How Bitcoins changes the economics?


We must have recently learned about the virtual currency that is recognized in the digital community as the Digital Gold. We all must have come across online social games where collecting coins determines how well you have performed in the game like the recently popular game app TempleRun. With those coins, we could unlock other stages, players, equipments and other innovative features that helps us survive in the game and get addicted to it. Similarly, there are coins which are used to buy and exchange real products in a new currency form known as Bitcoins.

What is a Bitcoin? 

These Bitcoins are not controlled by any government or banks, but are algorithmically designed intangible, digital form of currency that efficiently controls the flow of money. Today, almost $750m worth Bitcoins are traded and stored through the digital wallets. One can get Bitcoins by a concept called Online Mining, like the concept in mining of gold. By running an online store that accepts Bitcoins, or by exchanging dollars, yens, pounds etc to Bitcoins or by mining bitcoins through computer generated problems, we can acquire and use the Bitcoins. The current value of 1 Bitcoin is almost $120 and the value is volatile like the stock markets. The maximum amount of Bitcoins that can be traded and stored has a cap of 21 Million and not a single Bitcoin more.

So how does this affect the economics? 

In the ancient times, different metals were exchanged to barter goods among different communities, which represented amount of grains stored. Then came the coinage, where metals were mined, weighed and stamped into different coins of gold, silver and copper. Then, the need for credit and a currency that was less burdensome to exchange led to the introduction of Paper Money from the Pre-modern China.

As Bitcoins are gaining more popularity by the attributes it showcases like acceptability, design, limited supply and easy transfer without processing fees, the economics of money will be altered in bits.

1. While some people in the US government feel that the government is excessively printing money, for the money circulation and its link to productivity and employment opportunities, they are devaluing the dollar. If Bitcoins are introduced and gains acceptability, due to its maximum cap of 21 Million, the excess printing of money will be discontinued, which alters the economics of money supply.

2. Moreover, if Bitcoins are introduced, the transfer of bitcoins through buying/selling products which are legal or illegal in nature cannot be tracked. This definitely excites the ones involved in money laundering, manipulating the black money and other illegal activities.

3. Bitcoins also eliminate the possibility of transfer of dollars by paying a significant sum of fees to payment portals like PayPal, CCAvenue etc. These middlemen companies have no role in the transfer of Bitcoins. Similarly, the processing fees charged through central banks will also be eliminated. And governments, individuals, companies can transfer money without the need of these middlemen.

4. In Bitcoins, the money supply is fixed by design, which is a limiting factor and thus will be highly volatile in terms of dollar exchange rates.

5. There is a possibility of hacking the digital wallets in which the bitcoins will be stored and hence one cannot recover the bitcoins once stolen, this excites the hacker community in general. There is no way to track these stolen bitcoins though Bitcoins are cryptographically designed.

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Though, the new virtual currency is in the talks, the role of governments will be the most important factor in determining the life of Bitcoins. Till then in God we trust.