Tuesday, April 15, 2014

Is Bitcoin Real Money? Just What Is Your Bitcoin Profit Calculator Calculating?

By Wallace Eddington


This article follows the conventional practice of using the upper case Bitcoin to refer to the program or network and the lower case bitcoin to refer to the currency.

You crunch the numbers on your Bitcoin Profit Calculator , working out just how much that bitcoin is worth in the national currency in which you find yourself operating. How easy though it is for the creeping doubt to sneak into your thoughts: is actually real money? It would be strange if the thought didn't cross your mind.

We have, after all, been inundated in recent months and years by the condemnations and criticism from both sides of the chamber in the long running debate between fiat currency's defenders and their precious metal rivals. Both have often enough dismissed bitcoin as fools-gold. Their reasons of course are different.

Fiat currency defenders simply give no respect to any alleged money which isn't backed by a government. Without such backing, they consider it just a joke. More sophisticated versions of the case likely cite the relevance of network-effect - not without some validity.

Notwithstanding a certain practical merit, though, such arguments are the death rattle of a dying currency. History shows us, time and again, fiat currency is a recipe for monetary decrepitude, not to mention systemic theft, through inflation.

In this traditional debate, bitcoin supporters find themselves siding with the precious metal crowd. Fiat valuation is the last-gasp of any money. As I explained in an article at the Fiat Currency Review site, money always begins, and has as its only prospect of continuing as a valued currency, when adopted through market exchanges that initially valued it as a commodity. Such money alone avoids government corruption through fiat.

Whether sea shells, cattle, tobacco, salt or gold, money becomes money, in the first instance, because it is a commodity that enough people want that it can be used as a general medium of exchange or store of value. If though we concede that point (thoroughly as it pulls out the rug from under the feet of the fiat currency crowd), does it then leave bitcoin condemned by the arguments of precious metal promoters?

Gold bugs are perfectly correct in their insistence that money must be backed by a real commodity. Where they go wrong is presuming that bitcoin lacks just such a backing.

Bitcoin is no less a commodity-money then is gold or silver today, and cattle or cowry shells once were, in the past. Misconceiving bitcoin as merely abstract numbers, rendered in pixels, fundamentally misconceives what is happening, here.

It has to be understood that bitcoin as a currency is a product of Bitcoin technology - software and hardware - which is constituted through the networked work of what are, somewhat misleadingly, called the miners. It is these miners who audit and secure the Bitcoin system, by means of solving advanced mathematical equations. Thereby, Bitcoin (and thereby bitcoin) is literally the miners' math calculations.

Once this is understood, the major, salient fact about mining is the extraordinary amount of electricity consumed in the process. The great economist, Julian Simon, explained long ago that when prices of any resource are high incentives are generated for people to innovate less expressive solutions.

Likely, the long run expense of Bitcoin mining will fall, but it is difficult to imagine bitcoin without electricity. The existence of the electrical grid is Bitcoin's condition of possibility.

Indeed, electricity may be the single most important commodity in our world. It's only real rival is fossil fuel and it seems likely that hundreds of years from now, when fossil fuel has become too expensive for most of its current uses - whether generated by windmills, nuclear or hydro power plants, or some means not yet invented - there will be electricity.

Put in that light, then, we can see that the excavating, smelting and molding of aurous compounds into the coins and bars that constitute the commodity-backed money called gold is not any more money than the generating, conducting and programming of electricity into the mathematical calculations that produce B/bitcoin. Bitcoin no less than gold is backed by mining a natural resource from the world. That is, and always has been, real money.




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