Bitcoin

Bitcoin [...] is a cryptographic currency where the creation and transfer of bitcoins is based on an open-source cryptographic protocol that is independent of any central authority. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution. The concept was introduced in a 2008 paper by a pseudonymous developer known only as "Satoshi Nakamoto", who called it a peer-to-peer, electronic cash system. The processing of Bitcoin transactions is secured by servers called bitcoin miners. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology. In addition to archiving transactions, each new ledger update creates some newly minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. To accommodate this limit, each bitcoin is subdivided down to eight decimal places; forming 100 million smaller units called satoshis. In August 2013 Germany's Finance Ministry subsumed Bitcoins under the term "unit of account"—a financial instrument—though not as e-money or a functional currency. Although bitcoin is promoted as a digital currency, many commentators have criticized bitcoin's volatile exchange rate, relatively inflexible supply, high risk of loss, and minimal use in trade.

Source: Wikipedia

Sounds interesting, doesn't it? I'd like to share my thoughts about some aspects of Bitcoin. Please note that I'm neither an economics student, nor did I read the specifications of Bitcoin.

Security of Bitcoin

Data loss

Once in a while, hard discs crash. If you're unlucky, you will lose all your data. This could mean you lose your Bitcoin wallet, so you lose your money. There is absolutely no way to get the money back. It's lost. Just like if you've lost bank notes in a big city. You will never get it back (source).

BUT, unlike with bank notes, nobody else will get it. These Bitcoins are lost and nobody can do anything against that. I think that means after 2140 the number of active Bitcons will drop! This is called a deflation with normal money. But as you can subdivide every bitcoin in as small pieces as you like, I'm not sure what this means for economy.

Attacks

When money is involved, there will always be people who try to profit from that. So you have to think about security of Bitcoins.

System attacks

For me, a system attack is an attack where somebody tries to break the system. He does NOT want to profit from the system, but he wants to harm all people who use it.

The only attack I've found is a 51%-attack (source). This means, in long term you have to have more than 50% of the computing power of the total bitcoin network. So if there is a dramatic change in computing power, this might make Bitcoin as a system insecure. Also, in short term with much luck you might also take down the network with less computing power (source).

But the more people participate, the more unlikely it gets. And this problem might our current system also have. If somebody manages to get MUCH more computing power, he could break encryption. This means, all bank transactions could at least be read by this attacker, if not manipulated.

Theft

Theft is possible by stealing your credentials. This can be done by infecting your computer with a virus, just like it can be done today with your bank account if you use online banking (or with the computers of banks, though that should be much more difficult).

Also, the software you use for Bitcoin transactions might have errors.

Money laundering

It seems to be a big problem of Bitcoin that money laundering might be easy. You can't close a criminals account, you cannot stop criminals using Bitcoin for illegal operations.

But what can you do with the current currency against that? Not much, when the money gets abroad.

Credits

You can't give credits as banks do it today with Bitcoin. If I understand it correctly, the "Common Equity Capital Ratio" has to be at least 3.5% in 2013 (source). In other words: banks are allowed to give more than 27x the amount of money they actually have! Now I'm very uncertain if I'm here correct, but I think this was an important reason why the financial crisis happened. This would not have been possible with Bitcoin! With Bitcoin, you can only give credit for money you currently have. No cent ... uhmm ... Sotisho more than that.

BUT: I really don't know if this would be better. I guess it would be extremely difficult for states to get money. There would be the need of heavy restructuring in how we finance our countries.

Interest

A problem with credits in the Bitcoin-system would be that it is very difficult to estimate what the result of the interest would be.

As there are "only" 21 million Bitcoins, it would bet possible that the sum of all dept is more than available Bitcoins. Can it be legal to force people to pay when you know that at least one technically can't pay at the end? This problem seems not to exist in the current system, as they always print new money.

Wages

At the moment, employed people have to fight in unions for more money. They really need it, because inflation happens all the time. So just to keep the current situation, employees have to do something.

With Bitcoin, the situation might change. As we produce more and more every year, a deflation would be likely. This means, bosses would have to cut loans to keep the situation the same. But it is much more difficult to change the bills you pay. People will not blindly accept less money on their accounts per month. Unlike today, when people are basically ok when they get a compensation for inflation.

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