Bitcoin: Money is What Money Does

   Last week, we discussed in class about money and learned the different uses for it. We talked about its characteristics and examples. We also did an activity on different kinds of commodity such as livestock, gold, wheat, tobacco, manual labour, and so on then talked about its advantages and disadvantages.

          Relating to what we had discussed, we are going to talk about bitcoins as a commodity and its uses.

What are bitcoins and Bitcoin?

         
        Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto.  It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money. Cryptography is the practice and study of techniques for secure communication in the presence of third parties. Conventionally, "Bitcoin" capitalized refers to the technology and network whereas lowercase "bitcoins" refers to the currency itself.

How is it used?

         Bitcoins are created by a process called mining. Users send and receive bitcoins using wallet software on a personal computer, mobile device, or a web application. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies. It is generated by thousands of so-called miners. These are people who, working individually or in groups called "mining pools," use powerful computer components to run software that solves a series of mathematical puzzles. Each time the miner solves the puzzle, they receive bitcoins, which they can trade for currency or otherwise put into circulation.

           So why should they get money for doing this? The argument is that these users essentially become a decentralized version of the Bank of Canada. They invest their own time and resources — like electricity and computing power — and in turn, the bitcoin network is supplied with the processing power needed to maintain a transparent, running tally of all transactions. A similar process applies to all alternative digital currency.

           As of last Feb. 14, a bitcoin is worth $720 Cdn.

This video explains the basics of bitcoin:

Advantages and Disadvantages

        Pros:

• No Third-Party Seizure

          Since there are multiple redundant copies of the transactions database, no one can seize bitcoins. The most someone can do is force the user, by other means, to send the the bitcoins to someone else. This means that governments can’t freeze someone’s wealth, and thus users of Bitcoins will have complete freedom to do anything they want with their money.

• No Taxes

          There is no way for a third party to intercept transactions of Bitcoins, and therefore there is no viable way to implement a Bitcoin taxation system. The only way to pay a tax would be, if someone voluntarily sends a percentage of the amount being sent as tax.

• No Tracking

          Unless users publicize their wallet addresses publicly, no one can trace transactions back to them. No one, other than the wallet owners, will know how many Bitcoins they have. Even if the wallet address was publicized, a new wallet address can be easily generated. This greatly increases privacy when compared to traditional currency systems, where third parties potentially have access to personal financial data.

• No Transaction Costs

         Sending and receiving Bitcoins requires users to keep the Bitcoin client running and connected to other nodes. Essentially, by using bitcoins users will be contributing to the network, and thus sharing the burden of authorizing transactions. Sharing this work greatly reduces transaction costs, and thus makes transaction costs negligible.

• No Risk of “Charge-backs”

         Once Bitcoins are sent, the transaction cannot be reversed. Since the ownership address of Bitcoins will be changed to the new owner, once it is changed, it is impossible to revert. Since only the new owner has the associated private key, only he/she can change ownership of the coins. This ensures that there is no risk involved when receiving Bitcoins.

• Bitcoins Cannot be Stolen

         Bitcoins’ ownership address can only be changed by the owner. No one can steal Bitcoins unless they have physical access to a user’s computer, and they send the bitcoins to their account. Unlike convential currency systems, where only a few authentication details are required to gain access to finances, this system requires physical access, which makes it much harder to steal.

         Cons:

• It is not widely accepted 

         Bitcoins are still only accepted by a very small group of online merchants. This makes it unfeasible to completely rely on Bitcoins as a currency. There is also a possibility that governments might force merchants to not use Bitcoins to ensure that users’ transactions can be tracked.

• Wallets Can Be Lost

         If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have essentially been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy Bitcoin investor within seconds with no way form of recovery. The coins the investor owned will also be permanently orphaned.

• Bitcoin Valuation Fluctuates

          The value of Bitcoins is constantly fluctuating according to demand. As of June 2nd 2011, one Bitcoins was valued at $9.9 on a popular bitcoin exchange site. It was valued to be less than $1 just 6 months ago. This constant fluctuation will cause Bitcoin accepting sites to continually change prices. It will also cause a lot of confusion if a refund for a product is being made. For example, if a t shirt was initially bought for 1.5 BTC, and returned a week later, should 1.5 BTC be returned, even though the valuation has gone up, or should the new amount (calculated according to current valuation) be sent? Which currency should BTC tied to when comparing valuation? These are still important questions that the Bitcoin community still has no consensus over.

• No Buyer Protection

          When goods are bought using Bitcoins, and the seller doesn’t send the promised goods, nothing can be done to reverse the transaction. This problem can be solved using a third party escrow service like ClearCoin,but then, escrow services would assume the role of banks, which would cause Bitcoins to be similar to a more traditional currency.

• Risk of Unknown Technical Flaws

          The Bitcoin system could contain unexploited flaws. As this is a fairly new system, if Bitcoins were adopted widely, and a flaw was found, it could give tremendous wealth to the exploiter at the expense of destroying the Bitcoin economy.

• Built in Deflation

          Since the total number of bitcoins is capped at 21 million, it will cause deflation. Each bitcoin will be worth more and more as the total number of Bitcoins maxes out. This system is designed to reward early adopters. Since each bitcoin will be valued higher with each passing day, the question of when to spend becomes important. This might cause spending surges which will cause the Bitcoin economy to fluctuate very rapidly, and unpredictably.

• No Physical Form

          Since Bitcoins do not have a physical form, it cannot be used in physical stores. It would always have to be converted to other currencies. Cards with Bitcoin wallet information stored in them have been proposed, but there is no consensus on a particular system. Since there would be multiple competing systems, merchants would find it unfeasible to support all Bitcoin cards, and therefore users would be forced to convert Bitcoins anyway, unless a universal system is proposed and implemented.

• No Valuation Guarantee

          Since there is no central authority governing Bitcoins, no one can guarantee its minimum valuation. If a large group of merchants decide to “dump” Bitcoins and leave the system, its valuation will decrease greatly which will immensely hurt users who have a large amount of wealth invested in Bitcoins. The decentralized nature of bitcoin is both a curse and blessing.

Opinion

         I believe that is only the fallacious modernist view of currency that promotes the status quo, and indeed, provides the constant support for the gold standard. Restricting currency to single nations that can control policy has enormous precedent, and that alone will be a driving force against Bitcoin’s adoption. However, unlike previous era’s, I believe we are now quite firmly in a postmodern age where we no longer turn to local powers to affect our desires and in turn, repress the desires of those outside their domain. Rather, I find that Bitcoin’s embodies the individualist yet cosmopolitan spirit that lurks within us all. I think it is clear our current level of income inequality is intolerable and unsustainable. 

So much of the world's wealth is concentrated in the hands of a few. Maybe a libertarian currency regime can help change that.

          Bitcoins are a representation of humanity’s desire to broach the confines of history and precedent, and move forward toward a conception in which all barriers to social elevation and self-actualization have been eroded. Bitcoins might not provide us as much financial security in the short-term, but it would definitely empower us overall.