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Digital currency raises age-old question: What is money? Comment on this post ↓
November 21st, 2013 by Warren Swil

Gyrating value of bitcoin

catches interest of

public and regulators

The symbol for bitcoin can be found on many web sites.

The symbol for bitcoin can be found on many web sites.

CONGRESSIONAL HEARINGS this week and an avalanche of publicity have drawn attention to an entirely new form of money gaining currency online around the globe.
Bitcoin, the somewhat mysterious “cash” of choice for the so-called “dark web,” has raised anew the question: what is money?
The currency’s roller-coaster ride this week – up to a peak of $900 on Tuesday, but down to about $530 on Wednesday – doesn’t answer that question directly, but it does indicate it is not for the faint-hearted.
Well, at least not just yet.

THE SPOTLIGHT FIRST fell on the digital currency in October when federal authorities shut down the Silk Road web site whose users traded with it as the cash of choice for all sorts of allegedly nefarious transactions.
But its legitimacy as a currency was brought into sharp focus at a Congressional hearing Monday, reported online by The New York Times in Regulators See Value in Bitcoin, and Investors Hasten to Agree.

The story in The New York Times about the digital currency bitcoin. Click image to enlarge.

The story in The New York Times about the digital currency bitcoin. Click image to enlarge.

“The virtual currency bitcoin took a big step toward the mainstream on Monday as federal authorities signaled their willingness to accept it as a legitimate payment alternative,” wrote Nathaniel Popper.
“A number of federal officials told a Senate hearing that such financial networks offered real benefits for the financial system even as they acknowledged that new forms of digital money had provided avenues for money laundering and illegal activity.
“Signs that the government would not stand in the way of bitcoin’s development, even as it has been cracking down on criminal networks that use the digital money, stoked a strong rally in the price of the crypto-currency.”
The feds are not the only ones looking at Bitcoin.
“New York State’s top financial regulator, Benjamin M. Lawsky, said last week that he would hold a hearing to consider the creation of a BitLicense to provide more oversight for transactions,” Popper reported.
The effect of the statements made by officials and the attendant publicity was instantaneous.
The money and markets channel CNBC covered it in Bitcoin hits $750, up 107 percent in a week.
John Phillips reported:
“Bitcoin touched a fresh all-time high on Monday as the digital currency continued to gain favor with investors.
“The virtual currency rose to $750 on Mt. Gox exchange Monday afternoon, up 42 percent from Sunday’s close and up 107 percent from a week earlier.”
The story added a significant comment from a major player.
“Federal Reserve Chairman Ben Bernanke stated that the bank had no plans to regulate bitcoin.”

The web site Mt. Gox, which bills itself as “the world’s largest bitcoin exchange.” Click image to enlarge.

The closure of Silk Road in October, CNBC reported,  “has boosted hopes that bitcoin is fast becoming a credible currency alternative.”
One of the biggest players, according to its web site, is Mt. Gox which describes itself as “the world’s most established Bitcoin exchange. You can quickly and securely trade bitcoins with other people around the world with your local currency!
“We’re always on. Buy and sell Bitcoin 24/7/365 with the world’s most sophisticated trading platform.”
But it begs the question of what exactly is bitcoin and why does it have any value at all?

A PARTIAL BUT not completely satisfactory answer can be found at a paper published by the Federal Reserve Bank of St. Louis titled Functions of money
“[M]oney has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange,” the St. Louis fed says.
“Modern economies use fiat money-money that is neither a commodity nor represented or “backed” by a commodity. Even forms of money that share these function may be more or less useful based on the characteristics of money.”
The paper then details the characteristics of money as durability; portability; divisibility; uniformity; limited supply; and acceptability.
It is this final characteristic – acceptability – that is what might make or break bitcoin as a currency of the future.

The New Yorker story offers words of caution to potential bitcoin investors. Click image to enlarge.

For those with the guts to withstand the stomach-churning volatility of bitcoin’s current value, the willingness to use it as a medium of exchange is crucial. It’s only value, really, is what its users assign to it.
But before you rush to invest real cash, be cautioned by the New Yorker report Why Regulate Bitcoin? posted Nov. 18 by Brian Patrick Eha.
“… U.S. entrepreneurs are right to be concerned about their role in the growing market for digital currency – that is, bits of code that function like cash and can be exchanged over the Internet,” Eha reports.
“About a third of the world’s bitcoin transactions now flow through a single exchange, BTC China, which is open only to Chinese users, according to Bitcoin Charts, a Web site that provides bitcoin data. BTC China recently unseated the Tokyo-based Mt. Gox as the world’s largest exchange by trading volume.”
China is one of the least transparent markets in the world. If nothing else, this should be a red flag.
“Recently, the exchange value of the cryptocurrency has climbed, a trend that continued Monday after news broke that BTC China had raised $5 million of investment capital,” Eha reports.
“Chinese people who chafe at strict government control of the yuan may see bitcoins as a way to speculate on currencies.”
If speculation is your goal, then investing in this unregulated, largely unknown netherworld of digital currency might prove fruitful.
But it is fraught with peril.
Apart from the recent huge run-up in its value, bitcoin has a credibility problem, no matter what officials in Washington may say.
If demand evaporates, as it might do if regulators decide to intervene, the value will plunge. The mystery shrouding its origins and the operability of its system of exchange, let alone the legal underpinnings for dispute resolution, make it a high-risk venture at best … a foolish waste of time and money at worst.

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