A thing is worth whatever someone is willing to pay for it. My father told me this when I was about nine or ten. I had expressed amazement upon learning that a sports collector had paid $1,000 for a baseball card, commenting that no card was worth that much money. He begged to differ, if not share my amazement that a person would part with what was more than a month’s pay for a middle-class American at a time when a pack of baseball cards cost a quarter. I came to understand that the final arbiter of the value of anything ultimately is the mutual agreement arrived at between a seller and a buyer. Be it a bottle of ketchup, an apartment in Greenwich Village, a Kandinsky oil, an ounce of gold, black tulips, or even the currency of a sovereign nation for that matter.
And that goes for Bitcoins as well – the in-silico form of money that has captured the interest of investors, retailers and money-launderers.
At first look, the concept might seem ridiculous: a currency that comes into existence through computational “mining” backed by no country or international bank which is transferred from buyer to seller completely in the ether. But on further inspection, Bitcoin more closely resembles traditional money than it differs. Millions of people today collect salaries and social security payments directly into a checking account from which they pay for goods and services the same way they got the money – electronically as a bunch of bits and bytes. Of course, people can turn the numbers in their accounts into physical dollar bills, but what are they except fancy pieces of paper boasting fine portraits of dead luminaries. As long as someone is willing to accept dollars in an exchange, the bills have value – and as soon as the mutual trust vanishes, so does the value. Just ask anyone who held Confederate notes or Weimar-era Deutschmarks (assuming such people have been cryogenically preserved).
Getting back to Bitcoins: the thing I find most fascinating about them is how they come to exist in the first place. As I mentioned, Bitcoins are created by computational mining – the virtual equivalent of digging in the ground for silver or panning streams for gold. They’re out there – someone just has to find them. And by find, I mean solve some very complex mathematical problems.
Essentially, miners for Bitcoins try to tackle difficult mathematical problems using cryptography and other computational methods. Success results in the creation of a thing called a block; the block contains evidence that the miner has actually solved the problem which is confirmed by a consensus. The design of the program is such that the work needed to generate fake Bitcoins is harder than it is to genuinely mine them – kind of like the approach the US Treasury takes to discourage counterfeiting.
The difficulty of the problems to be solved is adjusted up or down depending on how quickly new Bitcoins are generated. This ensures that the market doesn’t suffer a glut or shortage of currency. Also, the total universe of the number of Bitcoins is capped at 21 million – and the number of them mined every four years in the future will be half the amount that were mined in the prior four years so that the discovery process slowly asymptotically approaches the cap but never reaches it. The idea is that like with a finite commodity such as gold the more that is discovered the harder it will be to find additional lode. Maybe this protects the currency from being devalued as happens when more and more dollars are printed. Maybe it means that the size of a Bitcoin-backed economy is artificially constrained, as when the US operated under a gold standard.
In any event, I think the Bitcoin experiment parallels nicely to an episode of the original Star Trek called “A Taste of Armageddon” which aired on February 23, 1967 (aka. Stardate 3192.1). The story opens with Capt. Kirk and team preparing to negotiate a treaty between two warring planets. Ignoring warnings to stay away, they beam down to planet Eminiar which has been fighting neighboring Vendikar for hundreds of years. Right after arriving in the capital, Kirk is informed by an ambassador that the city has just taken a thermo-nuclear hit from Vendikar that has killed over a half-million inhabitants. Kirk is perplexed in the absence of any evidence of devastation. Mr. Spock and his omniscient tricorder confirm that no explosion has occurred in the capital.
The ambassador explains: years earlier the two planets, in the interest of sparing infrastructure from destruction, renounced the deployment of actual weapons in favor of waging war with computer simulations. The planets launch complex mathematical problems at one another, and if one side fails to solve they must eliminate the equivalent number of civilians who would have otherwise been annihilated had the attack been undertaken with a real weapon. The computers calculate the casualty count based on the complexity of the problem – sounds a lot like the Bitcoin algorithm. Affected civilians are required to assemble at a local disintegration center where they line up for … well, disintegration. Kirk is appalled; Spock kind of digs the logic of it. I liked the story even though it ends like so many Star Trek episodes: Kirk threatens to blow everyone up unless they get their shit together and just all get along, which the Eminiarians and Vendikarites do inside of five minutes (even though they couldn’t come to that point in the past three centuries.)
Bitcoins and simulated Armageddon – friend or foe? It’s early – let’s see what the year brings as cyber-miners burn trillions of computer cycles and untold megawatts searching for the elusive, made-up currency. I guess it’s no more ridiculous than companies that bore a mile-deep hole in the ground to extract gold that is melted into ingots and warehoused for eternity in a Fort in Kentucky.