BitCoin: Money is electrons, as long as you accept it

BitCoin: Money is electrons, as long as you accept it

By Bob Travica

Recently, some advocates of BitCoin were arrested in the US. Not long ago, BitCoin was banned in China. These events again swayed public attention to BitCoin, and interesting international phenomenon that was born in 2009.

BitCoin is a form of digital currency, created in the open source community (programmers who make their software available in the form of source code and often free). It is a form of money that is used as a means of exchange among those who voluntarily accept it. There is no mint authority, no specific country issuing the money, no banks, no coins (although there could be plastic pieces imitating coins but hiding digital circuitry inside). And there is no money exchanging pocket, just shuffling of encrypted messages that specify transfer of BitCoin form one owner to another.

There are many problems with BitCoin, such as its exchange rate with regular currencies, large fluctuations in value, its geographical coverage, and, not the least important - BitCoin is sometimes used for irregular trade like narcotics. Advocates of BitCoin and other digital currencies point out that alternative means of exchanges serve as a rescue from over-powering banks. The argument goes, if a particular community agrees on its currency and it does the job of facilitating legal trade, who is to say that digital currency is inappropriate?

The bigger picture behind this story is digital format of money. In the 1950s, some visionaries asserted that money was going to be electronic. Bankers laughed. Today, however, most of banking transpires in the form of transferring debit and credit figures electronically.

Money is essentially a social contract between parties accepting a certain means of payment as legitimate (normal). They also accept that the given money is an appropriate meter of economic value of goods and services traded. As long as the contract exists, it doesn’t matter if the money is paper, metal, electronic numbers, or nearly anything to which imagination can stretch. It is important though that the particular format cannot be easily forged.

In the past, money itself had economic value; e.g., sheep, edible plants, and then gold and other precious metals. While gold survived as a sort of money, it is impractical to use it in regular trade due to wear, robbery, impossibility of measuring smaller value, etc. Up until early 1970s, paper money was backed by gold reserves in national central banks. After abandoning the gold standard, limits to digital money definitely disappeared.