If you’ve never heard of bitcoin, you’re certainly not alone. It has been around for several years, but until recently, has received very little publicity. So what is Bitcoin, and why are people using it now?
Bitcoin was started by a Japanese computer science major. The idea behind it is pretty simple. To create a currency that cannot be manipulated. No matter how much faith you have in currencies such as the dollar, Euro, or yen, these currencies are under the direct control of central banks. These banks can decide to increase or decrease the money supply denominated in this currency at any time of their choosing.
Japan is a great example. For over two decades Japan has had a problem of deflation. Deflation is the decrease in the price of goods or services. It can happen for a variety of reasons. Central banks and governments in general don’t like deflation. And most central banks have a policy of inflation. This includes Japan. They are attempting to drive the prices of their imports up by devaluing their money. They do this by printing more and more money.
The same thing is happening in the U.S. right now as well. Because the U.S. has so much debt, they can make servicing this debt less expensive by creating more money with which to pay for it. Of course for anyone holding dollars this is bad news as each of their dollars becomes worth less and less. In good times inflation is generally around 2%. This is a small enough number that most people don’t notice the increase in prices that is taking place.
So how do bitcoins fit in to all of this? Bitcoins are a currency that is beyond the control of any central authority. Therefore bitcoins cannot be created beyond what is allocated in the design of the currency.
As a result of this, citizens in countries that are experiencing high inflation rates are turning to bitcoins to preserve their wealth. Traditionally this was done with hard assets such as gold, silver, or even real estate. These types of assets generally increase in value as the value of currencies decline. This is because they are strictly limited resources. You cannot create more gold, silver or real estate out of thin air like you can dollars.
But getting your hands on gold and silver can be expensive. And then you have to store these assets somewhere safe. Bitcoins are all online, and they are protected by the same encryption systems that banks use to protect their financial transactions. And since they cannot be created, only traded for money, goods and services, their value is not dependent upon the whim of a central bank or any other authority.
More and more businesses are accepting bitcoins as payment. And as this increases, their value and use will grow. If you live in a country that has made inflation part of their fiscal policy (like the U.S. and Japan) you might do well to take a look at bitcoins yourself.