Preamble

In the run up to the richly-packed 2012 Bitcoin Conference in London, organizer Amir Taaki (the video game programming guru) said he was amassing and writing his thoughts. And concerning this revolutionary new electronic currency there have to be many.

With monopolistic central banks worldwide embarking on “quantitative easing” - a euphemism for printing lots of money to help bail out stricken banks that have wobbled since the 2008 financial crisis and ensuing depression – sparking perfectly rational and justified fears of destructive hyperinflation, investors have rushed to the safe havens of gold and silver (de facto commodity money), and to a lesser extent, Swiss francs, Norwegian kroner, Canadian and Australian dollars, and so on. Gold and silver are brilliant and always to be recommended, but become rather cumbersome if you want to move them anywhere or actually pay someone with them, especially over long distances.

Electronic money is hardly a new concept, but its earlier failed incarnations such as Mondex were nothing more than attempts at reinventing the wheel. The funds became electronically transferable but it was the same old fiat money, the same old monopolistic central bank and the same middle-man banks charging steep commissions to make an electronic note of a nominal financial transfer. With the advent of common Internet banking facilities and other commonly accessible EFT methods via bank cards, electronic money transfers are now already a firm reality. So what comes next?

Bitcoin goes the whole hog and fundamentally combines the merits of commodity money and worldwide EFTs. It is a “cryptocurrency”, a virtual money in its own right backed up (and produced) essentially by cryptographic strength, reinforcing a network “block chain” of all transactions made since the currency's inception (2009). Bitcoins cannot be counterfeited or printed out of thin air. There is no central Bitcoin corporation, no management, no bank, just peer-to-peer EFTs with virtual sound money. To quote Judge Napolitano and also my mother, “it sounds like something out of science fiction”. And here it is, growing into a reality...

...almost. Only a small number of retailers around the world accept bitcoins for payment, although of course from a development perspective, a small number is infinitely better than none. Bitcoin is still very much in its infancy, although having survived a couple of major bubbles already, looks surprisingly well settled. Its soundness proves itself without recourse to hyperbole or deceit. For the time being, Bitcoin traders have to accept the need to exchange to regular fiat currencies at some point or other, and are therefore susceptible to the whims of the exchange rate (the online Bitcoin exchanges are kind of a cross between a bureau de change and stock exchange or auction house). If the Bitcoin economy explodes, as we hope it will, this will be far less of an issue, just as short-term fluctuations in gold prices do not really concern long-term investors viewing gold as a secure store of value rather than something to speculate on. Businesses have every reason to embrace Bitcoin as it cuts out the middle man, i.e. the bank or credit-card company, thereby saving business untold amounts in commissions and bank fees. Bitcoin payments function like cash, in other words, there is no chargeback facility that you find on credit cards. Just as with a cash transaction, therefore, a high level of trust between trading parties is crucial. A key advantage of Bitcoin, though, is buyers really have no need to prove their identity (thus cutting out identity theft risks associated with named and numbered payment cards). Payments are quasi-anonymous and Bitcoin transactions do not need to be verified by a central authority or clearing house. It is an ingenious application of [a complex variant on] public-key cryptography.

It has occasionally been brought up in the mainstream media, on those rare occasions when Bitcoin has reached the mainstream media, that the currency is already being used for illicit activities. This is true. It is money, and sometimes people do illegal trades with money. This applies to all cash currencies, not just Bitcoin!

Once people are accustomed to the idea of electronic financial wires using sound money with no bank (!), just as with many aspects of the Internet, there'll be no turning back. Incidentally, how did we manage to live without the Internet?