I felt foolish the first time I exchanged “real money” for digital money. It was about four years before Bitcoin, and some friends and I were playing a silly little MMORPG called Dofus. After initial skepticism, I’m embarrassed to say we all become hopelessly addicted. This wasn’t due to the game’s battle mechanics, so much as the game’s underlying economic system. The animations were cartoonish, graphics were low-res, and the whole game seemed like a watered down, kid-friendly spin on other successful MMO franchises. Whatever the game lacked in aesthetics, it made up for with its sophisticated economic engine. This involved trade, banking, and education specializations (for rare natural resource extraction). On a deeper level, individuals could steal, collude, form monopolies, and manipulate prices.
One day I noticed a $99 Ebay listing for Dofus gold. It would’ve taken weeks of endlessly clicking animated trees (chopping wood) to earn the same amount. I realized it would be a far better deal to work a few extra hours in my summer job and to purchase the gold. I stopped playing soon after making that transaction. Any player could stockpile gold by exploiting this same flaw. The game’s economy and value system were broken by this external flow of money from dollar rich players.
A few years back, I stumbled upon this Wired article. I’d never heard of Bitcoin, but it reminded me of the digital gold in Dofus and other similar in-game currencies. I’d largely dismissed it until recently when I encountered several articles covering the cryptocurrency. After taking a second look, the potential technological implications are profound. Rather than exchanging my US Dollars for a digital currency that is restricted to a particular game, I can buy Bitcoin and exchange it with anyone, anywhere, without restrictions. I’ve found myself more and more engrossed by the fascinating characteristics of digital currency.
Most people never consider what makes a US Dollar valuable. As fiat money, it has no intrinsic value and isn’t redeemable for gold in a vault somewhere. Fiat’s value arises out of a government’s declaration that it is legal tender. The value is largely based on the public’s faith that it will be accepted in commerce. In a sense, I value the US Dollars in my pocket for the same reason I valued the gold in my digital Dofus vault. Both currencies are endorsed by a single economic rule-makers in a given system which confers trust that both will be accepted in the system. The drawback, of course, is that a single rule maker can manipulate the currencies at will.
The economic advantages of Bitcoin (as well as other cryptocurrencies) are compelling. As a scarce resource with a fixed future supply (only 21 million will ever exist), inflation is not a concern. Also, the decentralized and somewhat fragmented adoption can be viewed as a strength. There’s less chance that a single bad actor or even a colluding group of bad actors can manipulate the currency. The digital ledger and increasing cryptographic difficulty make this sort of action statistically improbable.
Bitcoin may never receive a nation state’s endorsement, but if it does… Bitcoin’s value could rise by a factor of 100 or more due to the extremely limited supply (when compared to the money supply of traditional fiat). In that scenario, the currency’s volatility would decrease making it a more practical medium of exchange. Even without nation state endorsement, Bitcoin could rival gold and other alternative assets as a hedge against traditional fiat currencies.