Bitcoin and the Fictions of Money

[Gifted]

How should we think about a currency like Bitcoin? The first thing to remember is this: Money is a sort of collective fiction. What money we choose to trust says much about how we see the world.

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Above the simplest exchanges, most money has limited use. Gold, the most common historical currency, is almost only good for adornment. To its fans, gold’s uselessness is a value in itself; since the stock of gold is not consumed, it’s reasonably stable, while governments can print all the currency they want.

Paper is, of course, a proxy for the government issuing the money. How much we trust the government’s ability to collect taxes, pay debts, and so on is the collective fiction that gives a country’s money value.

Paper or metal, money is worth something only if people continue to believe in it. And right now, an increasing number of people believe in Bitcoins and similar, emerging stateless currencies. From parity with the dollar three years ago, one Bitcoin is now just over $300.

Marc Andreessen, a venture capitalist whose firm has invested just under $50 million in start-ups related to Bitcoin, has written a very helpful introduction to Bitcoin in DealBook. It is also a spirited defense of Bitcoin. Mind you, a sensible person should read the essay aware that Mr. Andreessen has a significant number of United States dollars bet on Bitcoin’s increasing use.

The journalist Glenn Fleishman, with whom Mr. Andreessen has been spiritedly debating Bitcoin on Twitter for several days, wrote a strong critique of Mr. Andreessen’s thinking. Much of the argument is about the mathematics, or whether Bitcoin is deflationary, or the way in which the creation of new Bitcoins burns increasing amounts of electricity to no good end.


While regulators debate the pros and cons of bitcoins, this volatile digital currency inspires the question: What makes money, money?

So far, there is little discussion of what the collective decision to believe a fiction like Bitcoin might mean. In many ways, that is the more interesting phenomenon. Certainly, it is applicable not just to Bitcoin, but to Bitcoin proxies like Zerocoin or to other new stateless, math-based currencies, like Ripple. It also sharpens current preoccupations in the high-tech world.

In the place of believing in a central bank, or its owner, a powerful nation state, what do we believe in when we believe in Bitcoin? Specifics around the algorithm, of course. More deeply, we believe in a borderless world of hyper-empowered individuals, alive mostly through the Internet.

They are not gated by language, thanks to image sharing and Google Translate. Many have sent thousands of messages around the world, without ever using a sovereign nation’s stamps. Many have never done national service in the physical world. Even more do not expect their children to fight in a country’s wars, at least not as soldiers carrying arms. (Cyberwar is another matter, perhaps.)

None of this bodes well for the relationship between the most wealthy, powerful and gifted, and their home nations. In a telling moment a few months ago, I asked three tech executives – an American, a Czech and a Romanian – the following question: If I threw down five passports from “good” countries, like Germany or Singapore, would you care which one you picked up? No one would. Their business is on the Internet, everywhere and nowhere, and they have friends all over the world.

Charles Stross, the science fiction writer, wrote in a strong critique of Bitcoin that it has an inherently elitist, libertarian agenda. Alex Payne, another critic, wrote a piece slamming one of Mr. Andreessen’s partners that took it farther, saying that belief in Bitcoin was another symptom of Silicon Valley’s enormous self-regard.

By those lights, the old fiction of the central bank is being swapped for the new collective fiction of the almighty tech elite. That idea settles in uncomfortably close to recent calls by some prominent tech executives to detach, as much as possible, from the old, failed nations. San Francisco’s continuing antagonisms between tech workers and “normal” people takes on an even darker cast, once the protesters are seen as a crowd anxious at being left behind.

There are also other fictions associated with other currencies. Ripple, developed after Bitcoin, hopes to be a kind of universal proxy currency, perhaps enabling the owner of a farm animal in Nepal to directly trade it for an iPhone in Britain, or American frequent-flyer miles to become gold in Mexico.

“People will decide what kind of things they want to hold,” said Chris Larsen, the co-founder and chief executive of Ripple Labs, a company that is associated with the Ripple currency. “We think there will be an explosion of different currencies.”

Chris Larsen, the co-founder and chief executive of Ripple Labs, a company associated with the math-based currency.Credit
Ripple, the digital money, was created, open-sourced and put out into the world in a finite amount. Its presence is distributed over 50 servers on three continents, and all of them must agree on the rises or falls in the net value of the money. That should prevent the injection of new, inflationary Ripples being injected into the system. Even so, Mr. Larsen said that at this point it was “clearly a speculative market.”

“Is Bitcoin Friendster, and we’re MySpace? I hope not,” he said, referring to a pair of the earliest social networks. “Are we still waiting for our Facebook? Possibly. People worry a lot about the dollar now.”

It may be, as Mr. Larsen says, that math-based systems have a kind of purity, “the exchange of value within the exchange of information,” without the messy stuff of nations getting in the way. It may also be that life stays messy, and these new systems learn how to accommodate that, possibly by agreeing to be taxed by one or another government.

The language we use around money is telling. Words like “currency,” “tender,” “exchange” bespeak a world of social interaction, trust. In the meantime, informal terms like “loot,” “lucre,” and even today’s “cheddar” (from government handouts of cheese) show our more problematic feelings about money. So far Bitcoin is spoken of in extreme terms, as a threat, or a bubble, or the empowerment of drug dealers. If it is taxed, and becomes normal, it may actually be more revolutionary.

The poet Wallace Stevens called money “a kind of poetry.” He also had the horse sense to write his verses about the romance of the human imagination while walking to his job as a vice president for an insurance company. He knew both sides of the coin, when he said how closely the real and the imaginary need each other for society to work.