The U.S. Marshals Service on Friday will auction a $15 million treasure trove of “coins” that can’t be touched, tasted, smelled or seen. This mysterious “virtual currency” known as bitcoin exists only in a computer, but its fans say it could one day challenge the greenback dollar.
Computers “mine” the bitcoins by running complex mathematical calculation for days and months on end. Each bitcoin obtained by this process is worth precisely what tech-savvy users will pay for it. Currently, that’s about $580, and it’s a sum that fluctuates wildly. A year ago, a bitcoin was worth $100 and two years ago $7. It has been worth $1,000. Speculation in digital currency is not for the faint of heart.
Conservatives who favor commodity-backed currencies look with deep skepticism on any currency backed by nothing, not even a scrap of paper. Hard-money devotees insist that a truly market-based currency must be based on a commodity valued for its non-monetary uses, such as gold or silver. They eagerly await the day the bitcoin fades away.
They may be missing bitcoin’s most attractive feature. At its core, bitcoin is more payment network than currency. A bitcoin is an entry on a worldwide ledger, called the block chain, that tracks assets without the need for centralized third parties like banks or governments. Every bitcoin provider has a copy of this ledger, which is open to the public.
The network’s decentralization means that holders of bitcoin know their property can’t be debased by any government. Since the days of ancient Roman emperors, minting physical coins has been an invitation to currency debasement. Bit by bit, the Emperor Nero “shaved” about 15 percent of the silver content from his denarius, making it less expensive to pay the imperial debt. The result was inflation.
In addition to avoiding this problem, bitcoin has value from its role in providing a global transaction service. At the beginning of this year, online department store Overstock.com became one of the first major merchants to accept bitcoin. Since then, satellite television provider Dish and travel service Expedia.com said they will accept the digital currency.
Public interest in bitcoin has drawn federal scrutiny. The IRS says bitcoin will be treated as property for tax purposes, which makes it subject to capital-gains taxes. The ruling is evidence that digital currency is earning commercial acceptability.
The Marshals Service is auctioning 29,656 coins that were seized from computer servers that were part of the “Silk Road” underground website that accepted bitcoin for various illicit activities.
Like the Internet before it, bitcoin has passed through the shady phase, and legitimate uses are becoming more common than shady uses. The Internet survived bubbles, crashes and expert predictions that the fad would soon die. Maybe bitcoin has similar staying power, but the Marshals Service isn’t betting that way. The government will accept only a wire transfer in U.S. dollars, and from a U.S. bank. “Sound as a dollar” doesn’t apply to bitcoin yet.