BitCoin, a fig-leaf of a Digital Currency

Posted on January 20, 2014

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BitCoin, synonymous with Digital or ‘Virtual’ Money. On the one hand a regrettable state of affairs since BitCoin is so fundamentally constrained by its architecture that it risks tarnishing the potential of Digital Money, but on the other it is serving as the Poster Boy stimulating awareness to a broader spectrum of users. Digital Money I have no doubt is here to stay and will challenge the traditional status quo in due course. But for now BitCoin I do not feel is it. Why?

I am one of those individuals who never treated it seriously (and still don’t to be honest). I did buy 10 when it first launched just to see what it was all about, but as it was largely useless I never managed them and like many mine have gone the way of the wind. On today’s valuation $10k, but when purchased they weren’t even worth a round of drinks.

The whole virtual Currency is in its infancy still and whilst BitCoin has got the limelight I struggle with BitCoins viability as a day to day currency on basic economic and functional grounds. On current form it is behaving and being treated like a commodity, it’s very volatility and the root cause of more than a few distressed businesses that have tried to adopt it.

The actual economics of BitCoin have been taken apart by many others, so I don’t intend to repeat those facts, but factors that I have not seen clearly articulated and for me have direct impact and cannot be ignored include:

  1. Cryptography – The big uncertainty is the evolution of computing itself. With Quantum computing not that far away in real use terms, the very cryptography that secures these Virtual Currencies could be blown away. The spectra of an NSA being able to undermine a virtual currency by simply cracking its crypto is a serious and very real challenge to future stability and credibility. After all that is all the Virtual Currencies are, clever crypto, and history is littered with Crypto that today is trusted and tomorrow busted. Google for example has just finished testing the new D Wave Quantum computers and reports exponential compute capability compared with the most powerful server available today. This is just the threshold of Quantum capabilities which will turn the comfort and protection of high bit rate cryptography into a race to the bottom as times to crack codes tumble.
  2. Fix Volume – BitCoin has a built in limit to its supply = 21million BitCoins, that’s it no more can ever be made. That is not currency it’s a collectors trinket. As I have stated already the 10 BitCoins I bought are already history and the Internet is rife with other individuals who have reported mislaying 1,000’s! So we already have far from 21million as a circulation potential, so BitCoin is already declining to wards scarcity. I know of no way to reinstate these ‘lost’ BitCoins. I can only assume over time the number will continue to decrease rendering this more of a rare mineral status than currency. This is a fundamental Achilles heal that will prevent this from every becoming a true currency on Dollar scale. A mistake that is not being made by subsequent Crypto-concepts that are appearing such as BitCloud, which can change and develop.
  3. Its usability for the masses – It requires more than a modest level of technical competency which will worry many consumer users when it comes to something as fundamental as their cash. Bitcoin’s most common vulnerability is in user error. Bitcoin wallet files which store the necessary private keys can be accidentally deleted, lost or stolen, far more easily than traditional cash. I am a case in point! Imagine an extreme case of an Electromagnetic Pulse (EMP) incident in a built up area. EMP’s can erase digital storage devices in a blink of an eye. So much for offline backups and stores, unless you happen to maintain your own Private Faraday Cage for your backups! Aside of which outside of business environments I suspect backups are largely non-existent or at best an afterthought.
  4. Not Unique – The ‘Create your Own Virtual Currency’ movement is making a mockery of what BitCoin stands for and far too readily allow organisations to develop their own and undermine the marketplace, Amazon are talking about doing their own as are Apple, so it starts to relegate these ‘Currencies’ to the equivalent of Supermarket Vouchers. Why not go and start your own – Coingen and someone will create it for you for a small fee or if you want to do it for free (but will need some technical programming skills) ‘The Open-Transactions project’ .

For now its emotion and the ‘fad’ factor that is driving BitCoin, and more than a little Social engineering manipulation by a few with old fashion material interests at heart. So far it is little more than a speculators medium. But like many things in history economics and common sense have not always been a good guide and blind emotion has carried the day.

Watch this space I guess….

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