Many people fear that Bitcoin is overpriced right now. This view is held even by people in the Bitcoin community. A crash could bring down the currency unit in devastating ways, leading to another round of debunking and clucking from the advocates of government money.
But here’s the truth: No one knows for sure. Maybe the price will keep climbing. Next month at this time, people might be kicking themselves for not getting in right now. My instincts right now tend in this direction. I’m seeing BTC at US$250, then US$500, and then US$1,000 by year-end.
Why bullish? Government paper is failing at a faster pace than anyone imagined would have happened in the past year. The Cyprus disaster took nearly everyone by surprise. No close observer believes that the latest bandage amounts to anything permanent.
Moreover, the Cyprus save sets in place an incredible precedent: Bank deposits will hereafter be treated as government property first and belong to the depositors only at the discretion of the masters of the money.
It’s no wonder that Bitcoins are being brought from locales all over Europe, including Spain, Greece, Italy, and beyond. This also accounts for why mainstream news outlets are starting to write about Bitcoin as if it were the real thing, something serious, something that really matters on the world stage.
Meanwhile, Bitcoin applications are flourishing all over the Web. Among them:
- Bitspend.net, which allows you to use BTC on any website
- Bitpay.com, which enables payments on any website
- Coinbase.com is a popular place to buy and sell BTC, plus it gives you a local wallet
- Bitcoinstore.com is the emerging Amazon of BTC
- Blockchain.info is the application that many smartphone users choose.
I can completely understand why this emerging currency causes alarm, not just for central bankers, but also for regular people. People have a hard time wrapping their brain around the whole idea of a digital currency. It seems too abstract, kind of sketchy; maybe it is a pyramid scheme of some sort.
Now, you might think that these same people would have just as much trouble figuring out how such a thing as a dollar or a euro exists. After all, this stuff is just cotton fibre paper backed by nothing real at all, and its value has nothing whatever to do with its physical properties. That has been the case for fully 40 years now, since Richard Nixon destroyed the last remnants of the gold standard.
So there is actually nothing entirely unusual about a money being an abstraction. What’s ironic here is that Bitcoins are in fact more ‘real’ than dollars or euros. They are built from 1s and 0s arranged in a particular way to serve a particular monetary function.
Someone might say, ‘But that’s not real. That’s just code.’ Well, actually, code is real, as real as email, YouTube, Microsoft Office, the weather application on your smartphone, or any other piece of software on the planet.
When Bill Gates first started experimenting with the idea of making an economic good out of software and turning it into a commercial enterprise, he was practically alone. The whole idea of ‘commodifying’ stuff made out of code struck many people as outlandish and probably impossible. We know what happened: Code has become the basis of practically every significant economic advance over the last 30 years.
Yet we still have doubts! I’ve thought about this a long time, investigated my own doubts, and here’s what I find to be an additional major point of resistance.
In the world of software and digits, stuff is reproducible. You send an image to Mum and you still keep the image on your computer. When you download a song, you don’t ‘take’ it from anyone; it’s still there for someone else to download. When you invent software, you don’t have to keep inventing it; instead, you sell the same thing thousands or millions of times.
In other words, copyability is the key advantage that the digital world offers over the physical world. The Internet is one big copy machine.
But copying money? That’s not a feature; it’s a bug. Any digital currency has to and must solve the problem of reproducibility. It must be strictly controlled, as with the gold standard. If you want more gold, you have to mine gold.
It turns out that this is exactly how Bitcoin works. The servers run by miners have to work very hard solving complex math problems that grow more difficult over time. You have to use real resources to make more Bitcoins.
But what about those that exist? How can property rights be enforced? This is the real brilliance of Bitcoin. The structure includes a ledger that keeps track of all existing coins and their owners (not by name, but by digits). There is absolutely no way for one coin to be possessed by two separate people. The ledger is open and changes second by second, depending on the trades.
This is why Bitcoin succeeds where every other attempt to make a digital currency (and there were plenty before) had previously failed. Bitcoin assigned property rights to each unit of exchange and made that ownership a major feature of the software itself.
In other words, Bitcoin used computer code to reject what is seemingly the key advantage of computer code: its status as a nonscarce good. Instead, it built scarcity into the code.
Incredible, isn’t it?
What’s more, the integrity of the system itself doesn’t depend on a single institution like a central bank or one big corporation, but instead operates in a completely decentralized way, peer to peer. There are no money masters and no money slaves.
Dollars can be produced infinitely, and this power has been used to liberally since 2008. Bitcoins, in contrast, are mined about one every 20 seconds, and each new Bitcoin has a particular owner and cannot be spent simultaneously by two owners. In other words, it is sound, like the gold standard, and structured to be this way. This is why so many people are drawn to it.
There are other advantages that this currency unit has over even gold itself. Gold in large quantities usually has to be stored. Historically, this gave rise to deposit banks that tempt bankers to blur the lines of ownership.
When accounts are overleveraged and banks find themselves unable to pay out, they traditionally turn to government for help. That’s how we ended up with egregious institutions like central banks.
Bitcoins completely bypass this problem of storage, since they are literally weightless. They cannot be owned by more than one person at a time, so all loan markets will have to emerge within the strict confines of property rights. That means that emerging markets will exist on a sound basis, with no sneaky attempts to blur ownership titles.
Of course, the promise held out by an anonymous, market-created global unit of exchange with near-zero transactions costs can only be described as mind-blowing. Will it continue to advance? No one knows for sure, but my doubts are melting by the day, especially given the incredible failure of government money and the global clamor for a modern currency that serves human needs.
for The Daily Reckoning Australia
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