If you are like most of the population, you have heard of Bitcoins, but don’t truly understand their worth. I did not know either. You have probably seen that a few places you normally shop are now accepting them. There are Bitcoin sandwich shops, bars, and even a Bitcoin casino bonus. In an attempt to stay current and assuage my confusion, I decided to get to the bottom of this Bitcoin business. In this article, I will share my initial understanding and provide an overview of what backs this up and coming “new money”.
As you probably guessed, either from the name or the fact that businesses are starting to accept them, Bitcoins are a form of currency. But it’s not “real money”, right? I mean, paper money and quarters and dimes are “real money”. However, paper money and actual coins only represent value. But what value to they represent? Let’s look at the U.S. Dollar.
Some opponents of Bitcoins say that it has no value because it’s backed by nothing. One could say the same about the U.S. Dollar. Once upon a time, the value of the U.S. Dollar came from the precious metal that backed it. However, the Gold standard was abandoned in the U.S. in 1933. The silver standard was abandoned in 1968. The value of the U.S. Dollar is now only worth the goods and services for which it can be exchanged and that value is a loose equation relating to government spending and Gross Domestic Product. In this system, the Federal Reserve can print money whenever it feels it needs to, thereby messing with the value of our dollar, a.k.a. inflation.
So, what backs a Bitcoin? Technically…nothing. But, as you can see, that is exactly the same story with the U.S. Dollar. The interesting thing is that Bitcoins can’t be “printed”, or released into the economy whenever some organization (FRB) thinks it’s a good idea. In fact, there will only ever be 21 million Bitcoins in circulation. Instead of the Federal Reserve Bank being solely in charge of the financial books, the people of planet Earth are in charge. Bitcoins are released into the economy and the ledger is managed by computers all over the world. Most of these computers are owned by regular folks who have installed software to “mine” for Bitcoins. Their computer’s mining software keeps the world’s ledger up to date and in return, those folks are rewarded with fractions of Bitcoins. Bitcoins are only released into the economy at a set rate, regardless of how many people are mining. The idea is that nobody can cheat the system, saying they have more Bitcoins than they actually do, because the algorithm just won’t allow it.
Some say these characteristics make Bitcoins the wave of the future, and a viable and stable global currency. The Gold and Silver standards have been abandoned and the public’s faith in our government is at an all time low, so there are many people who would embrace a private currency that is free from government regulation. However, some say that Bitcoins are a flash in the pan, and they’re only popular until the next virtual currency is developed. Those same people say that the value of Bitcoins is volatile and our reliance on it will cause our economy to crumble. I assume that similar arguments came into play when our current currency was introduced, and when we stopped backing it with gold, and again when we stopped backing it with silver. I guess the real hang up stems from the fact that it is a private currency, not associated in any way with the U.S. Government or federal banks. I guess only time will tell.