What Is Bitcoin, the virtual currency?

New York Stock Exchange.

by Louis Shalako

Love, or money, is what makes the world go around.

Let’s talk about money.

There are of course moral and ethical dilemmas surrounding the issue of money. This being the future and all, the one we were all madly reading about when we were kids, there are new kinds of money.

Plastic debit cards, credit cards, in-store gift cards, have all changed the face of transaction in the sense that we do things our parents never would have done. Our parents, certainly our grandparents, would have never swiped a card through a reader, waved an electronic speed-pass in front of a gas pump, or bought and activated a plastic gift card.

Let’s look at gift cards. When the ‘credit’ or ‘money’ is loaded up on the card, it is said to be ‘activated.’ 

That’s backed up by something on the front end, some kind of deposit somewhere. and on the ‘receiving end,’ when the card pays out in the form of groceries, gas, a pair of shoes, that transaction, is still backed up by coin of the realm, a stable ‘real’ currency, backed up by the assets of the state, and, or, its holdings in specie or bullion. This ‘money’ is backed by a state, who uses the currency to pay its bills, pay entitlements, and carry out its social and economic goals or programs.

If you want to purchase such a gift card, you have to hand over some cash, pay with a credit or debit card, or you simply won’t get your purchase. No money, no card. U.S. or Canadian dollars are pretty stable. You have one year on a gift card to use the funds, or you lose your ‘rights’ so to speak, and that is one of the criticisms of the cards. If you are paying cash, it’s just easier to use the currency of the country you are presently in—I once had problems buying a sandwich twenty miles inland in Michigan. All I had was a Canadian ten-dollar bill. I was on the way to Flint or something and the trip came up at short notice. No sandwich, end of story.

Virtual currency is different. It has no backing from any state or bank, there are no holdings in gold, dollars, bonds, whatever has been used previously to covey the idea of value, of monetary worth. The transacton is real because some person paid some other person for the bitcoin. That is its only backing, (my own conclusion.). The bitcoin is worth what someone paid for it and no more, and it has also been volatile over its short history.

Bitcoins are traded like a commodity. A peck of soybeans is a commodity, a sow-belly is a commodity. 

Conventional commodities are traded electronically, on trust, by reputable and registered traders.

They own the right to the funds generated by the sale of some peck of soybeans or a sowbelly somewhere, and those trades are backed up by the intrinsic worth of the commodity itself.

An international, virtual currency is only worth what somebody has paid for it. Demand for it drives the worth of it up, and the same thing can happen to soybeans or sow-bellies or whatever.

The difference is that the commodity is real, as opposed to virtual.

Make no mistake, if I buy one bitcoin, real money is coming out of my account, otherwise I don’t have the right to own it. If demand is high when I cash it in, real money comes out of some virtual font somewhere and if I want then I can go and buy what I want.

What’s different about a virtual currency is that it’s new, ladies and gentlemen, and it’s also international.

Is it a threat, and by that, I mean is it a threat to me, personally? Enlightened self-interest, right?

How does this affect me?

This writer is not a hundred percent sure of just how I would go about buying a sandwich, ‘twenty miles inland’ in some country, any country, with a bitcoin. Debit card for sure, and that U.S. dollar transaction would be electronically calculated and converted instantly so the bill is paid in U.S. dollars from my Canadian account.

Right? That seems simple enough.

Bitcoin charts.

Business Insider interview with Paul Krugman.

“Economist and Nobel Prize winner Paul Krugman says that "in principle, you can have assets, which are considered valuable, even though there is nothing backing them," but he is skeptical about what drives the recent surge of the bitcoin.”

It also seems simple enough, that in the trading of bitcoins, simple electronic and mathematical rules apply. Conversions from and into bitcoin virtual currency would be relatively simple.

The question to a consumer, and we live in a consumer society just as much as in a ‘money-trading’ society, is, “What good is it? What is it for?”

But if a virtual currency like Bitcoin is to become a valid international consumer currency, it must be in denominational units of small enough for convenient use. One bitcoin worth say, $450.00 isn’t much good if all you want to do is to buy a cup of coffee. If the coffee is valued at $1.60, that’s 1/287^th of a bitcoin. That would essentially mean nothing to the average consumer, and if it’s volatile, one minute the value of your bitcoin is soaring, and the next minute it is plummeting.

So that is the starting point for the research to this story. I would like to know what it’s good for.

Here’s what people in nine emerging markets had to say about bitcoin. Sounds to me like they know more about it than this writer, but the M-pesa digital currency in Kenya is interesting. At time of writing, apparently it’s the most advanced such system in the world.

Bitcoin shut out of Chinese market, second largest in world. If it didn’t serve state policy, and if the government saw it as essentially chaotic, then it would be highly suspect in their eyes.

Will virtual currency break the power of the state to control monetary policy?

“There is another concern about Bitcoin that gnaws at me. Control of money is the State’s most important tool for maintaining power. Controlling money allows governments to engineer society, rewarding the politically connected while keeping the underclass content. It gives government the ability to promote the illusion that there is such as thing as a free lunch, and that the State is the fountainhead from which all good things flow. Thus, governments will crush anything that undermines their control over money. Absolutely no competition in this area is allowed.”

“Perhaps it’s my conspiratorial side, but something smells fishy here. If Bitcoin is as dangerous to the State as its proponents in the liberty movement claim, why isn’t the State already moving to crush it?” – Lew Rockwell.

Money Beat.

“Virtual currencies, perhaps most notably bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of many of us.  Indeed, based on conversations my staff and I have had with dozens of individuals both inside and outside of government, it is clear that the knowledge and expectation gaps are wide. Fundamental questions remain about what a virtual currency actually is, how it should be treated, and what the future holds.”

“Virtual currencies, perhaps most notably bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of many of us.  Indeed, based on conversations my staff and I have had with dozens of individuals both inside and outside of government, it is clear that the knowledge and expectation gaps are wide. Fundamental questions remain about what a virtual currency actually is, how it should be treated, and what the future holds.”

What’s so special about Bitcoin?

“The fact that Bitcoin advocates rely so heavily on the niftiness of its underlying algorithms and protocol is one of the best reasons to predict its demise.  If all you have going for you is a cool algorithm, then at some point there will be someone else out there with an even cooler algorithm. And then someone else.”

“Indeed, there is evidence that this process is already underway. If you don’t want to use Bitcoin, you can always try Litecoin.” – Forbes

How is Bitcoin different from the dollar?

Steven Kinsella, as quoted in Forbes:

“Bitcoin has no use value, only exchange value, and because it is has no worth in use other than what others are willing to pay for it, it is always in a bubble: these happen when prices of assets get dislodged from their fundamental value. So Bitcoin is the perfect bubble.”

“(Charles) Goodhart argues that states have essentially always been in control of monetary systems. He emphasizes that governments have always viewed seigniorage as a useful form of revenue and are unlikely to allow this source of revenue to be replaced by a private source of money.”

The article concludes, “There’s no doubt that Bitcoin is an interesting invention, useful at a minimum for provoking good classroom discussions in Money and Banking courses about what exactly is the meaning of money. But people should be wary of investing large amounts of their savings in Bitcoins. History provides plenty of reasons to suspect that private money is unlikely to work. Maybe this time is different. Usually it’s not.”

To go further than that, what are the ethical or moral considerations of allowing Bitcoin and other private currencies free reign, to conduct a global experiment that could, in the longer term be disruptive of national economies?

I have some philosophical sympathy with a new form of disruption, for it seems self-evident that at some point in the not-too-far distant future, new forms of international government will arise.

When the European Union came into being and adopted the Euro, some national powers had to be given up, and yet the currency is backed up by the combined holdings in all the member nations.

Their gross domestic product, the real wealth of the nation, (the more developed a nation is, the more it is ‘worth,’) the ratio of debt to income and expenditure, all these factors contribute to the worth, or value of the Euro. In relation to other similarly-baked currencies, its values fluctuates over time as circumstances and therefore demand the Euro as a holding currency, (a commodity of value) goes up and down. This only becomes volatile in moments of crisis. The fact the European Union is international really doesn’t change the rule-set. And everyone involved at least understands the rules.

Issues of national sovereignty are touchy, hot-button issues, and yet civilization is advancing—we are becoming more organized, more knowledgeable. Social systems are getting more complex, and the demands for international cooperation are growing rapidly as the challenges of the 21^st century become apparent or when they reveal themselves for the very first time.

It may be necessary to strip away some small portion of the sovereign powers of the state in its theoretical sense, in order to give some power to an international organization, one where all states and nations could hold membership, and have the right to speak, consult, debate, and set policy.

Also, if it is not to be completely powerless, such an international organization would have to have some funding, some revenue stream, generated by contributions on all members, dare I say ‘international taxation,’ and ultimately such an international entity would acquire assets. Their virtual currency, traded and used by consumers world-wide, might very well be backed up by an acceptable standard commodity—like gold, or even good old U.S. greenbacks as well as other high-value, stable currencies.

Such an international organization would of course use monetary policy to advance its social policies on a global basis, i.e., ‘world government.’ In its initial stages, that institution would be as experimental, and most probably just as potentially disruptive, certainly long term, as highly-speculative virtual currencies now in the marketplace.

In that sense, something very much like Bitcoin might be useful for an emerging world-wide electronic culture. Part of the usefulness of that tool might lay in its ability to subvert existing power structures and in laying the groundwork for something both benevolent in principle, in so far as it can be said that commerce is essentially benevolent and a socializing factor in human relations.

In terms of science-fiction futurism, displaced people, refugees, stateless persons, would still be citizens of the globe. No one could seriously claim otherwise. They might not want to acknowledge them as citizens, for that gives them certain rights, but the unfriendly state of origin in question could hardly suggest that they came from some other planet.

An international government might take some responsibility for those global citizens, but more importantly some virtual currency that they could take, send, receive, spend or trade anywhere in the world would appear to be their natural, supra-state currency. That currency would be a tool for further consolidation of a planetary government, once suitable institutional architecture is in place. a

And the world as we know it might even be a better place for it.

Sorry, even I didn’t see that one coming.

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Additional Resources.

Bitcoin: a peer-to-peer virtual payment system. (Wiki.)

How It Works.

How to Steal Bitcoin in Three Easy Steps.

Bitcoin units.

Weaknesses.

Transaction Fees.

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