(Revised) Bitcoin; why should we care?

I haven’t mentioned Bitcoin in a blog post in a while so I thought now would be a good time to revisit my very first blog post of the semester. While the title may no longer be relevant as I think Professor Kimball convinced us that Bitcoin and, more broadly, digital currency is something that we should all care about, I think there are some new developments in the Bitcoin world that are worth discussing.

Although I am sure that many of you are a lot more familiar with Bitcoin now than in the beginning of the semester, I will still leave this bitcoinbasic.com explanation here to reference.

There are plenty of digital currencies out there, many of which have similarities to Bitcoin, but none have drawn the attention or market value that Bitcoin has over the last year. Aside from the millions made by those who owned Bitcoins when they could be purchased for fractions of a penny or mined with greater success, why should we care about Bitcoin?  For starters, this image of a college student that appeared on a College Gameday broadcast received over $20,000 worth of Bitcoin from generous Bitcoin users.

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((credit: theverge.com article One college football sign netted over $20,000 in donations for a Bitcoin enthusiast))

As I mentioned in the original post, Bitcoin was receiving a lot of attention from central bankers and lawmakers around the world. This continues to be the case, as just a couple days ago, China has “ordered the country’s commercial banks and payment companies to close Bitcoin trading accounts in two weeks” While there were many reasons for this decision, a central argument against Bitcoin for the Chinese government was the “potential threat to financial stability” and the ability of Bitcoin to get around some of their capital and currency controls. The end result, however, is that Bitcoin will be harmed if governments worldwide follow suit and take similar stances towards the digital currency.

The United Stance is also continuing to give attention to Bitcoin. A couple of hours ago the House Small Business Committee has a hearing on the effects of Bitcoin on small businesses. A couple of days ago, the IRS decided that Bitcoin is property, not currency, causing the price to slip about 17 percent.

Another issue that I discussed in the original post was the volatility of Bitcoin. While this would still be considered highly volatile for other more standard assets, Bitcoin’s price jumps have settled down considerably over the last couple of months. While volatility is still a concern, it is a good sign for Bitcoin that its price is no longer jumping up and down by tens of percents every day.

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The issues discussed above would be cleared up overnight if you changed the word “Bitcoin” to “United States Digital Dollar”. The backing of a legitimate government in the creation of their own digital currency would cause the price to fluctuate no more than its paper equivalent. Additionally, it would be difficult for foreign governments to make policy against a digital currency that had the backing of the United States government. While my opinion on the impact of Bitcoin hasn’t changed a whole lot, my reasoning for Bitcoin’s importance has. I used to be confident that Bitcoin itself would become an alternative to government regulated currencies. After continuing to read articles and think about the policy implications of negative interest rates if governments adopt digital currencies, I realize that Bitcoin alone isn’t all that important but the idea of digital currency will be Bitcoin’s legacy that has the potential to change the future of currency and monetary policy.