Now that I’ve gotten that out of my system, I must confess that I don’t know much about Bitcoins, so this is largely unfounded speculation. Hopefully someone finds it interesting.

Bitcoins seem to be doing quite well in disassociating the transaction from the individual. They’re not untraceable as such; they just sever the link between the account with the money and a specific individual.

The problem I foresee is that Bitcoins are (according to some articles at least) already being used extensively for criminal activity. This is the perfect excuse for governmental agencies to crack down on the whole thing. They could institute disclosure requirements and force much stricter documentation requirements on Bitcoin-to-other-currency exchanges. They could also outright ban the exchanges, much like they did with online poker sites.

The other problem is that Bitcoins aren’t particularly user-friendly right now. When you’re dealing with a decentralized currency, it’s your responsibility to secure your wallet from attack, and those attacks can get mighty sophisticated. We’ve already seen how social engineering attacks remain effective when dealing with our existing banking system. If there’s something Bitcoin offers that supports greater security, I’ve not heard of it.

One solution to that might be a Bitcoin bank: A respectable organization that handles the authentication. You prove to them that you’re really allowed to access your Bitcoin wallet, much like you would when accessing your regular bank account. Disclosure requirements will likely come into play here again, but if they’re already in place for the exchanges then this will likely be much less of a concern for people.

What fascinates me (and what I don’t really understand the implications of yet) is the ability of *anyone* to essentially print money. I guess it’s really not that different from any other business: You invest time (well, CPU cycles, but still), electricity, and possibly even capital for new equipment, and get a product in return. That product can be exchanged for “real-world” money, much the same way you’d exchange a cabbage you grew or a chair you built for money. The curious thing is that unlike software, the product isn’t easily replicable — they’ve created the digital equivalent of a physical good.

(and yes, I am just as annoyed as you are about the depth limit on replies)

We’re talking about hydrogen-powered cars. Like the H in H20. As we find better and better uses for our surroundings, shouldn’t we err on the side of a currency that is valueless in and of itself, so as to not make its arbitrary material source artificially rare? I know you’re saying gold isn’t arbitrary, but consider the copper in American pennies. That’s a rare and useful mineral. And yet, if you took it out of the coin, I seriously doubt anyone would miss it. Or diamonds. How am I supposed to tiffany-cut this friggin diamond without a diamond?
I remember a pop evolutionary psychologist’s reading of diamond engagement rings going something like: diamonds don’t have a secondary market, and that’s exactly WHY they BUY you prestige/sex/trust/family. I guess, on the other hand, I realize that an immaterial currency opens the door to crashes and the whole arcane Goldman Sachs coven. 

So, specifically, I’d love your thoughts on Bitcoin. Seems to meet both parameters, right? Ethereal AND rare – even predictably so.

Would you be any less suspicious of someone who wanted to pay for your house in cash, legal tender though it is? The only reason you’re not worrying about someone handing you a cheque for your house is because someone else — the bank, the tax authorities, etc. — has done the due diligence, vetting the source of the money. Even then, with large purchases such as real estate there are precautions to be taken. There’s a reason why (in the US at least) title insurance is at the very least strongly recommended, if not outright required. All the things you criticize about gold as a medium of exchange apply to all other forms of currency in use today, whether they be physical or purely digital.

Look at why gold is no longer being used as currency, and why it was back in the day. Keep in mind that the reason we’re using any kind of universal medium of exchange at all is to minimize transactional overhead. If you had to trade your pumpkins for a loaf of bread, a ditch-digger’s three hours of labour, and a dozen logs of firewood, you’d have to find a ditch-digger, a baker, and a lumberjacks who all wanted pumpkins at that exact moment. Any kind of a token of exchange — paper money, gold, cowrie shells, no matter what — allowed us to introduce an arbitrary delay into the transaction.

So why gold? The main reason was its innate value: Governments were neither sufficiently interconnected, nor sufficiently reliable in their repayment of debts. Gold coins were guaranteed by virtue of being gold coins, not by any external agency. It was also hard to find, so you couldn’t randomly decide “I’m going to make myself a hundred gold coins.”

The reason gold is out of circulation today isn’t because paper money has some special quality gold lacks — it’s because paper money has *no inherent value.* This makes it a better fit for the purposes of universal exchange, but note I said “better.” Gold worked relatively well; it’s just that paper money works better.

Think about it: When gold was freely in circulation, it was a tempting target for counterfeiting, for shaving off of coin edges, for simply minting gold coins with the same faces but of lower weight… Ensuring that what you were getting was, in fact, worth its supposed value required significant skill and at the very least a scale of some precision. Once governments became sufficiently reliable the obvious first step in the fight against counterfeiting was to split the currency and the material goods that guaranteed its value.

As for the uncertainty over value, well… Look at the US. When gold prices fluctuate, a good portion of the time it’s not because demand for gold has suddenly dropped or a new deposit was discovered. It’s because gold is valuated in USD, and when investors start having doubts about the US’ ability to repay its debts… It’s not that gold increases in value; it’s the USD that drops. Welcome to the currency markets :)

That satisfies the first condition, but does it satisfy the second? People might have kept the coins around expecting the ban to be lifted at some point. And since it was, they appear to have been right to do so. Nor was the ban universal. I’m going off the same wikipedia article here; Apratheid-era numismatics aren’t exactly my strong point.

The claim that one doesn’t “spend” gold depends on how you define spending. Clearly, gold can be exchanged for products or services. So can pretty much anything else, if you’re willing to accept the transactional overheads. There’s a reason no one tries to trade cucumbers for vacuums directly — you’d have to find someone who had vacuums and wanted cucumbers at the exact moment when you had cucumbers and needed a vacuum. Money, shared illusion that it is, minimizes that overhead, but gold comes pretty darned close to the same (unlike diamonds, for which there is essentially no secondary market, or platinum, which doesn’t have anywhere near the popularity of gold).

Of course, that would be a very short-lived situation, as people melted their krugerrands and sold them for the straight gold value.