From Ryan Baker of Coburg Consultants

 

Welcome back!

It’s 2014, and that means that we can say goodbye to pretty lights and turkey dinners and say hello to bulging waistlines and credit card bills. As you are active in fulfilling all your New Year’s resolutions, you might be wondering how to squeeze a couple extra pennies out of your daily routine and maybe make some good investments for the year to come.

How about Bitcoins?

‘Bitcoins (insert puzzled look here)?’  – This is a typical response from someone when you ask them about the cool new crypto-currency and to be honest, that’s not surprising. We’ve been using coins as currency since 600 BCE and the modern banking system took form in the early 17^th century. With that in mind, it’s not hard to understand someone’s confusion around Bitcoin when each and every monetary transaction they make represents nearly 3000 years of accrued financial wisdom.

So, to add to the plethora of information there is available out there on Bitcoins, we thought that we would try to demystify it for our readers. Rather than give you a bunch of computer science/economics/cryptography textbook info, we’ll tell you what you need to know should you choose to join the Bitcoin wave and get involved.

To interact in any market you need currency, so the first step is getting your hands on some Bitcoins. When you leave your house in the morning, you probably bring your wallet, money clip, or just a bunch of crumpled up fives in your pocket. Just like that, you’ll need a place to store your Bitcoins and keep them safe. This is conveniently called a Bitcoin wallet. I recommend using Coinbase to get started.

However, you may also be embracing the NFC payment system movement (because science is cool these days) and that means your mobile phone is a big part of your day-to-day economic interactions. For all you Android users, check out Bitcoin Wallet for Android. If you’re an iPhoner, you may be out of luck for the time being.

So what is a Bitcoin? There is a ton of info out there for the curious reader and we encourage you read up on it. What’s really important to understand now is the idea of Bitcoin as a currency and Bitcoin as a commodity (sorry, I couldn’t resist using just a bit of economics in here).

As your Econ101 textbook will point out, for something to be ‘money’ it must do three things. 1) It must be a Unit of Value, facilitating valuation and calculation, allowing it to act as a 2) Medium for Exchange, eliminating the need to barter and allowing you hold it as a 3) Store of Value, to reliably make more transactions in the future.

In a very basic sense, Bitcoin’s value is (1) is derived from scarcity and demand, however, the more contentious bit in the C vs. C argument surrounds Bitcoins ability to be a store of value (3).

As you’ve seen on the news lately, the value of Bitcoin is jumping around faster than a kid with a pixie stick. This makes it a great commodity buy insofar as you can speculate on the price of Bitcoin and make money accordingly.  It begs the question, ‘If the Bitcoin price jumps around so much and I can make money, why would I use them to buy things like I would cash?’

That’s up to you to decide. I believe that as more people begin using Bitcoin (regardless of their reason) the more stable the price of Bitcoin will become, making the currency angle much more sustainable.

In any case, you should read up on Bitcoin. As students of business, it is important to expand our horizons and consider every opportunity and if Bitcoins truly are paradigm-shifting phenomena, we would be remiss not to.