Jack TenneyExtra Point

by Jack Tenney, Publisher

January 2014

Thinking about bitcoins helps you better understand quantitative easing and other stuff.

Bitcoins are a digital currency rapidly gaining acceptance, interest, fear, hope, advocates, and enemies. Satoshi Nakamoto (a collaborative quartet of techies) formulated the idea for an online currency that is freely transferred between buyers, sellers, and traders for low and no fees. The bitcoin is designed to be impossible to counterfeit and is stateless, thus avoiding direct government rules and regulations.

It recently made big news when its value traded north of $1,000 and again when China forbade its banks to recognize or accept it and Baido (the Chinese publicly traded media company) announced you could no longer purchase music with bitcoins. A recent price to buy 10 bitcoins at $795 each was offered — I didn’t buy. (Good choice? Google it now to decide.)

So: Currencies need to be stable to be used to settle debts, transact business, and price goods and services. Gold coins are for hoarding, not spending, while airline meal vouchers given to stranded travelers are for redeeming, not saving. Bitcoins are one or the other.

Say you have a dog you really like and there’s a dog artist who could draw a lovely portrait of the pooch from a photo. Assume you commissioned the artist last August to finish the picture in time for Christmas. The agreed price was $50 payable half in advance and the balance when the picture was delivered. Sometimes, artists are like computer programmers and Christmas comes and goes with no picture.

Now what? Normally, the outcome may be that you’re out $25 or the artist sends a refund or delivers the picture and waives the balance or delivers the picture and demands payment. You could probably live with any of the outcomes.

But suppose last August, the artist stated the price in bitcoins, 10 bitcoins — 5 with the order and 5 on delivery. So you went online and bought 10 bitcoins for $50, transferred 5 out of your electronic wallet and waited and waited for the picture.

Then what? Around Thanksgiving you read that bitcoins were trading for $1,200. Chances are the artist is reading the same news, which means the picture’s ready early and you’re hiding behind the couch and the doorbell’s ringing.

Worse case, you only bought 5 bitcoins to start the deal and planned to buy the rest when the photo was done. You are not only hiding behind the couch, you’re crying.

Last scenario: Artists being artists but honest, do you think you’ll get the deposit back in the form of 5 bitcoins, 0.0025 bitcoins, or a 20, four ones, three quarters, a dime, two nickels and five pennies?