I had penned some notes about bitcoin before the entire thing exploded last week. So it seems that everybody is blogging pretty much everything about bitcoin there is to blog. So trying to see if I have some points that are still worth publishing.
Provenance
The main improvement over a physical currency, is that with a digital currency you can in fact track all transactions. This is in fact a feature of bitcoin with its global transaction register.
The problem with that is that most transactions are done anonymously so you can see that money went from A to B but you don’t know who A and B are nor why it moved. This makes bitcoins very attractive to people selling illicit wares.
Now comes the challenge:
1. I don’t want to live in a failed narco-state (and I don’t think many others do either).
2. In principle I am for a currency where every transaction is public and traceable but I am not for the increase in state power that this will entail.
So there is probably some more crypto-trickery necessary to be able to get a currency where you can prove that: it wasn’t used for certain types of transactions, or that certain taxes were indeed paid in previous transactions.
Volatility
I used to think that bitcoin would not be viable because the market and individual actors are too easily compromised. The checks and balances are so weak that any computer exploit means you lose all your money. Right now I think that is in fact a feature not a bug.
Bitcoin was envisioned as an exchange currency and if you use it as such all of these problems go away. Whenever you need to buy something online, you convert some money into bitcoins at the day’s rate and do your business.
So it is in fact not necessary to store large amounts of bitcoins for a prolonged amount of time except if you want to speculate. All others would buy bitcoins as necessary and sell them when they don’t need them and this would increase the liquidity of the currency.