Digital currency is the biggest new thing on the market. It’s not a new idea at all, however the fact that someone was able to get it up and going is something new. The first time I’d heard of a cyrptocurrency and the potential impact it could have on the economy was in the Cyrptonomicon a 1999 book written by Neal Stephenson, but the idea is clearly much older than that. In fact, Paypal likely was something of a precursor itself to cryptocurrency. It filled a whole for money transferring on the internet, which was difficult in many cases. Paypal and eBay co-evolved as Paypal became the default transaction tool on the site – otherwise every seller would have needed to be able to accept credit cards. Paypal offered a safe way to transfer money directly from one account to another without messing with banks or credit card companies.
After the crash in 2007 and Paypal and other services refusing to transfer funds to Wikileaks people felt it was important to have another option. Fortunately, for those folks Bitcoin was already on the market, having been created in 2009. Bitcoin is essentially a digital version of gold in that users of the currency mine the coins and there is a set limit of 21 million Bitcoins. This has lead to a massive explosion in both awareness and usage of the currency. Currently, many locations accept Bitcoin as a currency so you can buy stuff with it.
Yesterday, Paul Krugman, wrote an op-ed arguing that Bitcoin, like gold, is a foolish standard to adhere too. Essentially, we mine gold and then bury it in a safe and never use it. According to Krugman, Keynes argued that the government should bury printed money and then let private enterprise mine the money – as it’s more desirable to allow private enterprise to spend money rather than government. However, in times where demand is low there’s no incentive for private enterprise to spend that money, unless they can spend it to pull it out of the ground. He then goes to argue that we’re essentially doing the same thing with a Bitcoin mine in Iceland.
This got me thinking a little bit last night. I’m not really sold on Bitcoin, I think that if anything it really points out that the only value in any thing is what people assign to it. Either paper currency, digital, or “precious” metals. Diamonds are artificially high in price because of a cartel. For instance, you can buy a set of lab created diamond earrings weighing in total 2.5 carats for $482 (12/24/2013) but if you were to buy two 1.25 carat diamonds to make those earrings it would put you back over $30,000. There’s a lot of diamonds out there and it’s impossible to tell the difference between lab created and those pulled out of the ground. Yet we put more “value” on the “real” diamonds from the ground. There is nothing intrinsically valuable about diamonds or gold. What both of them are though, are standards for trade, similar to the dollar and Bitcoin.
There is one cyrptocurrency that does have a more altruistic motive though. That one is called Primecoin and it’s encryption algorithm is based upon prime numbers. As the number of Primecoins increase in the market the number of prime numbers eventually discovered will increase. However, this was is mined differently from the other cryptocurrencies so it’s not as easy to switch to this cyrptocurrency. This coin does have an underlying value as every new prime number discovered typically has some sort of prize associated with it as it provides value to the mathematical and scientific communities. What they do with it from there is anyone’s guess. However, it provides value completely disconnected to it’s “value” in the market place.
Could we develop a cryptocurrency that instead of requiring increasingly complex solutions to an encryption key, but one that solves difficult problems at the same time? There are a large number of places where this would be useful such as SETI, Fold.it (folding proteins for science), and researching molecules for big Pharma. I’m sure there are many more options. However, then we take Bitcoin a digital gold and convert it into something more useful to everyone than Primecoin and potentially solve problems as well as mine usable moneys.
Edit: Originally said 40 Million Bitcoins, actually 21 Million