Thursday, April 14, 2011

Money, Currency and Bitcoin

There's a lot of excitement on the internet about something called Bitcoin - a new digital currency. I'm very excited about it. But then I get excited by money generally.

Bitcoin is digital. Its made up of 0's & 1's rather than yellow metal or paper promises. And its very quickly become a new currency. There have been quite a few attempts to launch digital currencies but none have captured the imagination quite like Bitcoin.

A currency is anything that can used to faciliate exchange. So dollars work as currency, so do Sterling & the Euro. Bonds & shares work too. But so do camels, cows, drugs and just about anything else. Obviously its much easier to buy a newspaper with a dollar than a camel. But then again who knows what the future holds? In the long term camels, cows and drugs may be a more secure currency than the dollar.

The point is that currency is a manifestation of money. And Money is magic. I mean this literally. It has a transformational power which we know but cannot understand. This makes me sound pretty flakey doesn't it? But tell me, how would you define magic? For me the phenomenon of money fits the bill pretty well.

Plus I like calling money magic. It serves to remind me of the true state of our understanding of money. In fact, its arrogant - and completely in denial of the evidence before us - to assume that science has a grip on money at all. When it comes to money we're medieval.

So if you find yourself asking if Bitcoin is really money, you might as well ask if the notes and coins in your wallet are really money too. The simple but amazing truth is - that we don't know. We don't know what money is. But if Bitcoin works as well as any other currency, then its fair to assume that it's at least as real as anything else we call money.

That gives you some idea why I get so excited about money. Now let me tell you why I'm very excited about Bitcoin.

To me the idea of a one world currency is really scary. Imagine what would be done in the name of its defence. I'm in love with the utopian notion we should all create our own currencies. I'd issue a thousand Jonny Units and via the market a price is established - we'd all know the value of 1 Jon so I could go shopping. If I ran out and needed more, I'd issue more and the value of 1 Jon would rise or fall accordingly. This utopian economic world would consist of billions of competing currencies. To my mind this, not charity, would make poverty history.

Of course, that's not what Bitcoin does now.

But it at least points towards that possibility. Its easy to imagine there could be more digital currencies competing 10 years from now than there are politico-state currencies competing today. The benefit is that Digital currencies work according to the rules laid down in their code. Code - that with Bitcoin - is available for anyone to read. Politico-state currencies work differently to that.

It may be a big leap from multiple digital currencies to individual currencies, but Bitcoin, and the exchanges and intermediary functions that it has spawned show the technological barriers are being broken. A deeper broader freedom is possible when we can create our own money rather than leave it to the men in suits. That's a tantilising prospect for the future inhabitants of planet Earth.

Between the iron gates of fate,
The seeds of time were sown,
And watered by the deeds of those
Who know and who are known;
Knowledge is a deadly friend
When no one sets the rules.
The fate of all mankind I see
Is in the hands of fools.

Peter Sinfield (an extract from) Epitaph ~ In the Court of the Crimson King (1969)

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