Digital Money: Bit Coin, Cryptocurrencies and the Block Chain - Part 2

Money Revolution

Aside being a digital currency, whats the big deal with Bitcoin? Well there's two big deals Bitcoin actually - its peer to peer so under the control of no single entity and second its anonymous. 

Peer-to-peer money:  All currencies, like the one used where you live are controlled primarily by a Central Bank or government agency. A bank authorized by the laws of your country to regulate the supply of money and ensure fiscal stability. At least thats the official line.

Now in a monetary economy like we live in, the control of money supply comes with great power -  power to decide who has access to money, power to control how much money exists, how much money people can share with each other etc. Worse still in a globalised world, more powerful countries can dictate the currency of global trade then use access to that currency as a political weapon.

To peer-to-peer cryptocurrencies allow private citizens to escape Central Bank/government dictated controls, restrictions and power. You can keep as much money in your wallet as you wish, send it without being tracked and you won't fall victim to the Central Banks money supply dictates. 

This may be a difficult motivation to understand, but when you consider how much control a government can exert on its people (or even the world in the case of the US and the Dollar), it makes good sense. Another thing to consider is that almost every country in the world has outlawed the creation and use of alternate currencies  within their borders - precisely because they don't want to lose the control.

Anonymity: A very important concept in an age where governments and corporations seek ever more information about us - motivated by paranoia (governments) and greed (corporations). Spending money without being tracked is very important for ordinary citizens to avoid the prying eyes of paranoid and potentially authoritarian or oppressive governments and to those of corporations seeking to track our every spending move so they can shove advertising down our throats. More seriously privacy is the one fundamental human right that it is casually and openly violated - the anonymity of crypto-currencies like Bitcoin offers refuge from this.

Now that we understand the motivation for crypto-currencies lets take a look at there weaknesses.

Double Edged Sword: Bitcoins anonymity and peer to peer nature are both its strength and its weakness. The anonymity of Bitcoin has been exploited by criminals to allow the on-line trade of vice on an industrial scale. 

The most notorious example of this is the closed Silk Road which allowed the open trade of narcotic substances, child pornography, adult pornography and Hitmen's services away from the prying eyes of law enforcement. Bicoin and Tor combined to make it virtually impossible to trace those involved. At its peak Silk Road did $15 million in trade annually. 

Silk Road's popularity and that of similar copycat sites have tainted the image of Bitcoin (its worth noting that the US dollar while the currency of legal global trade is also the currency of illegal global trade from human trafficking to narcotics. So don't be quick to judge a currency by how some choose to use it)

Another weakness that Bitcoin has is its complexity. While this is rarely a problem for technology (provided the user interface is simple). In Bitcoins case it becomes a problem because it is money and unlike regular money that is associated with a trusted authority (like a Central Bank), Bitcoin is associated with  . . . no one really. Hence it has to be explained, which is tough because its really mathematical and complicated to the average Joe.

Should you invest in Bicoin? The recent rise in the price exchange rate of Bitcoin against major currencies is not due to its growing acceptance as a medium of exchange - and the demand that would follows. No, its mainly due to speculators, encouraged by favorable regulation (or the lack of it) and who see its near-future potential and are pouring money into Bitcoin.

The sharp rise in demand and ever more favourable exchange rate has mean't  Bitcoin looks attractive as a temporal investment.

However the instability caused by speculation has weakened Bitcoin. Weakened it in that businesses are less willing to accept it as a medium of exchange. Bitcoin so volatile that sticking a price on an item in Bitcoin is just not possible. No trader wants an unstable currency and traders are starting to abandon Bitcoin - an example is content distribution site Steam recently dropped Bitcoin as a payment option.

Another impact of this speculator 'pile in' into Bitcoin is that ordinary people are taking out mortgages, loans and chunks of their paychecks to invest in Bitcoin. If the exchange rate tanks (as it has done by 30% this week), they will struggle and often fail to service their debt. Consequently, banks that have lent heavily to such investors will find themselves over exposed and risking insolvency. . . . remember 2008???

My advice is this invest short term without taking on any debt, make a bit of money. 

BUT, remember above all treat Bitcoin as a currency. If you sell goods or services, accept payment in Bitcoin. If you remit money to relatives in a far off country, send them Bitcoin instead of dollars or euro's. Once Bitcoin becomes more widely accepted it will remain strong against other currencies.

What do you think? Whats your investment advice. Would you use Bitcoin to buy and sell? Comment, share and follow this blog.