When I was a graduate student at the University of Oregon many moons ago, I taught economics to freshmen. With class at 12 o’clock on Friday afternoons, the only thing standing between them and a weekend of debauchery was I. And, remember, the movie “Animal House” was filmed there only a few short years before!

To “entertain” them, I used to come up with little aphorisms to make it easier for all of us. One of those aphorisms drifted back into my mind recently as I was reading about Bitcoin – the true value of any currency is like Peter Pan’s Tinker Bell. If you believe it, it exists. If you don’t believe it, it doesn’t exist. A lot of people believe in Bitcoin.

So What Is It?

Put simply, Bitcoin is a digital currency. It began as a form of online exchange back in 2009 and is gaining international acceptance as a payment system, certainly in Cyber world. There is no central bank that controls it. No international regulation. And you can simply get online at the website to start participating.

The Bitcoin is held in whatever online electronic “wallet,” and you can access it via your cell phone or computer. You can use the Bitcoins to buy products and services you want and participating merchants will accept it. Security comes through so-called “public key” encryption of the currency, which acts like a vault to keep thieves from accessing and stealing your Bitcoins.

The value of the Bitcoin is the function of the market accepting it. In short, a Bitcoin does not have a stable value. If more people want to use them, the value goes up. If not, the value goes down.

But Is It Real Money? A History

And now back to Tinker Bell! Currency (any money) is a means of exchange. If people are willing to accept something has value and are willing to exchange it for goods and services, then you have money.

The current system of monetary exchange with central banks and international controls on exchange and price are relatively new in terms of the world economy – perhaps about a century and a half. Throughout most of history, the “money” of the dominant culture of a region tended to be the one used, and it was almost always based on a ratio of its value to gold or silver.

For instance, in Roman times, the denarius was the unit by which a large number of Western currencies were measured. A denarius was equal to so much silver or gold. If you mined more gold and silver, you created more denarius. If people wanted them, the value rose. If not, the value fell.

As late as 1857, the United States still accepted the four hundred year old gold/silver measured Spanish doubloon as a currency. And, if you’re wondering, there was lots of counterfeiting, including milling the edges off of these gold and silver coins to make more coins. Some things never change!

In the post World War II era dominated by America, most of the currencies of the world were measured against a U.S. dollar, valued in gold at roughly $35 per ounce. International agreements by nation-based central banks were arrived at to value other currencies in terms of the dollar. A British Pound was worth $2.60 for instance.

In 1971, the Nixon Administration took the dollar off the so-called gold standard. That is, the gold and the dollar were no longer linked. The dollar was valued at the “full faith and credit” of the government – not in exchange for any precious metal. The rest of the world soon followed suit.

Money In the Cyber Age

The Cyber age of the early 21st century has vastly changed our day-to-day relationship with money. Few people get “hard” checks to deposit. They have “direct deposit” of their wages into their bank account. They pay their bills electronically. When they purchase goods or services, they use their debit or credit cards to pay. These transactions can be valued in dollar, yuan or euros. They do not necessarily need to be tied to a specific national currency.

Now, Bitcoin comes on the scene in this increasingly Internet-based world economy. I have no doubt that Bitcoin is here to stay in some shape and form. A few countries have tried to outlaw or restrict it in fine nation-state fashion. The United States has been much more judicious and cautious with both the Treasury and the Federal Reserves trying to understand what its implications are and how it might link into terrorist financing or organized crime. Reasonable thoughts.

The bottom line is simple: as people accept Bitcoin as a means of exchange for goods and services, then it’s a currency. If it maintains its value versus other currency, then it’s a currency. So far, it looks like electronic Tinker Bell is likely to exist and expand for some time to come.