Economist Daniel Altman explains the decentralized virtual currency Bitcoin.
Daniel Altman: It’s been a big year for bitcoin, the virtual currency. This is the currency which only has value because people want to use it. They want to trade it so that they can buy things online, buy things perhaps in private settings and so they can hold onto it because they expect it will gain value into the future. It’s a currency that has been controversial because one of its exchanges broke down recently with the possible loss of millions of dollars for people who thought they had bitcoins that may have been stolen. But it’s also been controversial because of legal issues, how will certain entities allow it to be traded. Will there be tracking of bitcoins, is it something that will remain truly private in the future. Now bitcoin over the past year has seen a lot of volatility in its value in part because of some of these controversial events and in part because there’s been more knowledge of bitcoin and that has spurred more demand that people want to hold this thing as a currency or perhaps as an investment. And the fact is because it’s so volatile and because there’s a possibility that many other virtual currencies will enter the market and compete with bitcoin, you have to think about it perhaps more like an investment as well as a currency than you would with something like dollars.
Dollars, yes. If you hold on to them they lose value relative to inflation as prices go up. But it’s fairly stable and you know that you’ll be able to use dollars in the future. Bitcoin is a little riskier because we don’t know exactly what the demand for bitcoins will be in the future and there’s the possibility that we will run out of new bitcoins. There’s supposed to be a finite number out there. If that number is reached and no more bitcoins are created then essentially individuals will have the power to make monetary policy for the entire bitcoin market by either hoarding bitcoins to contract the money supply or pushing their bitcoins out into the market to expand it. Now this is something that we rarely see in regular currency markets because individuals don’t have that much power. But it is something that could possibly happen in the bitcoin market in the future. Now if you’re considering buying bitcoins I think the right way to think about it is something like investing in fine wines or expensive musical instruments or paintings. It’s something that you wouldn’t want to do unless you really knew a lot about what was going on in that market and the underlying value of these things and how it was created. So I would say bitcoin can be a fun experiment. It can be something that you want to invest time in as well as money but perhaps not just for the dilettantes, especially because there’s so much uncertainty surrounding its value in the future.
Directed/Produced by Jonathan Fowler and Dillon Fitton