THE BLOG
05/16/2012 08:29 am ET | Updated Jul 16, 2012

What The Bitcoin Experiment Started

At the end of 2008, the world was in a global financial crisis. Governments everywhere were afraid their monetary policies would collapse and many people blamed the federal reserve and government involvement in monetary policy for it. Something needed to be done and someone needed to develop a real solution to economic problems that would not require government to get involved. If someone didn't at least attempt to create a revolution the world would fall prey to a poor financial system and a collapsing dollar.

With these problems in the world, Bitcoin was born. It is an alternative online currency limited to preventing inflation and relying on peer-to-peer interaction. The model was safe -- people formed Bitcoin IDs that could not be broken. It also had a decentralized model that could prevent corruption and collapse. So what is created is a currency that can remain stable for years. We can't have over-production causing inflation and it cannot be attacked or stolen. Value is based purely on people mutually agreeing to use the currency.

Making changes to money has been a topic of conversation for decades, and it has been important to various nations for thousands of years. Nations with strong monetary policies have historically been able to survive anything. The key is that it encourages savings because money holds value over years. Savings leading to investments creates the innovation that acts as life blood for the economy. Without it nations, cannot innovate or build things unless they can be created out of normal expenditures. So if inflation were five percent yearly, any money saved would be cut in half over 10 years. And if interest rates are low, no new money comes in, so interest rates will be beaten by inflation rates. This creates a disincentive for savings that can damage growth, leading to problems over time.

In terms of interest, the Federal Reserve has had power over the nation's banking and interest for almost a century. While many people have argued that this helps the economy, many have said that interest is very political and artificial manipulation has led to many problems, especially problems in recent times. After 9/11, Alan Greenspan would lower interest rates dramatically and then have them raised a massive 17 times. Some have said that this created the economic bubble that leads to problems in the housing market. Now, many economists, such as Peter Schiff, are saying that interest rates are comically low.

Bitcoin or another alternative currency could reform finance by encouraging savings and democratizing the banking structure, leading to long-term prosperity. For Bitcoin, many have stated that gold is the best possible choice for a currency. Yet in today's world where monetary freedom is not allowed, this is difficult. Also, having one central location for the currency creates some instability and risk in and of itself. Bitcoin, unlike gold, is built purely on voluntary agreement that this is a currency. So while that could be unstable, it is highly unlikely that Bitcoin would flop once it rises.

The history of Bitcoin is not very pleasant, but it's promising. At first it was seen as this mythical libertarian currency that could end all of the world's problems. Bitcoin rose to 30 dollars per bitcoin at its peak. Issues occurred over a small hacking incident on one person's computer where bitcoins were stolen. Another problem occurred when some larger figures started criticizing it as unstable. Yet the largest stab was the realization the government will eventually try and ban these. So the fad ended and prices continued to fall, and now sit at roughly $2-4 USD per bitcoin. Yet the accomplishment was made where over 60 million dollars worth of bitcoins existed and the idea of challenging the dollar was created.

The key to finding the world's future currency is simply to develop a demand. Currency is based purely on what's best for a medium of exchange, so in theory, anything can be money. Bitcoin accomplished the task of creating a decentralized currency that cannot be counterfeited, will not create inflation and is free for everyone to use. Now the challenge is building confidence in alternative currency. That will purely be done by innovators around the globe looking to challenge financial problems and inflation.

Moving forward -- Bitcoin or no Bitcoin -- a message was sent out. That message is that people need an alternative and they need an answer. This just puts more pressure on the government to fix the financial system and monetary problems. It puts pressure on entrepreneurs to develop new alternative currencies. Bitcoin was just the first innovation in what will be a revolution likely to take place in the next decade.

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