Jay LeonardBitcoin, the virtual currency that has many economists and monetary officials scratching their heads, continues to create waves with the US Marshall Service’s announcement of a new major auction of the currency. Why all the racket around Bitcoin? After all, it’s just another fad. It will pass. Or will it?
No one knows but the way things are shaping up, Bitcoin could be the future of a new global financial system. In a world where global trade is the norm rather than the exception at every level, from individuals to large corporations, there is a clear need for a universal currency.
And it’s that same world that is clamoring for a currency system independent of government whims and of the current financial system’s control.
After all, these are the same institutions that managed to tank the economy so effectively in 2007, bringing about a recession we still haven’t recovered from. It wasn’t called the Global Financial Crash for nothing. Is it surprising no one trusts them?
Why All the Fuss over Bitcoin?
In this mess, Bitcoin rises like an angel come to offer us salvation because it isn’t under the control of a single central authority, like fiat currencies. It’s also a currency that is not subject to inflation because, unlike fiat currencies, which can be printed at the will of the government, the Bitcoin can only create a finite amount of the currency. Only 21 million units will ever be produced and since the “manufacturing” system is extremely complicated and requires a lot of computing power, technical knowledge and patience, creating Bitcoins is nothing like printing another round of dollars.
Unarguably, Bitcoin offers a wide range of benefits, but for established economies, it also poses a threat because, essentially, it’s competing with the dollar. More and more businesses are accepting payments in Bitcoins and an increasing number of high-profile buyers are switching over to the virtual currency. After all, Bitcoins don’t depend on the health of a particular government and hyperinflation will not affect the currency or result in a collapse.
Plus, who doesn’t want to avoid lining the pockets of the very financial institutions that got us into this mess in the first place. Bitcoins can be transferred on a peer-to-peer basis, so there’s no intermediary taking a large chunk out of the transfer as payment for their services, making trade cheaper.
So, in all this, you’d expect the government to side against Bitcoin. If the virtual currency replaces the current financial system, it wouldn’t bode well for a government that relies on the Fed to print its money. The government would, basically, be unable to pull itself out of any holes it dug itself into. Quantitative easing would be a thing of the past.
To Bitcoin or Not to Bitcoin?
The government, in a surprising move to some, seems to have jumped on the Bitcoin bandwagon. At least to a degree.
Last fall, they shut down the underground site, Silk Road, where drugs and other illegal goods were sold, among others. In the process, the FBI confiscated 30,000 Bitcoins that belonged to the site and another 144,000 that belonged to the alleged owner, Ross Ulbricht.
Now, the government had a choice. Make the currency disappear or use it. In summer, they auctioned off 30,000 Bitcoins, and though the amount they sold for wasn’t disclosed, the rumor mill says they were sold at market price, which was $645 at the time. In other words, the U.S. Marshals would have netted $19,350,000 on the deal, which isn’t exactly chump change.
And they’ve announced a new auction, slated for the 4th of December of this year, where 50,000 Bitcoins will be auctioned off in two rounds. The first round will consist of 10 blocks of 2,000 units while the next round will be made up of another 10 blocks but of 3,000 units.
Does this mean the government is insane? By auctioning off Bitcoins, the government is admitting and validating their value. They are saying, essentially, that Bitcoins are not only legal but an accepted form of tender. And with the government being the seller, new investors are joining the game who might have felt reticent about sourcing their virtual currency from unknown sellers previously.
With more people joining the game, it means an increased level of circulation for the virtual currency, which means the government is expediting the economic collapse of traditional financial institutions – something that many believe will happen if Bitcoin does succeed in replacing fiat currencies.
So, is the government is cutting its own throat? Well, not really. It means that, for once, the government is waking up to smell the roses before the proverbial manure hits the fan and they get caught in the crossfire. They’re hedging their bets, but it doesn’t all have to do with Bitcoin as a virtual currency. It’s what other countries could do with Bitcoin.
Bitcoin as the Reserve Currency of the World?
There are many countries that would love nothing more than to undermine the status of the dollar as the world’s reserve currency and, if possible, remove that status entirely. Since the GFC, countries like China and Russia have demanded the removal of the US dollar as the world’s reserve currency, and if that were to happen, the dollar will crash and the results won’t be pleasant.
So far, this hasn’t happened because all the countries in question would have to agree on a currency to take over as a reserve and with trust being such an issue, an agreement seems unlikely.
Enter Bitcoin, a virtual currency with no allegiance, no color, a form of money that isn’t controlled by anyone. It might not be the ideal situation, but for certain countries it’s preferable to being under the boot of the United States, in their view.
If the US government were to try to discredit Bitcoin or, at the very least, ignore it, there’s a good chance it would end up fighting countries like China and Russia in a currency manipulation game that they can’t win. By being an early adopter of the currency and throwing their support behind it, they are proactively defending against exactly this situation.
The more widespread the use of Bitcoin is, the less likely it will be that any one country will have a large enough hold on it’s e-commerce to push for it to become a reserve currency, so maybe the feds know what they’re doing.
This article was written for Business 2 Community by Jay Leonard.
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Great article. I have been following bitcoin since buying my first about 22 months ago, but for the past 8 months, have been really studying both bitcoiin and the blockchain technology and protocol which underlies it. Bitcoin (with a big “B”) will most certainly and absolutely change the world and the way we do business, while “bicoin,” (the currency, with a small “b”) definitely has the potential to lead the forefront of financial transactions, “smart contracts,” escrow, notary, and many other as-of-yet not discovered capabilities. Once adoption hits a certain critical mass, the volatility will begin to stabilize, with the general market value direction inclining.