Don't Dismiss Bitcoin Too Easily

 | Apr 08, 2013 | 2:00 PM EDT
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Like many people, I had heard of Bitcoin a few years back but didn't know many of the details about it. I thought it was just some quacky electronic form of money that had been created by a few college kids and now was grabbing headlines because it could be easily manipulated.

Last week, Bitcoin grabbed the headlines as it went from something like a dollar in value at the start of the week, up to $1.18, and then "crashed" back down below $1.10. As of earlier today, Bitcoin's value was over $1.80.

The mainstream media's response to this Bitcoin phenomenon is: It's a bubble. Their coverage has a "We've seen it all and heard it all before" aspect to it.

Over the weekend, however, I read Felix Salmon's excellent account of some of the history behind Bitcoin. It's clear that there is some major thought behind Bitcoin that would be silly to discount.

Some things worth considering:

  • The Bitcoin was born in 2009 in direct response to the financial crisis that was occurring at the time. Bitcoins, unlike fiat currency, can't be debased. There is a finite supply. It cannot be changed by a central bank somewhere.
  • Because of this, it's seen by many -- especially libertarians -- as a modern alternative to fiat currency. Because it's electronic, it's infinitely more practical than carrying around gold bars and rubies in your shoes.
  • The supposed person behind its creation – Satoshi Nakamoto – has now disappeared. That name was likely a pseudonym, and it's likely that a combination of people were behind its creation.
  • The encryption behind Bitcoin allows for sending of money without tracing.
  • It's a highly effective means to transmit money in an electronic world, but it is also prone to some kinds of theft that also cannot be tracked. There is no FDIC for Bitcoin. You're on your own.
  • It utilizes the same peer-to-peer technology that changed the world of music (Kazaa) and telecommunications (Skype).
  • Gains in a Bitcoin world are not taxed.
  • It's likely that governments and large financial institutions will vehemently oppose the proliferation of Bitcoin.
  • The source code for Bitcoin is free and open.
  • Every time Bitcoin gets some mainstream press attention, the value of Bitcoins explodes upward.
  • It has increased from a value of less than a cent in July 2010 to $1.80 today.

Bitcoin is certainly capable of suffering a tulip-like bubble and collapse as time goes on. However, it would be short-sighted to simply dismiss it as some tech novelty.

There is some deep thought and philosophy behind it that makes it incredibly destabilizing for any established players, such as the banks and Visa (V) and MasterCard (MA).

Writing off Bitcoin would be a mistake, although it will take years for its potential impact to be felt.

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