I have written before about bit coins but a question from a colleague at this site urges me to comment once more.  The bit coin is a medium of exchange which means it can be used to buy things.   Its value is derived from its availability which is created through online accounts and by the products or services it can buy.   One has to remember that any currency is valued according to what it can buy or how much is offered to buy it.  Currency exchange rates are determined through this mechanism so in this regard bit coins are equivalent to currencies.  However, bit coins differ in one key regard, they are not issued by a government nor are they regulated by most governments.  Indeed they have been recognized by many authorities as a medium of exchange.

The intention of the bit coin is to provide a means to pay for items purchased via the internet.   It was not intended to be carried by buyers to stores where they purchase items.  And no one goes around with a pocket full of bit coins.  In fact they do exist as tangible items but these are not used in transactions.  They  merely represent bit coins located in an internet account.

The advantage of using the bit coin for internet transactions is that they are readily accepted by any seller anywhere in the world.  They thus avoid the problems related to currency exchange transactions, i.e. if I buy a good in Europe with bit coins I do not have to exchange my dollars for Euros to make the purchase.  The bit coin also avoids the charge made by credit card companies to use your cards thus saving the seller and buyer the percentage charged by the card company.

The mystery of the bit coin is generating lots of thunder and lightning but precious little understanding.   I just read a pitch by an investment outfit urging caution about using bit coins and in its place shilling its own “secret currency.”  The firm used its  ”secret currency  report” to lure you into buying its investment report service.  It even claimed its “secrete currency” was how the legendary Rothchild family gained what was once the largest family owned wealth in the world and the family continues to be one of the world’s wealthiest.  When all was said and done the “secret currency” was just a different way to hold gold.

By the way the Rothchild family,  as was the case with many other Jewish families in  Europe, gained its wealth through a small but important fact.  Most people do not know that usury, or the use of money to earn money, was a sin in Christianity until the 19th century.  Usury is still not allowed by the Koran in the Muslim faith.  However, usury was never a sin in the Jewish religion.  Thus Jews were the main bankers in Europe since they could charge interest on loans, since, believe it or not, very few people with money lend it out for no gain.

I am sure we will continue to see much noise about bit coins as they settle in to be a means of exchange.  No doubt since there is a limit as to how many bit coins can be created there will be competitors and there are dozens already in the market.  The value of the bit coin will also become more dependent on its relation to other “created” currencies than on its limited supply.  I see great potential for bit coins used in internet gambling since the USA and other countries strictly control this activity.

Anyway we will learn more about this new medium of exchange “bit by bit” (I could not resist.)