Bitcoins – The money of the future

Yesterday, I blogged about the downsides of fiat money (currencies that are not backed by real assets). –Through the actions and interventions of central banks, a currency may lose its value and the resulting inflation may “eat up” the savings of people.

The introduction of electronic money, which is not controlled by any central bank, provides an alternative payment method. Even though a number of virtual currencies have been introduced prior to bitcoins, this currency offered a reliable alternative to “common” money for the first time.

Invented by a mysterious programmer who calls himself Satoshi Nakamoto, bitcoins do not rely on any central money supply but are created by so called “miners”, users who solve cryptographic puzzles and by this, slowly increase the money supply.

Even though the currency is only accepted by relatively few companies, the acceptance of bitcoins grew has increased greatly over the past years.

Let’s see what the future holds: In a couple of years we may all pay in bitcoins :)

If you are interested in more information on bitcoins, take a look at this great article: http://www.wired.com/magazine/2011/11/mf_bitcoin/all/1     

Fiat money increases inequality

In 1971, Fiat money was introduced, replacing the gold standard. Since then, money is not backed by any collateral any more. As a consequence, governments (or rather central banks) continuously increased the money supply, therefore causing inflation. People hurt most by inflation are employees and savers. On the other side, banks and investors who can effort to own real assets have profited from the increase in money supply. Therefore, fiat money increases inequalities between the rich and the poor.

For a short and comprehensive view on Fiat money, take a look at the video: