In economics a currency is defined as:
A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.
Gold, Silver, Dollars, Euros, Pounds, Bitcoins, Litecoins, Peercoins, Primecoins, Namecoins, Lindon Dollars, WoW Gold, Stocks, Checks etc. All forms of exchange for goods and services are defined as currencies. That does not mean every currency is created equal.
In the case of Dollars, it is centrally controlled by the marriage of the United States Treasury and Federal Reserve System. This system provides (or attempts to provide) stability for the Dollar as a means of exchange within (and without) the United States. Similarly, most national currencies are managed by some central authority similar to the Federal Reserve System and the Treasury. This form of currency is quite often not based off any external factor, other than the belief/consensuses that the currency is worth something. That is to say that this form of currency is not “based off” or directly transferable into Gold, Silver or other commodity, or fiat money.
Another form of currency would be either directly or indirectly Gold, Silver, or some other material good. Essentially, this is what has been used as currency for the past thousand to tens of thousand of years. Gold with it’s “shininess,” malleability, and conductivity has and still is the standard for many currencies around the world, now and throughout history. This currency is not based off belief (as it clearly has some use/value), however the value is still based off the consensus of those using the currency.
Bitcoin’s, Litecoin’s, Peercoin’s, and nearly all other cryptocurrencies fall into the category of fiat money. The difference with crytocurrencies are they can never be held as a dollar, essentially it is always in an account of some kind. This is not necessarily bad, although it definently leads to some interesting delemas. The main issues I see are as follows:
- Most crytocurrencies are not completely anonymous, although difficult, it is possible.
- With enough computation power (in the case of Bitcoin’s a hell of a lot) the network could potentially be taken down with too many trades.
- In the case of Bitcoin’s or Litecoin’s (or many others) the maximum number of coins are finite. This creates a situation where there is always deflation, creating a situation where it is better to hold onto your money. Although this is not entirely “bad”, if it was the primary currency it would decrease the economy.
- The biggest issue is lost coins. I know I personally have 50 Bitcoin’s in a wallet where the private key was deleted and the backup was lost. This will happen to many people and over time take a large toll on the total number of coins available. Further increasing deflation and reduce societies willingness to use currency.
- This is the last reason because it is the least likely, if there was a large solar storm, nuclear war, or some other large scale disaster that effects the internet the entire currency will be unusable.
Upon reviewing this issues myself I came to the conclusion that although no currency is perfect as it stands cryptocurrencies have the largest issues. The ideal currency for economic growth needs the following properties:
- There is little to no inflation or deflation, according to Keynesian Economic Theory ideally there is some inflation to promote the use of money and investments. Although I would tend to disagree that inflation a good thing, it has yet to be proven.
- Everyone agrees upon the medium of exchange (currency).
- It is divisible as necessary. That is to say it can be divided as many times as necessary in order to make for smooth transactions. Example: It was once practical to have half-pennies, so we had them. Now, because pennies are worth so little it does not help to have them present while exchanging goods.
- It can expand as necessary. This is because if ideally there is no inflation/deflation then there must be an increase in the amount of currency equivalent to the amount of new products/services being produced.
- It is transferable. That is to say, everyone can hold/use the currency.
Although Bitcoin’s, Dollars, Gold have some of the ideal characteristics none have all. However, there is still hope! There is no reason a cryptocurrency cannot solve these problems, it is just not Bitcoin’s, Litecoin’s or any of the other cryptocurrencies out there at the moment. There is a better, more ideal cryptocurrency yet to be invented. Peercoin for example can expand (unlike Bitcoins) at a rate of 1% a year and have no bound on the maximum to the number of coins that can be produced. Further, they are transferable, divisible, could be used as a medium of exchange. On the other hand that 1% may not be enough to maintain little to no inflation/deflation. For that we would need to have a currency which grows directly proportional to the amount of goods being produced. There may be some mathematical method of determining this, I however do not know it. This is why the Dollar, Euro, and other currencies will likely have an upper hand on cryptocurrencies for the time being. They are closer to the ideal than the cryptocurrencies currently out there.
In the end, all that needs to be done is some number crunching. Once a method to have a currency grow at the same rate of production has been determined (in my opinion) the hurdle has been made and cryptocurrencies will then be more practical than standard currencies. We live in an age where we can see the ideal currency come to light, I for one am excited because I know it is possible, all that’s left is some foresight, math, and acceptance of a new and better currency.
As a disclaimer, I currently own a number of cryptocurrencies and believe them to be at least part of the future. Further, I believe cryptocurrencies could potentially be the greatest thing that ever happens to the world. If the cryptocurrencies are not saturated to extinction, it would change the world as we know it and provide benefits in many new ways.
My final note and what I am most excited about is that, inflation is simply another form of tax and with cryptocurrencies the government would then have to be honest about how much they tax their citizens! Immediate 2-5+% reduction in taxes sure seems nice to me.