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Bitcoin has seen remarkable success over the past year. More and more people have been using it, and more and more businesses have become willing to accept it as a payment method. As the first widespread cryptocurrency, many people in all walks of life have been paying rapt attention to the young enterprise.
It is thus fitting that Bitcoin was the subject of a recent Heartland Daily Podcast, featuring Bret Swanson, president of Entropy Economics. Swanson shared several of his insights into the potential advantages and problems of Bitcoin.
Swanson characterizes Bitcoin as “a platform for distributed trust.” In other words, the Bitcoin platform, more than just a cryptocurrency management system, serves as a mechanism for the broader establishment of trust between parties in an online peer-to-peer environment that have never met physically.
Swanson explains that the “blocked chain” program in the Bitcoin platform “stores all the transactions that have ever been made.” This is necessary in the trading of bitcoins, because it is the mechanism that prevents their duplication (ie. Counterfeiting). To Swanson, the blocked chain is even more valuable in its broader application as a means of authenticating the identity of another party in a transaction or interaction online.
The blocked chain system is a very important innovation for online commerce as it is a mechanism by which parties can establish trust, an expectation in most sophisticated financial and commercial interactions. Swanson perceives the Bitcoin platform as a way to bring banking and currency into alignmnet with the altered nature and demands of a more digital world.
While Swanson is very enthusiastic about the Bitcoin platform, he has serious, and understandable, reservations about Bitcoin as a replacement currency to more conventional, state-backed currencies. While he acknowledges that there is a certain romance and libertarian impetus to develop an economic arena outside of the clutches of governments, he points out that the Bitcoin market is very volatile, which has made economists across the ideological spectrum quite wary. He is also skeptical of the ability of Bitcoin and its ilk to remain unregulated, especially if it becomes a preferred platform for illicit transactions.
The simple fact is that currency’s worth is in its function as a store of value. The inherent volatility of Bitcoin does not lend itself to this function. While merchants may be willing to trade in it, it has more characteristics of a risky investment than of a true currency. It is also a risky currency because it could simply be superceded by another, better cryptocurrency. The advent of such a competitor could weaken the value of Bitcoin currency, or even wipe it out.
Swanson is right to view Bitcoin with a raised eyebrow. So long as the system is so volatile, people would be better off simply holding cash, or maybe gold, if they want to protect the value of their savings. Bitcoin is exciting, but people should not be blinded by the excitement. That’s how people lose money in a market.