L: Doug-Sama, we’ve had a number of readers ask for your take on this new Bitcoin system. As a person who likes to see the private sector compete in areas that governments try to reserve for themselves, this seems right up your alley – what do you think?

Doug: It’s a sign of the times. Lots of people are actively looking for an alternative to the dollar. I think Bitcoin is a very good thing, in principle. But after the recent disastrous hack, it’s probably a dead duck, at least in version 1.0.

It’s appropriate, however, that we’re talking about Bitcoin – an Internet-driven phenomenon – while you are in Bishkek, Kyrgyzstan and I’m in Beirut, Lebanon, and we’re speaking essentially for free over the Internet. Money is increasingly going to be Internet-related. But first we should explain what Bitcoin is.

L: Sure. There’s a Wiki entry, but the basic idea is that Bitcoin is an online (and therefore digital), non-government-backed currency. It’s not backed by anything, actually, but that doesn’t seem to be a problem for many users. The system has been adopted by a growing number of people around the world in just the last two years. People are used to currencies not backed by anything, so I guess I shouldn’t be surprised, but I am. On the other paw, unlike government currency, the Bitcoin system is based on a decentralized computer system that no single person or entity – including any government – has control over. That’s part of a design to keep the number of Bitcoins in circulation (inflation) strictly in check. So I can see why some people would see Bitcoin as being just like government currency, but better, because it’s supposedly inflation-proof.

That’s the idea, anyway, but in my view, it’s still not money – no more than unbacked government promises are. You can only use them among others willing to pioneer this cyber-frontier, so I really was quite surprised to see them catch on as well as they have. I’ve seen estimates that the market value of Bitcoins in circulation rose to about $130 million before they crashed last weekend.

Doug: Again, it’s quite encouraging to see that so many people are so disgusted with government currencies, and the total lack of privacy in banking. That’s why Bitcoin could catch on at all. But let’s go back to basics, and see if Bitcoin qualifies as money. Money is a medium of exchange and a store of value. Bitcoin may work as a medium of exchange sometimes, but not a very good one, because it’s proving so unstable. It has fluctuated so much in value over its short life that it is totally unsuitable as a store of value. Over 2,300 years ago, Aristotle identified the five essential attributes that are necessary for a good money…

Doug Casey on Bitcoin and Currencies, 6/23/11

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