The BitCoin FAQ may change based on this blog’s critique. To ensure that the version that I worked with is preserved, I have reproduced it here.
Another preferred source for BitCoin is here.
Text of the FAQ. Text reformatted for readability here. Typos retained.
The majority of currencies in circulation are fiat, created by governments out of thin air. This process allows governments to produce money on demand. The power to create money gives governments almost unlimited spending power1. However, any time that governments print more money, they devalue all the money that people possess. It makes sense that people should prefer currencies which can not be devalued in this way. Governments can not create gold on demand and this part of the reason why gold has been considered a safe store of value for thousands of years2.
Frequently Asked Questions about Bitcoin
Why are Bitcoins important? Why should I care?
Bitcoin is one of the most important inventions in human history It is the first time that the ‘double spending problem’3 has been solved in software. It also has many desirable features:
Bitcoin protects you from fraudulent government financial practices including inflation.
Bitcoin encourages savings.
Bitcoin is more efficient, secure, and convenient than any other means of digital value transfer.
Who controls Bitcoin? Can any government or entity manipulate Bitcoin?
Bitcoin is effectively controlled by its users and the developers of the Bitcoin clients. Whenever a change is made to the Bitcoin protocol, the change is only adopted if more than 50% of the users upgrade to the new protocol. Due to the Bitcoin client (the software that users run to send and receive Bitcoins) being open source any programmer can easily verify the software has not been tampered with. Like gold, the supply of Bitcoins is limited; this prevents anyone from devaluing them through inflation.
Where do Bitcoins come from?
People all over the world run the Bitcoin client software to create a decentralized financial peer to peer network. In the Bitcoin network each copy of the client software cooperates with the other copies and no single copy is vital to the network. Shutting down the entire Internet is the only way to shutdown the Bitcoin network. The Bitcoin network maintains a global ledger of Bitcoin balances and record of all transactions. Users that set their Bitcoin client to mine for coins are gradually awarded the undistributed Bitcoins in a lottery. There will only be 21 million bitcoins in circulation after all the mining is completed. Currently, 65% of the possible Bitcoins have yet to be created.
What is Bitcoin backed by?
Bitcoins do not have an intrinsic value, in the same way that the US Dollar and the Euro do not have intrinsic value. This doesn’t meant that Bitcoin cannot be used in lieu of money. The Dollar and the Euro have no intrinsic value, and yet they are spent in the trillions every day. Bitcoin has utility in the field of money as an irreversible and verifiable value transfer, at an extremely low cost, without a third party intermediary. It is unique in this respect; there is no way you can send a penny across the world for nothing instantaneously. The security of Bitcoin is achieved by the Bitcoin network, one of the most powerful distributed super computing networks in the world.
Can Bitcoin be stolen or hacked?
Bitcoin itself has not had any security issues. It has the qualities of a valuable commodity without a physical nature, and if it is not sufficiently protected it can be stolen. There is no third party which controls Bitcoin and who can issue refunds for theft or fraud, so it is important that you know the parties you are dealing with as if you were giving them actual paper money or gold.
In this respect, Bitcoin acts exactly like cash in your pocket or your house; if you lose it, you alone are responsible for the loss. If you store bitcoins at an online wallet service, you are trusting them to hold your bitcoins securely. If you have your bitcoins transferred to your own computer, you need to make sure you take proper precautions to protect yourself from hackers, trojans and viruses. You also need to make sure you regularly back up your Bitcoin wallet so that you can recover your Bitcoins after a catastrophe that destroys your computer or makes it inaccessible to you.
How anonymous are Bitcoins?
Bitcoin is very anonymous, but you are not completely anonymous when you use it. There are third party sites that provide anonymity services for Bitcoin users that solve this problem. Bitcoins are not easily seized like a bank account, and no one can dictate where you are able to spend your money. Like using anything connected to the Internet, there are some aspects of it that can be tracked
if you use it in its default mode4.
Why is anonymous money important?
Freedom of speech is a key aspect of Liberty. To communicate effectively takes resources such as printing, radio and TV air time, and venues. These resources cost money. Economic privacy protects your freedom of speech in that it allows you to support the voicing of your opinion without repercussions.
Are physical metals better because they have inherent value and/or use value?
Physical gold has its place as a form of money. Bitcoin has its place as a means of transferring value anywhere in the world at near zero cost without intermediaries. Gold has the properties of being easily divisible and being of a limited supply make it ideal as a currency. Bitcoins have the same properties of being easily divisible and of a limited supply. Additionally, Bitcoins are easily transferable over the Internet, and more convenient to use then a physical item. Bitcoins can be used like PayPal, online banking, and could replace debit cards5.
Isn’t money itself the problem? Wouldn’t it be better if we returned to barter?
A medium to exchange value is necessary for any sufficiently organized society. Using digital currency is compatible with using precious metals and/or barter systems when useful. No one is forced to use Bitcoin, unlike the Government issued Fiat currencies. You are at liberty to accept or reject Bitcoin as your personal philosophy requires.
The rich people already have all the gold, and some people could have more bitcoins then others too!
Most of the corruption in the world comes from the State. This is created by them having the monopoly power to create money, given to them by the State, and to use that created money first in the economy before it loses its value. Removing this ability to create money and inflate the money supply removes this unfair and destructive power. Someone may have a lot of gold or bitcoins, but if they spend them unwisely, they lose them and must find a way to earn them back from without the power of the State giving them an immoral advantage.
What about hoarding?
Hoarding is another word for saving. Saving is much better than being in debt. Saving Bitcoins leads to increased wealth as the Bitcoin economy grows. Being in debt leads to interest payments and having less wealth.
Importantly, people can not save 100% of their wealth. To participate in an economy i.e., buy food, and consumer goods, people must exchange with others. Whatever fraction of their Bitcoins that they use for exchange is sufficient for Bitcoin to be a successful currency. The incentive of rising value that causes people to hold on to an item, also creates a balancing incentive for other to entice them to sell it away6.
What about deflation?
Deflation is a decrease in the money supply. Prices are going up now nominally because governments are printing money to pay their debts. Banks also create money through thier fractional reserve system. Bitcoin does not suffer from deflation. The supply of bitcoins increases at a known rate, and will stop when it reaches 21 million bitcoins, each divisible into one million pieces. Bitcoin is unique in that the money supply is absolutely knowable and fixed. This is very important in the long run, and will make Bitcoin an extremely reliable tool for transmitting value. 7
What about speculation?
Speculation is a natural process that incorporates future expectations into current market prices. Speculation is also a driving force that supports the adoption of Bitcoin. Speculation in Bitcoins helps fuel the Bitcoin economy with capital to create more Bitcoin business and products. 8
How do local currencies fit with Bitcoin?
Communities have created local currencies to incentivize communities to spend locally promoting the local economy and decreasing pollution from the unnecessary transporting of goods. The Totnes Pound is a good example of this. Another reason to have a local currency is to protect the community from devaluation of the national state controlled fiat currency. Bitcoin is completely compatible with these goals. When asked about a global currency, many people think about a powerful dictatorship. Bitcoin is a global currency that is not controlled by any central authority, like gold, so it is an ideal medium of exchange to be used universally.
What are Bitcoins current problems?
Bitcoin is in its infancy and its problems are all temporary and are being solved through software development.
The Bitcoin wallet currently takes a long to first start up. this will change in the future
There are few merchants which accept Bitcoin. more and more merchants are coming online everyday.
Bitcoin is highly volatile. the price of Bitcoin will stabilize as its adoption grows.
This document is distributable under the following license:
What Has Government Done to Our Money? Murray N. Rothbard http://mises.org/resources/617