Can someone explain why Bitcoins are allowed as a currency?

[arcticpineapplecorp.]

I was wondering if someone could explain why Bitcoins are allowed as a currency? What I mean is that if you or I were to start some type of currency, wouldn't it be shut down by the government (or the Fed)? So why is Bitcoin different? Is it because there's supposed to be a finite amount of bitcoins available?

My question is not just about Bitcoin per se, but rather about how currencies form. I thought a currency was established by a country or region. Bitcoin is more open/universal and not tied to any particular country which makes Bitcoin interesting from that standpoint. Has something like Bitcoin ever been done before--not the technology part of it, but the non-country specific denomination of a currency in use?

I remember hearing (I think on planet money--npr) that before the civil war each state had it's own currency but it made trading very difficult (shop owners had to look up the conversions in a book, etc) and for reasons too numerous to mention here, a single US currency was established.

Any thoughts on why Bernanke and Co. seem to be fine with the use and proliferation of Bitcoin? Is it due to a lack of jurisdiction on their part, or that it's not viewed as a threat to the world's reserve currency yet or other reasons altogether?

full disclosure: I own no bitcoins and am agnostic about their prospect for the future.

Thanks for your thoughts

[neurosphere]

I don't know if this answers your question, but consider this question as a response to your question:

Are bitcoins any different than airline miles, which can be bought and sold with cash, and which can also be used directly to pay for merchandise at hundreds of on-line "malls"? Pay with miles or pay with bitcoins. How different are they?

[csage]

Gold is the easiest comparison - not backed by any country, not much use other than being a shiny metal. The only reason it has value is scarcity.

[PS241]

If you're not trying to pass it off as US currency and you're not declaring your house a sovereign nation, I don't see why the government would care if both parties agree to its value. You could build wooden chairs for example and try to buy everything by exchanging your wooden chairs for what ever someone else is selling. A silly example, but the same idea in my mind... maybe I am wrong?

[KyleAAA]

No, there are plenty of local and regional alternative currencies and some that are not tied to any particular geography. Nothing illegal about them. Bitcoin is no more a threat to the Fed than the existence of the yen, ruble, or yuan. Feel free to start your own!

http://en.wikipedia.org/wiki/Alternativ ... currencies

[Ged]

I was wondering if someone could explain why Bitcoins are allowed as a currency?

Lots of things are used represent value in some way or another. The US government gives a special legal position to the Almighty Dollar in that you can pay your taxes using it.

Other things can be used as exchange. Various foreign currencies, precious stones and minerals, energy in various forms, various agricultural products (barley was the first currency) and precious metals. And yes Bitcoins. The government really doesn't care if you exchange these or not. It may however regulate the ways these things are bought and sold to establish orderly markets.

[OKwarrior]

[OT comments removed by admin LadyGeek]

[Mudpuppy]

I was wondering if someone could explain why Bitcoins are allowed as a currency? What I mean is that if you or I were to start some type of currency, wouldn't it be shut down by the government (or the Fed)? So why is Bitcoin different? Is it because there's supposed to be a finite amount of bitcoins available?

Here's where your misunderstanding of how Bitcoins are legal comes about. You and I could decide to make our own currency for our own private transactions and there would be nothing illegal about that. That's how arcades, laundrymats, and the like operate on tokens (or these days, a custom electronic card that only works for one chain) instead of directly on coins or credit/debit cards. People are free to decide to use whatever form of currency they want to use for private transactions. Now there should be some sort of idea of equivalence to the legal tender of the local area (e.g. a conversion rate), particularly for tax purposes in large transactions, but there's nothing stopping us from negotiating with red kidney beans, beads, or whatever other token we wanted to use.

[bargainhuntingking]

Bitcoin has value. There is demand for it. People want to own it. You can use it to buy things. Lots of people feel that the value will increase, hence the speculation.

Here's a nice infographic summary of it:

http://www.visualcapitalist.com/the-def ... of-bitcoin

[bargainhuntingking]

OKwarrior, I believe you meant to use the word "cash" instead of "bitcoin" in your second paragraph above.

All bitcoin transactions are recorded and traceable on the blockchain, they are not anonymous like cash transactions, but rather pseudonymous.

And yes, I "tilt" toward bitcoin as a nice diversifier in my portfolio.

[Valuethinker]

I was wondering if someone could explain why Bitcoins are allowed as a currency? What I mean is that if you or I were to start some type of currency, wouldn't it be shut down by the government (or the Fed)? So why is Bitcoin different? Is it because there's supposed to be a finite amount of bitcoins available?

My question is not just about Bitcoin per se, but rather about how currencies form. I thought a currency was established by a country or region. Bitcoin is more open/universal and not tied to any particular country which makes Bitcoin interesting from that standpoint. Has something like Bitcoin ever been done before--not the technology part of it, but the non-country specific denomination of a currency in use?

I remember hearing (I think on planet money--npr) that before the civil war each state had it's own currency but it made trading very difficult (shop owners had to look up the conversions in a book, etc) and for reasons too numerous to mention here, a single US currency was established.

Any thoughts on why Bernanke and Co. seem to be fine with the use and proliferation of Bitcoin? Is it due to a lack of jurisdiction on their part, or that it's not viewed as a threat to the world's reserve currency yet or other reasons altogether?

full disclosure: I own no bitcoins and am agnostic about their prospect for the future.

Thanks for your thoughts

Historically, banks did issue their own currency. And it was accepted as payment.

I don't know enough about the legal position of say the US Dollar, but I *believe* (but don't know) that it is by law defined as 'legal tender' in the USA, and nothing else is.

So the decision to accept anything else (like Air Miles, or Starbucks Reward Cards) is a form of bartering. Indeed store gift cards trade on Ebay (right after Christmas, which is depressing if you think about it) and at a discount. These too are 'near money'.

So my gut is that Bitcoin is a kind of 'near money'. It's a money substitute, like Air Miles, that some people accept as money.

Because it is electronic and has various other attributes which are 'sexy' I think it is rather catching the zeigeist. The level of debate here will tell you that it is yet unclear whether it will become an established thing. But it seems to have found a need, so Bitcoin or something like Bitcoin may well do so.

What one would ideally like is a Bitcoin that is mechanically constructed to keep a value say within 50 cents of the USD (ie a range 0.50 to 1.50). In the way the Swiss Central Bank has decreed that if the CHF rises above c. 0.75 to the EUR (ie EUR: CHF is 1.20 max), it will print enough Swiss francs to drive it back down, thus setting an effective cap on value. Without setting a target, AFAIK, the Bank of Japan is up to something similar with the JPY.

[3504PIR]

I was wondering if someone could explain why Bitcoins are allowed as a currency? What I mean is that if you or I were to start some type of currency, wouldn't it be shut down by the government (or the Fed)? So why is Bitcoin different? Is it because there's supposed to be a finite amount of bitcoins available?

Here's where your misunderstanding of how Bitcoins are legal comes about. You and I could decide to make our own currency for our own private transactions and there would be nothing illegal about that. That's how arcades, laundrymats, and the like operate on tokens (or these days, a custom electronic card that only works for one chain) instead of directly on coins or credit/debit cards. People are free to decide to use whatever form of currency they want to use for private transactions. Now there should be some sort of idea of equivalence to the legal tender of the local area (e.g. a conversion rate), particularly for tax purposes in large transactions, but there's nothing stopping us from negotiating with red kidney beans, beads, or whatever other token we wanted to use.

Very valid points and I agree completely. It is interesting how the views on currency have evolved over the past century. The word "allowed" in the title of the thread is proof of that fact. What we mostly use as currency today has nothing to do with what is legal to use or not. At its basic element, currency has value to a producer/provider and consumer. Ease of use plays a major factor as well.

The Theory of Money and Credit by Ludwig von Mises is an interesting work on the topic from 100 years ago.

[Gauss44]

Bitcoin reminded me of those tickets you get for winning games at Chuck e Cheese before it grew in value.

[Professor Emeritus]

[OT comments removed by admin LadyGeek]

Actually it is not difficult to shut it down. The easiest way is to make it unlawful for any lawful business of any kind to trade a thing or service of value for Bitcoins. That is the key to all "money laundering" statutes.

[3CT_Paddler]

You can also target Bitcoins through their exchanges (a website where you can trade dollars for Bitcoin and vice versa). There are not that many of them, and people will be drawn to the biggest exchanges due to better liquidity. It's already been a major pain point for Bitcoin.

PS People should also realize that there is no recourse for a dispute or stolen Bitcoin... Which isn't the case for credit cards or banks.

[LadyGeek]

I removed some off-topic comments. This thread has run its course and is locked (political). See: Forum Policy:

UNACCEPTABLE TOPICS

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It's also somewhat non-actionable (economic policy, money laundering conjectures).