Is the Bitcoin a Digital Gold Standard?

is a digital peer-to-peer technology and currency that allows users to transact online without using credit cards or bank accounts. Using a file sharing system, users can trade Bitcoin files for goods and services. Records of every Bitcoin transaction are stored on every user's computer, but the service offers significantly more anonymity than traditional methods of online payment. This has made it a currency of choice for the black market. Most infamously, Bitcoins are being used to

on the illicit Silk Road website—a fact which has drawn the ire of two powerful Democratic senators. There may be something more to the Bitcoin story, however. Bitcoins are appreciating in value at a startaling rate. Last year, one half of one cent could purchase a Bitcoin. Last week, a Bitcoin cost $10.50. On Tuesday, the price of a Bitcoin stood at $15.50. As the Bitcoin becomes more widely known and accepted, the "currency" may appreciate in value further. What is most interesting about the Bitcoin, from an economic perspective, is its ability to potentialy shed light on monetary theory. The Bitcoin, though digital, is effectively a fiat currency just like the U.S. dollar or the euro. It has no inherent value; its users give it value based on the fact that others are willing to accept it for goods and services. However, unlike the USD and the EUD, the Bitcoin is not governed by any central banking system. Further, the rate of inflation in the Bitcoin currency is mathematically-based, and known by all users. The amount of Bitcoins in circulation increases every day, but there will never be more than 21 million Bitcoins in existence. Thus, the Bitcoin has a number of similarities between itself and the gold standard. Like the gold standard, the Bitcoin is relatively limited in supply. Like the gold standard, the Bitcoin is not regulated by any central banking authority. In fact, like gold, new Bitcoins are created through the process of "mining" for them. Obviously, the two have major differences: you can't hold a Bitcoin in your hand or make it into jewelry. But, on a purely theoretical basis, the two have remarkable similarities in terms of monetary ability. Critics of the gold standard have traditionally raised a few common criticisms: the gold standard cannot be expanded in times of economic contraction; the gold standard leads to deflation; the gold standard is a relic of the past. The Bitcoin is arguably the most modern form of money on the planet, so gold's traditional "barbaric relic" critique does not apply. As for the other criticisms, only time will tell if they are valid. Though the majority of professional economists view gold's limits as a serious impediment, in recent years, there has been a renewed push for a return to gold.

, the Republican congressman and presidential candidate, has based a major portion of his platform on monetary policy. Although Paul has not explicitly called for a return to the gold standard, he has argued for years that the U.S. should have never abandoned it. As the market for Bitcoins is still relatively primitive, traders may wish to consider alternative methods of playing the digital currency. The rise of the Bitcoin may be indicative of other trends at play within the global economy.

Traders who believe that the Bitcoin's rise is demonstrating the market's distaste in present fiat currencies might want to consider the following trades:

Traders who believe that the Bitcoin is a short-lived phenomenon, and that the monetary system will ultimately remain within the confines of the status quo for some time, may consider taking positions in the following: