Organic Design statement on Bitcoin
...yeah! what he said!
Bitcoin certainly doesn't fit the classic definition of "sound money" and can seem like a currency that's not backed by anything. However this is a new age, and in many ways the old rules and definitions don't apply here. The main reason that fiat currencies are considered to be a problem and need to be backed by something tangible is that the issuing authority cannot be trusted, and corruption inevitably seeps in and leads to inflation and deflation in order to control the people and benefit the few who control the issuing authority.
It is believed that by backing the money with a commodity of intrinsic value such as gold or silver will prevent this problem, but the reality is that gold and silver can also be heavily manipulated by those in power. In fact gold and sivler are being manipulated to the most extreme degree ever known right now in order to help prevent the US dollar from collapsing, that's why we're seeing both extremely low prices as well as an unprecedented demand at the same time.
But in the case of Bitcoin, there is no need to resort to this form of protection from the fraudulent issuing authority because there is no central authority in control of issuance. So yes Bitcoin can be considered a fiat currency, but it does not suffer from the problem that many other fiat currencies suffer from. Decentralisation is the real solution to the problem, backing the currency with commodities of value is not a complete solution because it doesn't address the core of the problem which is that centralised systems are prone to corruption.
It should also be noted that the most successful monetary systems we've ever had have been fiat systems, not gold-backed systems. Systems like Major Douglas' Social Credit which are backed by labour and resource have been implemented in many places and always lead to abundance. Unfortunately these systems are always short-lived because they're too much of a threat to the status quo, they're shut down even if a world war is required to do it, such as was the case with Germany which financed its entire operations from 1935 to 1945 without gold, and without debt.
Finally, I would add that bitcoin is certainly not backed by nothing! It's backed by a service - a service that many people find extremely valuable, which is the ability to transfer value directly without a trusted third party. It's for this reason that people keep buying back in every time there's a crash and Bitcoin's pronounced dead.
Bitcoins unstable price prevents it from being considered as sound money. The way Bitcoin is intended to be used in the sense of a currency is as a medium of exchange, users hold their wealth in the currencies or commodities of their choice, and then when they want to pay someone else, they can convert the required amount of currency to Bitcoin and pay the recipient anonymously and privately with full confidence that they'll receive their value in an unforgeable and irreversible way, regardless of whether they're trustworthy or where in the world they're located. The receiving party can then immediately convert their payment to the currency or commodity of their choice if they're unwilling to expose themselves to the volatile nature of the Bitcoin price making that volatility totally irrelevant for everyday use.
Trading with others around the world with total privacy and security is an extremely valuable service in an age where practically everything you do is being monitored, and most especially things of a financial nature since there may be taxes due on them. Many people have recognised that a monetary system free from authoritarian scrutiny is a very valuable service, and this fact combined with the limited supply of Bitcoins creates an increasing demand for them. The more businesses and services that build up on top of the basic Bitcoin functionality, the larger the Bitcoin economy grows and the more valuable the coins become.
A Bitcoin can be seen not only as a medium of exchange, but also as a share in the Bitcoin economy. As stated above, the actual value of the coins makes no difference to the way Bitcoins are used in day to day payments between peers, but the increasing value does add the extra incentive for users to save their coins since they know that their value will appreciate over time. This leads some to believe that this saving incentive is a problem because it leads to less and less Bitcoins in circulation, but since the coins are effectively infinitely divisible, the amount of Bitcoins available in circulation doesn't affect the ability for trade to continue, it just effects its exchange rate with real-world commodities and currencies.
Is it a bubble?
The Bitcoin value will continue to increase rapidly while it is extending into new markets, but its growth will slow down as its share in these markets reaches a point of equilibrium with the other competing technologies and financial instruments in those markets. Currently it's value is around $700 which equates to a total market capital of about ten billion dollars, but has not yet begun to really take off in many markets that it is very well suited to such as banking and escrow services, smart contracts and other high-level financial instruments. There are also other technologies outside the financial arena which Bitcoin has given rise to which are likely to help grow the network such as private communications and distributed user authentication. Even fairly conservative analysis yields a very high likelihood that a few more years down the track the Bitcoin economy will be in the trillion dollar scale, which puts the individual coin value into the tens or even hundreds of thousands of dollars.
However, there is also a risk because there are definitely a number of things that could go wrong causing the system to fail and loose all its value very quickly. For example, a flaw in the code being discovered and exploited, the mining operations being bribed or taken over, it could be made illegal etc. I personally believe that since these things have all been tried extensively and it's survived all attacks so far, the chances are good that it will thrive for at least a few more years yet, but I could be wrong. My advice to anyone heavily invested in it is to sell a portion of your Bitcoins and buy silver (why not gold?) and/or land with the money - a portion that equates to a good overall return on your investment, but still leaves you with a reasonable stake in the Bitcoin economy.
Why is Bitcoin important?
Many new applications are now beginning to take form, some of them like Ripple are currencies which solve some of the problems Bitcoin is seen as having. Other systems based on the bitcoin technology (the Blockchain) are creating solutions to replace all sorts of services that are currently performed by centralised systems such as domain-name registry, user authentication, messaging, commerce/trade, social networking, SSL certificate authorities, crowd-funding, insurance and even notary services.
For us at Organic Design the Bitcoin technology makes the whole vision possible. The Organic Design vision is built upon the ability for groups to work and trade together in private trust groups which together form the platform network. The problem that prevented us from moving forward with our vision was that we couldn't figure out how to implement many of the low-level details involved in trading and authentication in a peer-to-peer network. Bitcoin has solved these problems and made our project and many others possible in the process. Following is a comment from our 7 June 2010 news item which is when we first heard about Bitcoin.
|Bitcoin may last for years and become a popular global currency, or it could be just a flash in the pan, but either way I think this is an important sign of the times to come. This is one of the first truly decentralised currencies and has paved the way for hundreds more to compete together in the new arena of Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in The Sovereign Individual.|
|— Organic Design, 2010|