Are virtual currencies akin to trading cards or the way of the future?

Are virtual currencies akin to trading cards or the way of the future?
Seriously, did someone wake up one morning and think to themselves, “I’m going to create a currency today” and subsequently give birth to Bitcoins? Why didn’t I think of that?
I’m not even going to try to explain the technology behind Bitcoin or how one mines them from a technical standpoint because doing so would not only give me a migraine, I would almost certainly get it wrong. It is the notion of a decentralized digital currency or so-called cryptocurrency that interests me more.

The incredible thing about a Bitcoin is that it is actually worth something in real dollars or whatever currency applies where you live. It doesn’t live on an exchange (well, actually it does, but not the kind we are generally familiar with) and if you check mainstream e-currency converters like I did, you won’t find Bitcoin among the listed currencies.

However, there are sites that sell all manner of goods and services in exchange for Bitcoin. In fact, it appears as though the Howard Johnson hotel in Fullerton, Calif., is experimenting with payment in Bitcoin. At the same time, there is at least one company, the Virtual World Exchange, that facilitates the buying and selling of Second Life Linden dollars as well as the exchange of open metaverse currency, which is a virtual denomination used by avatars in environments like Second Life. Who knew?

There is an entire subculture being built around Bitcoin mining. You can mine Bitcoin yourself or pay to have someone do it for you. Whatever your preference, there appears to be a movement afoot in this area, a development that begs the broader question of whether we should embrace a global digital currency. There are a lot of supporters of digital currency, but are we ready to have a monetary denomination based on technology that the vast majority of us can scarcely understand? Would we care? Should we care?

From legal and legitimacy perspectives, Bitcoin raises some interesting issues. Ordinarily, the value of a currency is based upon a number of factors, including the government that stands behind it and the economy of the jurisdiction in which it is accepted. As the economy is affected by events, so, too, is a country’s currency. If there are no reserves left and no new tender can be issued, trouble is around the corner. Bitcoin isn’t that different, but is it a legal form of currency? Whether Bitcoin is legal tender in the true sense of the term is questionable. While some jurisdictions may have a test for and accept the legitimacy of electronic money, in most countries, only its official currency is recognized as legal tender.

Creating an alternate currency is problematic on a number of levels. In Canada, for instance, we enjoy regulated banking and monetary regimes under which Bitcoin is unlikely to be recognized. That’s not to say that Bitcoin proponents would likely want this form of legitimacy. I like to think of Bitcoin as a disruptive innovation that can be viewed as a kind of early-stage beta test for a decentralized global currency.

In the case of Bitcoin, its value appears to be based upon scarcity in much the same way that commodities like oil and coal might be. Scarcity in the case of Bitcoin exists because the process of mining becomes exponentially more onerous as doing so becomes more popular. At the same time, it is said that there’s an intention for there to be a cap on the number of Bitcoins in circulation.
In some ways, the notion of scarcity makes sense given that the more Bitcoins that are in circulation, the lower its value will be assuming that the law of supply and demand applies. If there is a low ceiling on how many Bitcoins can be created and they have value based on scarcity and demand, its existence as a form of currency — except in very limited circumstances — may ultimately be extinguished. Do you remember the days when you could go to the corner store and pay 25 cents for a pack of sports cards that came with a cheap piece of gum? I’m sure if my brother dug around, he could probably mine some really valuable hockey and baseball cards. O-Pee-Chee, for instance, issued Wayne Gretzky cards in 1979 that are now worth about $50,000. So at the risk of antagonizing a number of people, are Bitcoins really that different from the situation of trading cards where only a limited number are issued, they’re accessible only to a narrowly defined market, and they’re very much subject to trends?

The last time I checked, a single Bitcoin was worth anywhere from $6.50 to as much as about $20. That’s not bad if you ask me, even if the Bitcoin market is subject to fluctuation. Given the current state of the U.S. economy, maybe we should think about investing in gold and Bitcoin.

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