When I was very small, I used to make mud pies and sell them. The process of making a mud pie is, if you’re five, labor-intensive and I wanted compensation for my hard work. I accepted it in the form of rocks. My friends would present me with stones big and small. In my rock-economy, a pocket full of pebbles meant I was flush. This was my currency. It was as real for me, just as Bitcoins are for the millions who invest in and use them today.
I had been struggling with the concept of Bitcoins. If you’ve never heard of them, the idea is, for the most part, pretty simple. It’s decentralized, online money that springs out of virtual mines. There are a few ways to get currency: One is to have people give Bitcoins (as payment or a gift). Another is to offer up the computational power of your own computer to help mine new Bitcoins.
The latter method will get coins, but far more slowly than if you were to buy them on your own. This does require that you install local software. If you do help support the mines, remember that they only unearth a certain number of coins at a time and the overall network sets the value of each coin. Right now, one Bitcoin is worth over $100.
What’s Real
However, thinking about how much a Bitcoin is worth in “real money†is sort of missing the point. Bitcoins are real money. Think about it. What backs the U.S. dollar? Nothing but your trust. The value is set by global markets and local economies, and certainly not you.
Similarly, Bitcoins have value because those who have them and use them to buy real goods believe they do. They believe it so strongly that they can, if they want, convert them into real cash.
When people talk about Bitcoins, they use a lot of buzzwords and terms like “virtual,†“crypto-currency,†“abstraction of value,†“decentralized,†“global.†Each of them makes Bitcoin sound better than the bills and coins you have in your pocket.
Controlling Value
To a certain extent, they’re right. I recently traveled to London where my hard-earned U.S. dollars were worth just 75% of their original value. This made London a very, very expensive trip. Why is it that some third-party economists, governments and banks get to decide the value of the dollar that I earned? In Bitcoins, this can’t happen.
Actually, that’s not entirely true. So, the good news: My Bitcoin value in London (or anywhere else in the world) would be the same as it is in the U.S. This makes perfect sense since the currency is almost entirely online in virtual wallets. It’s part of the global Internet that most of the world can access. However, the value is set by virtual currency trading systems and we have seen it shoot up to over $200 per coin and drop as low as $30 per coin. Years ago, each coin was worth pennies.
I also think Bitcoin mania needs a bit of reality check: It still, if you want to have a decent number of coins, usually starts as regular money, after all.
It All Starts with Ben Franklins
You begin at a site like MT.Gox, which lets you transfer in real funds (dollars, euros) from a real bank to then buy Bitcoins at the current market rate.
I guess the benefit here is that you’re converting money that may be beholden to big banks into a currency that grows in value and access thanks to the community.
Bitcoin is also becoming more and more legitimate. We already know you can buy games and online services and it’s a good way to gamble online (if you think there’s anything good about gambling), but we’re now hearing about people buying real goods in the real world. There’s even an NYC bar that has started to accept Bitcoins as payment.
It does seem like it could be time for us to walk away from real money and embrace virtual, crypto, democratic currency, doesn’t it?
Yet, I am still not ready to invest, and here’s why.
Dirty Money
Bitcoin is now under heavy investigation by governments around the world. Banks surely want to see it go under and, to be fair, as virtually untraceable currency, it’s a perfect platform for every illicit activity you can imagine. I can just see the criminal who hired tech nerds to figure out Bitcoins so they could start effortlessly laundering their money. Think about it, you put $100K into, say, Mt.Gox, and out comes untraceable Bitcoin funds that could rapidly increase in value. You buy a boatload of virtual and real goods, maybe sell all that for more Bitcoins and then pull the money out again in real dollars.
I worry about having my money inside a system that is so obviously a perfect breeding ground for crime. It's one of the reasons that you now have to provide MT.Gox with valid ID before you can transfer "real" money in or out of the system.
So, I won’t argue that Bitcoins aren’t real or have no value, but I worry about their long-term prospects. As I see it, they may have about as much chance of long term viability as my mud pies and rock change.
Image: George Frey/Getty Images
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