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Bitcoin Bytes the Dust

Bitcoins are the archetypical virtual currency. But when is any currency NOT virtual?
Bitcoins are the archetypical virtual currency. But when is any currency NOT virtual?C.G. Masi

Well, not entirely. Mt. Gox, the biggest exchange handling the virtual currency bitcoins shut down operations Tuesday (that was yesterday, wasn't it?), stranding -- a lot -- of assets locked up as bitcoin deposits in the exchange.

So, what's a virtual currency, anyway? How's it different from the dollars, euros, and yen that are supposedly not virtual? Are those government-backed currencies somehow more "real" than bitcoins? What about the recent noise about how bitcoins represent the future of digital currency?

First of all, we need to think about what currency is in the first place. Then, we can think about virtual currency. Then, we can finally get to the future of digital currency.

Currency is another word for money, and money is fictional to begin with. In the real world, folks trade stuff. In the absence of money, folks trade stuff they have for stuff other folks have that they want. That's called barter. The problem is that to barter what you have for something you'd rather have, you have to find somebody that has what you want, while wanting what you have -- right now! It can be a pain in the butt.

Money makes things more convenient by designating certain stuff as being so commonly desireable that you can trade it to just about anybody for just about anything at just about any time. Gold, for instance. It used to be that if you had gold laying around, you were always able to find somebody to accept enough of it in trade for just about anything else.

That was in olden times when we still used gold for currency. It doesn't work that way anymore, 'cause we don't.

Eggs and milk, on the other hand, are pretty universally desireable, but never worked well as currency because if you try to trade, say, eggs for, say, an office building, you'd need a lot of eggs, so by the time you get 'em all together they'd start to rot. You'd also need a big fleet of trucks to deliver them to whoever has the office building you want to barter for. And, anyone with an office building is unlikely to want that many eggs all at once. To be useful for currency, the stuff has to be compact, portable and reasonably physically stable over time. Gold fulfills those criteria a lot better than eggs.

Note that "of high intrinsic value" is not among the criteria. Gold is, by itself, almost worthless. As a metal, its crappy. By almost any standard, any job you want a metal to do can be done better by something else. As currency, however, it does pretty well.

Before computers, the very best stuff to use for currency was little pieces of paper. In a little tin box on my bureau, I've got pieces of paper representing 35 Dutch guilders, 50 German marks, and 20 euros left over from various trips to Europe. Are those currency? Not around here! If I take them to the local Publix supermarket, there's a good chance I won't come home with any bananas.

I've got a $10 bill in my back pocket, however, that has "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE" printed on it. Assuming the bill is not counterfeit, that's a promise by the U.S. government that if I take it down to the Publix market to exchange for bananas, and the checkout clerk refuses to accept it, Uncle Sam will be on my side wanting to know why.

My expatriate European currency, however, carries a similar promise from their governments that they'll stand with me, too. They do that by making agreements with the U.S. Federal Reserve to exchange my marks, guilders, or euros for pieces of paper that are legal tender here at home. All I have to do is take them to the right bank, and I'll come home with an equivalent amount of dollars, which I can exchange for bananas at Publix.

All that brings us around to what's virtual about bitcoins. If I take a bitcoin to Publix, and they refuse to barter it for a bunch of bananas, there's nobody standing on my side asking "why." I'd be on my own, with no recourse to anyone able to enforce anything. That's the situation Mt. Gox depositors find themselves in. The exchange stopped making transactions, so nobody gets anything back. If they complain to the U.S. Federal Reserve, the Fed will just say "tough titty toenails."

The future of digital currency is nonexistent unless the U.S. Federal Reserve -- or somebody with equivalent you'd-better-do-it-our-way power -- stands behind it. What are the odds of that happening? Nil.

The reason the odds are nil is that the U.S. Federal Reserve already has a digital currency it stands behind: the U.S. dollar. The entire U.S. economy already runs on digital dollars, anyway.

So, if you want to see the future of digital currency, go online to check the balance (in dollars) in your bank account.