People seem to be very interested in bitcoin. Let’s have a look at what bitcoin is and how it works.
Bitcoin is a digital currency which can be bought at the exchange-rate at the time, or likewise, you may transfer your bitcoins into “traditional” money, be it euros dollars…
As any currency, the most important key is value. What is bitcoin worth? It’s hard to say since bitcoins are very volatile.
To understand why, we look at demand and supply.
The interesting thing about bitcoin, you could say, is the way it’s created. The supply of bitcoins, is actually managed to mimic gold mining.
In fact, this is exactly what people do, I’m not sure how, but you can mine bitcoins, paying a certain price for the software I guess, but creating bitcoins out of nowhere.
However, the amount of bitcoins that can be mined is limited. The supply is said to increase logarithmically, which would be the opposite of exponentially, meaning that the supply will increase less and less until eventually getting to a point where it does not grow anymore, so no more bitcoins can be “mined”.
This concept, of having a steady increase in the supply of money, was actually put forward by Milton Friedman more than 50 years ago.
He argued that the supply of money should increase yearly by 2-5%. He in fact pitched this idea in front of congress.
We know however, or at least I do, (and if you don’t go back and read my other posts!) that when analyzing money, it is not enough to look at supply, we must also look at demand.
Demand can vary a lot, and this will affect the value, even if the supply is “steady”. In this sense, what I mean, is that you can only have over/under supply for a given demand, so supply is subject to demand.
This partly explains the volatility of bitcoin. The demand is very variable, there are many reason for this. Overall, the demand is still unreliable and can vary a lot based on speculation.
In conclusion, bitcoin is a junk currency, but it lays the foundation for a better future.
First of all, it proposes a model, which is somewhat better than what we have, though not perfect. This is to have a steady increase in the growth of the supply.
But secondly, and most importantly, it introduces the world to the idea of parallel currencies.
In a world of monopoly issuance of currency, the idea that someone can create their own currency is a breakthrough in the area of freedom and liberty.