May 30th, 2011
Via The New York Times, an interesting article on the value of Bitcoins:
“…In the currency wars, the nerds are winning. The value of a Bitcoin, a digital currency trading over peer-to-peer networks, has rocketed more than ninefold in two months to more than $8.60 as of Friday afternoon. The preordained supply and decentralization of Bitcoins have intrigued geeks and paranoid inflationistas alike. But this abstract gold may not survive what looks like a bubble.
Bitcoins are actually strings of unique digits, tracked and traded via an online network. People earn new coins by solving network security problems. These coins can then be traded for real currencies on exchanges, or for goods from certain businesses that accept them.
The Bitcoins in a user’s virtual wallet are tracked by the secure system and can be transferred only by that user. Moreover — and here’s the hook for the inflation worriers — the currency can’t be printed willy-nilly. The supply of Bitcoins is on a predefined path and will be capped at 21 million. And because there’s no central point in the system, there’s no equivalent of the Federal Reserve to rewrite that policy.
The concept of the Bitcoin is no less real than regular paper money or coins. All such currencies have only the value their users accept. Bitcoins do, though, have a couple of disadvantages: they don’t generate income, and since they exist in the digital cloud they’d be less use than paper money in any scenario involving power cuts or lost connectivity.
Still, it’s easy, quick and essentially free to transfer Bitcoins. Moreover, transactions are anonymous and the system knows no national borders. That’s helpful for some legitimate users, but also makes the currency a potential worry for law enforcers.
The finite supply means the value of Bitcoins should rise as demand increases. But the latest run-up looks decidedly frothy. A flush user can buy Web design help or alpaca socks. But there aren’t many businesses that accept Bitcoins. So it seems likely that enthusiasts and speculators are hoarding them without regard to the value they really represent. A bubble that bursts when the abstract intellectual appeal fades would probably doom the otherwise creative idea.
This entry was posted on Monday, May 30th, 2011 at 2:36 pm and is filed under Blog. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
