Bitcoin: how can a virtual currency attain real market value?

Extracts from BITCOIN: HOW CAN A VIRTUAL CURRENCY ATTAIN REAL MARKET VALUE?


Introduction

Bitcoin adapts the age-old barter system to a globalised marketplace, while attempting to avoid the limitations of bartering—especially the so-called “coincidence of wants problem.” It resuscitates the ancient custom of two-party trading and minimises the interference of a third party. This sounds simple enough, but in reality is incredibly difficult to accomplish.

The coincidence of wants problem (often “double coincidence of wants”)
is an important category of transaction costs that impose severe
limitations on economies lacking money and thus dominated by barter or
other in-kind transactions. The problem is caused by the improbability
of the wants, needs or events that cause or motivate a transaction
occurring at the same time and the same place.

“Coincidence of wants,” Wikipedia, accessed May 1, 2014

Bitcoin is collectively regulated, rendering the involvement of any external agency obsolete. No government oversight or regulation, no clearing procedures beyond its intrinsic method of authentication are required. Compare this to a conventional cheque, a wire transfer, a credit card transaction, or an online financial service (such as PayPal) in terms of administrative efficiency and costs and you can readily see how Bitcoin diminishes the shadowy influence of a third party and moves closer to the principles of barter.


Virtual Currency

The general reaction to the concept of cryptocurrency is often reflexive; it comes as a surprise to some people that bitcoins have substantive exchange value, and that an intangible digital coin—seemingly as ethereal as Scottish mist—can actually be traded for something material. Yet some of the same people unhesitatingly accept that donations are offered at the conclusion of weekly sermons or the staggering riches of the Vatican. Perhaps understandably, other people are sceptical of them all.

What appears incomprehensible for some or too novel to appreciate is just how a “virtual” cryptocurrency can attain real-market exchange value?

We are well conditioned to the hardware/software dynamic, and understand that hardware is the tangible platform for software: it is the means of producing software, as the piano is the means of producing Rhapsody in Blue and furthermore that software can have exchange value: it can be traded in the market place. We are also familiar with software often having a virtual nature; replicating in digital form recognisable aspects of real life for various applications and various markets: for education, for business, for training simulations, for vicarious gratification in a gaming capacity and so forth. What is innovative about Bitcoin, however, (and sometimes difficult to digest) is that the software which so dependably operates an entire cyber-economic system online is freely distributed and that we are not exchanging the software itself but what is considered to be the virtual produce of this software.

So how do bitcoins actually attain real market value? A review of monetary principles (by no means the definitive analysis) reminds us that it has always been a system of deferred exchange, whereby suitably practical units, or tokens, are adopted and accepted as intermediary representatives of goods in absentia, to be acquired at a time when necessity dictates. This sensible form of exchange is a socially acceptable method that alleviates the coincidence of wants problem discussed earlier. The tokens require certain properties to be functional (for example they must compensate for the limitations of the goods they are agreed to represent)—they must be portable, imperishable, and so on; and it is in this capacity that they are also able to store value. But there is one criterion that they must always be seen to fulfil: they must be seen to reflect in some (possibly arbitrary) way, a measure of effort to acquire, comparable to that which they are traded. It therefore follows that for the practice to work, such a token cannot be passed off with a counterfeit substitute whose acquisition requires far less comparable effort.

To summarise: There is a social demand, even pressure, for a medium of exchange whose use value is not that it can be planted and harvested, milked or consumed, but rather that it acts as a kind of buffer against the complication of wants remaining unsatisfied due to a mistiming in the availability of such goods to be exchanged. The medium of exchange isn’t completely arbitrary, it has to have certain key properties in order to be fit for purpose, and it may be that a change in the marketplace transforms the medium of exchange into something more applicable. It may be that gold, for example, starts to lose its lustre as a convenient medium of exchange in favour of something more pragmatic and suited to a changing infrastructure.

Get Real

There is nothing remarkable about the technology providing the platform for Bitcoin, it could have, hypothetically, coincided with the advent of the Internet; it just took time for the concept to mature. After all, we already have electronic methods of monetary exchange and e-mail based transactions. As much as recent technology has enabled the development to some degree, it is still reasonable to assume Bitcoin wouldn’t have happened at all unless there was a gaping social vacuum of unfulfilled needs for it to fill.

We are meant to be dazzled by the promotional marketing of technological innovation, of consumables particularly, yet the significance of this radical economic development has received little fanfare from the “mainstream”. It isn’t a material innovation (nor is e-mail) and it bears the appellation of “virtual currency”, just to emphasise the point. There is something in the term virtual currency, that doesn’t quite feel quite right. We don’t refer to e-mail (electronic mail) as v-mail (virtual mail). As long as the primary function—discreet distribution of the written word to an intended recipient—is met, we needn’t get too hung up on the medium. So what is going on with this insistence upon the “virtual” moniker?

A virtual currency or virtual money has been defined in 2012 by the
European Central Bank as “a type of unregulated, digital money, which
is issued and usually controlled by its developers, and used and
accepted among the members of a specific virtual community”. The US
Department of Treasury in 2013 defined it more tersely as “a medium of
exchange that operates like a currency in some environments, but does
not have all the attributes of real currency”. Attributes of a real
currency, as defined 2011 in the Code of Federal Regulations such as
real paper money and real coins are simply that they act as legal
tender and circulate “customarily”. The key attribute a virtual
currency does not have at this time, is the status as legal tender.

“Virtual currency”,Wikipedia, accessed May 1, 2014

The term “virtual currency” is a misnomer and wishful thinking for those with conflicting economic interests (especially the indispensible “third wheel” involved in a conventional transaction). We are dealing with a phenomenon that is clearly breaching, or at least permeating, the boundary between the so-called virtual and real worlds. As such, cryptocurrency could be more accurately described as a synthesising event in a historical context (maybe even in a dialectical context?). What germinated in the virtual world of playtime is encroaching into the territory of grownups. If a virtual currency/commodity is of sufficient quality to replicate the conditions of its real-world counterparts; if it has satisfied those basic requirements; if it is fungible, and is stable enough to render the experiment successful, it can only be a matter of time before it has fulfilled the basic requirements of any currency/commodity (which are demonstrably abstract), lure in capital investment from speculators, and take its place as a bona fide member of the asset class.

In terms of being abstract: fiat money is living proof of just how “lite” things have become (and with a velocity of exchange to match) as described by investopedia:

Currency that a government has declared to be legal tender, but is not
backed by a physical commodity. The value of fiat money is derived
from the relationship between supply and demand rather than the value
of the material that the money is made of. Historically, most
currencies were based on physical commodities such as gold or silver,
but fiat money is based solely on faith. Fiat is the Latin word for
“it shall be”. Because fiat money is not linked to physical reserves,
it risks becoming worthless due to hyperinflation. If people lose
faith in a nation’s paper currency, like the dollar bill, the money
will no longer hold any value. Most modern paper currencies are fiat
currencies, have no intrinsic value and are used solely as a means of
payment. Historically, governments would mint coins out of a physical
commodity such as gold or silver, or would print paper money that
could be redeemed for a set amount of physical commodity. Fiat money
is inconvertible and cannot be redeemed. Fiat money rose to prominence
in the 20th century, specifically after the collapse of the Bretton
Woods system in 1971, when the United States ceased to allow the
conversion of the dollar into gold.

“Fiat Money”, Investopedia, accessed May 1, 2014

Yet fiat money, for all its abstraction (notwithstanding its divorce from fundamental monetary principles), is not considered a “virtual” currency.


Parting Thoughts

The promise of cryptocurrency is quite tantalising. This is particularly true for disenfranchised sectors hankering for collegial participation in the institutions that govern their lives, people demoralised by the inexhaustible audacity of the global banking monopolies and desperately seeking workable alternatives....

We have at our fingertips the means of conducting cheap, non-reciprocal currency transfers (remittances), any time, any place, on a whim, without wondering just how much of the goodwill gesture is being skimmed off by anonymous entities. The likes of PayPal et al. must be wondering just how real Bitcoin gets, and the fiat institutions may need to refresh our memories as to why they are so indispensible, other than “because we say so”.


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