By Marc Jampole
Money has always been based on faith, even when it was
theoretically convertible to gold or another precious metal. Throughout
history, governments and economies have sometimes used gold, silver or copper
as money, putting their faith in the value of these metals to others. But
sometimes they have also used beads or shells or anything that can be counted,
stored and transported without deterioration. It would be unwise, for example,
to use raspberries as currency, because they spoil so quickly.
A better name for money is “currency,” because the word
contains a definition of what money does—allows objects and services to flow
without encumbrance between people and organizations. The current of these
goods and services—their exchange from person to person—would be much harder if
there weren’t some easy thing to count, handle and transfer to serve as a
medium of exchange. I can’t negotiate with the supermarket, dry cleaner and bus
driver to have them take something I’ve written in return for groceries,
cleaning services and in-town transportation. They will take my money, though,
and fortunately other companies will pay me the same to write articles,
commercials, brochures, blog entries and websites. Multiply my situation millions upon millions
of times and you’ll see how much we as a society depend on having currency.
Money is the lowest common denominator of exchange value.
Currency creates value relationships between different
items. A loaf of bread may cost three dollars and a ticket to a first-run movie
may cost twelve dollars, meaning that theoretically a movie ticket is worth
four loaves of bread, except during a famine when four tickets to the movie
might not even be tradable for a single slice of bread.
In using money, we engage in an act of faith—faith that what
we accept will have just about the same value when we want to spend it. Usually governments issue currency and our
faith in the currency reflects are faith in the government and the economy it
controls.
Having more than one kind of currency issued by more than
one source by definition creates a value relationship between the different currencies,
similar to the value relation between all products and services. Any value relationship
is subject to change. For example, the euro, which serves as currency for 23
countries, may be worth $1.40 one month and $1.25 another. Political and
economic events and decisions can affect the relationship between two
currencies, just as it can affect the relationship between specific goods and
services.
Without money, it’s impossible to conceive of any kind of
complex economy. And yet only our collective faith in any specific type of
money will enable us—society—to use it. If we didn’t believe that it would be
accepted as exchange value by others, it would have no value to anyone.
Which is why anyone who invested even one dime in bitcoins
was and is a fool.
The Bitcoin system is a computer-controlled private network
consisting of s series of private enterprises that have agreed to follow the
same protocols for “printing,” distributing and setting the value of bitcoins.
The bitcoins exist entirely as numbers in accounts; there are no physical
versions such as coins and paper bills. You can’t go to a bank and get a few
bitcoins. Like all currencies, bitcoin value floats and is determined on the
open market. If you bought one bitcoin a year ago, it’s worth more today—that
is, unless you were holding it at Mt. Gox, which just went under. In that case,
you may have lost everything. If an American bank fails, the money in your
account is insured (up to $250,000 per person per bank). No such protection exists
for those holding their bitcoins at Mt. Gox.
I fail to see any advantage of using bitcoins over euros,
dollars, yuan or other currencies. All of these currencies are subject to
failure—except that individual institutions and businesses fail much, much more
frequently than governments do. Dollars
are backed by the “full faith and credit” of the U.S. government and euros are
backed by the full faith and credit of the EU. What backs bitcoins? The full
faith and credit of the Bitcoin system? What’s that?
Other than currency failure, there is another drawback to
bitcoins: Organizations and individuals have to agree to accept payment in
bitcoins, whereas they all accept the currency of the country in which they do
business. Only if and when a significant number of organizations begin
recognizing bitcoins as currency will it have a true exchange value. But the rampant
speculation that makes bitcoin’s exchange value jerk up and down dramatically serves
as an impediment for corporations to accept them as payment. Who wants to
accept a bitcoin worth $579 the moment you sell your product knowing it may
only be worth $400 in a week? That’s speculation, which, by the way, is a
polite way of saying “gambling.” That’s what buying bitcoins has been from the
start—nothing but a gamble.
Some may argue that one could use the bitcoin to hedge
against a decline in all world currencies.
What they’re really saying is that an artificial currency that exists only
as numbers in computers is a better hedge against a regional or worldwide
economic disaster than gold or silver—things that are finite (you can’t print
more gold) that you can hold, barter and use to make things.
People are attracted to the bitcoin concept because it
represents the pie-in-the-sky ultimate in privatization. Instead of using
government-issued currency, we’ll use private currency. But the bitcoin adds
nothing to make the economy, society or individual asset holders any richer or
safer. In fact, the unusual speculation in bitcoins makes it less safe as an investment.
It may go up significantly in value, but it’s just as likely to go down.
People like to speculate, especially rich folk who buy
paintings, baseball cards and vintage cars hoping they will increase is value.
But if you buy a Manet and suddenly the world hates Manets, you still have a
pretty picture. With bitcoins all you have is a bunch of numbers on the screen.
I’ll stick to dollars, euros and yuan—with an occasional
Swiss franc thrown in for balance.
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