The first person who came up with the idea of money did more to advance civilization than most inventors whose names we know. Trade, commerce, and financial operations would be inconvenient or impossible without it. Money is one of the most real and commonplace things that people deal with, but for all that, it is fundamentally a non-material entity. And a person (or persons) known as “Mr. Nakamoto” has recently pushed the idea of money that much closer to its true essence, which belongs wholly in the realm of ideas.
In January of 2009, Bitcoin was born. It is a totally digital form of currency. Instead of dollar bills, or numbers in a bank account representing dollar bills or any other sovereign currency, bitcoin exists physically only on computers running a highly sophisticated encryption software program written by Nakamoto himself (we will refer to him thus for convenience, although he may in fact be a team of programmers, or even a secret branch of a government agency, for all I know).
Where do bitcoins come from? A computer-operated lottery that anyone with a fast enough computer can play. Practically speaking, only people who devote considerable computational resources to the task stand a reasonable chance of winning the lottery, which will be played every ten minutes or so for the next twenty years, at which point about 21 million bitcoins will be in circulation. These specialists are called “miners” because of the obvious analogy to gold mining.
What is a bitcoin worth, in terms of a dollar? Right now, about three dollars and eighty cents, depending on market fluctuations. Bitcoins have been much higher—up to twenty-nine dollars last June—but there’s been a bit of a bitcoin bubble, apparently, and so anyone who bought some last summer is probably regretting their decision.
Can you counterfeit bitcoins? Not so far. Mr. Nakamoto is a very good cryptographer, and no one has been able to fool his software into taking bogus bitcoins. The system is based on digital security that verifies bitcoins as genuine articles (I suppose it’s sort of like serial numbers on dollar bills), and so faking bitcoins is not practically possible.
Is the bitcoin legal tender? Here we get into a hazy area. There are U. S. laws against making and selling coins or other currency “intended as current money.” In other words, places such as the Franklin Mint have the excuse that they’re really selling their commemorative coins and other objects of value to coin collectors for esthetic reasons, despite the fact that many “collectors” simply buy them as an investment. But bitcoin goes farther than that. You can buy things with it, keep it in a digital “wallet,” exchange it online for a wide variety of other currencies, and treat in most ways just like money. The only thing that stops Mr. Nakamoto from getting in trouble with the FBI is, well, nobody knows who or where he is. Which is, I’m sure, one reason he took care to erase his digital footprints, despite the efforts of many people, including New Yorker writer Joshua Davis, to identify him.
I first learned about bitcoin from Davis’s article in last week’s New Yorker magazine. The essentially non-material aspect of money has fascinated me for years, and to find that someone has pursued their individual idea to the point that millions of dollars of equivalent cash in bitcoin is now floating around the Internet is intriguing, to say the least.
According to an article Mr. Nakamoto reportedly posted, he invented bitcoin because was hacked (meaning irritated, not digitally outsmarted) at the tendency of governments to inflate their fiat currencies whenever they got into a financial bind. Fiat currency is any type of money not tied by law to an article of intrinsic value. The U. S. dollar has been fiat currency ever since we went off the gold standard in 1933, and most other countries have the same setup.
Technologically, bitcoin wasn’t possible until the Internet developed, and now that it’s here I’m not sure what its fate will be. In perilous economic times, people tend to run away from ethereal-sounding concepts and head toward investment instruments that have historically proven to be sound: U. S. government bonds, gold, diamonds, that sort of thing. Of course, bonds are just the paper documentation for a promise made by a government. And all we have to back bitcoin is Mr. Nakamoto’s promise that he won’t flood the market with bitcoins at some time in the future, if he happens to get hard up for lunch money some day. This shows that any currency that exists in time must of necessity be based on some mass expectation of how its issuer will behave in the future. When bitcoin goes up in comparison to the dollar, I suppose it says that some number of people concerned about both currencies trust Mr. Nakamoto more than they trust Uncle Sam, at least for the moment. Which, if you think about it, is a remarkable thing to do.
I own no bitcoin, nor do I plan to invest in any, although I may check out its price from time to time. As the world’s first supra-national digital currency, it deserves some attention from ethicists who no doubt have opinions about this novel way of dealing with the problem of currency. And it will be interesting if we ever find out who Mr. Nakamoto is, assuming he shows up some day. But unless the world economy gets a whole lot weirder than it is already, I expect bitcoin may just fade away and become a historical memory, like emu farms. Remember emu farms and emu oil? If you don’t, don’t worry about it.
Sources: Joshua Davis’s article “The Crypto-Currency” appeared in the Oct. 10, 2011 issue of The New Yorker. I also referred to an article on pseudo-currency laws in the Wall Street Journal at http://online.wsj.com/article/SB10001424052748704425804576220383673608952.htmland the Wikipedia article on bitcoin.