Bitcoin has been gaining much media attention due to its recent rise in popularity. Rather than relying on a central monetary authority to monitor transactions and manage the money supply, Bitcoin uses peer-to-peer technology to allow users to make purchases online without using a credit card or bank account.
The rate of inflation for the Bitcoin currency is mathematically-based and predetermined. The amount of Bitcoins in circulation increases by 300 coins every hour, with that rate being cut in half every four years. The currency will level off around 2030 at 21 million coins.
The real question here is can the Bitcoin become to the currency of the future? Many dismiss the Bitcoin as being nothing more than a modern-day gold standard. The two do have many similarities: both are limited in supply and are increased through a “mining” process, while neither is regulated by a central banking authority.
Beyond this comparison, The Economist explains several issues Bitcoins may face:
Bitcoin may be useful for trading goods and services but it does not yet allow borrowing or lending. A virtual Bitcoin bank might spring up but that would create problems of its own. How would a saver be assured that he would get his money back when he wants? If a bank got into trouble, who would be the lender of last resort? The usual answer is a central bank: exactly what Bitcoin is trying to avoid.
With no central bank or real assets backing Bitcoins, I believe it has too many issues to take off in the way some are predicting. While it is a very interesting endeavor, the Bitcoin lacks as a monetary system.