Sunday, February 24, 2013


There's a new currency out there and it's called Bitcoin.  Monetary policy for this currency was set even before it began to be used.  There will never be any more than 21 million bitcoins in existence.  This may lead to deflation, but that should not be a problem because bitcoins are infinitely divisible.  Think about a dollar...the smallest portion of a dollar you can spend is $0.01 or a "cent."  Bitcoins are divisible to 8 decimal places at the moment, so you could spend BC0.0000001.  If deflation becomes an issue, then the software could make bitcoins divisible down to one hundred-millionth of a bitcoin.

Bitcoin is interesting because it is as anonymous as cash but can be spent electronically.  Furthermore, people in different parts of the world can transfer bitcoin to each other without losing money to exchange rates.  The transactions also easily remain in the informal economy.

At the moment, there are only about 10.7 million bitcoins in existence.  This number will grow as people "mine" them by solving complicated math problems.  More info about the usage of bitcoin can be obtained here.

Instead of bank accounts, bitcoins are stored in virtual "wallets."  You can get one for free...just don't lose your password or your bitcoins will be useless.  In fact, it is likely that after 21 million bitcoins are mined, there will be fewer than 21 million bitcoins in circulation because people will lose their wallets.

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