A possible alternative to our growing financial crisis

By: Katherine Thorsteinson, Staff Writer

via TraderTim, Flickr

In the wake of a global double dip recession the world is screaming ‘Show me the money!’ However, the response to this demand is widely varied. There are those involved with Operation Occupy Wall Street, those like libertarian Ron Paul advocating a zero percent income tax policy and reversion to the gold standard, and finally there is the more traditionally moderate position of slow recovery and little systematic change.

With all this opposition and disagreement the really interesting question becomes, what will this money begin to look like? Currently, things are not likely to change in this regard, but one very novel invention seems to be indicating where money may take us in the future. Can you imagine a totally decentralised digital currency? Welcome to the world of Bitcoins. In the spirit of anonymity upheld by this new currency, its 2009 invention has been attributed to the pseudonym Satoshi Nakamoto. But to whom this might be or to how many people this may include is entirely unknown.

Bitcoins are an online currency which may be exchanged in a virtual value system with other users around the world. Bitcoin.org tells us that, “Compared to other alternatives, Bitcoins have a number of advantages. Bitcoins are transferred directly from person to person via the net without going through a bank or a clearing house. This means that the fees are much lower, you can use them in every country, your account cannot be frozen, and there are no prerequisites or arbitrary limits.”

To some, this may sound like the perfect answer to many of our current economic difficulties in which the world’s greatest superpower relies on a Federal Reserve Bank that remains suspiciously not federal. But how exactly do these new Bitcoins work? Somewhat allusively, Bitcoin.org explains that “Bitcoins are generated all over the internet by anybody running a free application called Bitcoin miner.” To ‘mine’ your Bitcoin a certain amount of ‘work’ is required.

The network automatically adjusts the amount of Bitcoins earned per amount of work completed so that they are always being produced at a predictable and limited rate. To transfer your Bitcoins, the program adds an electronic signature, and within minutes this transaction will be certified by another member miner. This entire transaction is then stored in the network permanently and anonymously. Because this software is open-sourced, anybody has rights to access the code.

In spite of this explanation, for many this system will remain troubling and elusive. Indeed, difficulties have already surfaced. Due to a number of factors, including the currency’s short life-span and user uncertainty, Bitcoin continues to display a highly volatile rate of exchange into USD, and this problem is only amplified by the inability to make use of futures or options. There are a number of online businesses and exchange markets that are already accepting Bitcoin.

However, different users are quoting widely different exchange rates for any given time, suggesting that value in the Bitcoin market is not so evenly distributed. More technical concerns have been raised about the security of such online currencies in the face of a growingly competent hacking community. Others have wondered to what extent Bitcoin is a viable alternative to our current financial crises. After all, critics ask, isn’t it troubling that our value system has strayed so far from the real, physical modes of production and service? It is unclear whether this new financial option could assess these more psychological considerations.

For all its novel interest and seemly good intentions, this currency remains somewhat of a play thing for those involved with or curious about computer programming and economics. Considering how drastically different Bitcoins are from our current system, it is unlikely for the moment that this ‘change’ is going to come.

ARB Team
Arbitrage Magazine
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