Sunday, April 14, 2013

Thomas Edison, Bitcoin and the Evolution of Digital Currency

As many global central bankers continue to hit the “print money” button to resolve varied financial problems, some investors have promoted a return to a gold-based monetary system to increase market integrity. Over the centuries, societies have continually sought better ways to store and trade units of value in exchange for produces and services. 

Interestingly, inventor Thomas Edison provided an alternative view in the early 1920s when he said, “Gold is a relic of Julius Caesar, and interest is an invention of Satan” and he suggested that commodities should be used to back the financial system.

This past March, as the government of Cyprus closed its banks to stabilize a faltering financial system, market interest significantly increased in Bitcoin, a digital form of currency. The objective of Bitcoin, which was developed in 2009 and is based on computer-generated algorithms, is to provide a decentralized and international payment system that leverages a distributed technology infrastructure while providing low transaction costs. 

Last week, Bitcoin had more media exposure as the value of a single Bitcoin rose to $266 on Wednesday, up about 100% from the prior week, and then traded down to $54 and finished the week at $93. Amid this media frenzy, venture capital firm Andreessen Horowitz announced an investment in a new digital currency firm OpenCoin, which also promises to be open, distributed, integrated with other payment systems and provide an “almost free” fee structure.

Last week's broad moves in the value of Bitcoin were likely driven by a mix of speculation, limited liquidity and issues related to an immature infrastructure. However, the increasing interest in digital currencies is setting the stage for serious consideration of alternative forms of exchange. While Bitcoin’s early days are likely to be viewed as the “gold for geeks” libertarian era, it is likely that:
  • Many venture capital firms are following Andreessen Horowitz in the pursuit of digital currency based investments,
  • Major commercial banks are trying to figure out how to participate in this market,
  • Organizations such as MasterCard, Visa and PayPal are committing business development resources in this area and 
  • Central bankers and regulators are gearing up to control it.
The evolution of digital currency is also likely to reshape digital wallet efforts such as Google Wallet and Square, as well as various microfinance initiatives such as Cash-Lite. Bottom Line: This market is still early stage – expect innovations and mistakes, as well as challenges from governments and other incumbent players.

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