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Friday, January 17, 2014

Bitcoins – you just have to believe for it to be true

Like most, I’ve been seeing a lot of buzz – articles and news stories and such – about the new virtual currency called Bitcoin. Now, let me state up-front that I still don’t feel comfortable that I understand this whole thing about how Bitcoins are mined, i.e. created or brought into existence, at least in cyberspace somewhere. This is one of those concepts that can easily give one a headache when trying to understand it; however, I do believe that the concept of Bitcoins has a reasonable chance of catching on.

Let’s start at a more basic and understandable level, with an understanding of the concept of currency in general. Currency, money if you like, was created way, way back to facilitate trade. Before that everything was pretty much on the barter system. Prior to currency a bottle of wine might have been “worth” a half peck of wheat or some other commodity. Much of what was actually being exchanged in those days was probably food, but there were other things, even back then – household goods and of course jewelry (ladies always had to have jewelry).

So, sometime way, way back the concept of creating an easy to carry and exchange form of surrogate for actual goods was created and dubbed currency (likely not the work used back then, but give me some license on that). Perhaps the first currency was actually a commodity itself, like gold or silver. Some of the first scales developed in civilized worlds were used to measure the weight of this currency, in order to determine how much of some other items it could buy.

Fast-forward to the Roman Empire and we see some of the first use of coins as currency. The concept had evolved such that this trade surrogate, which itself had some intrinsic value (they were forged from gold or silver), was used because it was easy to carry about and generally accepted between people who had other things of value to exchange.  I’m sure that the value of exchange was locally determined, i.e. how many Roman denarius for that goat probably varied by regions. The important thing about this era is that it established firmly in everyone’s minds that they could accept this currency for their goods and use it to buy other goods – it was real money.

The concept of money evolved over millennia and settled into an exchange mechanism that was controlled by and backed by the governments of the various countries in which it was issued and used. That led to the establishment of very complex systems for establishing exchange rates between countries, systems so complex and so corrupted with political influence that they eventually became cumbersome. Eventually all currencies were freed from any connection to an underlying object of intrinsic value (the gold standard was abandoned).

Hit the fast forward button again and you have the concept of the Euro replacing many local currencies in the countries of Europe. The larger world is still awash in various currencies and there is still a very large and sophisticated mechanism in place to establish and maintain exchange rates, although the common interests of countries involved has dictated a more stable and less corruptible system for those exchange rates. At its absolute core it still comes down to how many of the X? (name that you call your currency) does it take to buy that goat. The concept of there still being some official entity in charge has hung on, whether it be called the central bank or the treasury of the country. The other thing that has endured is the existence of a physical instrument, whether it is a dollar or a franc or a pound note. There has always been something that the common man could hold in his hand and put in his wallet.

Enter the BItcoin. The Bitcoin is a virtual currency that had s no connection to any central authority. It is not backed by the faith and good credit of the government of the United State or any other government. It has at its core nothing of intrinsic value; in fact it has no physical embodiment. There is nothing beyond computer files somewhere in the “cloud” to represent this new value placeholder. It is truly a virtual currency.

An even stranger (at least to me) aspect of this virtual currency is the concept of how it is created or “mined”. I’ve  read 2-3 articles on this process and still don’t understand it well enough to explain. Apparently the whole Bitcoin concept was dreamed up by a mysterious and as yet unidentified technology guru who put forth the challenge of solving an increasingly difficult set of mathematical problems, each of which, when solved would result in the creating of some number of Bitcoins. The create of Bitcoins also put a cap on the total number that can ever exist. For reading on this topic which could serve as a great cure for insomnia go to https://en.bitcoin.it/wiki/FAQ . I suppose that this process is no more starnge than the government’s (all governments) ability to create more currency by just turning on the printing presses. More money exists because they say it exists.

For a while after they were created, BItcons were for a while the fascinating playthings of the technical community elite. Then a strange thing happened and they got out into the world at large and finally somebody asked, how many BItcoins for that goat over there? When the owner of the goat accepted whatever number that he took, Bitcoins became real currency.  An exchange mechanism to establish the rate at which Bitcoins can be exchanged for other currency is growing and the “value” of Bitcoins has fluctuated based more upon that than anything else – remember that there is no underlying intrinsic value or backing by any central authority. As I write this, the current Bitcoin to dollar exchange rate is $854.75. If you want to know what the exchange rate is at any time go to http://coinmill.com/BTC_USD.html#BTC=1 . Coinmill is one of the companies that is offering exchange services. You won’t be able to exchange your Bitcoins at the border at the exchange window.

Recent, I’ve read that at least a few real estate brokerages have been advertising home for which the sellers would accept Bitcoins as payment and they have stated that they will pay their agent’s commissions in Bitcoins. That should be interesting. Since they don’t exist physically, all you would get, one can assume, is some sort of pointer to a file somewhere in the cloud which would be your Bitcoin account. There’s probably an App for that, too; I just haven’t checked.

So, will Bitcoins be the next big thing? Will they take off and replace currency as we know it? It’s interesting to think about it this way – currency is all in our minds anyway. Since there is no intrinsic value in any modern currency, it is just our belief that it is worth something that causes us to stick it in or wallet and pull it out when we want to buy that goat over there. If you really consider it, most of what you think you have that is measured in modern currency terms only exists as files somewhere in the cloud now – your bank statement or investment statement tells you how much of this currency you have somewhere. It is basically your belief that you can turn those reports into real currency that can be spent to buy something that gives you comfort in the fact that you have nothing in your hand (or wallet) at the time. Bitcoins just take that thought process a step further - there is nothing ever in your wallet with them; but, you can still buy things with them.

Bitcoins feel weird to me right now as a day-today currency and I don’t understand the process through which they are created. They are a little awkward right now because we don’t yet have names for the subdivisions of this currency that might make sense. After all who wants to carry around a coin that is worth $854? Imagine trying to get change for that at your local filling station or 7-Eleven at midnight. Eventually those issues will be solved. I suspect that our Bitcoins will exist on our smartphones as files that can be accessed and used interactively at places like Starbucks for purchases, where the “change” is returned as a balance in the file. I’m still trying to figure out how the Salvation Army Red Kettles will have to be upgraded to let me tap my phone on the kettle and transfer some small portion of a Bitcoin to the kettle. At least I may end up with a smaller bulge in my back pocket. In the meantime, I have a house listed for sale for 281 Bitcoins, if anyone is interested.

By the way I was going to include a picture of a Bitcoin, but I couldn't find one.

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