The second great monetary fiasco is something called bitcoin, the computer-generated Internet currency that has captured popular imagination. Bitcoins are currently made available in a fairly constant stream using an encryption technique that replicates some of the inconvenience of mining gold. This has enthusiasts gushing over bitcoin’s apparent invincibility to devaluation. There are just a couple problems, though.
First, bitcoin is no more stable than other currencies, because its value ultimately rests on public trust and its relation to other currencies. Second, a significant portion of its transactions involve illegal goods. So, bitcoin is great for buying anything over the Internet that might land you in jail if transacted on your credit card; think gambling, child pornography or tax fraud. For this reason alone, governments might restrict its use, thus demonstrating its susceptibility to devaluation. So, as one thoughtful analyst in my office noted, “Bitcoin is a schadenfreude-generating machine fueled by libertarian tears and child pornography.”
Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and an associate professor of economics at Ball State University. Contact him at firstname.lastname@example.org.