of debate among economists. A year ago,
Bitcoin appeared to be little more than a digital novelty, the concept of a
completely decentralized digital commodity that individuals all around the
world would use as money completely alien to the general populous. The events
of the past few months have proven differently, with Bitcoin's sudden rise in value leading
many to hail Bitcoin as the future of money. This claim is not entirely with reason.
Bitcoins are superior to conventional currency in many aspects, such as imperishability,
transportability, and divisibility. However,
Bitcoin falls short is two key aspects, and only time will tell if these
shortcomings will prove to be Bitcoin's ultimate undoing.
The
first aspect Bitcoin falls short in is
ease of use. Few businesses, either digital or brick-and-mortar, accept
Bitcoins as payment for goods and services. While that number is starting to
increase, current Bitcoin users must rely on digital trading houses, which
charge a fee for each transaction, to convert Bitcoins into local currency. Due
to the decentralized nature of the Bitcoin system, It is not uncommon for transfers
to take an hour or more to process, and the problem will only get worse as new
users, and therefore more computers, are added. With no central controlling
entity with an incentive to improve the Bitcoin client in order to attract new
users, current users are forced to rely on third party development to improve the
system, which can lead to software
conflicts, further decreasing the system's performance.
The
second aspect that may result in the failure of Bitcoin is its presumed
inability to be counterfeited. One of the most widely known traits of Bitcoin
is its 21 million "coin" cap. The system is purportedly programmed to
never pass this limit, ensuring that Bitcoins will never inflate. However, with this critical task left entirely to the
system, and with no governing entity ever vigilant for hackers developing new
ways to ensure that the currency cannot be duplicated, it may only be a matter
of time before someone finds an ingenious way around the system's safeguards
and finds a way to counterfeit bitcoins. Every user has an incentive to be the
first to hack Bitcoin's system, for whoever discovers it first will be able to
reap a vast sum of money by simply creating and selling as many Bitcoins as
possible until the currency inevitably collapses. What makes this even more
attractive is the fact that, due to Bitcoin's open-sourced nature, so long as the hackers find a way to create
more Bitcoins instead of stealing, their actions will be perfectly legal.
Despite
these flaws, this does not mean that Bitcoin is a great leap forward in the
development of currency. A similar system with a currency cap could be adapted
to work under some form of private ownership, which would result in an
individual with incentives to actively upgrade and monitor the system in order
to attract more users, resulting in greater profits for the owner. So long as
the owner is able to prove that he is unable to inflate the currency, the
result will be a system that is, in theory, superior to Bitcoin. Such currencies
are already in development, and only with time will the market process show
what system consumers prefer.
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