I’ve been pretty intrigued by bitcoin lately. If your not familiar with bitcoin you can of course head over to the wikipedia bitcoin entry or you can head over to this no nonsense post bitcoing post on gizmodo . In a nutshell bitcoin is an on-line digital currency (sometimes referred to as a crypto-currency) . You have a digital wallet (which you create) and then you can transfer bitcoins in and out of it to buy and pay for stuff , just like a regular currency.
There’s a who lot to bitcoins online, so I suggest you take a gander on some of these articles to find more.. Planet money even did a podcast on bit coin its worth a listen. Its still a bit of a fringe way to exchange goods for money, but that is changing, its slowly going mainstream.
While I’m intrigued by the digital currency prospect, I’ve also come to realize bitcoin has a long way to go before it can become a mainstream currency. It does have some amazing potential (non government controlled, universal, egalitarian , elegant digital design) but some of this potential could also lead to its downfall, below I’ll point out some fails and possible solutions, feel free to chime in.
Why bitcoin may likely fail…
- It’s still too fringe, and too hard obtain: Yes, friends bitcoins are actually darn hard to get. I have tried and the process is elaborate and I’m still bitcoin-less. The average Joe will have no patience for it. It needs to be way easier.I understand that these are the early days. But the number one thing in spreading this currency is availability and ease of use. Its still a bit of a fringe currency. This can and will likely change over time. At its simplest I should be able to go online, present some validation credentials and point to my digital wallet and be able to exchange dollars for bitcoins etc. Right now it’s possible to do this , but it requires a lot of steps. Few places will convert dollars for bit-coins and the ones that do require a lot of setup to make it happen.
- Its a currency that relies on a lot of technology and infrastructure: This may be the biggest and perhaps most insurmountable problem. Bitcoin relies on the following:
- a global, free internet, with consistent secure accessibility,
- built on top of a accessible network of servers, that can freely communicate
- all built on top of a reliable power grid and network infrastructure.
- Not to mention that it requires client computing machines, compatible with the various digital wallets that have to communicate with this global network.In other words bitcoin relies on a lot of technology and infrastructure just to work. Compare that to the simple paper dollar bill or gold coin. All I need to do is show it or exchange it for some goods or service and that’s it.. If there’s a break in any of these points of the infrastructure ( power grid goes down, governemnt blocks internet access, worm of virus destroys data) , it poses problems. That’s a big advantage traditional currency (physical currency) has over digital currency.
- Established government currencies will fight back: Bitcoin is simply too insignificant at the moment for any government to be concerned . But the reality is if large amounts of monies or transactions begin to flow into bitcoin (or any alternate currency) for that matter, governments will likely quickly enact laws or barriers to prevent the currency from working. What’s great about government currencies is that they are completely backed by the faith in the government, If governments lose control over that faith its a problem for them. This is a problem because bitcoin is government neutral and should it ever become truly popular, it could create all kinds of financial ripples that may upset the established currencies. I try to avoid thinking in this conspiratorial fashion, but it doesn’t really require a lot of analysis to reach this conclusion. Governments will fight to retain control over a key economic instrument. Anything is possible from making bitcoin illegal, to suspending currency-conversions, to disabling bitcoin domains (exchanges) etc. While it may not happen overnight any quick shift to this digital currency may lead to government intervention.
- It’s being labeled as the new way to foster illegal transactions: You’ll see it mentioned bitcoin is favored by folks doing illegal activity (drugs etc.) as a a way of exchanging currency for goods while remaining anonymous. Frankly this argument can be applied to any currency. I’m sure paper dollars are 10000x more favored than bitcoin for any illegal transaction. But this is one negative stereotype that will likely persist because bitcoin is anonymous and for some people thats why they like it.
What would it take to make bitcoin future-proof and a truly usable currency.
Here are my suggestions and ideas on what it would take to make bit coin future proof.
- Bit coin must be capable of working off-line(non-networked): This to me is a big one. I understand that the nature of the technology requires a network for transaction verification, creation and dissemination of bit-coins and so forth. But I think its completely possible to have a local version of this.
For example , if say two people with mobile phones need to exchange currency without a network connection, this should be possible. Some sort of mobile or scaled down version of the verification process should work in a peer-to-peer fashion and then at a later point when the network becomes available , the transactions can be re-synced online. I suspect the technicalities of this are difficulty, but not insurmountable.Without this the currency becomes useless for what currencies are good for immediate exchange of goods for money. This has the added benefit or removing some of the infrastructure and technologies reliance vulnerabilities.
- Bitcoin must be easily convertible to gold: Some mechanism (aka a defacto exchange rate) must be established for easily converting bitcoin amounts to gold equivalents Why gold, well because it is the defacto and universal offline, physcial currency. Virtually everyone, everywhere understands the value of gold and in the simplest sense its the ideal established currency.
- Bitcoin needs to be more universal This is happening already and baring any major calamity (intentional government actions to prevent it, magnetic solar storm , etc. ), it will become more and more available and popular in advanced nations. But its still too fringe, and some major player (aka killer app) needs to make use of bitcoin to bring it into common usage.
- It needs to be trusted: At the end of the day, currency is really about trust. You trust in the dollar bill when you go back a pack of cigarettes at the store because you know the shopkeeper will give you the cigarettes, and he trusts that the bank will accept the dollar you gave him, so he can buy stuff for himself. That trust is caused by the acceptance of the currency and by how easily it can flow from one person to another. In the modern world trust in an established currency is the most important concept. Bitcoin is not their yet.