Thursday, 13 February 2014


Bitcoins have been in the news lately.  Most recently, some sort of "technical glitch" has affected one of the exchanges that deal in them. Hacking and wildly fluctuating values seem to be real issues, but even if these weren't sufficient to dissuade me from even thinking about becoming involved with them (not that I am likely to have the opportunity, anyway), there's a deeper issue.

There was a report on 7.30 about bitcoins a little while back which I watched with interest.

The aspect that I just didn't "get", and the ABC made no attempt to explain, is how is this currency created?    I see that Wikipedia refers to it being "mined", but in my world, a person who derives an object as a result of mining it gets the full value of that object, paying only the cost of production.   Yes, the purists might say that this isn't perfect, but mining for gold and other precious metals is long-established and there is some sort of correlation between the cost and difficulty of mining and the value of the commodity.  Can this be compared with the cost of running a computer program to produce a unit of exchange?

The bitcoin webite didn't help me much, and I must admit that I get really, really, dubious when I read that the "mining process" is too hard for mere mortals to understand!  But, as I see it, you "mine" a bitcoin by solving a complex numerical problem, that is, it's like a prize.   In fact, I had already deduced this, when I came across this quote: "Mining bitcoins, at the end of the day, is literally solving a math problem again and again".   It seems that the difficulty of the problem is somehow adjusted (or ought that be "manipulated"?) to regulate the supply of bitcoins.

Hmm, funny basis for creating units of exchange, if you ask me.  Even if there isn't someone, somewhere who is making money as a result of the production of these units, what guarantee is there that the system won't be corrupted in the future?  Government control of our conventional monetary system may not be perfect (and there have certainly been massive failures in some countries over the years), but at least it is less opaque than is the case with bitcoins.

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