Bitcoins: A Step in the Right Direction

BitcoinsThe free market is at work in attempting to come up with alternative solutions to government-controlled fiat money.  One interesting innovation is the development of “Bitcoins.”  A Bitcoin is simply a piece of information stored on a computer that is designed to be used as a medium of exchange and a store of value.  That is, Bitcoins represent a privately produced “money.”

The purpose of Bitcoins is stated as follows:

“Building upon the notion that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.”  (https://en.bitcoin.it/wiki/Main_Page)

We greatly applaud the founders of Bitcoin.  Creating a new “money” that eliminates the government and central bank’s monopoly on currency manufacturing is a significant move towards economic freedom and transparency.  However, there is a drawback to Bitcoins:  Like fiat money, Bitcoins are not backed by anything real.  One way to obtain a Bitcoin is to purchase it with government-created fiat currency.  The other way to get a Bitcoin is to generate it through a process of computer “mining.”  Either way, there is nothing of real value behind it.

 Of course, there is nothing of real value behind government-created fiat money either.  And at least Bitcoins are designed to be of fixed quantity.  In these days of across-the-globe money printing by governments and central banks, the promise of a fixed quantity of Bitcoins is precisely what is giving the new money some appeal in the marketplace.

Better than a Bitcoin would be a privately-created medium of exchange that is actually backed by something having real value.  The evolution should be toward a money that is traded electronically, and when it is exchanged it represents the transfer of ownership of a small sliver of the economy’s productive capital.  

We believe Bitcoins are unlikely to be widely accepted as a medium of exchange for the simple reason that the public is rightly suspicious of a money that is backed by nothing other than a promise to not create too much of it.  However, Bitcoins represent an important first step in the development of a private money that does have real value:  Capital as Money.

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5 comments
  1. Adrian Alatorre said:

    Great to hear your description. It is surely not in the class room where I’ve learned about bitcoin two years ago.I enjoy reading your blogs almost as much as your course lectures. Good job mentioning it. Are you wagering in it a small amount in it? C’mon Barney..

  2. Dwayne said:

    Hey Adrian:

    I have not purchased any bitcoins yet. Have you bought some?
    I’m holding out for the emergence of Capital as Money!

    Dwayne

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