Deficits, Dollar, Dubiously Free Trade, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn

Bitcoin: A Totally Decentralized P2P Digital Currency

I can’t think of anything that might get a government more riled up than a threat to their monopoly grasp on currency. It was the patriarch of the Rothschild international banking dynasty, Mayer Amschel Rothschild, that said, “Give me control of a nation’s money and I care not who makes her laws.” Of course it is a federal crime to make “counterfeit coins”, and the government does not take kindly to anyone interested in putting out competing currency into circulation. Just ask Bernard von NotHaus of Hawaii. His “Liberty dollar” featured the image of Texas Congressman Ron Paul, and von NotHaus intended for the coins to compete with US currency. With the incredible devaluation of the dollar over the last few years, it’s not hard to see why the free market might like an alternative.

Anne M. Tompkins, the attorney for the Western District of North Carolina, described Bernard von NotHaus and the Liberty dollar as “a unique form of domestic terrorism” that is trying “to undermine the legitimate currency of this country.” She also went on to say, “While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country”. Domestic terrorism, huh. Bernard and I are not friends, but doesn’t he appear to be a guy that didn’t like the Federal Reserve and the tax code, and took action?

The problem for the feds with Bitcoin is that it is digital, so the whole “counterfeit coins” defense becomes more difficult. Bitcoin is starting to gain a lot of notoriety in the mainstream. For those that are just getting up to speed, Bitcoin is a fast-growing digital currency network that is totally decentralized. The peer-to-peer (P2P) currency is totally anonymous and untraceable. This video from Bitcoin’s website will provide a proper introduction:

As predictable as a sunny day in Palm Desert, the government has taken action against Bitcoin.

Senators Charles Schumer of New York and Joe Manchin of West Virginia became concerned after Gawker reported that people were using a website called “Silk Road” to purchase illegal drugs with Bitcoins. They wrote to Attorney General Eric Holder and Drug Enforcement Administration (DEA) head Michele Leonhart, urging them to take action against Bitcoin. This intersects two of the most reprehensible government initiatives: the War on Drugs and a monopoly on currency. We live in a country with 4.5% of the global population, and 23.5% of the world’s inmates. That is a sad commentary on freedom, particularly when you consider how many people sit in a jail cell 16 hours/day for possessing small amounts of cannabis. 40 years after President Nixon declared a War on Drugs, it still costs us billions of dollars every year. Maybe its time to take a page out of Portugal’s playbook and decriminalize the use and possession of heroin, cocaine, marijuana, LSD and other illicit street drugs. The Portuguese focus on treatment and prevention. Since these actions were taken in 2001, the number of deaths from street drug overdoses dropped as well as the number of new HIV cases caused by using dirty needles.

Of course Senators Schumer and Manchin did not address the threat Bitcoin imposes on the dollar and government power, but the concerns about untraceable drug transactions is a nice veil. Let me think, what else could you use to anonymously pay for illegal drugs? Hmm, CASH. So by the Senators logic, I guess we will be ending the circulation of physical cash soon.

Having been up and running for about a year, Bitcoin has appreciated significantly against the dollar. To give you an idea, Bitcoin users say on the forums that one of the first ever transactions using bitcoins was to buy a pizza online. One year ago, that pizza cost the consumer B$10,000. After a year of appreciation, B$10,000 is worth roughly US$140,000.

The nice thing about bitcoins is that they are not arbitrarily created. Bitcoins are awarded to users referred to as miners. The reward is for their participation in processing transactions, securing the network, and providing the electricity and CPU. In other words, for providing value that is essential to the process. There are about 6.5 million coins in circulation and about US$500,000 changes hands on a daily basis. There is no need for a financial institution in the Bitcoin network. The amount of bitcoins in circulation is kept in check by the amount of CPU required to mine each additional coin. In fact, the difficulty for miners increases exponentially with each additional bitcoin, guaranteeing a steadily growing currency supply, but one that is ultimately finite. It is a decentralized, potentially improved version of Milton Friedman’s plea for a steady yet static growth of the money supply by the Federal Reserve. The number of bitcoins constantly grows, but in response to built-in constraints and with ultimate limitations. Bitcoins are awarded in a predictable way.

It’s not hard to see why the government is scared of Bitcoin. The network is still in its infancy and there are plenty of skeptics out there. This guy writes off Bitcoin on the basis that they are “a little like a very well sealed, very well documented box with nothing inside.” He continues, “Now, if there were a way to put something in the box, BitCoins could become a very good currency, but the current incarnation of the technology does not allow for this to occur. A good analogy for a marketplace using BitCoins would be to imagine a group that plays ‘catch’ with an imaginary ‘ball’ (a game I remember playing a few times back in elementary school), except that instead of playacting, the group actually believes they are playing catch.” So Bitcoins have no commodity backing it, therefore they’re not worth anything? This guy gets fairly well lit up on the comment section (of the above link) by folks pointing out his obvious omission: fiat money has nothing backing it either, only faith that it has and will retain value in the monetary system.

Bitcoin may be in a massive currency bubble right now. Who knows? It may be a flash in the pants akin to one-hit-wonder Harvey Danger’s ‘Flagpole Sitta‘. However you slice it, it’s pretty damn cool that the free market has produced a decentralized competitor to fiat money, even if the government shuts it down in the end. The longer it survives, the more online vendors that accept it as payment, and the more awareness it has, the better off we all are.

Photo Credit: Wikipedia

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