Saturday, October 5, 2013

The unfounded fear of BitCoin and its cousins

Disclaimer: The author of this post really likes paying with cash.  Debit cards and credit cards have their place but that does not mean liking them. Cash is it. I know how much money I have, how much I spend, and nobody can tack on some hidden fees or devalue rewards points by a factor of one hundred. Or, evil of evils, grab the card info and go shopping in my name. Buying a watery coffee in O'Neill, Nebraska, with cash and getting a five dollar silver certificate as change is so much more meaningful than signing yet another thermal paper slip.

Having retained some curiosity about life despite having crossed the, spoiler alert, not really magic age threshold of 30 years,  the K-Landnews Random Research team spent some time looking into the "virtual currency" BitCoin.

To us, this was an expression of simple curiosity - no different than writing a text processing program in C in a virtual MS DOS environment on a Macintosh computer for the thrill of it before everybody started talking about virtual machines. No different than using an "in memory database" before the software whales realized what it was and, in a display of what they call innovation, bought up the viable ones to flog them to their customers.

So, it was only a matter of time before we checked out virtual currencies, and then BitCoin became famous.

What happened?

Hype and fear, that potent combination of crap thinking so familiar in public discourse began causing all sorts of problems.

On the hype side, digital currency was thrown around as a means to stick it to the man, to become independent of banks and government. There are even some lunatics who claim that BitCoin could bring down the dollar.

On the fear side, the control freaks and fear mongers pointed at use of digital currencies for illegal purposes.

Can you name the two most important digital currencies in the world?

They are the U.S. Dollar and the Euro.

Most of either currency exists only in digital form, not as paper or coins. What's worse, the popular statement that governments are just "printing more money" is as outdated as it is wrong. Unless you are okay with deforesting the Amazon, you won't be able to turn every single dollar, euro, yen et al into paper money. 

Both, the friends and the enemies of the "digital" currencies are fond of this statement: Digital currencies are not controlled by any central authority.

Not true as an absolute statement, read the Wikipedia entry about digital currency, and you will find that some are centralized, just not under a government agency. But the U.S. Federal Reserve is a public-private agency, not a pure government agency.

Historically, the true extent of control over currencies has been somewhat sketchy. How well did, for instance, German control of their currency work for them after World War I?  What about the Italian Lira, with its candies as change episodes?

These questions point to the issue "size matters". How dare you compare a tiny "token" currency like BitCoin to the multi trillion dollar, euro, peso or whatever currencies!

Right, the hype and the fear. And it may have to do with the ease with which people - or computers - just some days ago confused a bankrupt US retailer with Twitter.

Realistically, measured by their size, the "new currencies" are more like the small regional currencies that have to be called coupons for legal reasons. Means of exchange which can co-exist with the "official" currencies.

Another myth by friends and foes is: They are anonymous and cannot be controlled.

How would you feel if you buy a loaf of bread and the baker says, oh, isn't this the bill Ms. Jones gave you last week?
So, without making it too simple, the "new currencies" are not necessarily untraceable. They are somewhere between paper money and "digital dollars" or "digital euros".

And people go back and forth between the old currencies and the new ones. Unless you are a serious nerd, you go and buy BitCoins from someone.

The more value currencies like BitCoins gain, the easier it gets to trace the exchanges. 
At a rate of 1 dollar equals 1 BitCoin, you can hand over a 20 dollar bill and get 20 Bitcoins, but at a rate of 100 dollars for 1 BitCoin, getting 20 BitCoins makes it almost inevitable to use some form of non-cash exchange to do this.

So, the combination of some inherent traceability and higher exchange rates should make the whole thing less frightening.

Of course, the word "should" generally has little impact when ulterior motives are in play.

The only somewhat realistic loss of control could be experienced in a "closed" "digital currency" eco system, where whole communities perform all transactions in the new, decentralized digitals without interaction with traditional currencies. Which is unlikely on planet Earth any time soon.

This being said, we will go back to doing some web programming with jQuery for a German friend who has a small side business selling motorcycle parts.

He only accepts Euros.


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