Is Bitcoin Real Money? Just What Is Your Bitcoin Profit Calculator Calculating?

This article follows the conventional practice of using the upper case Bitcoin to refer to the program or network and the lower case bitcoin to refer to the currency.

Doing your conversions on your Bitcoin Profit Calculator , estimating the worth of your bitcoin, you could be forgiven for asking: is this stuff really money? It's not a crazy question.

We have, after all, been inundated in recent months and years by the condemnations and criticism from both sides of the chamber in the long running debate between fiat currency's defenders and their precious metal rivals. Both have often enough dismissed bitcoin as fools-gold. Their reasons of course are different.

Fiat currency defenders simply give no respect to any alleged money which isn't backed by a government. Without such backing, they consider it just a joke. More sophisticated versions of the case likely cite the relevance of network-effect - not without some validity.

While having some current, practical merit, though, those arguments, I suspect are the death rattle of a dying currency. After all, experience of the last hundred years has demonstrated that having a government (and a government alone) as the backing to money is a recipe for monetary decrepitude, not to mention systemic theft, through inflation.

On the matter of fiat currency, bitcoin enthusiasts doubtlessly side with precious metal fans. Fiat decreed value is the last-call of a currency. As I explained in an article at the Fiat Currency Review site, real money originates in and maintains strength only via market processes privileging it as a demanded commodity. Only such commodity backing has any hope of withstanding government's inflationary corruption.

Going back to the dawn of our species, right up to the recent agricultural revolution, sea shells, cattle, tobacco, salt and gold, among others, have arisen as money initially because it was a commodity demanded by enough people that it could be relied upon as a general medium of exchange or store of value. However, if we concede this point against the fiat currency crowd, is bitcoin thereby self-condemned by the same argument, as many precious metal promoters allege?

Certainly the gold bugs are correct to emphasize money as necessarily being backed by a real commodity, with real value. Where they go astray, though, is in their premature dismissal of bitcoin as lacking such a backing.

Bitcoin is as much a commodity-money as gold or silver today and cattle or cowry shells in the past. The illusion that bitcoin is just abstract numbers, rendered in pixels, misses the point.

The bitcoin currency exists because of the Bitcoin technology and that technology, including both the software and the hardware, is driven by the networked work of what are called the miners. It is they who audit and secure the system, through advanced mathematical calculations. The system is effectively their math work.

Once this is understood, the major, salient fact about mining is the extraordinary amount of electricity consumed in the process. The great economist, Julian Simon, explained long ago that when prices of any resource are high incentives are generated for people to innovate less expressive solutions.

In the long run, the costs of Bitcoin mining will likely come down. It seems difficult to imagine though bitcoin existing in the absence of electricity. The electrical system is Bitcoin's condition of possibility.

When you think about it, electricity is probably the single most important commodity in our world and likely to be so going forward. The only rival to that crown is oil and who knows what its future holds. In all likelihood, 100s (or 1000s?) of years from now, when oil has become too expensive for most of its current uses - whether generated by windmills, nuclear or hydro power plants, or some yet uninvented means - electricity will be still central to our economic life.

The excavating, smelting and molding of aurous compounds into the coins and bars that constitute the commodity-backed money called gold is no more the production of money than is the generating, conducting and programming of electricity into the mathematical calculations that produce B/bitcoin. Each is equally backed by the mining of a real resource from the natural world. And that is real money.

When you need to know the scoop on all the best insights into Bitcoin and cryptocurrencies, check us out at the Bitcoin Profit Calculator site. If you're interested in currency issues, Wallace Eddington's recent article on the Pros and Cons (and Con Jobs) of fractional reserve banking is must-reading.