Posted by: tally on Dec 02, 2010
Is this a gimmick or the next world currency?
This morning someone pointed me towards the BitCoin site. Raise your hands if you've heard of it. You haven't? Neither had I.
Basically it posits that strings of code, generated by computers on a network, could become currency to buy actual products – currency as real as a credit card transaction or paypal payment. But without the bank charges.
The idea of money has always been based on the fact that the note in your hand is a place holder for something physical, like gold in a stash somewhere, or land in the country. We need the place holder only because it's too inconvenient to lug gold, or land, around. So when I pay R4 for a packet of chips, those little coins really mean that you now have R4's worth of my stash of something else, with real value.
This idea is slightly different. This idea seems to be based around how we see money in modern times - money has value because people want it. Which is really what it's come to since I doubt the federal reserve bank would actually give me gold if I showed up at their gates with my salary.
The BitCoin currency itself has no value – in fact you can make it on your own computer. It doesn't do anything. You can't make a pretty necklace out of it, or live on it, or even eat it. There is no centralised power who will give it worth by exchanging it for something physical. You produce these strings of code on your computer with a specific BitCoin program which generates the money, timestamps it and conducts your transactions with it, using only CPU power and electricity.
Perhaps I am too stupid to wrap my brain properly around the concept but this is how I see it:
The coins only obtain value once they are exchanged for something. This first transaction may well happen on faith alone - “I know your coins will be worth something one day, so I'm going to collect them”. Then, it has the value of thing purchased. For example, if someone takes my coin in exchange for a potplant, then my coin is worth a potplant and so it goes. See one red paperclip for example of how far this concept could go...
But will it ever work? The site already has a list of traders who accept BitCoins for goods. Goodness knows why. Perhaps so they can trade with each other? Or perhaps because they believe this is the next universal currency and that before long they'll be able to use said coins to do their Christmas shopping?
The worth of a currency as I understand it is very much determined by how much is in circulation. Which is why you can't just produce coins until the cows come home. There's maths involved. Complex maths I don't understand. But still... doesn't the democratisation of currency creation sounds like a pretty quick way to undermine the currency's value? Supply and demand etc.
I don't know. Perhaps not. Perhaps it's the way we will one day close the gap between the rich and the poor. What do you think?
The initial paper on the concept is available here for your perusal.