This story is interesting. The value of a bitcoin in USD had a sharp crash, going from a high of $260 to $130.
Could you imagine a crash of 50% in gold or silver? There would be a lot of people buying physical, if that happened. The last time the price of gold sharply crashed in 2008, a lot of dealers ran out of inventory. The “official” price of gold was low, but there wasn’t much gold available to buy at that price.
I have previously posted on Bitcoin. That led to an interesting flamewar in the comments. There was a lot of hostility to my criticism of Bitcoin. It reminded me of the hostility to my posts on node.js, Stackoverflow, Test Driven Development, Design Patterns, and Ruby On Rails. That’s one lesson I’ve learned from blogging. If a post receives a lot of hostile comments, that’s how I know it’s an important subject and I’m probably right.
I don’t see the attraction of Bitcoin compared to physical gold and silver. Bitcoin has several flaws.
Every Bitcoin client gets a copy of every transaction. That makes it very easy for police to track what’s happening with Bitcoin. If police arrest some Bitcoin users and figure out identities, then they can start figuring out other users’ identities also. BITCOIN DOES NOT PROVIDE STRONG ANONYMITY PROTECTION.
One conspiracy theory is that Bitcoin was set up by undercover State police. They’re tricking stupid people into using an “alternate monetary system” where they can be easily tracked.
The value of a Bitcoin can never be greater than the cost of mining more. If it was much greater, people would mine more, and drive down the price. However, due to the “difficulty” adjustment, the more people are mining, the more the cost to mine each one. Bitcoin can be worth less than the cost of mining more, because it’s a currency with no intrinsic value. If that happened, people would mine it less. (Some people do mine Bitcoins for free, by using spare CPU cycles on their employer’s computer.)
The sharp fluctuations in Bitcoin’s price is a symptom of a thin market. If there’s a large block bought or sold, prices can move a lot.
Bitcoin also is useless as money in a SHTF scenario, with no electricity. Gold and silver would still have value as barter money, although there would be a risk of being robbed.
Bitcoin has another weak point that police can target. When you exchange State money for Bitcoins, that becomes a regulated financial transaction, with legal restrictions, taxation, and reporting requirements. Those are the same laws that ruined E-Gold.
I’d prefer a system like Ripplepay, with transactions based in gold or silver, with the right to redeem for physical at any time. Under a ripplepay-like system, each transaction becomes a credit. If A buys something from B and then B buys something from C, A’s credit to B can be transferred to C. Another advantage of such a system is that only people you trust know about your transactions, rather than everyone. If A does not trust C in my example, then the transaction does not offset.
Systems like Bitcoin give alternate currencies a bad name. Why not keep it simple, and use a system based on physical gold and silver? The only reason electronic money backed by gold and silver failed is that they were ruined by State violence. State laws were changed to make electronic gold and silver illegal or heavily regulated/taxed.