Edit ModuleShow Tags

The Economist: The Bitcoin phenomenon


 When I wrote my Ph.D. dissertation back in 1979, my research topic was the money demand function and the effect financial innovations had as a result. I unearthed my copy this morning — all 391 pages — to remind myself what I’d learned.

Money, in case you’ve forgotten your macroeconomics, serves three functions:

         •  A medium of exchange

         •  A store of value

         •  A unit of account

In the late 1970s, people were using a lot less “money” – cash and checks - than the traditional demand function predicted. My thesis was that this was thanks to innovations like credit cards, sweep accounts, overdraft protection, debit cards and corporate cash management practices. Now it’s hard to imagine life without all of these conveniences. I don’t even carry a checkbook anymore and seldom pay for anything with cash. I want those airline miles! But in the mid-’70s there were only a few thousand ATMs in the U.S. and “charge cards” were used primarily to put gas in your car.

In the last few years, another advance has exploded on the financial scene. Bitcoin, which allows people to make anonymous electronic payments without having to reveal their identities, account information or pay fees, was introduced in 2008 and has since spread rapidly. Created by an anonymous programmer called Satoshi Nakamoto, the coins, or digital tokens, are “mined” – generated by cryptographic algorithms at an unalterable rate – and maintained by a decentralized peer-to-peer network of computers that records every transaction in the history of the currency. The owners of these computers are rewarded with an occasional payment of new Bitcoins. There are 12 million Bitcoins today, and the total number can never exceed 21 million.

This is merely the most prominent of new virtual currencies moving toward mainstream adoption. There is Litecoin, Namecoin, Ripple and Liberty Reserve and hundreds more crypto-currencies out there. The Channel island of Alderney, a British crown dependency, is considering becoming the first jurisdiction to mint a physical Bitcoin, hoping to expand its international appeal beyond online gaming. JP Morgan Chase has filed a patent application for a proprietary computerized payment system that is remarkably similar. 

There is, however, rising concern that Bitcoin supports illicit activities. Last July, Thailand became the first country to ban Bitcoin. The Chinese market, which accounts for about one-third of Bitcoin transactions, has banned its financial institutions from handling the virtual currency, although it still allows individuals to buy and sell it. Our Federal Reserve has been a bit more positive, arguing that it may be useful, if illegal usage can be prevented.

Bitcoin is also used more for speculative purposes. If you had good timing in 2013, it was an outstanding investment. The price soared more than 100-fold, from $12 to more than $1,200 per unit last year. But it also fell 11 percent the day China announced its ban. Because there is such a small amount in circulation, the price can be easily manipulated by speculators. Critics warn of the danger of a risky bubble and note that if it bursts, Bitcoins aren’t backed by anything.

Still, every day it becomes more evident that the Bitcoin boom is here to stay. Me, I’m going to keep my retirement funds in nice, safe annuities.

Edit Module
Tucker Hart Adams

Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.

Get more of our current issue | Subscribe to the magazine | Get our Free e-newsletter

Edit ModuleShow Tags

Archive »Related Articles

Don't abuse your employees with performance appraisals

Did you know that traditional performance appraisal is based on 100-year-old research by behavioral scientist on dogs, rats and pigeons? Stop and think for a moment: How do managers come up with the ratings for the performance review?

Law firms are getting creative with their real estate

Despite rising rents in many U.S. markets, the legal industry can still find opportunities to improve real estate efficiency, according to JLL’s latest annual Law Firm Perspective.

Buena Vista's South Main has the Wright stuff

Buena Vista’s South Main won the 2016 Wright Award for its collaborative spirit, strong vision and a commitment to craft. The winner was one of a dozen peer-nominated contestants from 10 Colorado towns.
Edit ModuleShow Tags

Thanks for contributing to our community-- please keep your comments in good taste and appropriate for our business professional readers.

Add your comment: