Inside Money: Undermining the Bitcoin belief system

Photo / Thinkstock

The collapse of Tokyo-based Bitcoin exchange, Mt Gox, last week dented the already somewhat-unshapely reputation of this pretender to the global currency throne.

Most of the faithful shrugged off the news as irrelevant, the Bitcoin price barely blipping as Mt Gox fell over. (While the Bitcoin price is holding steady-ish, it remains about half its peak value recorded in November last year.)

But whatever the failure of Mt Gox means for the ultimate fate of Bitcoin, it clearly demonstrates that we should no more trust anonymous technologists absolutely than believe in the doctrine of papal infallibility (pleasingly, my version of this link included an ad for a Bitcoin exchange).

Despite the best efforts of Bitcoin developers, it looks like trust is a quality that can't be completely outsourced to a mathematical equation.

Bitcoin enthusiasts might dismiss Mt Gox as an aberration, but how do you spot the next aberration?

Can secret coders create a trustworthy currency? The question itself is probably irrelevant, according to noted economist (and recipient of the 2013 Nobel Memorial Prize in Economics), Robert Shiller.

The world's first bitcoin retail store opened in Hong Kong on Friday, despite the virtual currency facing much scrutiny over the last week. Photo / AP

Writing in the New York Times last week, Shiller suggests Bitcoin shouldn't even bother trying to be a currency.

"The central problem with Bitcoin in its present form, though, is that it doesn't really solve any sensible economic problem," Shiller says.

Even so, he says the Bitcoin story has highlighted ways that technology could improve our money systems.

"... if we go back to the electronic-money drawing board, we may conclude that Bitcoin has been focused on the wrong classical functions of money, as a medium of exchange and a store of value. Bitcoin offers a way of 'mining' electronic coins that can replace our dollar bills and bank accounts. Yet there is no fundamental need for this," Shiller says.

"Money, as we've known it for decades, works quite well in these respects. It would be much better to focus on another classical function: money as a unit of account - that is, as a basic standard of economic measurement."

Ultimately, he says the "Bitcoin experience" should drive the world "toward a system of stable economic units of measurement... empowered by sophisticated mechanisms of electronic payment".