Sunday, March 2, 2014

How Your Customers Should Think About Bitcoin

Bitcoin reminds me of the Gold Standard or UN SDRs. They're great in concept, but probably needs to weather a good crisis or two before I'll trust it.

The first thing to understand is that it is a bearer-owned stored-value mechanism like gold, dollars, or bearer bonds. It's not a payment network like paypal. It's not a payment mechanism like a credit card. It's not an account. Whoever physically "holds" the bitcoins owns their value.

This leads to one great benefit: Unlike the USD or other national currencies, no politician can use them as a political tool by using inflation to ruin the value or using executive orders to inflate the value of Bitcoins. So, like gold, they should be safe stores of value, immune to a specific country's situation.

But the reality is far less sanguine or simple. There are problems:

  • The notion that it is outside the influence of governments hasn't been tested. I'm sure government lawyers are working on this. Every single time a bitcoin changes hands, its authenticity is verified at the central database. This means every transaction and transfer can be monitored. The amount of data is too juicy for the NSA to ignore. But will other parts of the government (executive branch, for example) also get ahold of the info? 
  • The way they determine the value of the currency. Bitcoin is based on supply and demand. Because it is a small market with relatively few traders, it is easily manipulated. The issuing company says they are increasing the supply steadily based on the size of the economy. The good news is that, since 
  • Counterfeit. Every computer system has weaknesses. Even the most secure networks have been attacked, and most of them have been compromised at some point. I don't trust that Bitcoin is secure enough, if for no other reason than because it hasn't been attacked hard enough. 
  • Fraud. There are system-administrators in the Bitcoin foundation who must have special system access in order to do their jobs. These people could certainly be bought off for the right price. We haven't invented a really technologically fool-proof way to avoid this yet. Mt. Gox is the obvious example of what can go wrong here.
  • and, of course, not many places accept bitcoins as payment (currently)

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