Virtual currencies such as Bitcoin are an attempt to create another store of value which nation states cannot debase for political or economic reasons. Bitcoin is portable, non-taxed (so far) and has a finite cap on the number of Bitcoins which can ever exist. It also represents a serious strategic threat to, amongst others, the United States. To explain, the United States is currently living far beyond its means. This is made possible because the US Dollar is the world’s reserve currency. Oil is priced in US Dollars. There will always (seemingly) be a demand for US Dollars by investors and trading institutions. As the US Dollar is seen as being a rock solid store of value which also underpins the global economy the USA can borrow money far more cheaply than it would otherwise be possible to do.
But what if other stores of value - such as Bitcoin, were to become mainstream? Wouldn’t this undermine the value of nation state currencies in general and the US Dollar in particular?
For an example of how seriously the US government takes these things consider the case of the Liberty Dollar. The Liberty Dollar was an attempt to create a physical alternative to the US Dollar. Its creator, Bernard von NotHaus was recently convicted of "making, possessing and selling his own coins” and faces up to fifteen years in prison. He has been described as a “domestic terrorist” by US government officials. In that context what view is the US government likely to hold on Bitcoin?
Now, Bitcoin is essentially a bunch of clever mathematical algorithms. See here for a great description of how Bitcoin actually works. With gold you’re trusting people’s belief in its intrinsic value and with traditional currencies you’re trusting the economies and political systems which stand behind them. However, with Bitcoin you’re trusting that the mathematician(s) who created it have left no chinks in its cryptographic armour. Is it likely that very smart mathematicians and cryptanalysts at the NSA (and every other major nation state intelligence agency) are trying to find weaknesses in Bitcoin? Highly likely, I’d say.
Lets suppose that, for example, the NSA were to find a vulnerability in Bitcoin. It wouldn’t necessarily need to be functionally catastrophic - it would merely need to damage Bitcoin’s reputation as a safe store of value. Bitcoin would have, in effect, an electronic Sword of Damocles hanging over its head. It could potentially be instantaneously and irrevocably destroyed by a keystroke in an NSA data centre. If such a weakness existed then when, if you were a nation state, would you choose to use it to destroy Bitcoin? If it were up to me I’d wait until Bitcoin had, to an extent, gone mainstream. When holding Bitcoins is considered normal enough that the average person might choose to hold some - that’s when I’d pull the rug from under it. Some average folk lose some money, as a result virtual currencies (all virtual currencies) are rendered toxic for a very long time. People rush back to the seeming safety and security of traditional currencies - and the natural order is preserved.
So, if you hold Bitcoin now then any value which it currently has may only exist on the sufferance of the NSA. Risky, no?
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