Bitcoin: Toward a World Currency?

A Guide for the Perplexed

By Shlomo  Maital  


Bitcoin 2

   What is bitcoin?

     It is a virtual digital currency and person-to-person payment network developed by “Satoshi Nakamoto” (not a real name).  It uses cryptography to secure funds.  When you pay in bitcoins, the money is transferred between Bitcoin addresses that are encoded.   You can store bitcoin addresses in an online “wallet”.

    Bitcoins’ use is growing though it is still small relative to total on-line payments. Bitcoins’ value relative to dollars is set by supply and demand.  Contrary to popular belief, there is actually a physical bitcoin.  You can buy a physical bitcoin, which can be broken open to reveal  a piece of paper with the private code or key to a bitcoin wallet with bitcoins in it.

    Is this real money?

     In a sense yes.  Bitcoin is no more ‘virtual’ than dollars, yuan or euros.  Most money is not paper, but instead takes the form of bank deposits.  Bank deposits are created by a stroke of a bank manager’s pen, when he or she lends money. If the bank goes bankrupt, all those deposits disappear.  What could be more ‘virtual’ than that?

  What determines the value of bitcoins?

  The same thing that determines conventional money’s value – willingness of people to hold it and to give up real goods and services in exchange for it. 

   What do we learn from bitcoins?

  A simple powerful lesson.  America today is  endangering the world’s economy and trading system by printing massive amounts of dollars.  This erodes our trust in the dollar; without a secure currency, we cannot run a global economy. And 80% of foreign trade transactions are still done in dollars.  (Note: The yuan, or renminbi, has just taken over as #2!).   Bitcoins’ amount is more or less fixed.  So their value cannot be destroyed by overprinting.  The value does fluctuate a lot, because of speculation; it started at $50, rose to over $1200, is now done to just over $600….

   Can you, say, travel the world and pay only in bitcoins?

Yes, one couple did.  But it was really really difficult.

    Could bitcoins take over from conventional money?

    No, but – perhaps they should.  In 1944, at the Bretton Woods conference, Keynes suggested a world money, bancor, issued by a world central bank.  This world money would be issued in just the right amount to finance global trade and investment, avoiding both inflation and deflation.  Bitcoin is kind of similar.  It does show that we could, if we wished, create a virtual world money, solely for global trade and finance.  It would avoid the perils of being dependent on the irresponsibly-managed U.S. dollar.  Perhaps we will have to have another serious world collapse to make this happen; even then, America is unlikely to agree.