Even though the Bitcoin idea appears new, it has been around since 2009. And the idea is part of an important, economic disruption: the emergence of the peer-to-peer (P2P) economy.
The argument for this seemingly necessary emergence is postulated by Charles Eisenstein, author of the popular book, Sacred Economics: Money, Gift & Society In The Age of Transition. “Today’s national and supranational currencies have become a blight…created through interest-bearing debt, controlled by financial elites, tracked by the surveillance state, and necessitating endless growth, money as we know it is a primary agent of inequality, injustice, and ecocide,” states Eisenstein. Really?
He continues to say that one solution for these currency consequences is the emerging formation of the P2P economy. Bitcoin is the first digital currency that can be used in this emerging exchange system, but certainly not the last. It is a fascinating idea, with extremely controversial subtexts. It is a virtual currency used only for online transactions. Though not backed by any central bank, it is traded on a number of exchanges or swapped privately and generated by a process called mining, which requires particular software. Theoretically, it is possible for all computers across the world to run the software and locate Bitcoins by solving an algorithm. The Bitcoin owner has a virtual wallet, and through the use of a key, a transaction can be made through key identification, but not the identity of the user.
Understandably, Bitcoin’s digital money seems to solve many problems from which our current currencies suffer, while also creating many problems that consumers, economists, and bankers have never had to deal with before. This often comes with the new ideas territory.
Low Inflation Risk – Unlike in traditional paper economies where governments can print as much currency as they need, the Bitcoin system is designed to be finite. As of this writing, only 21 million Bitcoins are set to be released, or, mined. No more.
No Government Dependence – As Bitcoin is a global virtual currency it does not depend on governments collapsing or re-emerging. In theory it is not a political product, though it seems that most all currencies created by human beings will become political at some point.
It is safe and cheap – There is really no intermediary involved in a purchase transaction. With credit cards, PayPal and other online payment systems, there are middlemen who are paid transaction fees.
With a Virtual Wallet, money is easy to carry – With Bitcoins, you could carry a million dollars on a memory card.
Bitcoins are untraceable – The final upside is the first downside. For those who have had identity theft through online transactions, this idea of untraceability, or genuine anonymity, is a great relief. No one knows who you are, your Bitcoins can be sent to purchase or sell, and that is that. Furthermore, unless you have told someone about your Bitcoin wealth and your passwords, there is no way for a third party to know how much Bitcoin wealth you have.
Bitcoins are untraceable – Many news items have shown that illegal drugs and other items have been bought and sold with Bitcoin currency.
Lost Bitcoins are LOST – If you lose them, you have lost them for good. There is no system yet to recover the lost or stolen ones.
Bitcoins are volatile – Currently Bitcoin prices are rising. It's likely that the price will stabilize at around USD $10 from the current USD $200. But, each day brings a different price, or so it seems. And this leads to a major challenge: Bitcoin’s value is not yet stable; it has fluctuated wildly, which makes its dubious as a long-term currency. These fluctuations are often due to speculation, which usually happens when supply is fixed (remember: only 21 million will be mined), and demand is erratic. People with money tend to hoard it, expecting its value to rise.
In addition to these downsides, Bitcoin has also experienced its share of serious problems with governments. Under the best of circumstances, Bitcoin expected to be immune from government interference, especially concerning its legality. But when the governments began issuing rulings against it, its market value plummeted.
In November 2013, the United States Senate held a committee hearing on virtual currencies. At this hearing, held by Senator Tom Carper, Bitcoin and other currencies were received generally positively, with it being stated that it was a "legal means of exchange" and that "online payment systems, both centralized and decentralized, offer legitimate financial services." But it was also noted, that the Justice Department's Criminal Division has seen an increased use of virtual currencies for illegal purposes. Some suggested that due to its close association with illegal purchases, governments could outlaw Bitcoin. They are not currently illegal, however.
In the same month, November 2013, Richard Branson announced that Virgin Galactic would accept Bitcoin as payment, saying that he had invested in Bitcoin and found it "fascinating how a whole new global currency has been created," encouraging others to also invest in them.
With all this said, and as of this writing, there are two other recent iterations of Bitcoin that are also doing well as P2P virtual currencies: Litecoin and Freicoin. Litecoin is a peer-to-peer digital currency that enables instant payments to anyone in the world. It is based on the Bitcoin protocol but differs in that it can be efficiently mined with consumer-grade hardware. Litecoin provides faster transaction confirmations (2.5 minutes on average.)
Freicoin is another P2P digital currency, and unlike Bitcoin, has an anti-hoarding mechanism built into it. In the Freicoin system, money is subject to a negative interest or a “demurrage” charge. The value of currency decreases by 5 percent a year, so that if you have 100 Freicoins in your virtual wallet, in a year you will have only 95. In theory, at least, this creates an incentive to spend rather than hoard, which as Charles Eisentein, states is one of the challenges facing Bitcoin.
If all of these digital currencies and their uses seem like an economic version of the Wild West, this is the usual terrain created by new ideas. Some will inflate, some will deflate, some will blend — creating an unusual, new consumer currency community. Stay tuned!