Is Bitcoin fiat money but without accountability?
As the noise around Bitcoin continues I thought it was time to understand this alternative currency a bit more. The key questions that I wanted to explore were:
The mining and supply side equation.
Learning how to mine Bitcoins would probably take quite a lot of dedication in understanding the processes and steps provided by Bitcoin. Whilst you don’t need to be a software developer to do this, technically minded people are more likely to mine. As Bitcoin enables a limited amount to be mined (currently 50 Bitcoins per 10 minutes.) The ease with which they can be mined depends on competition. The more miners, the more difficult mining becomes, as Bitcoin makes the solving of the mining data proportionately more difficult. The cost of mining depends not only on labour costs and hardware/software but also electricity, as the larger miners are running dozens of computers on full tilt concurrently.
What determines the market price of one Bitcoin?
There are currently approximately 10.5 million Bitcoin in circulation with a maximum allowed by the Bitcoin programme to be just under 21 million by 2040. With the current market price for a Bitcoin around US$15 (the price having seen some volatility, fluctuating between $1 and $30), the current supply of Bitcoin is $157.4m. The value, or purchasing power of Bitcoin is determined in the demand/supply equation. If there are 100k holders worldwide, this would mean an average holding of 150 Bitcoins valued currently at $2,250. Intuitively this seems quite a high per person holding. I haven’t been able to find the average daily or monthly amount of Bitcoin transacted.
Bitcoin as a payment system.
The Bitcoin payment providers and marketplaces do not seem to accept card payments or PayPal. You have to transfer funds to a bank account and the receiving fees are quite high, which has meant that I haven’t done any trial transactions. I do need to look into this more, because I think this must be putting people off using Bitcoin. However, once you have paid for your Bitcoin, the payment system for exchanging Bitcoin for goods by all accounts work as expected.
Faith in the long term value of a currency, that is a credible medium of exchange is a long term marketing exercise, and confidence is self-fulfilling. The longer Bitcoin stays around, without any horror stories, the more likely it is to be accepted by the mainstream. For Bitcoin to become accepted by the mainstream, it also needs to be more transparent and open about its infrastructure, people, turnover and supply.
Could Bitcoin collapse? It wouldn’t take much to scare people off using a relative new-comer to the alternative currency market. Possible problems could be:
Governments outlawing Bitcoin;
Rush to the exit causing a price collapse.
I see Bitcoin as a fiat currency, although I’m sure its supporters would argue that the government backed fiat currency system is over leveraged in a way that Bitcoin isn’t. But governments and central banks have a lot more to lose if confidence in their currencies evaporate.