The very tangible woes of the virtual currency Bitcoin are an object lesson for those who believe any government is bad government.
Most of us think of “money” as cash, coins and credit cards – things you can touch. Even if you never actually touch the stuff, your banks or credit companies send you a monthly accounting of how much you have and how much you’ve spent. You can see where your money goes – but so can bankers and, if it wants, the government.
Bitcoin is a virtual currency favored by people who don’t want anyone else to see where their money goes. But a bitcoin’s value can fluctuate depending on interest and speculation. The price has swung wildly from $1 per bitcoin to more than $1,200. The current exchange rate is about $848.
Some of Bitcoin’s aficionados prefer to operate outside the law. For example, Silk Road, the recently busted Internet drug marketplace, used Bitcoin. More conventional businesses, such as Overstock.com, also accept Bitcoin. Recent events should give them pause.
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Mt. Gox, the Japanese virtual currency exchange, announced it had lost 850,000 bitcoins – worth $480 million – through hacking. This led Mt. Gox CEO Mark Karpeles to seek a very non-libertarian solution: bankruptcy protection. Last Sunday, the Canadian virtual currency outfit Flexcoin announced that it, too, had lost $600,000 to hackers, who had either stolen or cracked users’ passcodes. Those passcodes apparently offered less protection than, say, a bank vault.
Bitcoin came to life on the fantasy-gaming website “Magic: The Gathering Online Exchange” – the acronym is Mt. Gox. Intended as a way to exchange fantasy cards, Bitcoin morphed into its own fantasy game.
The fantasy of a completely free market works great ... right up to the moment it doesn’t. The notion of intrusive government is truly dreadful ... until the moment you need its protection.
Karpeles did say he was “very sorry” to the people who lost all that money. But investors have no recourse.
A boring, staid Federal Reserve note backed by the full faith and credit of the U.S. government has none of the cool cachet of Bitcoin. But then Bitcoin is not protected by the feds. Given a choice, we suspect Karpeles and his magic money friends today might prefer the warm virtual embrace of Federal Reserve Chair Janet Yellen to that of the libertarian novelist Ayn Rand.
In the 19th century, different banks issued their own currencies. If the bank went under, the currency became worthless. Eventually, we settled on a single currency and built the world’s greatest economy around it. Along the way, we’ve created all sorts of safeguards to protect out currency. The Federal Deposit Insurance Corporation backs deposits of up to $250,000, for instance. It might be big government, but those $20 bills you took out of the ATM this morning are still accepted at the coffee shop.
We create institutions such as banks to protect common people. With heavy oversight, most of those institutions work. When they don’t, there are usually consequences and accountability. We can have real currency backed by governments, readily traceable, or we can have the anarchy of virtual currency tracked by no one.
One of the trademarks of anarchy is survival of the fittest. You’re on your own with no one to help when theft and fraud occurs. The losers in the Bitcoin and Flexcoin thefts know how that feels.