Bitcoin for bankers

What is Bitcoin?  A new currency and a platform for transferring the currency.  The currency is bitcoin (little "b").  The platform is Bitcoin (big "B").     

Why is bitcoin a currency? Because merchants accept it is as currency.

What gives bitcoin value?  Current and future merchant adoption.  

Is bitcoin a good currency now? No, because most bitcoin holders don't want to spend it because they believe the price is going up.  

Will bitcoin become a good currency?  Many people believe so, yes.  

Can a government control the supply of bitcoin.  No and yes.  No government can force a change in the Bitcoin protocol to adjust the bitcoin cap.  But any creditworthy government can create bitcoin notes, which function as bitcoin for purposes of commerce. 

Paul Krugman says that bitcoin is not "tethered to reality." Is this true?  Bitcoin is tethered to reality to the extent that merchants accept bitcoin now or in the future.  There is not a lot of merchant adoption now (see above).  Whether there will be in the future is the big question.  

Will bitcoin reduce bank deposits?  Yes, that is likely because bitcoin can be held outside of banks to avoid the credit risk created by a bank deposit.  

But don't banks reduce credit risk?  No, banks create credit risk, which is either held by the depositor or transferred to a government.

So will bank deposits disappear?  Likely not, because of the value added services that a bank can provide.  

Isn't bitcoin just anonymous digital money?  No. The Bitcoin invention is not so much about anonymity as giving people the option to transact without a bank.  The addresses used to record ownership on the public Bitcoin blockchain are pseudonymous to protect the privacy of users, just as a bank would do. 

Don't criminals use bitcoin?  Yes, criminals use the pseudonymous feature of bitcoin to hide illegal activity.  This is similar to how criminals use encrypted verbal or written communication.  It needs to be controlled and limited as much as possible while balancing the need for privacy. Banks can help do this by issued bitcoin notes.