For those who haven’t heard of it, Bitcoin is a private, digital currency generated by a software program and obtained (although “mined” is the preferred term) by solving complex mathematical problems. There are currently about 11 million bitcoins in circulation, and the limit on the total number of bitcoins that will ever be circulated is apparently 21 million. Bitcoins began to be issued at the start of 2009. They exist as a public database: as the New Yorker explains, in the database, “The chain of ownership of every bitcoin in circulation is verified and registered with a timestamp on all twenty thousand network nodes. This prevents double spending, since no coin can be exchanged without the authentication of some twenty thousand independent cyber-witnesses.”
The value of a bitcoin has soared in recent weeks, to more than $1,000, and people are increasingly speculating on whether Bitcoin or some other form(s) of private currency will emerge as a widely used alternative to government-issued currency. One problem with that possibility is that the value assigned to bitcoins has swung wildly in the five years of Bitcoin’s existence. On the whole, it has been very lucrative to simply hold onto the bitcoins you have rather than spend them, but there have also been periods of the value of a bitcoin dropping 50 percent or more. This doesn’t sound like a reliable currency: it sounds more like, for example, the market for a 1952 Topps Mickey Mantle baseball card during the 1980s, in that there is no consistent, long-term standard for what either the card or a bitcoin is worth. Just as it was extremely lucrative to buy that Mantle card in 1980 and sell it in 1990, it was extremely lucrative to buy a bitcoin in 2010 and sell it in fall 2013.
Until you feel secure in spending bitcoins on something like a ticket to a baseball game that will be played five months from now: that is, using it as a currency that you can trust will maintain a fairly steady value in coming months and years, Bitcoin will not really function as a currency. Instead, the Bitcoin market will be a vehicle for speculation and idiosyncratic personal interest, similar to the market in sports memorabilia, or fantasy sports.
At the same time, some people have attacked the Bitcoin currency because of the difficulty of determining what a bitcoin is worth, the idea that bitcoins are given an arbitrary value, that they represent nothing of evident value, have no utility, and you can’t use them for anything. I think they miss the point. There are all sorts of objects that meet this definition, including, in the realm of sports, baseball cards, autographs, ticket stubs, and broadcasts of games, none of which have real utility, and lack any obvious tangible value or use. You cannot do anything with a Joe DiMaggio autograph but look at it and handle the object that holds the autograph. In fact, throwing around a DiMaggio-signed baseball will only decrease its value, by smearing the signature, getting dirt or water on the ball, or losing the ball by throwing it into the street.
The value of a bitcoin, like the value of sports memorabilia, is based on the fact that people assign values to things that they can’t do anything with. This is also true of government-issued currencies: the only thing you can do with a normal $100 bill is buy something: the bill’s merit comes from the ability to use it as a means of exchange and an indication of value. If the United States ceased to exist, the $100 bill would probably become worthless. That’s what happened to Confederate bills after the Civil War.
We’re already very accustomed to using purely digital forms of private money, like gift cards, coupons, credits used within games like Farmville, and credit cards and other forms of loans. As far as I can tell, Bitcoin is really just an attempt to establish a privately-issued digital currency that has universal application, instead of the limited application of these other private forms of money.
The question “Is a bitcoin worth $1,000?” is like the question “Is a year of Justin Verlander’s services to the Detroit Tigers worth $20 million?” in that there is no objective correct and permanent answer. There are all sorts of reasons to say no to both questions. Clearly, you can use the $1,000 or $20 million to do more vital things, like feed, clothe, and house people. But right now, enough people are giving a yes answer to both questions to say that yes, right now we can assign those values to a bitcoin and to Justin Verlander’s 2014 services.