Extracts from BITCOIN: HOW CAN A VIRTUAL CURRENCY ATTAIN REAL MARKET VALUE?
Introduction
Bitcoin adapts the age-old barter system to a globalised marketplace, while attempting to avoid the limitations of bartering—especially the so-called “coincidence of wants problem.” It resuscitates the ancient custom of two-party trading and minimises the interference of a third party. This sounds simple enough, but in reality is incredibly difficult to accomplish—an uncomplicated means of exchanging value from one peer to another directly, regardless of geographical location and without recourse to any intermediate agency.
The coincidence of wants problem (often “double coincidence of wants”)
is an important category of transaction costs that impose severe
limitations on economies lacking money and thus dominated by barter or
other in-kind transactions. The problem is caused by the improbability
of the wants, needs or events that cause or motivate a transaction
occurring at the same time and the same place.
Virtual Currency
The general reaction to the concept of cryptocurrency is often reflexive; it comes as a surprise to some people that bitcoins have substantive exchange value, and that an intangible digital coin—seemingly as ethereal as Scotch mist—can actually be traded for something material. Yet some of the same people unhesitatingly accept that donations are offered at the conclusion of weekly sermons or the staggering riches of the Vatican. Perhaps understandably, other people are sceptical of them all.
What appears incomprehensible for some or too novel to appreciate is just how a “virtual” cryptocurrency can attain real-market exchange value?
A virtual currency or virtual money has been defined in 2012 by the
European Central Bank as “a type of unregulated, digital money, which
is issued and usually controlled by its developers, and used and
accepted among the members of a specific virtual community”. The US
Department of Treasury in 2013 defined it more tersely as “a medium of
exchange that operates like a currency in some environments, but does
not have all the attributes of real currency”. Attributes of a real
currency, as defined 2011 in the Code of Federal Regulations such as
real paper money and real coins are simply that they act as legal
tender and circulate “customarily”. The key attribute a virtual
currency does not have at this time, is the status as legal tender.
So how do bitcoins attain real market value?
