Bitcoin and Virtual Currency


While it’s not inaccurate to refer to Bitcoin as ‘virtual’ currency, it can be a misleading
description, because in a couple of important senses nearly all modern national
currencies are also virtual, and in one of those senses Bitcoin does not have the
same virtual nature as those currencies.
When currencies began to take over from direct trading of goods and services,
commonly the value of the currency was backed directly by the cost to make the
actual coin, this type of money is known as commodity money. As this became less
feasible, many countries started to back their currency via what became known as
the ‘gold standard’. As one of the first virtualizations of currency, money backed by
the gold standard essentially works via a tacit agreement between nations to treat as
valid any currency whose issuer holds a minimum amount of actual gold bullion, in
some determined ratio to the amount of issued currency. In a literal way the gold
standard is nonsense – why should the amount of currency in a nation, the amount of
which is supposed to represent the total value of available goods and services,
depend on the amount of a particular metal, too soft to be of significant real use,
stored in a basement somewhere? Money backed by some sort of physical entity,
however ridiculous it might be, is known as representative money.
The occasional (or constant if you listen to Ron Paul) calls to go back to the gold
standard are mostly based on superstition. However they gain their apparent
credibility from the virtual nature of most modern currencies. Most modern currency
is in specie (in kind) fiat currency. Fiat means that the backing for the currency is simply the issuing government’s guarantee. In essence, since that guarantee is only sustainable in a situation where the general agreement to accept it as money holds, money is no longer representative but virtual. Although the currency in a given nation may itself be represented by bank notes or coin, it needn’t be, and the vast majority of money in western countries is only represented via entries in bank systems, and thus known as ‘bank money’. Bank money is created simply by entering a number into the system, with government authorization to do so.
This virtualization of currency even beyond the sometimes absurd nature of
representative money makes holders of that money nervous, and for good reasons.
Failure of the tacit agreement between all the users of a nation’s currency can result
in rapid and catastrophic devaluing of the currency, known as runaway inflation.
While there are other issues with the modern fiat system, runaway inflation is the
potential problem of most concern to those who hold the most in bank money.
However a return to a representational currency would simply make a potential
problem nearly inevitable, since the lack of any sensible relation between the
availability of currency and the availability of goods and services would make the
tacit agreement that sustains both types fall apart rather quickly. while the nature of
money is not clear to most people, there is an intuitive sense that this virtualization
contains an inherent instability, and history of other nations’ currencies bears out this
instability.
Creating bank money, as I noted earlier, is simple. It requires virtually no effort from
an authorized entity. Since authorization is restricted to legitimate financial
organizations, creation of money is simultaneously effortless and only available to a
select few. ‘Virtual’ as a descriptor of fiat currency involves three different types of
virtualization: firstly it has no ‘real’ backing; secondly in most instances no physical
representation, even one as easily created a a bank note, is necessary; thirdly no
effort is involved in its creation (other than the effort to win authorization from the
government).
Bitcoin is not, currently, legal tender. While this means that nobody is under any
obligation to accept it as a form of payment, it doesn’t prevent anyone from doing so,
and as such can be considered ‘in specie’ currency. It also means it has no guarantee
from any government, but as has been amply demonstrated with fiat currency, both
the obligation to accept a fiat currency as payment and the guarantee that is
and as such can be considered ‘in specie’ currency. It also means it has no guarantee
from any government, but as has been amply demonstrated with fiat currency, both
the obligation to accept a fiat currency as payment and the guarantee that is
supposed to accompany that both depend in a practical sense on the continuation of
the agreement to accept it as money by all parties involved in a nations finance – the
government, financial institutions, businesses and public that use the currency.
Like national fiat currencies, Bitcoin is virtual in the sense that it has no backing, not
even a representational backing, and exists for the most part simply as entries in a
system. However it does have one significant difference from fiat bank money, in that
it is not effortless to create more even though it requires no authorization. This ‘effort’
is not human effort, but computer effort, and is measurable theoretically in terms of
computational effort, and practically on a given system by the amount of electrical
power necessary to perform that computational effort. Since its value at any given
time is, like fiat currency, largely governed via market demand and supply, this
computational effort and associated electrical power usage helps to create a ‘low
boundary’ on its value, that boundary being the average cost to generate new coin.
As long as there is demand for the currency, the supply will be regulated to a large
degree by whether its market value is above or below the cost to generate the coin,
given that anyone can generate coin (known as ‘mining’) as soon as the market value
rises above the nominal cost of mining, it becomes profitable to mine new currency
and make it available. This also of course tends to create an upper bound, which is
the difference between the lower bound and value the currency can rise to, given
current demand, before the supply increases due to increased mining activity, itself
prompted, and then quiesced, by the presence or absence of a sufficient differential
between the market value and the production cost.
It’s in this third sense of the term ‘virtual’ when applied to currencies that Bitcoin is in
fact not virtual in one of the senses that fiat bank money is. To a certain degree, Bitcoin is, like some early currencies, backed by the cost of its creation.  Since the effort to create the
currency is cryptographic effort, the means of creating Bitcoin has a couple of
interesting by-products:

 

  • Bitcoin is self-stabilizing in a way that national fiat currencies are not.
  • Bitcoin maintains its value by overt agreement among users, not tacit agreement, and by its self-stabilizing cost properties. As such it’s far less vulnerable to radical devaluing even without the government backing fiat currencies possess, other than in the case where all parties agree, due to an issue with the current system, to move to a new system that solves whatever issue had been found.
  • Bitcoin cannot be lent or borrowed.

Of course, fiat currency can still be lent or borrowed and Bitcoin purchased or sold with it,
creating a lending / borrowing potential at second hand, but Bitcoin itself is ‘owned’
by its creator via the encryption process, and can only be transferred via a legitimate
transaction recorded in the Bitcoin public registries, which will transfer the key
required to use that Bitcoin to the new owner. If fiat currency lost its tacit agreement,
for instance, and Bitcoin didn’t lose its overt agreement between the parties that use
it, it would be impossible to loan or borrow except by actually purchasing goods or
services with Bitcoin and then personally giving them to the borrower. As such there
is a common use-case of fiat currency that Bitcoin cannot fulfil – it cannot be used as
capital, it is always and only property. Indeed, the IRS has deemed Bitcoin as
property and not currency, and it is as property that it can be used as payment ‘in
specie’.
For the most part, and to a large extent due to fiat currency being usable as both c
apital and property, we fail to distinguish between the two. The result is on the one h
and extremists on the left who are against any private ownership of property simply b
ecause it’s conflated with capital, and those on the right (unfortunately they don’t ne
ed to be on the extreme right) who are against any limits on ownership of capital be
cause it’s seen as an abrogation of property rights. The simple existence of an al
ternate currency that embodies all the requirements of both being property and be
ing useful for the exchange of property, yet is fundamentally unusable as capital co
uld help to clarify the distinction between the two, and therefore clarify both the
positions of left and right concerning ownership, as well as giving access to those
ing useful for the exchange of property, yet is fundamentally unusable as capital co
uld help to clarify the distinction between the two, and therefore clarify both the
positions of left and right concerning ownership, as well as giving access to those
clarified positions to moderates, so that they can make a more cognizant decision as
to whether they support the ownership of capital, and if so to what extent, rather
than having the question muddied by questions of property rights that are really not
relevant.
A simple way of understanding the basic difference is this: I own a car (a very old
one). As such it is my property, nobody is expected to give me anything because I
own it (although a wave from other classic car aficionados is always welcome).
Capital on the other hand creates an obligation on others to work beyond what they
need to produce for themselves and their families in order to give the surplus to the
holder of that capital. Simultaneously, the confusion between both via fiat currency
makes the idea that lending should earn interest while borrowing should pay interest
appear natural, when in fact it contradicts what fiat money is supposed to be.

Fiat money is supposed to represent the value of available goods and services in an
economy, and by so doing enable the simple exchange of any such goods and
services for any others, based on relative value counted in that currency. Most goods
and a significant percentage of services have a natural devaluation over time in
common. Since fiat currency used as capital, though, tends to increase in value over
time, it appears to be a natural corollary that lending money should earn interest and
therefore also increase in value, since someone with currency over and above their
immediate needs can either lend that currency or use it as capital, and which is
chosen generally depends on the anticipated increase each offers at a given time.

This contradicts its definition, though, since the goods and services it represents
generally devalue, rather than increase in value. Since ‘savings’ tend to increase for
those with extra whether those savings are actually invested in capital or lent to
borrowers who need additional currency since their income is not sufficient, there is
a general tendency of income over time to migrate from those with less currency to
begin with to those with more. As a result of both current wealth and future income
borrowers who need additional currency since their income is not sufficient, there is
a general tendency of income over time to migrate from those with less currency to
begin with to those with more. As a result of both current wealth and future income
migrating to those with more of the former, the initial inequality almost inevitably
grows unless there is sufficient additional burdens such as high taxation placed on
the wealthy and used to supplement the income of the less so.
This migration of both wealth and income increases as economic growth increases,
leading to the unintuitive result that greater economic growth creates more poverty.
Economic growth measures the input / output values of a given economy, rather than
what remains, which is properly speaking the wealth of a given economy, since
efficient exchange requires available currency, economic growth increases the need
for borrowing, since although the wealthy have currency available for exchange, their
needs do not grow in sufficient relation to their means, while on the other side of the
income difference means do not grow in sufficient relation to needs.
Economies become ‘third world’ economies when the amount of borrowing that is
both desired and allowable via means testing of the borrowers drops further and
further below the amount of ‘saving’ or ‘investing’ required for the wealthy to
maintain their wealth. As virtual, the ‘wealth’ owned by the wealthy, outside their
physically ‘real’ property, can only be maintained if it is spent on the goods and
services it represents, and this must occur constantly, meaning there must be a
constant borrowing and spending by some other entity or entities, otherwise the
wealth of the wealthy in large part would vanish almost overnight. The telltale sign of
a third world economy, beyond the massive income and wealth disparity, therefore
becomes the amount and amount of yearly increase in national debt. The only way
the wealthy can maintain their wealth in a situation where the majority of those that
might borrow and spend either just have sufficient, and therefore don’t want to given
that it will cost them more to do so than to wait for non-necessary purchases, or do
not have enough to qualify for credit in the first place, is for the government to do t
he requisite borrowing and spending. The national debt, for the most part, is how the
wealth of the wealthy is maintained.  As well, the base rate of inflation in an economy prior to demands for wage increases (which as general demands usually arise in response to already existing inflation, and thus are only a secondary cause of more inflation, and moreover one that can never actually keep pace with the overall rate for that very reason) is simply the interest rate charged itself, which since the increase is not reflected in an increase in the real value of goods and services results in an increase in their nominal value, which is the basic definition of inflation.

Historically this situation, in the major western economies, has been partially
corrected via emergency actions such as a massive war tax (the reason WWII ended
the depression is simply the institution of a huge war tax on the wealthy and
subsequent release of currency into the hands of those with the need to spend it).
Currently Deutszche Bank and the IMF are calling for a one time global ‘wealth tax’
that would essentially do the same thing, without requiring a war as justification for
it. Of course no right-leaning government is going to agree to such a solution,
temporary as it is.
A second issue with the notion of interest on currency involves the means by which new
currency is issued.  New currency is primarily created, as noted above, as bank money. Since banks don’t give away such currency, but loan it with an accompanying interest rate, the inevitable result of money creation by private banks is a situation where there is more currency owed in total than exists in the given society. Bankruptcy, far from being simply bad luck or a moral failing, is actually an economic inevitability for a given percentage,
and simultaneously an economic necessity, since there is no other means by which
the rest of the money owed can be remitted by those who don’t declare bankruptcy.
The full effects of the latter problem require a separate look, since on top of the
issues with fiat currency in general, the current means by which it is created has a
whole set of inevitable issues that are not, strictly speaking, germane to fiat
currency in a more general sense.

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