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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