Getting back into blogging after a long break, holidays, marking, usual!
Ive covered the issue of bitcoins and virtual currencies a few times before. One of the arguments I would make is that while I can see a possibility of such currencies being used as a trade currency (e.g. a currency you use to buy sandwiches and coffee), but I cannot see bitcoin or any other virtual currency becoming a reserve currency (a currency you store youre wealth using or invest with).
This is an important distinction, particularly as much of the speculation surrounding bitcoin has generally come from libertarians who are trying to use it as a reserve currency and go head to head with the dollar. Of course quite apart from the obvious fact that there is little chance of them convincing markets to abandon the dollar (even the Euro has failed to do that, despite the fact it is holding its value far more effectively than the dollar recently, despite all Europe’s woes), there is the more serious problem of ensuring that a virtual currency holds its value. And this is something bitcoin has largely failed to do. Not least because bitcoin has known deficiencies, which has led to competing currencies being established.
Indeed Mark Ward of the BBC has shown how easy this is by establishing his own currency beeb coins, using the same technology…well its one way to pay off the TV license!
Clearly however, if anyone can just set up their own currency (and in theory can print vast reams of the stuff to the point where the currency is worthless) then you would have to be a fairly brave person to invest a substantial portion of your savings into it. While the dollar, the pound and the euro do have their problems, the whole reason why such currencies are considered a safe haven is that it is accepted that these governments will do whatever is necessary to defend these currencies, while libertarian bloggers are powerless to protect bitcoin.
Again, I can see some role for such currencies for trade purposes. Some smaller communities have already issued theyre own local currency, hoping to encourage local trade. One could see such virtual currency technology being used for these purposes, particularly as it eliminates the need to actually print bank notes. But I dont see much usage beyond this, as there is simply no way for any virtual currency to compete with an established currency with a central bank behind it.