Bitcoin is a technology that makes the Internet stand out. It is something that could not have existed without today’s communication infrastructure. It makes us think outside the box. Before bitcoin money was different. It was something you handled physically, or if you wanted the privilege of virtual money you’d have to pay a premium. Credit cards and wire transfers all have associated fees which aren’t negligible.

Because the government is so involved in the banking industry, it is no surprise that the field of money transfer is heavily regulated. Domestic regulations are imposed with the excuse of preventing fraud or money laundering, and this happens throughout the world. International bank transfers are heavily regulated not only because of the fear of laundering, but also because of this irrational idea that capital outflows are bad. And this stems from the belief that capital is socially owned, and must be protected from being transferred across borders.

Such an autarkic policy does not come without its deleterious economic effects. Without restrictions capital would flow from areas of less productive activity and move to areas of higher productivity. Arbitrary restrictions on capital flow reduces the overall efficiency with which the economy operates, in this case, the world economy. Of course the basic idea that capital is owned by society and not by the rightful holder of title to that property is flawed in itself.

But then, along comes bitcoin riding on top of this Internet platform, which itself no single entity has the capability to block. Suddenly, borders or distance don’t matter. A user can send bitcoins all the way across the world, just as easily as he can use them to pay for coffee at the local cafe. He can send any amount he likes, the fees are exactly the same. No human being has been able to conduct any transaction like this ever before. Business can be conducted literally at the speed, and reach, of light.

Not everyone is happy with bitcoin though. There are many criticsisms, ranging from considering it a pyramid scheme to calling it not a currency at all. Why? Among other reasons, because it isn’t backed by anything. So what about every other fiat currency in the world? Well, they’re backed by the good faith of their respective governments. And we all know how good that faith is. As James E. Miller eloquently puts it,

When Richard Nixon took the United States off the gold standard … completely … that the transformation of the dollar into a full fiat currency backed only by the “full faith and credit of the United States” was complete. The “full faith and credit” of course refers to the government’s ability to pillage its citizens of their earned wealth.

You could consider bitcoin to be backed up by trust in the thousands of miners and users connected to the bitcoin network, because after all that is what bitcoin depends upon. Arguably, having a decentralized trust network might actually be a good thing — you’re not dependant on one node for failure. However, even if bitcoin was not a currency, and even if it never reaches mainstream usage where I could buy my groceries and fill up my gas tank with bitcoin, it still serves an extremely important purpose: Capital transfer.

The beauty of bitcoin is that it disregards arbitrary borders. There really is no natural reason sending money across borders should be so expensive or so difficult in terms of natural costs. And bitcoin proves that. Moreover bitcoin is highly secure. Even with decades of multi-billion dollar industry experience credit card companies are unable to provide the same kind of security and service bitcoin does. There is paypal, which was originally touted as a simple way to email money to other people. But it too has fallen prey to the regulatory trap, and become very much useless.

Detractors claim that because bitcoin is unregulated, bitcoin is mostly used for illegal purposes like drugs. They all point to the Silk Road, which used to be this gigantic underground marketplace where one could trade anything they wanted without the prying eyes of government. Drugs being illegal in the real world, naturally found a place on the Silk Road. However, the majority of bitcoin usage is not on drugs but on donations. Moreover, even though Silk Road was brought down two weeks ago (check this), the bitcoin exchange rate instead of crashing, is soaring!
[Going from 140 to 220, then down to 190 is not, as many people would have you believe, crashing]

In addition, bitcoin is a sound currency, like gold. By this I mean that it is not subject to printing or “issuing” by a monopoly entity. All national currencies today are unbacked by specie and are issued by their respective governments which tends to keep the issuance rate above 0. This causes the money supply to increase, in turn causing inflation. Holding national currency is thus not a good idea, because it loses value over time. Bitcoin on the other hand, gains value over time, because there are only a fixed amount of bitcoins which will ever be issued. This again is game changing. For the first time in generations, people are able to hold a currency that they can actually save for a rainy day.
[On the irrational fear of deflation espoused by most mainstream economists, see Mark Thornton, Apoplithorismosphobia]

Bitcoin’s value lies in its ability to circumvent government capital controls and to give people the ability to hold a currency which does not lose its value through inflationary state policy. As such it is potentially disruptive for the existing monetary and money handling system. It is no surprise that this causes the entrenched firms, businesses and governments to be hostile towards it. But just like the internet on which it is based, there is very little they can do to actually stop the bitcoin network.

Bitcoin is competition for fiat currency. Competition which is not allowed to occur in the physical world due to state imposed laws. Competition that should be there to let the best currency win. This is now happening thanks to today’s technology. We are indeed living in interesting times.