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Ayd Asraf

Corporate Senior IT Executive - Release Team, Aramex International

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Are "Bitcoins" the future of money?

It is clear that there is still a debate raging about the future of cash. Cash is one of the other traditional bastions of the old guard of financial servicing.

Yet with mobile wallets, ebanking, contactless everything and real-time transactions, does cash really have a future?

Some say ‘yes’, due to the unique attributes of cash, other says 'no' due to the recent disruptive invention that is called "Bitcoins".

For those whom are new to the term mentioned above, Bitcoin is a digital currency designed to be controlled through encryption rather than a centralized authority. Operating in exactly the same way as cash, Bitcoins are fully exchangeable as an anonymous form of currency in real-time across the internet and, shortly, at Point-of-Sale.

Seems tempting right? but cannot things go bad with all of this anonymity? knowing that Bitcoins has no refund feature and it's solely left to the consciousness of the second party to refund you your money, wouldn't that be a concern?

Let me know what you think about the future of money, Bitcoins or Cash? what do you think is good & bad about Bitcoins, as well as cash?

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    Jan 21 2014: Bit coins are just electronic S&H Green Stamps. Same concept, different decade.
    http://en.wikipedia.org/wiki/S%26H_Green_Stamps
    • Timo X

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      Jan 23 2014: Not quite. S&H Green Stamps were more like conventional forms of currency, Bitcoins differ from this mainly because:

      1. S&H Green Stamps were issued by S&H and were always exchangeable for items in their catalogue. This is comparable to having a country adopting a specific currency and having a central bank issue it. In contrast, the issuing of new Bitcoins is decentralised, and there is no place where they are always valid.

      2. The supply of stamps was only limited by the resources required to make them, like a central bank they could always print more if need be. There is, however, only a limited amount of Bitcoins, as predetermined by a mathematical limit built in in the code.

      3. There was no record of who held which stamps, as there is no record of who holds which cash in a normal currency. But there is a public record of who holds which Bitcoins. That is, in fact, an important part of how Bitcoin works. You may have heard that Bitcoins are anonymous, and that's true, because the 'who' in this case is a simply a number behind which could hide any person or organisation. (Think of it as a Swiss bank account: anyone with the right set of numbers can get money from it.)

      Whether these innovations are truly for the better remains to be seen. The wild fluctuation against the USD is not a good sign in my opinion, because the value of a currency should be stable. But I think it is an interesting concept nonetheless.
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        Jan 23 2014: can you explain why do we ever need more money?
        • Timo X

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          Jan 23 2014: Well, more money leads to inflation, which is generally considered a good thing. Some reasons are listed here: http://en.wikipedia.org/wiki/Inflationism

          I do not find any of those reasons truly compelling, but current-day economic systems work under the supposition that there will be a certain amount of inflation. Bitcoins therefore represent a change, the effects of which are not entirely known. That is why Bitcoins are an interesting natural experiment.
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        Jan 23 2014: so to summarize:

        1, we can not adequately support the claim that inflation would be good
        2, even if we assume it is good, we still need to show that it is necessary

        if any of these fails, your statement about bitcoin can't be inflated loses weight. do we agree?
        • Timo X

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          Jan 23 2014: You misunderstood me if you think I said the value of Bitcoins cannot inflate, I did not mean to imply that at all. I said that there is a limit to the total amount of Bitcoins. One possible cause of inflation is an increase in the money supply, but there are plenty of other reasons why the value of Bitcoins may suffer inflation. Disuse is a good example, if nearly no one uses Bitcoins any more, the value will drop very fast. The change that I referred to in my earlier post is the change from an economic system with a central bank that aims to CREATE (a limited amount of) inflation, to a decentralised system that aims to AVOID it.* The effects of this change are not entirely known.

          * The real story gets more complicated still. New Bitcoins are actually made all the time through a process called 'mining' which is done by letting a computer solve a mathematical puzzle. The difficulty, and therefore the speed of discovery, is determined by a mathematical function established by the Bitcoin computer code. This function has diminishing marginal returns, and an an asymptotic limit. That means the discovery of new Bitcoins becomes slower and slower all the time, until the last Bitcoin which is nearly infinitely slow to mine. The amount of Bitcoins is already so great that the discovery of new Bitcoins is extremely slow, that is why, for practical purposes, you could say that the money supply is limited.
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        Jan 23 2014: i don't think that there is a misunderstanding as lack of understanding. you seemed to claim that the problem with bitcoin is that it can't be made more of. i replied that it is not only not necessary, but probably not even beneficial. so what is your point after all?

        let's turn the tables a little bit, i explain what i think. changing quantity actually hurts money. the best money is something that has a fixed quantity once and for all. gold is something that is very close to that, it can only be slowly and costly mined. the value of gold remained high for many thousands of years. empires came and went, gold remained.

        we live in the era of fiat money, which is by its nature allows easy manipulation by governments. governments routinely create new money for themselves to spend, effectively robbing us blind. being resistant to this influence is very valuable. bitcoin is, in my view, a terrible currency. but it does not stop it from spreading, because that much valuable its independent nature is.

        it is only a matter of time that governments start to tax, ban or hinder its spread. you all have been warned.
        • Timo X

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          Jan 23 2014: Calling it a lack of understanding is perhaps indeed more appropriate. I did not claim that it is a problem that there is a limit to the amount of Bitcoins. I only pointed out that this property is different from conventional currencies, and that this thus represents a change with unknown consequences. The very fact that the consequences are unknown to me means that I cannot judge those consequences to be good or bad.

          As for your argument about fixed quantities being superior, it is deeply flawed because it ignores the demand side of the economy. You say gold keeps its value, true enough: gold has been a valuable commodity for some time. But we can say the same of oil, milk, grain, and virtually any other commodity. What does any of that prove? And while gold may have a stable SUPPLY, it has the least practical applications and so the the least stable DEMAND, of all the commodities mentioned here. This means that the value of gold can fluctuate wildly, which it does (and not just against the USD).

          You also argue that governments financially burden their populations by printing money. True, but the money comes from somewhere: if it is not gained through printing, then direct taxes or lower spending. So having a fixed money supply doesn't solve your issue with the redistribution of economic goods, and it doesn't even solve your issue with inflation itself either. Because even if the total quantity of some currency is fixed, this does not imply that the MARKET demand and supply for this currency are fully correlated. That means the value of the currency can still fluctuate and that there can still be inflationary and deflationary periods.

          For example, if someone with a lot of Bitcoins suddenly decides to exchange them for USD, the value of Bitcoins against all currencies would plummet. This is because the market supply is suddenly much higher while the demand has remained the same. No attempt to fix the total money supply can protect against that.
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        Jan 23 2014: this is what you have said: " they could always print more if need be. There is, however, only a limited amount of Bitcoins". i can not see the "inability to print more if needed" as a good or even neutral thing. so i think i assumed with a good basis that you see this as a problem.

        my analysis of money is not flawed, and it has nothing with any sides of the economy. the value of money (in terms of products) adjusts. if we have half the amount, a unit of it worth twice as much. there is no right amount of money, any amount suffice. the only issue are practical, you don't want to exchange tons or micrograms of something. but with data, it does not matter at all.

        the assumption that governments has to collect money somehow, therefore it does not matter is flawed for two reasons: 1, the government can reduce its spending, and indeed it is desirable. 2, tax is much better than inflation, because it is visible, fair and less damaging.

        for your final example: if the entire world is using bitcoins, one player can't influence its value. also, it is highly unlikely that this person could benefit from such a transaction. it never happened with gold.
        • Timo X

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          Jan 24 2014: "so i think i assumed with a good basis that you see this as a problem."
          Regardless, the assumption was wrong, as I am pointing out to you now for the third, and final, time.

          "my analysis ... has nothing with any sides of the economy."
          That is precisely why it is flawed. There are both demand and supply factors to any market, including the money market.

          "the assumption that governments has to collect money somehow, therefore it does not matter"
          Again, you assume I mean something I did not say. You argued that governments effectively tax their citizens by printing money. I agreed that this is true, but pointed out that a fixed money supply will not change the tax burden. I didn't say that the way governments are financed doesn't matter, I said it doesn't matter to the amount of taxes people pay. Or, to put it in your words, we would still be robbed equally blind.

          "for your final example: if the entire world is using bitcoins, one player can't influence its value."
          If pigs could fly, we wouldn't need aeroplanes. The entire world is NOT using Bitcoins, and one person CAN influence the value of Bitcoins if he owns a large enough share or if the market is illiquid.

          "it never happened with gold."
          If the USA would sell all her gold reserves at once, the gold price would plummet. Whether the gold price was ever actually noticeably changed by one person or organisation, I do not know. I do know that is certainly within the realm of possibility, and I also know that it did happen to other commodities, e.g. cacao.

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