Coins of the Realm
23 April 2013

by tmartin on April 23, 2013

YOU HAVE. I WANT. LET’S TRADE!

An awful lot of human exchanges boil down to that most basic of communication. We want what someone else has.

In first grade lunch rooms, the request might come with a grab and scream, but by the time we’re grown up most of use have settled on the use of money as means of getting what we want.

Money represented a big leap forward in humankind. Instead of haggling directly over PB&J crackers vs a chocolate chip cookie, we moved the trade up a scale in abstraction, agreeing to agree we’d accept some other item as a medium of exchange across all transactions.

Over history, we’ve agreed on a lot of different media as money: gold bars, quahog shells, cowrie shells, cattle, tulip bulbs, printed paper, animal pelts, copper coins …  we traded things we had for some quantity of this medium of exchange, and then in turn, traded this medium of exchange for what we wanted.

The system works reasonably well, as long as we agree on the value of the medium. When speculators jump in, it can get a little wacky.

Welcome to the current state of the state in the land of Bitcoins.

Bitcoins?” you ask? “What the heck is a Bitcoin?”

Digital denizens known the answer, of course. They are a digital medium of exchange with which you can buy and sell every thing from web hosting services to a bowl of noodles.  Bitcoin supporters (http://bitcoin.org/en/) calls them “an open source P2P digital currency.”

The past few week, this medium of exchange has been, uhm, shall we say, volatile? Over the last few weeks the virtual “coins” have traded at a low of $50 and a high of nearly $270 (http://money.cnn.com/2013/04/19/investing/bitcoin-prices-rally/index.html).

Bust.

Boom.

Rally.

Spike.

Forget international currency trading! You want action and excitement? Look to Bitcoins.

The idea of a new type of digital money appeared on a cyberpunk mailing list in 1998 in a discussion on the notion “crypto-currency” – a form of money whose creation and transactions are managed by cryptography rather than a centralized government or other authority.

The spirit of these coins lies in a realm that supports a non-political economy, openness and independence.

In 2009 a pseudonymous poster/s on a cryptography list shared a detailed specification for Bitcoins and, like many other open source ideas, Bitcoin began to take on a life of its own.

In September 2012 the Bitcoin Foundation (https://bitcoinfoundation.org) launched to standardize, promote, and protect this new currency. Its first conference, The Future of Money (http://www.bitcoin2013.com) happens in May in San Jose.

But this isn’t just some fuzzy concept. No, people are actually using Bitcoins to buy and sell real objects. And multiple trading markets (https://en.bitcoin.it/wiki/Trade#Currency_exchanges) let people buy and sell Bitcoins in the same way traders buy and sell global currency.

Supporters say that about $4 million USD transacts each day in Bitcoin. At the end of March the 11 million Bitcoins in circulation had a value of just over $1 Billion USD and by mid-April that that doubled to almost $2B.

To use Bitcoins, you’ll need an account, called a Bitcoin address. Each address has a private key that you store in a Bitcoin wallet.  There’s an official Bitcoin wallet … and a number of new Bitcoin wallet companies.

With wallet in digital hand,  you can start collecting Bitcoins. You can buy them from a trading market or gather them as give-aways from various vendors. You can “mine” them by solving puzzles.

Once they are in your virtual wallet, you can trade them for items as varied as:

Last fall Word Press started accepting Bitcoins for its web publishing services and upgrades (http://en.blog.wordpress.com/2012/11/15/pay-another-way-bitcoin/).

In February geek entertainment and social site Reddit (http://blog.reddit.com/2013/02/new-gold-payment-options-bitcoin-and.html) did as well. Reddit, by the way, may focus its content on the digerati, but is owned by the Newhouse family’s very traditional publisher Advance Publications, whose umbrella includes dozens upon dozens of magazines, newspapers, and industry publications.

Bitcoin companies appear to be white-hot venture startup investments. Combinator Y investment Coinbase (https://coinbase.com), for example, offers a digital wallet and transaction platform and hopes to grow as the number of transactions grow.

Over at Bitspend (https://bitspend.net), the company focuses on the sales end of the transaction, with a pitch that if your chosen vendor doesn’t accept Bitcoin, it will act as a go-between. For a small transaction fee, it will take Bitcoins and pay the vendor in its preferred currency.

The currency has even generated its own magazine and podcast, the cleverly named Bitcoin Magazine (http://bitcoinmagazine.com) and its own analysis and tracking site, bitcoin charts (http://www.bitcoincharts.com).

Despite all the drama in the Bitcoin market, Bitcoins hardly represent some far out fringe element. The concept of digital money sits squarely in the center of next gen digital life.

Like recent drama in the stock market, Bitcoin trading market drama grabbed a lot of attention. Over the past few days the wild swings of the past month appear to have settled out. But, like the stock market, it’s anyone guess what happens next. In other words, invest at your own risk!

Traditional economists seem unable to get their minds around the idea of open source money – but they shouldn’t be that flummoxed.  After all, all kinds of communities have long experimented with and successfully used their own medium of exchange.

In-game worlds operate their own economies with currency that trades with real world currency. For example, Linden Labs’ Second Life works off of Linden dollars ()

Since 1987 Disney (yes, Mickey Mouse!) Dollars act as legal tender within the theme park world (http://disneydollars.net).

In the real world, local communities, in an effort to spur spending with locally-owned businesses, have created local currencies. Traverse City in Northern Michigan and its Bay Bucks (http://www.baybucks.org) represent one of the most successful and longest running efforts.

The bucks, explains their backers, “are valuable and useful because people in the locality agree that they are and use them.

Bitcoins might be more a global and more sophisticated production, but at heart they come from the same source: a community agreeing on a medium of exchange.

Money is nothing more or less than that.

There’s no miracle math in currencies; there is just an implied agreement among community members.

Whether they bear the words “In God We Trust” and come backed by the community represented by the US Government, whether their design sprung from a local community and their distribution connects local stores, or whether an open source spec with powerful cryptographic protection build them, in their respective communities each of these “exchange mediums” become the coins of their realm.

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