Currency Wrapping with Bitcoin

Bitcoin is nothing more than a wrapper for an underlying regulated currency, without which Bitcoin would have no value. It’s equivalent to a casino chip, and the Internet is the casino.

If you’re not familiar with Bitcoin, here’s the short of it. Bitcoin is a digital “currency” that lives on a peer-to-peer network and is not currently regulated by any government. It can be used to buy things just like any other currency so long as a merchant is willing to accept Bitcoins instead of “real” money. Bitcoin supply is managed by an algorithm that adds Bitcoins into the system at a predefined rate. It’s no different than a central bank adding money to an economy to help it grow. The number of Bitcoins will reach a limit of just shy of 21 million by the year 2140. Bitcoins are exchanged through “mines”, which are effectively intermediaries, just like banks. Most mines take a transaction fee for making the exchange, just like banks, because managing the systems/servers needed to be involved in the Bitcoin network costs money (i.e., you need computers, electricity, and all of the other expenses of running a business, as well as a profit…imagine that). Here is more information on Bitcoins if you want to take the time to get into the details. You can also do a simple bing or Google search.

OK, so what’s the point? Why not use real money? Some claim Bitcoin is anonymous and as such people can use it to stay off the official currency grid. But it’s not anonymous. The transaction log used to manage the Bitcoin system, which contains the information for every Bitcoin transaction ever made, can be unwound all the way back to the original Bitcoin owner. Would it be harder to trace than a traditional credit card transaction? Sure. But it’s not completely anonymous. But perhaps this layer of pseudo-security is enough to drive the use of Bitcoins. “Find me if you want, but you’ll have to decrypt and unwind the transaction hash.”

What if I don’t care about pseudo-anonymity, why would I use Bitcoin? Really, there is no compelling reason.

Let’s take a step back. What is a currency? A currency is nothing more than an agreed upon item used to simplify the storage and exchange of value. Today we use “money”, but if you want to do some research you’ll find that all sorts of things have been used as currency throughout human history.

For example, you get paid money for doing a job. This money represents and stores the value of your labor. You can then use your money, the value of your labor, to buy other goods and services. But if you got paid with pencils instead of money, it would be much more difficult to buy the goods and services you need because you would be limited to transacting with people and businesses that need pencils. If no one needed pencils, or if the people that needed pencils didn’t provide the goods and services you need, your pencils would be completely worthless and the hard work you put in to get those pencils would have been for naught. But with a common currency you can trade that currency for any good or service from anyone, because then those people can use the same currency to transact with anyone else, etc. It simplifies trade immensely.

So what makes Bitcoin usable as a currency? The only thing that makes Bitcoin usable as a currency is that it is assumed it can be exchanged for an underlying regulated currency, just like a casino chip, and then that regulated currency can be used to buy things. Keep the casino chip and try to buy things outside of the casino and you’ll be met with a blank stare. A casino chip has no value outside of the casino.┬áIn the case of Bitcoin, the casino is the Internet and Bitcoin is the casino chip. On the Internet, where people have blindly given Bitcoin a value, it has value, although that value tends to fluctuate based on the inherent irrational nature of its users. Bitcoin is worthless everywhere else.

The best advice I have for using Bitcoin is caveat emptor.