Imagine that one day you woke up and someone told you, “Hey, these M&Ms over there have monetary value. Go ahead and buy whatever you want with them”. Okay, so M&Ms may be a bit facetious, but that scenario pretty much describes the origin of Bitcoin. If you’re a millennial like me, our trust in currency has always been anchored in the US dollar. We’ve been trained and conditioned to believe it’s worth something despite being a measly piece of paper. Now we are told these “Bitcoins” are equivalent to money too? Madness! What does this mean to money as we traditionally know it? And more importantly, why does this matter? I spoke with Emily Neville, a UPS senior studying Economics, who examined the Bitcoin fad, its implications, and its importance in online transactions in her thesis.
HR: So let’s try and break down the idea of Bitcoin for Sound Economics readers. What is Bitcoin exactly?
In simplest terms, Bitcoin is essentially internet monopoly money. You can use Bitcoins to purchase tangible goods and services in store (using a smart phone) or online. Unlike traditional currency, the catch with Bitcoin is that it is completely unregulated by the government, it has no physical shape, it’s easily acquirable, and spending can’t be traced back to the spender.
HR: So did people just invent Bitcoin one day? How did it come about exactly?
The purpose behind creating Bitcoin is a bit fuzzy. It could’ve been to help protect transactions between vendors and consumers in illegal markets, or a political statement. Who knows! The inventors go by a pseudonym, so we don’t know who or what group created it or for what purpose!
HR: How are governments and businesses reacting to Bitcoin?
Government reactions to Bitcoin are varied. The US recently held a hearing about the use of Bitcoin and adopted a nonintervention policy (although recently, some states, like New York, are seriously considering intervening). On the other hand, China has completely prohibited the exchange and use of Bitcoin. Bitcoin could be subject to more government intervention in the future because it’s especially popular for facilitating transactions in illicit markets. As for businesses, several well-known companies like Overstock.com, OkCupid, and Reddit accept Bitcoin as a form of currency.
HR: So why are Bitcoins so popular in illicit markets?
Bitcoins are so popular in these types of transactions because they enable anonymity. On these “Deep Web” (illicit) markets, transactions are completely anonymous. You don’t know who you’re buying from or selling to. Paying with Bitcoins allows buyers to protect themselves from giving personal financial information. Your Bitcoin wallet is unconnected with your personal bank account so no one can obtain your private information and the government can’t track your purchases.
HR: Based on your findings, do you think Bitcoin can ever emerge as the mainstream medium of exchange?
The extent of Bitcoin’s widespread applicability is being the techie’s way of laundering money. I don’t think it will be mainstream but only among illegal markets. If underground markets get too big, then government will shut it down completely or highly regulate it.
HR: Anything else you want to let Sound Economics Readers know about Bitcoin?
One thing I found interesting was Milton Friedman’s anticipation of a phenomenon like Bitcoin. He made this prediction way back in 1999, and it’s crazy to think he was absolutely right!
“The one thing that’s missing, but that will soon be developed, it’s a reliable e-cash. A method where buying on the Internet you can transfer funds from A to B, without A knowing B or B knowing A. The way in which I can take a 20-dollar bill and hand it over to you and there’s no record of where it came from. And you may get that without knowing who I am. That kind of thing will develop on the Internet”