Hello,

I have an interest in software (I'm a developer) and economics.

When I first heard about bitcoin it seemed like an absurd idea. But once I read about it, I think it has some beautiful ways to deal with some of the usual problems of virtual currencies.

In the end, what is required of a currency is that enough other people recognize is as such to give it value, and that it has a relatively stable value. Its this second point I think might cause problems. The fixed money supply will make it inherently deflationary. Whilst this is good for those holding the currency, it will affect liquidity - if the purchasing power of bitcoins is always rising, people will sit on them rather than spend them. It will become just a type of investment (a risky one at that) rather than a medium of exchange - kind of like gold has become today.

Gold and the economy under the gold standard had similar deflation issues, but gold supply was able to grow, albeit slowly (with new mining). If demand for gold is high, the price rises and people invest more money in mining. The bitcoin algorithm seems perhaps a bit too limited in this respect... it might have been better if rather than topping out at 21million BTC it was able to grow inline with economic growth, eg 2-3% per year, indefinitely?

I appreciate that present fiat currencies are inflationary (unlimited new money creation) and that this is also not desirable (I bought lots of gold 4 years back, as I could see what the central banks were going to do).

Anyway, the system is a stroke of genius and I'm interested to see how it develops. Its a fascinating experiment!

Saddam Smith