By now, a good portion of the financial world is at least familiar with the concept of Bitcoin, the decentralized digital currency which comes into creation via the operation of a fixed logarithm over a set period of time. Given this predictable pattern of currency creation, accepting Bitcoins as a form of payment is beneficial as they should theoretically continue to appreciate in value against the fiat currencies of the world, which have no set rate of creation other than the stated controlled inflation goals of the world's central banks. The fact that controlled and inflation appear together as a concept should cause most thinking persons to give pause for thought, as it the phrase is essentially an oxymoron.
As of this writing, Bitcoin adoption is running well ahead of the logarithm, which is causing massive deflation in terms of Bitcoin pricing. Bitcoins can be traded fractionally up to 8 decimal places. Should Bitcoin adoption continue to take off, the Bitcoin’s rigid logarithm will not allow for the Bitcoin’s continued use in commerce. This has been described as its fatal flaw.
Should this occur, the Bitcoin will, in theory, take its place in the digital realm as “Good money” in the terminology of Gresham’s Law and exit circulation. In its place will appear a plethora of digital currencies which would then come into existence via their own logarithm and trade against the Bitcoin, as today’s fiat currencies do.
In this sense, Bitcoin is the current gold standard of digital currencies. As such, the acceptance of Bitcoins in trade is like trading physical goods for digital gold, as Bitcoin’s trajectory will theoretically track that of gold with one notable exception: Barring any subsequent changes to the logarithm, there will be no new “discoveries” of Bitcoins to augment the stock.
For all of the benefits of Bitcoins, it must be reiterated that wealth must be held in the real world to be of any worldly good, and trading in Bitcoins, while temporarily solving the problem of rapidly depreciating fiat currencies, comes with its own set of risks, as credits and data on servers have a strange knack for disappearing when you most need them.
One last word to the wise, never, ever go short Bitcoins agains fiat currencies, as doing so places one on the wrong side of a trade against two deep pocketed adversaries: A fixed mathematical limit and proliferate government spending.
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