Why Digital Currency?
You may have heard that a new type of money has been invented. Perhaps you have heard of Bitcoin, or one of its many alternatives known as ‘alt coins’. But what is it really all about? Why should you trade in your national currency for this new digital money? What are the benefits for you personally or for society? If you are new to all of this and you are asking yourself that kind of question, then this article is for you…
What are the Benefits of Digital Currency?
Because digital currency is a native part of ‘cyber space’, it is the perfect fit for making payments through electronic systems. This means that you get the following advantages:
- Cheaper transactions, cheaper prices: Digital currency transaction fees are usually a lot cheaper compared to things like credit cards or Paypal, and sometimes there is no transaction fee at all. This may save you money, or it may save money for the merchants you use allowing them to offer you cheaper prices on your shopping.
- Zero International Transfer Fees: Because digital currency exists on the internet, which itself is global, borders mean nothing to it. Usually sending money abroad carries substantial fees, in addition to currency conversion costs. But on the other hand, sending digital money to the other side of the planet costs exactly the same as sending it to somebody sitting right next to you – and if you aren’t in a rush for it to arrive instantly that is usually a big fat $0.00! It can also be used for shopping in any country, so you may also be able to avoid the cost of currency conversion too (btw – those zero fee currency exchanges you may have seen are a bit of a scam, because they still buy and sell for different prices and take a profit from you on this ‘spread’). International payments also go through just as quickly as local payments, so no waiting around for days to send money through the banking system!
- Zero Account Fees: Many bank accounts today charge their users a monthly fee. Many of them also catch you out with hidden fees and charges for using your account. Anybody can create a free bitcoin wallet, to give one example, and nobody can ever charge you any fees.
Easy account creation: Because digital currency is so new, so different, and so ‘high-tech’, some people wrongly get the impression that it must be difficult to use. In actual fact, it is much easier to use than traditional banking.
Opening a new bank account is a long laborious process, because they require you to provide so many personal details, proof of identity and address, and often also conduct all kinds of intrusive background checks on you.
Anybody can create a new digital currency ‘account’ in seconds, without providing personal details unless they want to use a service which requires it themselves, and without submitting to credit checks, or digging out all of the necessary paperwork. There is a 100% acceptance rate too!
Bitcoin, the first of this new wave of digital currencies to gain popularity, was created as a reaction to the global economic crisis of 2008, and the negative economic impact of modern banking which it highlighted.
Commercial banks have a privileged role in our modern economies, and this creates a number of problems which are solved by digital currency:
- Trust: When you put your money into a bank, they do not just store it in a vault for you until you need it. They use it to trade on financial markets and make a profit for themselves. You just have to trust that they will have enough left to give you back your money when you need it. This doesn’t always happen. During the 2008 global financial crisis and its aftermath many, many banks simply did not have enough money to make good on all the balances that their customers supposedly held with them. Governments had to step in to provide them with the cash they had lost, but still in places like Cyprus many account holders lost part of the money they had trusted to the banks, whilst many other countries were forced to undergo ‘austerity’ to pay for what the banks had lost, and some countries like Greece are now economically crippled as a result. When you hold money in a digital currency wallet only you can spend it, and you will never risk loosing your savings due to somebody else’s reckless and greedy behaviour.
- Too Big Too Fail Banks: A related social issue is that of banks which are ‘too big to fail’ and have to be bailed out by governments. This creates a system in which the banks take profits when they are successful, but you pay the bill when they are not. Quite apart from the risk to you personally, this is an immoral situation which encourages irresponsible lending and trading by the banks, with all of the boom and bust cycles and other social problems which this creates.
- Responsible Money Creation: Conventional money is created as interest-bearing debt. It only gets created when somebody borrows it into existence, and that person then has to pay interest to a profit-seeking bank. Quite apart from the fact that we are unnecessarily giving commercial banks the ability to control money creation for their own profit rather than the good of the people or the economy as a whole, this creates a situation where the only way for there to be enough money to sustain the economy, let alone for it to grow, is if the people who need money the most are forced to borrow it into existence. This situation, aggravated by ‘quantitative easing’, has already created a dangerously imbalanced economy with unsustainable debt levels in many countries and high property prices in some (see here to learn about the connection between property prices and money creation) and stock markets which grow faster than the companies and economies they represent due to money being funneled to the top. Forcing the people of a country to pay interest in order to be able to use money is also a form of usury, an immoral lending practice which both Christianity and Islam strictly forbid. The only way to deal with our debt crises and create a health economy is to end this institutionalized usury. Digital currency usually has a fixed period of money creation, in which new coins are paid to people who maintain the network – with no interest needing to be paid on them.
Unlike traditional forms of money, which tend to gradually lose their value over time due to inflation, simply owning digital currency is an investment:
- Most digital currency has a fixed period when new coins are created, and a fixed maximum number of coins after which no new currency units can be minted. Because they are still in their early days, currencies like Bitcoin are still going through their inflationary period of coin creation. In the future, however, this period will end. Because some coins will still end up being lost in abandoned or forgotten accounts, this will create the conditions for ‘deflation’, in which your money will gradually become worth more over time as you hold it.
- If more people use a digital currency this also creates more demand for it, which tends to drive up the value. This is similar to the way that the money of rich countries tends to be able to buy more than the money of poorer countries. But with digital currency you don’t need to emigrate to a country with a growing economy to take advantage of this and see the value of your money going up over time – you just need to switch to a digital currency with a growing number of users. Digital currency in general is going through its early growth period right now, meaning that the number of users is going up all the time.
But, Isn’t Bitcoin…(XYZ)?
OK, so we have looked at some of the best reasons why you should buy Bitcoins or another digital currency. But I’m sure you have heard some scare stories and some compelling reasons why you shouldn’t buy Bitcoin too. Many of these criticisms are overblown. Let’s look at some of the top myths you may have heard:
But…Bitcoin is Anonymous Money for Criminals & Terrorists: Bitcoin is not anonymous. Anybody can create an ‘account’ without registering their real world identity, but once you do so every transaction you make is recorded on a public ledger that anybody can read. In fact, far from being a secretive activity, the use of most digital currencies is characterized by radical transparency. This transparency is actually one of the big advantages of digital currency which I didn’t mention above – for example London mayoral candidate George Galloway is calling for the technology behind Bitcoin to be used to provide transparency and accountability in government spending. Companies, charities and other organizations can also use this technology to ensure that they are accountable for the way they spend their money. But how about terrorism? Mainstream media has carried a number of stories about how Bitcoin is being used to fund ISIS – but a deeper investigation reveals that the owner of the ‘dark web’ site cited in these stories raised a grand total of just $5 worth of BTC. In other words, despite global mainstream media coverage of this attempt, it failed to convince IS supporters to use Bitcoin, which unlike cash can be tracked back to them by law enforcement. Of course that doesn’t address the issue of criminals using Bitcoins for buying and selling drugs, stolen credit card details and illegal weapons – that connection is well known to be true, right? Well, it turns out that digital currency is significantly less anonymous than good ol’ cash, which is still the preferred method of payment for criminals the world over. Take a look at this article for more info: Debunked: Bitcoin Facilitates Crime.
But…Its Not Safe: Some people do not trust the peer-to-peer networks which run these new currencies to securely track their wealth. They may point to some high profile ‘hacks’ in which large amounts of money were stolen as evidence of this. So, is your money safe if you keep it in something like Bitcoin? Well, the simple truth is that unlike the software used by your bank, Bitcoin has never been hacked. In the early days some amateur services popped up to offer money changing services to users of this new type of money. To use these services you had to send your coins to them to hold onto for you, as you would when you put money into a bank account. Unfortunately some of these services turned out to be either poorly run or downright fraudulent, leading to losses for some customers. Today the technology has developed allowing for the use of things like ‘multi-sig’, so you do not have to give the providers of services like this total control of your coins – making them significantly more secure than traditional banks.
But…Its a Ponzi Scheme! Some people think that digital currencies are a scam, because they reason that there is nothing to ‘back up’ their value, so they should have no value. Well, you may like to ask the people of countries like Zimbabwe what backing there is for the value of any other type of currency, which can go to almost nothing in cases of hyperinflation. What backs up the value of any digital currency is its utility – how useful it is to people and therefore how much incentive people have to buy it. See the first section of this article for a small sample of these incentives.
But…You Can’t Buy Your Groceries with Bitcon! A lot of people that I have spoken to like the general idea of a ‘people’s currency’ but think that there is no point making the switch because there is nothing that they can do with it – “I can’t buy my groceries at the local shop with Bitcoin, so what’s the point?” they say. Well, in actual fact you can spend Bitcoin anywhere with things like debit cards – in just the same way that you can spend the money from your bank (which itself is stored as a kind of ‘digital money’ anyway).
Getting started is very easy. You just need some coins and a ‘wallet’ to keep them in. There are even some great services available that provide both of those things in the same place. For the moment Bitcoin is the ‘industry leader’ by a long way, with many more users, a lot more different services for those users to take advantage of, and a lot more places to spend your money. In the coming months I will be adding a new section entitled ‘Which Digital Currency?’ to provide a comparison of the main alternatives, so if you fancy meandering a bit further from the beaten track to pick your currency from a free market of options, each with their own unique features and advantages, then please do check back soon.
For now, most people making the switch from national fiat money for the first time will want to get started with Bitcoin. By far the easiest way to do so is with a service called ‘Coinbase’, which provides a convenient and secure wallet to store your coins as well as an exchange where you can buy and sell them in the USA and most of Europe. They may require ID to actually buy bitcoins – if you prefer to avoid this check out our article on buying Bitcoins without ID. Follow the link below to get started!