With Bitcoin, we have the glimpse of something important. Whole cloth imaginary money outside the control of the government. That is, two characteristics that suggest "impermanence" to my mind. I am wrong about most things financial so I would not rely on my opinion. But I am here to inform your thinking and care not a whit whether you get rich or not. Bitcoin is 20 million units of made up money that has already had 15 million of it distributed to users but has an additional 5 million yet to be found sprinkled devilishly around in complicated computer problems. It is sustained like everything on the internet by a distributed network that is here, there, everywhere as long as the power is on. Nothing prevents the manufacture of other block chain currencies. The supply is potentially infinite but many will not "catch on". They will be offered in the market and like a slow day at the trade fair wilt into so many spoiled vegetables and thrown out at days' end.
The problem of money that exists only in the ether is that you have to sell it to know it's there. Otherwise you have an artificial statement of "gains" from somebody like Bernie Madoff. It's all about trust. What if I give you my bitcoin and you say you never got it? Whatever I bought, still sits in your hands. So I appeal to an online exchange: "Make Mr. Deadbeat give me my purchase"! Can they? Who are "they"? So I go to the police. I gave some imaginary money to this guy in Dayton, Ohio named Wanker on craigslist and he told me it never happened--it must have been in my imagination. But Here's my e-mail log with the criminal.....
Imaginary money exists because other people say it does. When they don't--it doesn't. The value of imaginary money is whatever you can exchange it for. It has use value and exchange value but no intrinsic value. As a store of value it might fluctuate or disappear. Of course it might make you rich!
And the second problem of being "outside the control of government" is important. The government gets to decide what can be done "outside" the oversight of the government. But they can't touch it! Technically true since it's imaginary but they can touch you and that's the problem. What if Bitcoin trading is made illegal? Whoever logs in to a bitcoin exchange is a criminal and their civil assets are forfeit. Yes, you can be clever and perhaps evade detection but government could put a few computer whizzes on the payroll and go treasure hunting. If Bitcoin stays at $1,000 then 20 million of them is $20B. I am unfamiliar with the FBI's budget but it might be worthwhile to scarf a few of those Bitcoin ledgers up.
So my take on the Bitcoin craze is as a proof of concept. A lot of people could be induced to use an e-money with the right incentives. Bitcoin has rewarded the early adopters. Most people however do not have any bitcoin. I believe 1,000 people hold 1/2 of the Bitcoin already created. This is a condition similar to the current skewed distribution problem with the dollar. However, the government could take over the whole concept and make it "fair" as in establishing a lucrative role for itself in the formation of a government e-currency. They would launch this currency as a UBI (universal basic income) which could be distributed to ALL citizens based upon whatever political criteria they desired to use. Like the dollar--all other forms of electronic money could be made illegal. Or they could set up an exchange where ALL currencies could be frictionlessly exchanged with a tight spread and a minimal transaction tax. What would be the harm in that? We could all diversify worldwide, paying instantly with the money in our digital wallet that is exchanged instantly by the seller into whatever money they prefer.
Does the government have any bitcoins? The government closed the illegal Silk Road site and confiscated the accounts in the exchange because they were dealing in contraband. If a particular money is made "contraband" then there you go. The government normally "disposes" of illegal drugs that are confiscated but when it captures illegal money through civil asset forfeiture, it claims it and spends it. The government is able to criminalize the money by allowing the dealers to exchange the contraband into cash and then confiscating it. Let the deal go down and swoop in for the profits. Do they do that? I am a trusting soul and don't think so but surely the temptation is there.
So what about confiscation in Bitcoin? How can the authorities access the private network? My understanding is that they can't now but if they were able to create their own e-money then they of course could (like the communication wiretap problem) have a backdoor created that with court approval would allow confiscation. How many alternative currencies could the authorities allow? Currently we have at least 50 besides Bitcoin. The central question to me is at what total value of private e-money does the government shut it down? The total value of dollar financial assets is over $100 Trillion. The current value of Bitcoin is $15 Billion. Chump change. Spare change in the DOD budget. But I think the critical number is 10% of total asset values by ALL digital currencies.
Because of the small relative distribution of Bitcoin ownership, the increase in value is subject to a rapid fall when the original issuers "diversify" into some other more fungible type of money. I suspect that at $10,000 they will have "earned" enough and gradually exit leaving the marks with their digital wallets holding imaginary value. Since Bitcoin is limited to 20 million units it would require a value of $350,000 per Bitcoin to replace the minor value of gold($7 Trillion) in the world financial system. To actually replace the current world value of assets, let us say $300 Trillion, would require a Bitcoin value of $15 Million dollars. I think it unlikely that will occur....
I am in awe of the possibilities in private, distributed monetary networks and my own analysis strikes me as "sour grapes" because I have no Bitcoin. The future, as ever, will be interesting with the Donald at the helm.