Can Bitcoin Last?

We’ve been hearing odd terms like Bitcoin and crypto-currencies for some time.  For the most part, these terms had no meaning for the average person and the average person didn’t understand how these so-called crypto-currencies “work”.  Now, however, we hear that Bitcoin has rampaged upward in value; that people are becoming Bitcoin billionaires; and that Bitcoin is just one of many crypto-currencies. 

We also hear that Bitcoins are being accepted by many businesses especially online businesses.  We hear that you can play at online casinos with Bitcoins.  You can also play online games free but if you want to play for real money, Bitcoins are an option.

So, suddenly everyone wants in on Bitcoin but it’s still true that most people don’t understand how Bitcoin works.  Here is a short tutorial on Bitcoin.  In some aspects it applies to all crypto-currencies and in other respects it’s unique to Bitcoin.

Decentralized Money

Money is called a medium of exchange.  It’s also called a store of value.  So, if Bitcoin is accepted as a medium of exchange and if it can maintain its value over time, then Bitcoin and by extension all other crypto-currencies can be called money. 

The first key difference between Bitcoin and national currencies is that national currencies are run by central banks and Bitcoin is completely decentralized.  In theory, no government can manipulate Bitcoin in the way it can manipulate its national currency or the currency of any other country.

For millennia gold and silver were the primary stores of value so currencies were either made from gold or silver or were backed by them.  Today, no national currency is backed by gold or silver.  Instead they are backed by the government that issues the currency.  Some have said that that is comparable to letting wolves guarantee the safety of sheep.

Bitcoin is backed only by itself and its “mining” methods.  In this way, it resembles national currencies with one important difference: there is a limit to the number of Bitcoins that can be “mined” unlike national currencies which can be created out of nothing by central banks.

Bitcoin’s supporters claim that eventually people will lose faith completely in national currencies.  We believe that it is next to impossible for every national currency to implode and be replaced by crypto-currencies.  National currencies often lose all or almost all of their value and that will likely continue forever.  But it seems far-fetched to think that central banks will be unable to create a new national currency if the present one implodes.

While national currencies as a group will survive, Bitcoin may very well take a prominent place in international commerce as merchants decide that in big money international transactions, Bitcoin is more stable and reliable than national currencies.

It would be bad for the United States dollar to be replaced by Bitcoin in much international trade but it wouldn’t be bad for people in almost any other country and it certainly would be bad for holders of Bitcoins.

Bitcoin Exchanges

There are many places where you can buy Bitcoins.  Some say that the advent of Bitcoin exchanges is a very bad development and that central banks and governments should stop the practice.  Bitcoin exchanges are exactly like stock exchanges or commodity exchanges.  They are like exchanges in any commodity bought and sold anywhere in the world.

If you make corn flakes and you need many tons of corn, you buy them at a commodity exchange.  The same holds true for oil, cotton, metals, and numerous other commodities.  It is a very important development that Bitcoin is already considered a commodity.

Tracking Bitcoins

These are called “block chains”.  It is no more necessary for you to know how a block chain works in order to use Bitcoin than it is important to know how financial transactions in national currencies are tracked. 

Wild Rise in Value

The massive rise in value of Bitcoins was owing to three factors.  First, people are finding national currencies less and less trustworthy and are looking for an alternative.  Crypto-currencies represent one such type of alternative.  It is still far too early to know if crypto-currencies will remain a viable alternative to untrusted national currencies.

Even if crypto-currencies do last there is no guarantee that Bitcoin will last.

Faith in Bitcoin

The second reason that Bitcoin has risen so far so fast is that at this time people do trust Bitcoin even though they have no real understanding of what it is.  If one thousand dollars buys a given basket of goods and a given number of Bitcoins will buy the same basket of goods, it can be said that Bitcoins are money because they are both a store of value and a medium of exchange.

Low Supply of Bitcoins

A growing number of businesses are accepting Bitcoins.  We see this very prominently in online casinos but businesses in many industries either accept Bitcoins already or are gearing up to do so.

As more companies accept Bitcoins, there will be increased demand for them.  But the number of Bitcoins s strictly limited.  Thus, the law of supply and demand in economics dictates that Bitcoin will rise in value against national currencies.  It won’t make goods and services more expensive.  It will make Bitcoins more expensive.

The End of Cash

Bitcoin is actually money that exists only as computer software.  Therefore you’ll never buy something with Bitcoins and get change back.  Because Bitcoin is entirely digital it represents the first salvo in the movement against cash.

The ultimate success or failure of Bitcoin will rest on the public’s perception of it as a store of value in place of national currencies.  If national currencies go cashless, there will really be no reason not to use Bitcoin for purchases.