In 2009, a mysterious computer programmer(s), using the pseudonym Satoshi Nakamoto, came up with something that the world had never seen before: a decentralized, open-source digital currency. We know it better as Bitcoin, and it is perhaps the single-most fascinating topic of monetary economics in the 21st century. Although it was heavily hyped after it was released, it seems as though bitcoin has faded from the spotlight somewhat. Despite this, bitcoin still has the potential to completely redefine the way we purchase cars and car accessories.
So, what is it?
Well, for starters, I am not a computer programming expert by any means. I don’t even have Twitter. But I’ll try and give you a brief summary of what bitcoin is, what it does, and why you should know about it.
Bitcoin operates under a highly complex spider web of thousands of computers called a blockchain. A blockchain essentially is a ledger that keeps track of all past bitcoin transactions. This ledger is publically visible, but the identity of the payer and the payee are essentially impossible to hack thanks to a series of cryptographic hashes. In addition, since every single computer in the blockchain has to verify the transaction, it makes the bitcoin network basically impossible to hack. Also, because bitcoin is basically self-governed by the blockchain, bitcoin is completely decentralized; meaning that it does not have a connection to a central bank (and, therefore, cannot be affected by monetary policy).
Mining is the process by which bitcoins are made; and it essentially involves bitcoin users verifying bitcoin transactions through a series of extremely complicated (and random) computer algorithms. Bitcoin miners are then given a reward (in bitcoin), which usually consists of transaction fees and/or new bitcoins. Of course, if you are like me and barely know how to use Facebook, you can also exchange other currencies for bitcoin.
The notion behind bitcoin is that every single bitcoin is accounted for and stored in a secure database. This is much different than Visa or MasterCard, which essentially act as on-demand loans that are subject to interest; but must be paid off with actual money. Bitcoin can qualify as a medium of exchange, a store of value, and a unit of account. This means that, instead of being a form of credit, bitcoin can itself be considered money. Because of this, bitcoin transaction fees can be significantly less than what a credit card company can charge.
Sounds good, eh? An extremely secure, web-based currency that can’t be manipulated by the government or a central bank. Is the future upon us? Should you buy a car with bitcoin?
The answer: no. Bitcoin has no shortage of alarming problems.
If people lose confidence in their currency, one thing that they might do is go back to the barter system.
Because bitcoin is fairly new, it may be difficult to find people who know enough about it to accept bitcoin as money. However, if I was a merchant, I’d probably refuse to accept it anyway. This is because bitcoin is extremely volatile, which means that its value is extremely sensitive and unpredictable. Unlike a U.S. dollar, it’s pretty uncertain what one bitcoin can buy you next month. This high level of risk means that bitcoin isn’t a particularly safe store of value. If that’s the case, it would be unlikely to be accepted as money (especially since bitcoin is not legal tender), because merchants have much less confidence that it will hold its value into the future. To put it in perspective, a bitcoin was worth over $1200 U.S. at its peak, around $100 at its worst, and around $700 today. This kind of uncertainty is what the Soviet Union faced in the 1980s, where cigarettes were more often used as money than was the Russian ruble.
Another issue with bitcoin is its legality. Because bitcoin is extremely secure and offers its clients near-perfect anonymity, it has become a popular method of payment on the black market. For the same reasons, it makes it easy for crooks to get away with tax evasion and money laundering. Governments generally don’t appreciate that. In fact, the Internal Revenue Service of the United States wants Bitcoin to surrender and de-encrypt user data to [out tax dodgers](fortune.com/2016/11/20/irs-bitcoin-tax-evasion-case/). What’s more, if bitcoin fails as a currency, you’re on your own if you lose all your money. No deposit insurance, no consumer protection, no legal recourse, nothing.
So, to answer my original question: getting bitcoin to finance a car purchase is a really bad idea, for now. You’ll take on far less risk by simply taking out a car loan. Yes, there are plenty of stories of bitcoin tycoons who have made obscene amounts of money by buying low and selling high, but they did so while facing the prospect of blowing tens of thousands of dollars. Even if bitcoin became significantly less volatile, though, I would personally stay away from it. I’m not saying that the founders of bitcoin are deceitful deviants. In fact, I believe that it’s in their best interests to be aboveboard with their extremely complex network currency. That kind of honesty and transparency is the only thing keeping the company from essentially being a transnational Ponzi scheme.