BITCOIN: UNDERSTAND CURRENCY BEFORE YOU GO CREATING ONEThe digital currency Bitcoin is fascinating in design. It is comprised of an elegant equation, the solution to which yields a unit that is limited in supply to 21 million. Super computers, kept cool near the arctic circle in Iceland, work ceaselessly, processing the equation in what is called ‘Bitcoin mining.’ It is a libertarian techie’s dream come true.
The problem with Bitcoin, however, is so simple, it is almost stunning Bitcoin’s creators didn’t take it upon themselves to learn how currencies operate before efforting the complex machinations that sustain its virtual existence.
Since its inception, Bitcoin has fluctuated from around $20 per Bitcoin to over $1,500. When China recently announced it would prohibit use of the currency, its price dropped nearly 50% in one day. Two weeks later, Bitcoin had another snag when an exchange on which it is traded was hacked and undisclosed amounts of the currency went missing.
Those who tout Bitcoin as the currency of the future are quick to assert pride in that is decentralized. Here in lies their flaw.
Technology places a ceiling of 21 million on Bitcoin, but nothing gives it a floor which is why it fluctuates without control. In contrast, the dollar is reined in by the Fed who will buy back excesses until value is stabilized.
For a currency to be successful, it must be a unit of exchange and also a stable store of value. Bitcoin is very easy to exchange but if one moment you have only half as much as you did the minute before, who would take the risk to store significant wealth in such a currency.