A widespread awareness that something is deeply wrong with our financial and economic systems is pushing creativity. A variety of online virtual monies are popping up. They are called crypto- currencies because the money unit itself is encrypted information in a secure code. The best known is Bitcoin, a curious experiment in a private, self-regulated, global currency. But, Bitcoin has become the grandfather of digital crypto-currencies and it’s having a hard time keeping up with its offspring. (So am I.)

Blockchain technology

These innovative crypto-currencies use blockchain technology – a new open source software that will radically alter how we make exchanges and contracts. In 2016, Don and Alex Tapscott published, Blockchain Revolution; How the technology behind bitcoin is changing money, business, and the world.30 They quote Marc Andreeson, cofounder of Netscape, who hails blockchain technology as “…one of the most fundamental inventions in the history of computer science.”

The technology offers a way to establish extremely secure blocks of information that connect in forking chains. The forked lineage is nearly impossible to replicate by hackers.

This technology is developing rapidly. At a 1996 conference organized by RSA, an American computer and network security company, Ron Rivest, a company co-founder, put the source code and methods for crypto-currency into the public domain.31 Since then we’ve gone through several generations of experiments, including grandfathers, PayWord and MicroMint , and growing-a-beard-_Bitcoin._ New kid on the block (crowd-funded 2014) Ethereum Wallet, is expanding the possibilities of crypto-currency. It’s website says, “It is a gateway to decentralized applications that allow you to hold and secure Ether and other crypto-assets built on Ethereum, as well as write, deploy and use smart contracts.” 32

Venture capitalists began investing in blockchain and blockchain-adjacent startups in 2012 with a few tens of millions. In 2017, nearly $1 billion was raised in venture capital worldwide to fund new ideas about how to use this technology.33 It is a technology that can be used by governments, banks and private individuals to reduce fraud and transfer costs. It is being researched and rapidly adopted by banks globally for transferring money securely.

This technology is transformative. We can expect currencies that are specific to affinity groups, adding diversity and resilience to our monetary system. Blockchain technology offers a bright hope for reducing inequality, increasing market efficiencies, and improving democratic decision-making. And, as for all new technologies, hazards abound.

For now, I’ll use Bitcoin as my example since it may be the best known. But, Ether appears to be a money system founded on a sounder understanding of money as a medium of exchange. You now have the information you need to determine whether or not Ether is money and what kind of system it is.

Bitcoin – Money or Banking?

Is Bitcoin a money system, a banking system, or a tradeable asset? Courts and governments are weighing in, and some have classified it as a commodity asset, and not as money, and others have accepted it as currency. Bitcoin and some other crypto-currencies blur the line by turning a transfer service (a traditional basic bank function) into a virtual commodity asset intended to function as 100% commodity money.

Bitcoin is designed to perform two functions of money (Chapter 3.15): exchange medium and store of wealth. The third function of money, serving as a measure of value, will likely remain tied to national currencies. As an extra-governmental currency, it likely will always function like a foreign currency – one you buy with your national currency to use in the global marketplace. Though some advocates believe it can supplant national currencies and become a primary global medium of exchange, it seems unlikely, given it is modeled on commodity money.

Bitcoin models itself on gold commodity money. It is called bit coin. Those who create new money for the system are called miners. It is a perfect example of how the agreement of a community is the critical essence that turns something or nothing into money.

As money, it is intended to function like a 100% commodity money, an asset with increasing scarcity and hence, an increasing value. However, it differs from commodity money in that its asset value is its service value; it is a digital signature with no value beyond its ability to provide the transfer service. This is the same service a bank or PayPal provides plus the benefits of secrecy, a transfer of funds globally, and freedom from government oversight and regulations (though this last is changing). However, there are disadvantages to operating without government regulations and oversight, which provide a level of protections for buyers and sellers. Bitcoin functions like digital cash. Once it is transferred, even if by fraud or theft, you have no recourse. It is gone.

So, does it serve two masters as does an ordinary commodity money? Yes, with a catch. A real commodity like gold has uses in the marketplace that give it a commodity value. And, in a commodity or commodity backed money system, it has an additional value as a money service. It does double duty. A Bitcoin’s only real value is the service it provides. But, since it is designed to have an increasing value, it has a totally virtual value as a speculator’s game piece. It is like a 100% gold money system with virtual gold, or owning a player in a virtual sports team – only valuable as long as others are playing along with you.

It is a great example of the power of belief. Bitcoins are money because the people who use them have declared it. Without that declaration and agreement, they would have no value. Here’s how Bitcoin describes itself:

Bitcoin is an innovative payment network and a new kind of money. Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Bitcoin.org34

And, Wikipedia:

Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto. It is a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money. Users send payments by broadcasting digitally signed messages to the network. Participants known as miners verify, timestamp, and record transactions into a shared public database called the block chain, for which they are rewarded with transaction fees and newly minted bitcoins.35

Bitcoin achieved success meeting the need to transfer value at a minimal cost. It succeeded for some, but not for other speculators as a commodity money with increasing value, as it was designed to do. Because, it is designed to have a steadily increasing value, a few will benefit at the expense of the many.

In a Bitcoin money system…

Bitcoin is designed to mimic a commodity based money system, but one could design a virtual money system based on other money systems (which Ethereum appears to do). Here I use Bitcoin as an example of a virtual, opt-in digital crypto-currency.

Who Decides

Bitcoin’s creator was an anonymous individual or group of computer programmers who decided to build and launch an alternative, private kind of money, free from government oversight.

The initial creation decisions were made in secret by these unknown person(s). However, the code language is open source and the code can be read by anyone with the know-how. While in theory the computer code that is Bitcoin is totally open for inspection, the skill level required means this openness is limited to a small group of people who will check on each other – or collude on corruption. (However unlikely, how could you know?) For improvements and changes, it is locked to the general public. One must qualify to be on a development team that reviews, screens, and tests suggested improvements before they are implemented. As an open source platform, in theory, there is no central authority or control once the system launched, but given the power of hackers, that is a matter of some faith.

The decision to use Bitcoin, to opt in or opt out is made by individual participants. It has a heavily encrypted record of transactions which makes it a haven for people who wish privacy for their buying and selling. Unfortunately, criminal elements fall into this group.


Yes, though the community using it to buy and sell goods and services is dwarfed by speculators, counting on its value rising. This is similar to the existing foreign currency exchanges, where about 95 percent of ALL exchanges are made by speculators and have nothing to do with making a purchase using a different currency.36 This ratio of speculators to users is a common aspect of money systems designed to have the value of money increase or decrease, because gaming with money and/or manipulating its value, while high risk, can be more lucrative than building a real business or creating a service.


Bitcoins are a virtual token, a digital signature. A Bitcoin has no tangible substance, but is a recorded unit in cyber space. Some private businesses offer a physical coin that encloses a paper with the code for a Bitcoin.

Authentic & Trustworthy

Bitcoin is authenticated and made trustworthy by encryption, distribution of data, and by a unique kind of computer code called blockchain technology.

Bitcoin is a cryptocurrency. Crypto means hidden or secret. A coin is a string of digital code that is encrypted and decrypted for transfer. Cryptography authenticates these strings of code as legitimate coins , and hides them from unwanted views. When you transfer a Bitcoin to someone else, the exchange is encrypted and made secret.

Bitcoin was introduced as a distributed platform, which means the whole program resides on many computers. This distribution functions as a backup system assuring a level of trustworthiness. If one computer fails, the entire program and its data resides on many other platforms.

The code that creates a Bitcoin consists of chains of information. Each digital coin carries its full creation and transfer history as little blocks of information and this information resides on many computers. A counterfeiter would face the nearly impossible task of altering information in a chain of information that resides on many computers.

Bitcoin models a cash money system, so your money is as safe as your personal security systems, the security systems of your networks, your banker’s networks, and the security of the overall distributed platform. If you lose cash in any money system, it is gone forever, which is one reason why cash only represents about 3 percent of the money in use. For most of the national currencies, there are rules, regulations, backup systems, oversight and guarantees that help keep one’s virtual money safe from predators and from computer meltdowns. You pay for this service. Without government regulations and effective oversight, there are no guarantees the security promised is real, but it costs less.

Bitcoin is able to offer low fees for the cost of transferring money, in part because the distributed network of sentinels are paid in newly created Bitcoins. As long as the demand for the coins is growing faster than new creation and their value is rising, the user pays none of this fee. However, once the limit of coins is reached this will change, and some mechanism for paying the sentinels will need to be in place, and charged to the user.

Fees are low because there is no independent oversight of the system. Under banking law, banks cannot compete with this fee structure because they must pay a portion of the costs of keeping their systems authentic and trustworthy. Taxpayers pick up part of the tab for this. People pick Bitcoin because they like the idea of being free of government and middle men, but they screech loudly when crime, incompetence and negligence make their coins vanish. As governments respond to their demands for protection, and banks scramble to incorporate some of the efficiencies of their system into their own services, the cost of using Bitcoin will probably even out with the cost of transferring national currencies.

Creation & Destruction

Bitcoin is created by computer wizards, who mine it by solving complex and increasingly difficult math problems. The power to create new Bitcoins goes to those who have the computer know how and increasingly, the wealth to set up the hardware to handle the mathematical problem-solving process of mining-creating new Bitcoins. The miners are also the sentinels of the system, helping to guarantee authenticity and security in an Open Source computer environment. Bitcoin is designed to make the creation of money increasingly difficult, limiting its creation to fewer and fewer miners with the wherewithal to mine. It is designed to reach a limit of 21 million coins, and then stop. When all the money has been created, it will increase in value as it is needed for more and more exchanges.

Bitcoin can be destroyed, vanishing into the virtual ether if you lose your encryption key or it is stolen. Unregulated and unsupervised Bitcoin exchanges and banks have proven to be vulnerable to loss. A Tokyo exchange Mt. Gox filed for bankruptcy in February 2014, admitting it lost over $480 million of its clients’ Bitcoin money (850,000 Bitcoins). This would be like your bank saying, “Oops, our computer shutdown and we have no record of your money. It is gone.” By law the value for depositors was frozen at the time of the bankruptcy at $400USD. However, Mark Karpeles, former CEO of Mt.Gox, rediscovered several hundred thousand Bitcoins after the bankruptcy. In November 2017 these were valued at $7,500/coin. He will do very well from the bankruptcy, but his customers suffered.37 38

In August 2016, Hong Kong-based Bitcoin exchange Bitfinex lost $68 million in customer money and suggested it would spread the loss over all its customer accounts.39 Virtual money requires some form of exchange and there is nothing stopping any group of web entrepreneurs, both reputable and criminal, from establishing one. Virtual currencies must deal with the issue of oversight and accountability, which costs money and will bite into its touted minimal transfer fees.

Measure & Store of Value

Can Bitcoin be used as a measure of value? Yes, but it’s a volatile one. It is not a stable, fixed measure currency. It is designed to have a steadily increasing value, making it subject to market-gaming manipulations. The total potential number of coins is fixed at 21 million in the programming. So, as more people use it, each individual coin will be worth more. The system is designed so that a coin can be broken down into as many slices as needed to be useful for purchases. Because it is new and unproven, and unregulated, its service value is vulnerable to wide swings in opinions of its worth. In late 2013, a Bitcoin was valued at $1,200. It hit a low of $152.40 on January 14, 2015. When a new government regulated bit coin exchange came on line in late January 2015, the value moved up into the $250–300 range, and rose above $400 by 2016. From 2016 to 2018 the price skyrocketed to $19,783 in December 2017, before plummeting in a month to $7,964, where it has mostly remained into 2018. Volatility is high and I can’t keep this section up to date.

Can it be a store of value over time and distance? Yes. Bitcoin is designed to be a coin with a steadily increasing value. Because the value is designed to increase, people will jump on board for the speculative investment value. And so far, most of the action with the coins has been speculative and volatile. An increasing value discourages people from using Bitcoins as a medium of exchange. After all, if they just wait to use it, it will buy more. Because of its distributed platform, it is also a slow process, often taking 15 or more minutes.

Every exchange using Bitcoin requires factoring in its fluctuating value and the value of the exchange. As with any commodity based system, those who have great wealth can manipulate the supply of money, and hence its value, to their personal benefit.

Is it money?

By my definition, barely. It fits the criteria I have defined for money. It’s not a particularly good money, since it is modeled on commodity money, which has many drawbacks and which has not been in much use for millennia. The Commodity Futures Trading Organization (CFTC) ruled in 2015 that Bitcoins are not money, they are commodities because they fit the CFTC’s definition of “all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.” Then by 2018, they’d ruled that Bitcoin and virtual currencies were “virtual currencies serving as a medium of exchange, a unit of account, and/or a store of value.” In other words, they changed their mind and accept that it is a form of money.40

Ultimately, who rules?

Those with greater wealth will have greater power over the active supply. Whoever initiated the creation of Bitcoins – and it is a secret evidently holds a stash of 600,000 of the coins. If you consider the limit of 21 million maximum coins of a currency intended for use by a global population of over 6 billion people, then it is clear that retention in the hands of a few people gives them an incredible power over everyone using the coins in the future. Like all commodity monies, unchecked or unregulated by government, Bitcoin gives governing power to a wealthy and hence, powerful, few. In that Bitcoin is hailed as the currency of Freedom and Liberty, that is a curious twist on the bright hopes of adopters. It will be interesting to see what type of money system other crypto-currencies choose.

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