Merry Christmas folks. And have a happy and safe New Year’s Eve. Lets hope that 2014 is a better year for all of us.
I’ve been toying with the idea of writing a post on the worthiness of BitCoin. First let me get right out in the open that I have a personal bias here: a very close friend (maybe one of my closest friends) currently makes his living writing software for a company that does business specifically around the concept of BitCoin. I assume he has some personal stake equity in the company for which he now works. Obviously, as I am not an envious person, I want my good friend to make millions and millions of dollars! I hope (for his sake) that BitCoin continues to take off in popularity.
Having given that disclaimer, what exactly is BitCoin? Well it is a crypto-currency (of sorts), just data that is stored in your digital wallet, a huge log file of every transaction of that BitCoin (who had it last and what did they spend this coin on to get and what did they get?) since the time the “coin” was created (mined.)
There will only ever be 21,000,000 of these mined, ever. That’s okay since each one goes to eight decimal places so that brings in over two quadrillion possible units of “currency.” Right now, there are (roughly) 12,000,000 total BitCoins in circulation and the price is highly volatile, fluctuating from a low this year of about $100 to a high of almost $1200 (that was until China basically outlawed it.) It is (as of this writing) at around $640 a BitCoin. By the time you read this post, the “value” could be vastly different.
There is no centralized authority assigning “value” to BitCoin. No nation state backs this as legal tender. It is not a legitimized “currency” the way the US dollar is. It’s only value at $640 a BitCoin (or $800 or $300 or whatever) is based solely on what the Free Market feels each coin is worth, nothing else. In that sense alone, BitCoin is not that much different than gold, a “digital” commodity.
And not every vendor accepts BitCoin as payment. Very few do (almost none.) You have to look around to see who does and who does not and how many BitCoins it costs (or fractions of Coins there-of) to purchase a good or service they are attmpting to vend. And the amount of BitCoins for what they are vending, that changes daily (in some cases, changes minute by minute) given the volatile nature of the “value” of the coin.
That is about as much depth as I would care to get into on BitCoin (for now) from a purely factual, objective, basis. If you are interested to find out more, there are thousands (maybe millions) or articles already written that can fill in the gaps. I’m really not interested into getting into all the technical aspects of BitCoin, nor am I interested in arguing the merits or demerits of it. I’m more interested in arguing what might happen in the United States (from a legal perspective) the more this becomes part of the mainstream. Because the way I look at BitCoin, all I see is something that could cause a lot of people to lose their jobs/businesses since what they do would become obsolete!
Have you ever wired money from a bank to another bank? Pretty much every bank offers this service… for a price. That price could be a flat fee (say $50 or $100 or whatever) or possibly a teeny-tiny percentage of the amount of money being transferred. But it costs something. And for those who don’t have a bank account (for whatever reason) on either the sending or receiving end, you can wire money Western Union style (and this is very expensive.) But you can do it. Those services are available and there is always a price….
…but not with BitCoin. You could (in theory) transfer any amount (in “value”) of BitCoins from one digital wallet to another for virtually anything, anywhere in the world, at anytime (24 hours a day, 365 days a year) and the “value” would be transferred instantly and could have essencially NO vigorish cost to either party. A free transfer of funds, instantly. So much for Western Union. That just went the way of the Buggy Whip and the Pony Express not to mention the entire banking industry having a large portion of its business (wire transfers) instantly rendered obsolete. This costs them alot (billions and billions of dollars lost, a million jobs lost, maybe more) who knows? Well I’m of the opinion that they will not go down without a fight. They will do what every industry that doesn’t create any actual wealth does in order to protect its turf and earning power…
….Rent Seeking legislation.
I expect that in the next 3 or 4 years, if BitCoin continues to grow exponentially in popularity, that our lending institutions/money transfer retailers that transfer money will lobby our Congress to enact laws to stop (at ALL costs) BitCoin in its tracks, by any and all means. They will think of something (anything) to protect themselves, to protect their livelihood that is in jeapordy. And they will have allies in their Rent Seeking scheme. Who are these allies?
Have you ever visited another country? For those who don’t have access to credit cards or a willingness to buy travelers checks, they need to exchange cash. Either before they leave or after they get there, they are taking their money in the currency in which it currently exists and buying another form of currency, the local currency. This is a small form of arbitrage. And whoever you do business with (in exchanging money, yours for theirs) there is a price that must be paid. That is how the money changer makes a living….
…but not with BitCoin. If this “digital asset” becomes a mainstream “currency” that is used around the world, there would be no need for money changers. Afterall, a BitCoin is a BitCoin is a BitCoin for anyone, anywhere, in any nation, for anything. All they (and you) need, is a computer that gives both parties access to the same BitCoins and you can cut whatever deal you want. And everything and anything can be priced in BitCoins.
Yes I sincerely see laws being passed at the Federal level in our country to stop this particularly because those who stand to lose the most from the legitimacy of BitCoin are organized, centralized, powerful, and wealthy. More to the point, there is no centralized authority for them to do battle with in their desire to harm BitCoin. BitCoin is intentionally meant to BE de-centralized. For those who adore BitCoin and want it to “change” the world, there will be no one to speak out for “our side.” There will be no organized BitCoin “lobby” to run to Congress to battle the forces of the financial industry. So I think it is just a matter of time before they get around to regulating/criminalizing BitCoin. The real question then is, how will that change things and how long will it take for those Rent Seeking laws to be removed/de-regulated?
So the network has to get a lot bigger before it will have reached critical mass. As I said yesterday, I think Bitcoin’s problems get even larger if it does reach critical mass, because governments will step in to kill or co-opt it. But that’s a post for another day. Right now, I just wanted to explain why Bitcoin needs very high growth levels for a long time if it is to become a serious contender as a payment system.
And by kill it, what we really mean is Rent Seeking legislation on the part of lending institutions lobbying Congress.