One of the stories in the news is Mt Gox "losing" up to 6% of BitCoins. As a transfer service, it sounds like they aren't backed by anything but faith. Which is similar to how governments operate. But we are wiling to believe that the United States will back money. Similarly for many other countries.
So what holds up Mt Gox? Or held up until now? It seems odd to give "currency" to a service not backed by anything.
Most money is backed by faith. Unless you have gold coins in your hand, you have paper money, which is backed by the government, or money in bank accounts. If I go onto Internet Banking and tell it to send Jeanne Boyarsky $100, no money will travel anywhere, but I shall have $100 less and you will have $100 more. We have worked on faith ever since banks were invented.
As for losing 6% of money entrusted to them, that is the first I had heard of it. It sounds as though they are very inefficient and may have to pay lots of compensation.
There is a story of a British chap who had several bitcoins on his computer and threw the hard drive out without backing it up. He was told at the rubbish tip that the hard drive would be there, under several hundred tons of more recent rubbish. He didn't get a spade out.
Like with any other product or service, trust in it grows. Why do people use PayPal for money transfers, or GMail to send e-mail with? It starts slow and grows exponentially. After a while it's not just people, but big companies and other exchanges making transfers with them as well.
People trust they will back it, simply because they haven't had reason to believe they won't. Then they hear the company isn't solvent (apparently because of theft), and all the trust goes away, making the bitcoins themselves worth less.
The most important reason people trust modern governments to back their money, is because they don't have a place to run to.
author & internet detective
Jeanne Boyarsky wrote:Aren't gold coins backed by faith too?
Looks like fundamentally, Mt Gox got hacked and has been losing coins for a few months.
Well, it depends upon what you mean by gold coins. Once upon a time, a gold coin was valued at the value of the gold it contained. This did not last long, as the rulers decided that they could put say 9 dollars worth of gold in the 10 dollar coin, and net a profit of a buck a coin. Technically, this is called seigniorage. Its the profit that the crown makes when they make the money. But up until 1971, when Richard Nixon screwed it up to pay for the Viet Nam war without raising taxes, the US dollar was backed by roughly a certain amount of gold ($42 per ounce in 1971).
There is, of course, a certain amount of faith that the gold coin is actually gold, and that it weighs what it should. That is why coins have milled edges. In theory, a gold coin has an intrinsic value of the gold that serves as a floor to its value. No faith needed.
I've got a few silver dollars that are worn and are not rare. They are worth about $5 each for the silver they contain, but nothing because they are minted coins.
Joined: Oct 13, 2005
I suppose there is faith in gold, as PF says, that they actually contain real gold. There is also faith in the Philosopher's Stone, that it will never be found and flood the world with millions of tons of gold because that would undermine the value of the gold.
Campbell Ritchie wrote:I suppose there is faith in gold, as PF says, that they actually contain real gold.
You don't have to have faith that its real gold. For centuries, there has been a process to test the purity of gold and silver. It is usually called an "assay". Its a bit technical, but was commonly done. So you can assay the coin, see how pure it is, weigh it, and from the purity and weight, know how much real gold is in the coin.
But, again, this is about the value of the metal, not the value of the coin. Most coins are stamped with a value that is higher than the value of the metal.
Joined: Oct 13, 2005
You have to have faith the assay process is accurate. But this is beginning to look like an infinite regression.