Bothered By Bitcoin

Bitcoin has been in the news recently, especially as the Federal Election Commission considers allowing Bitcoin donations to political campaigns.  Which is, of course, a colossally stupid idea, but almost anything dealing with US election funding these days is a colossally stupid idea, so they’re not really treading new ground.  But this prompts the question: what is Bitcoin and why should I care about it?

Bitcoin is a virtual currency.  What’s that?  It’s online money.  That is, money not backed by the full faith and credit of any government.  Bitcoin was made up by an anonymous developer and only has value in so much as people are willing to accept it as currency.
    Which, at first glance, is not so different from any modern currency.  Since the US went completely off the gold standard in the early 70’s, the Dollar is representative of the idea of money, rather than money itself.  It’s the same thing for any modern currency, the Euro, the Yen, the Yuan, none of them backed by anything other than their respective governments claiming they’re worth something.
     Bitcoin is kind of the same thing.  Each Bitcoin only has as much value as two sides of a business transaction place on it.  If I think one Bitcoin can buy an apple and you think one Bitcoin can buy an apple there’s no problem.  If I think one Bitcoin can buy an apple and you think one Bitcoin can buy a Ferrari there’s a huge problem.  This mismatch is what governments who centrally control currency manage.  In the US, the Federal Reserve sets that value, saying (in essence) that one dollar can buy an apple but it takes half a million dollars to buy a Ferrari.  Uncle Sam steps in to resolve what is, at its heart, a barter dispute.

The problem with Bitcoin is it has no Federal Reserve.  It’s a peer-to-peer system, designed from the beginning to be decentralized.  There is no Bitcoin monetary policy, the number of Bitcoins doesn’t come from anything other than the one guy who created it deciding there should be more or less Bitcoins in circulation.  Seriously.  That’s how it works.  One dude.*

That’s what Bitcoin is, but the other question remains: why should I care about it?

You should care because the media is increasingly taking Bitcoin seriously.  Which, in turn, means consumers will take it seriously, which, in turn, means they will pressure their legislators to take it seriously.  This is a huge problem because no one – not even the drug dealers who have been the major source of Bitcoin transactions to date – should take it seriously.  It’s a fraud, a sham, and a huge problem waiting to happen.

The issue is the word ‘coin’ in Bitcoin.  Makes it sound legit.   Plus, anything online makes the media's shriveled black hearts flutter, even if they don't understand it.  Or maybe especially if they don't understand it.  But let’s un-abstract this, and see if any of it makes sense.
    Let’s assume that instead of being nothing but lines of code and electrons, Bitcoins were something real that you could touch.  Say, special orchid petals.  Rare ones.  Only 21 million orchid petals like this exist in the world, and the orchid seeds are owned and controlled by one guy.  The only way there are going to be more special orchid petals is if that one guy decides there should be more; he’s the only one who can grow them.
    You own a coffee shop.  One of your customers orders a latte, and wants to pay you in special orchid petals.  They do this with a straight face, they’re completely serious.  They tell you that if you accept the special orchid petals, even if you might not be able to spend them everywhere like you could real money, there are other places in the world you can use those orchid petals to buy stuff you’d need as a business.
   Would you take this random, anonymous person’s special orchid petals as payment?

Absolutely not, orchid petals aren't real currency, they're intrinsically worthless and represent nothing of value.  If Bitcoins were a tangible thing like special orchid petals there is no way anyone anywhere would accept them as currency, and you’d be a laughingstock if you did.
    So why should it be different just because Bitcoin exists only online?

Yes, modern currency is an illusion.  It’s a game of smoke and mirrors, shared assumptions and shared delusions.  But while modern currencies are no longer backed by precious metals, they are backed by the full faith and credit of their respective governments, which means they’re backed by their citizens’ labor and efforts.  Bitcoin is backed by nothing.  And is worth exactly the same.  If you get involved in it you deserve what you get.


* Everyone assumes it’s a dude, but it could just as well be a woman.