Bitcoin, Namecoin, Litecoin and PPCoin are relatively new mathematical crypto-currencies, with Bitcoin being the largest and breaking into the mainstream. These crypto-currencies are open-source peer to peer digital currencies and the big banks don’t like them…Bitcoin uses peer-to-peer technology to operate with no central authority; managing transactions and the issuing of bitcoins is carried out collectively by the network.
I have been in two minds over bitcoin as a future investment as well as a currency. Like all fiat currencies, just like the UK pound, US Dollar or the Euro it isn’t backed by anything but it is mathematically sound, which is more than can be said about the pound et al.
I studied Keynesian economics at uni but I will look to the Austrian school of economics and regression theory to explain Bitcoin and its value. As Rothbard explains in Man, Economy, and State: A Treatise on Economic Principles (1962)
“…a money price at the end of day X is determined by the marginal utilities of money and the good as they existed at the beginning of day X. But the marginal utility of money is based, as we have seen above, on a previously existing array of money prices. Money is demanded and considered useful because of its already existing money prices. Therefore, the price of a good on day X is determined by the marginal utility of the good on day X and the marginal utility of money on day X, which last in turn depends on the prices of goods on day X – 1. The economic analysis of money prices is therefore not circular. If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday.”
TL;DR (Too lazy, didn’t read) Bitcoin derives its value from current fiat currencies, as long as those fiat currencies have a value, so will Bitcoin as knowledge of existing price ratios can be utilized. If bitcoin ever derives its value from gold or silver, the game is up for the central banks, but in its current form I don’t believe it would.
What has changed the game for me was this article sent by my mate Cass. Here’s a slice of what got me excited, essentially bitcoin will be incorporated into all HTML5 websites:
‘So this is where things get interesting: With a bitcoin-specific “scheme,” any link on a webpage becomes a one-click route to instantaneously transmitting money—or at least bitcoin. Imagine you’re buying socks or more likely, since this is bitcoin, assault rifles stuffed with heroin. On the checkout webpage, the “buy” button could use the “bitcoin:” link, which would automatically pop open your bitcoin wallet, which might reside in an external application, on another website, or even in your browser itself. In any event, it would make paying with bitcoin dead easy and absolutely universal.’
I need to state that I’m not giving financial advice just in case anyone tries it, it goes tits up and I’m sued. One thing to bare in mind is that all fiat currencies throughout our documented history collapse, normal life of fiat currencies is around 50 years. Below is an infographic on how bitcoin works and you can make up your own mind