So I’ve been giving a lot of thought to Bitcoin. I was introduced to it by listening to the EconTalk podcast on Bitcoins. Russ Roberts, the host, touched on many important issues regarding Bitcoins, but in my opinion, missed on some others. I want to think out loud on the blog about some of those issues today.

So for those who are unfamiliar, or too lazy to click the links above, Bitcoins are an alternate online currency, whose units are limited, and whose distribution is completely decentralized, unlike previous attempts at online currencies such as beenz or flooz. What this means in practicality is that nobody can inflate currency. Bitcoins are generated at a rate of 50 every ten minutes, and will stop being generated once there are 21 million Bitcoins in circulation, which are divisible down to 8 decimal places. By downloading the Bitcoin software and leaving it running on your machine, you enter into lottery to receive the 50 Bitcoins generated every ten minutes. So you can either get Bitcoins by waiting to win the lottery, or by trading goods or services for Bitcoins. By all accounts, the Bitcoin system is cryptographically sound and hacker proof.

So what’s the point?

Well, there are a few major points that hit me immediately. The first is that this is in essence, the world’s first fiat currency that literally cannot be inflated (Is it even appropriate to call this a fiat currency, since it’s not decreed by force? Can we even call it a paper currency?). This represents an enormous achievement. The second thing that hits me is that in a world of high inflation, this may prove to be a valuable currency worth using, a thought not lost on Russ Roberts or on the creators of the currency. The third thing that occurs to me, that was not at all touched on in the podcast, is that the existence of such a currency proves an enormous threat to Paypal, Visa, MasterCard, American Express, and every bank that makes money on ATM fees and checking accounts. It is, to put is mildly, completely insane that 17 years after the creation of the world wide web, we still pay fees to these types of companies to electronically move money around for us. Arguably, if we had a congress or federal government that did its job, they would have already developed a digital, cryptographically sound currency for us to be able to exchange electronically by now, but we don’t. Regardless, it is this last thought that really makes me think that Bitcoin may have legs.

When you go shopping at a retail establishment, you have likely noticed that many stores try to get you to use cash under a certain dollar amount. Moreover, most retail establishments, but particularly the ones that sell high-ticket items, really try to direct consumers to use their debit cards over their credit cards. This is solely because of the difference between the fees generates when using the debit network vs the credit card networks. Imagine if your will, how much money a company such as Amazon spends on credit card fees. Amazon could allocate a tiny portion of that to Bitcoin development, and the long term rewards would be enormous. Moreover, they could operate an exchange for Bitcoins to existing currencies, one that would be much cheaper and more easily accessible than the current solutions, which charge exorbitant fees or use existing systems such as Paypal to conduct the exchange. Amazon could simply enable merchants to accept Bitcoins, and offer dollar exchanges for flat fees, and potentially initiate a tidal wave.

So the Bitcoin thing has really got my wheels turning. You have a real online currency, with real incentive for major retailers to back it and get out from under the credit card companies. This thing potentially has legs. So i’m going to blog my thoughts about Bitcoins in a few blog posts. I’m sorry if this sort of thing bores you.

Tags: Amazon, American Express, Beenz, Bitcoin, Currency, EconTalk, Flooz, Mastercard, Paypal, Russ Roberts, Visa

This entry was posted on Tuesday, April 12th, 2011 at 10:34 am and is filed under News & Politics, technology. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.