Archive for December 2015

Virtual Money; What Gives it Value?

If you’ve heard of bitcoins, you know that society is being forced to confront the fact that the value of money is more a matter of societal acceptance than something grounded in truth. This isn’t news; after all, even when all U.S. currency was backed by gold, you have to admit in our technological era that gold doesn’t quite have the same value as it used to in terms of our society. Gold earrings are nice, rings are cool, whatever, but it’s kind of an outdated thing to enjoy in a world powered by oil and advanced electronics.

drawn moneySo back to the bitcoin, the little currency that could. What led to its adoption in society and why was it accepted as valuable? Hypothetically, anyone could have proposed that a previously nonexistent currency start to mean something, but people would probably begin to think that person was insane.

Perhaps the elegance of the bitcoin code and system was what pushed it over the edge, from idea to real-thing. Its P2P system, which is heavy with encryption and bitcoin mining, allows for a user-controlled economic space where greedy bankers and corrupt governments can’t gain enough leverage to upset the system; the entire virtual economy functions based on advanced mathematical equations, not the whims of business-savvy pseudo-monarchical figures.

Here’s how it works: you have a store of bitcoins in your virtual wallet, a bitcoin storing application you can download for free. You can either leave them there and hope that they appreciate in value as time goes on (you used to be able to buy 5000 bitcoins for $27, now they’re worth over $400 each), or you can cash them out into local currency.

drawn money2If you decide to store them onto your computer, it’s important to remember that there’s no central bank to keep track of how much money you have (that was the appeal, remember?). That means you might want to make a backup record of your balance, perhaps on a flash memory drive.

Bitcoin transactions are immediate and irreversible. Your bitcoin is validated by a process that verifies whether or not it has the proper credentials. There are no national regulations for bitcoins, so you can transfer across country lines and dodge the service charges and taxes that tend to come with those kinds of decisions. No one can know how much money is in your account other than you, and your account cannot be frozen.

But how did the bitcoin come to be accepted? Simply, because people chose to believe in it. After the 2008 recession was caused by irresponsible and greedy bankers, libertarian-minded activists, financial speculators and people who simply no longer trusted the government-backed banking system began to see value in the system. To the, the use of mathematics and encryption implies a lot more real value to a currency than a government official’s thumbs up.

The more people believe in the system, the more believable it becomes. Trust tends to be contagious, meaning that the virtual currency becomes more and more legitimate the more people use it. It’s difficult to judge just how many people are using it today (seeing as it’s an anonymous system), but the guessed number tops out at 2.5 million.