Dr Peter Morici: Bitcoin believers were
shaken to their digital souls when Mt. Gox,
the world’s largest exchange, defaulted on $470 million worth of deposits and
The virtual currency was supposed to provide a
safer, more private and less costly alternative to money issued by governments,
but lacking the imprimatur of a sovereign is a failing.
Fundamentally, money provides a secure place to
keep your wealth—you can store your savings for later use at a government
guaranteed bank. And it eliminates the inconvenience of barter—a necessity for
even the most rudimentary market economy.
Money permits a nightclub singer to buy bread
from a baker who gets his music from iTunes. All accept dollars, because the
US government declares those to be “legal tender for all debts public and
You can do business through barter or some
alternative currency. However, workers, suppliers and landlords expect to be
paid in dollars, and the IRS will require dollars at tax time for income earned
What gives money its value are the goods and
services that may be purchased and taxes paid within the sovereign jurisdiction
of the issuing government.
The earliest currencies were coins, often with
the face of the sovereign stamped on gold or silver to instill confidence. Yet,
governments minted coins with non-precious metals, and the Chinese issued paper
money more than two thousand years ago.
The creators of Bitcoin and advocates of virtual
currencies are fixated by the temptation of governments to print too much and
destroy its value through inflation. However, inflation is hardly a problem in
the United States, Europe and Japan, and central banks in other countries hold
dollars, euro and yen to back up their currencies.
Bitcoin is created by ordinary folks solving
increasingly difficult mathematical problems defined by the virtual currency’s
creator, and like gold, is naturally limited in supply. It is stored in virtual
wallets on private computers, or deposited at exchanges like Mt. Gox. These
function much like commercial banks but are not guaranteed for safety by the
FDIC, Federal Reserve and similar regulatory agencies around the world.
There is no “Bitland” where a
government has declared it legal tender to buy goods and services and pay taxes.
Lacking such a tangible connection to the real economy, it is very hard to value
day-to-day, never mind next year.
Bitcoin traded for $1,117 on December 4, and now
commands only about half that amount.
It is no place for your children’s college fund
or retirement savings.
Bitcoin is hardly secure. A hacker can steal it
from your digital wallet or an exchange that holds your deposits, just as
pirates stole bank debit and credit card numbers from Target. And the government
does not stand ready to back up Bitcoin exchanges that lose your money or
identity to thieves.
A 2013 study found some 45% of all Bitcoin
exchanges closed, taking their depositors money with them.
Bitcoin is supposed to be more private, because
unlike commercial banks, its exchanges are not monitored by regulators, and its
private payments system charges lower fees than do Visa and MasterCard.
However, personal and business transactions can
be spied by hackers or government security agencies through its fairly open
payments system. The government can subpoena your Bitcoin records or those of
your exchange when it needs.
Factoring in such risks and potential intrusions,
Bitcoin is a lot less private and more expensive to use than advertised.
Detractors of paper money have always been
fixated by the absence of gold to back it up, but they fail to recognize what
really makes a currency accepted and secure—the government guarantee and the
good sense of the sovereign not to abuse its franchise.
It’s not the gold but the face of Caesar—the
promise his image carries—that makes a coin money.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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