As we all sit around trying to figure out how we’re going to pay off our credit card debt without selling our plasma, those of us who aren’t “in the know” (translation: “engaging in illegal activities”) have had a way of generating our very own money all by ourselves and we didn’t even realize it.
The only problem is that the method for making and spending this currency is more complicated even than teaching your parents how to set their DVR. And its value swings back and forth like Miley Cyrus on a wrecking ball, only with better posture. Also, the government isn’t sure whether it likes this currency or hates it. Oh, and no one really accepts it unless you’re into illegal drugs or porn, so once you find some you’re kind of stuck with it. Other than that, it’s a really cool idea.
Bitcoins are an online currency that began life in 2009 as a “non-fiat” — or, loosely translated, “I have no Italian car” — alternative to regular money, and the method for finding these bitcoins is so complex that I suspect it is at least one reason why Ben Bernanke is taking such a long vacation from the Federal Reserve.
A pseudonymous software developer named “Satoshi Nakamoto” released a paper that essentially said that a currency that was not beholden to any central regulatory group and had an official end date for printing so that there would be a finite number of them was a spiffy idea. He apparently released some bitcoins into what could loosely be called “circulation” online and then left those who were paying attention a road map for making more.
Don’t bother looking for them; you need a computer system that is so advanced it would cost you tens of thousands of dollars to put it together. And the more bitcoins that are generated, the harder they are to find. Most people these days just buy them from people who bought them from other people who were waiting for the value to go up so they could sell them and reap the profits in real money, which can actually be spent. The problem is that once you buy these bitcoins, no one really wants to take them off your hands, for a variety of reasons. It’s kind of like the investment version of trying to shake a piece of sticky tape off your fingers.
While we financial Philistines place our trust in the government to keep our money safe, bitcoin believers place their trust in an anonymous body of “miners.” Miners are hardcore computer users who have agreed to record all transactions for public record and who also “make” new bitcoins in the process. The idea here is that this anonymous network with no knowledge of finance or economics will approve your supposedly untraceable purchase more quickly and less expensively than will your average credit card company, which employs thousands of professionals, has bank-grade security systems, and is beholden to the federal government. Fair enough. For my money, the real danger here — other than having someone steal your bitcoins in the transaction, which happens more than they’d like to admit — is the possibility of editorializing: “Your $19.95 charge for viewing ‘Saturday Night Beaver’ has been approved and, frankly, we think you should be a little ashamed of yourself.”
Here’s another thing: No one really knows the precise value of a bitcoin at any particular point in time. According to The Wall Street Journal’s <Market Watch>* blog, the value of a bitcoin recently shot up to $1,242 before settling back down to around $1,000 in a single day. And for those who collect physical bitcoins, which are minted in precious metals for that “under the mattress” style of investing, the coins are so hard to sell that they are primarily used as game board pieces.
And there are other online currencies competing for a place in the market, so conceivably we could one day be trying to pay for things in several different currencies, all of which have different values that may or may not stay the same throughout the transaction:
Store Owner: “That will be 0.0001 bitcoin, please. Will you need any satoshis back?”
Me: “Satoshis? What is that, metric?”
Store Owner: “No, I think it’s the smallest fraction of a bitcoin. Whoops, the value just dropped again. That will actually be 0.0002 bitcoin.”
Me: “I only have this half pogue in my wallet. Can you break that for me?”
Store Owner: “I’m sorry, you’ll have to buy something else…”
So who in their right minds, you ask, would accept this imaginary money that may or may not be worth anything, is incredibly hard to find, and is even tougher to spend? Up until very recently, there were four main groups: Hackers who were into the Deep Web, angry libertarians with a taste for investing, drug dealers and unsuccessful money launderers. Theoretically, bitcoins are not beholden to any central network of control, which is the main benefit if you’re doing something naughty with your money. It’s anonymous, almost. Just ask the proprietors of Silk Road, the former “Amazon.com” of illegal drugs that was shut down by the federal government.
More recently, the bitcoin is being accepted as payment in a wider market for items that are far less likely to earn you an appointment with a probation officer, but it’s still in its infancy. If you’ve read Kashmir Hill’s fabulous account in Forbes of what it’s really like to live on bitcoins for an entire week, then you know it’s possible to survive as long as you’re willing to go hungry and be homeless, depending on where you live.
That doesn’t mean that there aren’t bitcoin believers among those whose wealth would have us believe that they know a good investment when they see one. If you happen to have enough bitcoins in your imaginary online wallet, you can always hitch a ride with Brangelina on Richard Branson’s galactic spaceship. If it ever takes off.