Digital money: store of value or illusion?

Digital money: store of value or illusion?

Summary: Digital coinage like Bitcoin can't do everything a physical coin can do, but that's not stopping people from giving up real money for them. Or are they trading one fake currency for another?

TOPICS: Mobility, Storage

Digital currency as a store of value?

Today the value of Bitcoin and other digital currencies is more volatile than Americans are used to. But with Amazon and eBay looking at accepting them, that could change.

If that seems unlikely, recall that much of what you use now as "money" is simply electronic transfers: credit cards; debit cards; PayPal. Now, grasshopper, are those more "real" than Bitcoin?

The bad old days

Digital currencies are like how the US currency system used to work, before we had a national dollar.

Local banks issued its own currency supported - in theory - by the deposits of customers. To redeem the currency you'd go to the bank and exchange the notes for coin. When business crashed people would "run" to the bank to exchange their notes for specie - gold and silver coins.

Since banks borrow short term and loan long term, they would often run out of coinage and close - often costing depositors their life savings - which was Very Bad for business. That's why the US has a national currency, a Federal Reserve Bank and insures bank deposits (FDIC).

Digital currencies have none of these protections. But maybe that won't matter if the utility of them is greater than the fear that they'll become worthless.

How would that work?

"Gold bugs" advocate going back on the gold standard rather than letting the dollar "float" against other currencies. After all, advocates contend, without gold the dollar isn't backed by anything at all.

And yet the dollar remains the worldwide currency of choice, not only for B2B but as a store of value and convertibility as hard cash. Proof: most US currency circulates outside the US - Americans prefer credit cards.

Since the US dollar isn't backed by gold, and since the Fed can loan as much money as it wants to banks that can use it as reserves against loans - if only they were making loans! - why do we ascribe value to the dollar? Global acceptance and ready convertibility are two major reasons.

Which is where the value proposition for digital currencies makes the most sense. So can a digital currency replace - or at least supplement - national currencies? Yes.

The Storage Bits take

That isn't much different from what we used not so long ago - or what we use today. Digital currency is the new frontier in more ways than one: the 19th century dressed up in 21st century tech.

I hope to have more to say about it because I'm attending a Bitcoin conference that starts today. If you see me, say hi!

Comments welcome, as always.  Would you use a virtual currency? Would you put your life savings into it?

Note: Another version of this post appeared earlier on StorageMojo.

Topics: Mobility, Storage

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  • the US gov will ban it

    because it can't control it or issue bitcoins at will as it does with the dollar.
    LlNUX Geek
    • You do make lots sense ...

      when you are able to stay off the FOSS rubbish.

      Digital currency just like Dollar has counter party risks as it too requires sound managment from someone else, which is not guaranteed.
    • Can't happen

      It is almost impossible to trace bitcoin transactions and all the exchanges are overseas. The US Government has no ability to ban it.
  • As noted in the article

    There is a lack of stability with the digital currency. Everyone loves a party until the bill arrives. All the unregulated non-sense we just went through with sub-prime is waiting to happen to people that risk using unstable currency. Use it knowing the risk and be smart about it.
    • Miners don't lose

      Miners who create the electronic currencies don't lose out. You make it, you sell it. There is no bill coming due for miners. If the value tanks below cost of generating, you just stop. The only ones who will get hurt are those that play the market. But, at the current level of $121 per btc, you have to have very deep pockets to do that. If the rich boys get bit, too bad, so sad. I will keep mining and making money in the meantime.
  • When Starbucks takes Bit Coin ?

    At the end of the day we want goods and services, not IOUs in any form whether it's worthless fiat US dollars or Bitcoins. When the restaurant, public transit, gas stations or that "good looking lady down the street" for that matter takes Bitcoin, I'll believe it. LOL
    • Agreed.

      Agreed. At the end of the day - money is exchanged for goods and services. If those who have the goods and services don't accept bitcoin, then bitcoin is worthless to me.
  • Just another bubble scam

    There's always con men out there eager to tell you what you want to hear so they can take your (real) money.
    Sir Name
    • Not A Scam

      I have been mining for 18 months, and while there is market volatility, it is definitely not a scam. You definitely get paid in the currency of your choice when you cash them in. Nobody is taking anything from you.
      • pyramid

        Pyramid schemes are never a scam... until they collapse and 95% of those who invested lose all their money. But up until the moment they collapse it's one, big, wild, 24 hour a day party, that's true.
  • FYI

    The "Federal Reserve Bank" is just another "privately" owned bank.

    The name is designed to give the false impression that it is part of the US government.
    • True, the Fed is private, but

      only in the same sense that the United States Postal Service has been private since the Nixon administration (and ideally, I believe neither one should be, but that is another issue). There are no shareholders in either one except the United States in the case of the USPS, and the banks, COLLECTIVELY, in the case of the Fed. Both are managed by people appointed by the President with Senate approval. Both try to make "profit" on the books, but the profits are not paid as dividends to any individuals.

      As I said, I have philosophical problems with both of them, but in a practical sense they both work (as long as Congress does not interfere negatively using the authority it DOES have, as it did to the USPS in the lame duck session of 2006). The problem with the Fed is that banks in general take its "profits" by using its money to make profits of their own by lending it out to the private sector AND to the US Treasury (it would be better to have the Treasury ITSELF keep as profit the interest earned loaning to banks, rather than keeping it in the Fed's corporate "treasury"). But, since its managers (Governors and Chairman) work for the government, their motivation is to keep the economy stable, according to the philosophy of the President who appointed them. Citizens and politicians may agree or disagree with specific decisions, but they do NOT have an agenda of letting the dollar go worthless, as it would hurt THEM. It is a WORKING system even though not an IDEAL one.

      You may now put your tinfoil hat back on.
      • re:

        jallan32, I don't know which "tribe" (Windows, Apple, or Linux) you're with, but you definitely have your head on straight with regards to the PO and the Fed. Very good explanation. Hats off.
        Sir Name
        • Sir Name: "don't know which "tribe" (Windows, Apple, or Linux) you're with"

          Tribalism is a big problem at ZDNet. Just like it's a big problem in Africa.

          I, for one, am OS-independent, just as I am politically-independent.

          P.S. The U.S. dollar is headed for a major fall as the U.S. used the Japanese model (which failed to correct the financial malaise in Japan) in an attempt to stabilize the Wall Street monster banks and the EU is currently using the Japanese model to deal with their own woes. The $13 trillion U.S. that the U.S. government transferred to the Wall Street banks sealed the U.S. dollar's fate. It even dwarf's the $2 trillion or so that the U.S. currently owes China.

          Obama could have saved the U.S. had he chosen to use the Swedish model with the Wall Street Monster banks. That's what F.D. Roosevelt would have done.

          In closing, it wasn't the United Nations that took over the world as some nutcases feared, it was the multinational banks. Hail your new master.
          Rabid Howler Monkey
          • re:

            I actually agree with most of what you said, except that that I'm part of the Windows tribe. I'm not sure, however, that President Obama would have been allowed to go in the direction you said though, just like he wouldn't have been allowed to go with Medicare for everyone instead of what make up the plan he did. It's too bad because both would be an improvement.

            As far as the dollar falling, I'm all for it. First, it would reverse the current import/export imbalance. U.S exports would be way more attractive with would spur job creation here. A bit of inflation would certainly help everyone who is underwater on home mortgage debt, which would spur domestic demand. The main people who would suffer would be the big banks and Wall Street (although not that much because of increased demand). But they can rot in Hell as far as I'm concerned.
            Sir Name
  • As for Bitcoin,

    From what I have seen, the entire Bitcoin "money supply" is in the form of an equation that must be maintained and SYNCHRONIZED by all of its users' local storage files. If those files get too far out of sync, the entire supply of Bitcoin becomes worthless to everyone at the same time. There is room for manipulation in that whoever has collected the most REAL money in exchange for THEIR Bitcoin can crash the whole system and be left with their entire balance intact (in real money) while the other users all go broke.
    • Not Valid

      As a long term BTC miner I can tell you that there is no need for synchronization. Blocks are issued in sequence at the current level of difficulty to the various mining companies. Workers then solve the blocks that the mining company has on hand, and then they are paid in BTC. When all the blocks at a currently level of difficulty are used, then the level of difficulty raises for the next set of blocks. 99% of miners do not have anything on their local storage as the level of difficulty is so high, you have to use a mining company to solve blocks using pool mining. The system cannot crash. A mining company or exchange may go temporarly down, but that has always been temporary and normally a result of denial of service attacks.
  • Dollars vs. bitcoin

    Both are stores of value and illusions. They are only as valuable as the trust in the system. They have no intrinsic value of their own.
  • Mt Gox and others are insecure

    Look at all the headlines of breakins, manipulation and info stolen from these bitcoin exchanges. I myself had accounts at three different exchanges only to have one shut down , Bitfloor, and my account drained on another, Mt Gox. There is no security in the insecurity of bitcoins. That is the allure...untraceable money. Great for the people at the exchange who want some extra money, they just take yours.
    • Mt Gox

      I have used Mt Gox for almost two years and never have had a problem. Despite everything that has happened with BTC, they make every effort to serve their customers and protect your holdings.