Bitcoin: Money of the Future or Old-Fashioned Bubble?

Posted by M ws On Wednesday, April 10, 2013 0 comments
Patrik Korda holds a bachelor’s degree in political science from BISLA and currently lives in New York, NY, where he works in market research. His latest piece is an excellent read, at least to me.

Excerpt:


Bitcoin has been all the rage lately. The stuff, or lack thereof, runs on peer-to-peer technology, is fully decentralized, has no patents, and is open source. Currently, there are almost 11 million bitcoin units in existence and the maximum amount of bitcoin units that will ever be created by the logic of its design are 21 million. For more details on how they work, see the recent Mises Daily “The Money-Ness of Bitcoins” by economist Nikolay Gertchev.

The Issue

While bitcoins are designed so that they cannot be hyperinflated in name, they certainly can be hyperinflated in substance. Already, there are numerous knockoffs such as litecoin, namecoin, and freicoin in place. This is a particularly valid point because bitcoin is a starfish, i.e., it is fully decentralized. As stated by Ori Brafman and Rod A. Beckstrom,

The starfish doesn’t have a head. Its central body isn’t even in charge. In fact, the major organs are replicated throughout each and every arm. If you cut the starfish in half, you’ll be in for a surprise: the animal won’t die, and pretty soon you’ll have two starfish to deal with.[1]

After the music-sharing service Napster went under, Niklas Zennström (the creator of Skype) stepped in with his creation called Kazaa, which had no central server that could be shut down. Eventually, such peer-to-peer programs became more numerous, to include Kazaa Lite, eDonkey, eMule, BitTorrent, etc. While this may be good news for people who like to download and share content for free, it certainly is not for people who are under the impression that bitcoin is a hedge against inflation. Those who compare bitcoin to a language neglect the fact that most people do not have an incentive to create a new language out of the blue. On the other hand, a great chunk of human history consists of people searching for the philosopher’s stone to magically produce gold. There can be no doubt that bitcoin has a built-in gold rush mechanism, which has already spilled over to litecoin and will be sure to spill over to subsequent knockoffs as well.[2]

Money


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