BitCoin – a monetary revolution

E-gold was an exciting development in the world of money. E-Gold is a kind of private currency, although to be strictly correct it is an electronic account keeping and payment system that monetises gold. E-Gold provides an electronic means of making payment in units of value called gold grams. Every electronic gold gram is backed by a real gram of gold. If you had enough electronic gold you could trade it in for real gold. I thought the system was brilliant. At it’s peak the annual value of transactions in E-Gold was worth the equivalent of billions of US dollars even though most transactions were very small. And this volume was growing at about 50% per annum. However a few years ago the velocity of the E-Gold currency plummeted to zero following US government action against the operator of the system. I regard the treatment dished out by the government as malicious but that’s another story. The point is that what looked for a short while to be a revolutionary new form of private currency, divorced from direct government control, and on a rapid growth trajectory, was quickly cut down by a hostile government. There are alternative digital gold currencies that still operate such as GoldMoney, but they don’t seem to have the same momentum as a payment system that E-Gold once offered.

Governments will always be able to shut down any serious alternate money schemes. Or at least that’s what I thought until I recently discovered BitCoin.

BitCoin is a cryptocurrency. It entails using encryption techniques to trade and verify electronic tokens between computer users. It is essentially anonyomous like cash. I had looked at such systems in the past but all seemed to rely on the need for a central clearing house during any exchange of the tokens to avoid fraud such as double spending of the same electronic token. And any private currency based on a central clearing house is vulnerable to shutdown by hostile government authorities. BitCoin has a clearing house but BitCoin get’s around the clearing house problem in a really neat way. The clearing house is a distributed peer to peer system. There is a clearing house but it does not live anywhere and is not controlled by anybody. It is a community based system tied into a set of open source algorithms that can’t be changed unless the majority of the community agrees to change them by replacing their individual implementation. And the larger the community the harder it becomes to change the core algorithm. A hostile government authority can’t kill the system by going after a person, a company or a particular datacentre. In a way the BitCoin clearing house is like the BitTorant network that people use for sharing pirated movies and music. Even if they make it illegal nobody can police it. In essence BitTorant looks on the face of it like a private online currency that is unstoppable. The future of online commerce will be a BitCoin cash economy.

There is a lot more to say about BitCoin. About how the unique BitCoin creation process will soon lead to BitCoin deflation (BitCoins are currently exchanging at about US$0.90). However none of this really matters because the technique is now available to create BitCoin competitors if it turns out that there are economic limitations that impact the practicallity of the original. The code is open source. Anybody with the right programing skills can create BitCoin2, expound it’s superior benefits, create an anonymous peer to peer community based clearing house and compete with the original.

One other cool thing about BitCoin. Nobody knows the real name of the BitCoin inventor. It is just “out there”.

11 thoughts on “BitCoin – a monetary revolution

  1. I do not see any reason to split BitCoin or generate a branch. I do not know a single person who has used BitCoin even just a little and supports branching it, unless the block chain is kept.

    There exists a new consensus on what the world’s independent currency is, and you will see that this consensus is worth more than meddling in petty details such as the timespan in which coins are created. I am not an early adopter, but I think it is fair to reward those who are for starting the system. A handful of people getting rich for doing that is an acceptable deal for the rest of the world.

    Also, I think BitCoin is not actually far away from the optimum. It is well designed for the purpose of steady growth and stable value. If it ever reaches critical mass, there will be no stopping it — and from the looks of it, this might happen this year.

  2. Where do you have your rate from? MtGox has only exchanged below .8 USD for almost two weeks.

    Current price corridor is .75 to .8 USD/BTC, take a little for MtGox withdrawal fees affecting asks more than bids.

    There’s always a lazy dude using PayPal to buy some coins somewhere, but that’s not the price people trade at above 1000 BTC.

    Of course, maybe you think it’ll rise above .9 again, as it did before. But that’s foretelling the future, and if you’d truly know it’ you’d be on the market now buying BTC. 😉

  3. There is no “consensus”, everyone just follows what the major client program is coded to do. If googles client program ends up being used by the majority, google can put out an updated that changes the inflation rate. Sure *many* people will be angry, but if heaps of laypeople are using the system, the currency will fork, and the majority will be on googles side. (Im just using google as an example, anyone can do this).

    Also, any government on earth at the moment could steal all wealth from bitcoin easily by simply faking a huge amount of transactions until they become trusted as part of the chain then forking it.

    Bitcoin is exactally opposite of how you want an ideal money system to work. You want each transaction to be accepted and rejected by ONLY those involved in the transaction. Bitcoin accepts or rejects transactions based on majority!

    It is nothing more than a democratic currency, and one that I am surprised libertaians don’t see straight through.

  4. A democratic currency is superior to a currency controlled by the government. Even if the government is elected democratically.

    You might be right that the government could take over Bitcoin but can they take over BitCoin2, 3 and 4. Possible is not the same as practical. The law suites filed by the music industry against the music sharing sites may have defeated a few but it didn’t stop the trend.

  5. Bet you wish as much as I did that you’d tried to predict the future…

    From .8 USD when Terje wrote this post to $17 USD now…


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  8. The thing with a commodity like gold is that when the price goes up, more is mined, and when price goes down, less is mined. This acts as an automatic stabiliser for price.

    Bitcoin, on the other hand, releases new coins at a constant rate. The difficulty is adjusted by the network to be inversely proportional the amount of mining. The market has no control over supply, which I believe contributes towards it’s instability.

    What I propose is that the difficulty instead be proportional to the number of coins in existence.

    This way the miners will act as a stabliser on the price, mining less when the price goes down and more when it goes up.

    I’m thinking about doing this fork and releasing it, as it should involve only a few minor changes to the source. This might annoy the people that got in early when people were paying 10000 bitcoins for a pizza, but I think new adopters would rather deal with something that isn’t doubling or halving in price every other day.

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