Friday Report: It’s a brave new world beyond paper scraps
February 12, 2014
"Money, it's a gas "Your cash ain't nothin' but trash,"
Grab that cash with both hands Steve Miller
And make a stash"
Everybody smiles when they own a big pile of cash. Cash is king. Cash is . . . what? Actually, your cash ain't nothin' but paper scraps that the Feds burp out whenever they feel giddy and daring. A dollar bill is just a few pennies worth of paper. If you think about it, cash is a lot more faith-based than religion. We play a game amongst ourselves that says, "you tell me what your cow is worth and I'll give you some little pieces of paper. Then you ask your neighbor what his pig is worth and give him those same little pieces and then we'll do it all the way around the block and call it a brisk economy."
Everybody world-'round knows and understands cash, but what in the world are bitcoins? Glad you asked. Bitcoins are currency just like the peso and the euro, except they're not regulated by anybody. Oh, and don't bother looking in your penny jar for some, they only exist on the internet. If you see coins or bills labelled "bitcoin," they are fake proxies of the real thing – the real thing that doesn't physically exist.
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Advocates call it a global, free market currency that allows for the simple and secure transfer of value without a bank to process the transaction. Credit and debit card providers rely on skimming transaction fees to pay their CEO's. Bitcoin has no CEO to feed.
Bitcoins are created by miners who devote their computers to deciphering a 64-byte number before the next guy. The computing power needed to do this is so great that hundreds of miners will work together to come up with the correct 64-byte string. The first group that gets it creates 25 bitcoins divided amongst them.
Only 21,000,000 bitcoins will ever be mined. Each bitcoin can be divided into 100,000,000 slices. Because of this finite supply, bitcoins will become worth more over time, whereas traditional currencies, like our dollar, lose value because there is an infinite supply, only depending on how fast the Feds print it. So, hmm, would you want a currency that gains value as you hold it or would you rather watch inflation taking away value while it's in your pocket? Bitcoins are not unlike gold; the appreciation is due to demand and scarcity. Contrast the depreciation of the dollar; there is demand, but there is also a limitless supply.
More and more people are buying bitcoins. Currently, bitcoins are trading above $800 with a total capitalization of 9.2 billion dollars. This has attracted people outside the mining network and momentum is building as more people are involved. All transactions are conducted anonymously and the security is said to be, and so far is, impenetrable. The fact that huge sums of money are being exchanged via bitcoins was bound to raise the attention of organized low-lifes like the IRS.
With currency, it's hard to make an expensive purchase without other folks being involved. Money is deposited or withdrawn somewhere, with the bank pocketing fees along the way and the IRS wanting to know where the money came from. With bitcoins, value flows from one electronic wallet to the other and no one discloses anything about buyer or seller in a completely private transaction. Authorizations for bitcoin transfers can take up to ten minutes as thousands of computers work together to verify that the buyer actually has the required bitcoins.
Come on! It's a brave new world — and not such a small one, after all.