Bitcoin. You may have heard of it: a so-called virtual peer-to-peer currency system. It’s been billed alternately as the savior of the world from the hands of the banking system, the scourge of world governments, a monumental waste of energy resources, a privacy nightmare, and just plain dumb. But what the hell is it? Nobody knows. Let’s get started.

You have to admit there’s something exciting about a virtual currency system, but at the same time, that something just might be hype. There’s something vaguely “of Anonymous” to the whole deal—it might be revolutionary, but also could be a joke. It could be teenagers pretending they’re anarchist comic book heroes. The trouble is, it’s tough to tell for sure.

And yet, this is what we were promised from cyberspace, wasn’t it? This is the reality of Neuromancer and Snowcrash. Virtual currencies to spend in virtual shadow worlds, run by cryptopunks, comprising off-the-grid hacker economies. If you have a single sci-fi bone in your body, you are irresistibly turned-on by the idea of a fluctuating exchange rate between Second Life’s Liden Dollars and Bitcoin. Watching the numbers rise and fall on www.bitcoincharts.com is better than a Matrix screensaver, because it is somehow, possibly, maybe, happening in real life. This is the sort of radical stuff that is The Future we fantasized about, rather than oil shortages and housing surpluses.

Virtual technologies are becoming decidedly real. From cell phone augmented reality, to the broad range of Kinect motion-sensor hacks, to location-aware tech, it’s hard to tell what is virtual, what is real, and what is just made up. The virtual is real... but still, a different sort of real. As Gilles Deleuze wrote, “The virtual is opposed not to the real but to the actual. The virtual is fully real in so far as it is virtual.” We have more reality than ever, only some of it is virtual reality, and other elements are actual reality.

“Extreme virtual reality” seems to describe Bitcoin. Setting aside the functional import of a virtual currency for a moment, Bitcoin is quite real, and impressively so. The value of all Bitcoins in existence is around 105 million USD. Over 24.5 million USD in transactions take place every 24 hours. (My stats are as of June 13, 2011. For real-time statistics of all kinds, see the excellent site http://bitcoinwatch.com.) It is difficult to estimate the total computing power of the distributed Bitcoin network, but some vague guesses place it greater than the power of the world’s top 500 supercomputers... combined. This virtual reality might not mean a thing to most of us in our daily life of tweets and emails, blogs and new media. But it certainly is not nothing.

So how does this “not-nothing” virtuality compare to actual currencies? Well, this is where is gets even more complicated, because we have to find a way to compare something as technologically complex as Bitcoin with something as economically complex as US Dollars. They really aren’t comparable, because they function differently.

Simply, the US Dollar is controlled by the Fed, which attempts to keep the Dollar’s value stable, with supply in good relation to demand. But Bitcoin is controlled by its algorithm: that is, controlled only by itself. Bitcoin is the sum of all the software connected in a network, working with the furiousness of hundreds of supercomputers in the effort to solidify and secure the transactions and freely-tradeable units which constitute it. It doesn’t control the currency with monetary policy, it keeps it functioning securely according to its rules. Therefore, the value of Bitcoin is not stable, and will move according to demand. And the demand is only constituted by the nodes who use the currency, who simultaneously constitute the work of the algorithm. Bitcoin is only as real as itself and those using it.

But Bitcoin is exchangeable for paper money through the mail, of all supposedly-obsolete physical systems. You can buy drugs with it: online, through some sort of crypto-eBay, only accessible through TOR’s peer-to-peer anonymity routing network. But the drugs are real. (At least until you eat them.) And the CIA is paying close attention. What’s the only thing more real than drug sales and the CIA? Need we repeat? $24.5 million USD per day of transactions. And rising. Someone is using it for something, even if we don’t know what. Rock and roll isn’t music like Bitcoin isn’t currency. If the kids listen/spend it, then it’s music/currency. Perhaps, in this virtual age, there is no existential criteria more sufficient than that.

If you’re not a little uncomfortable, perhaps I’m not explaining it well enough. There seems to be an Uncanny Valley between the virtual and real, which Bitcoin falls directly within. It is decidedly virtual and real, and we have trouble with this combination. Perhaps we haven’t grasped the import of Deleuze’s statement, and we are still trying to assign “reality” to either Bitcoin or US Dollars, but not both. There is something deeply suspicious about Bitcoin, even for those of us who’ve had nothing but blue sky visions for the networks and their wide net of applications. Perhaps a virtual currency like Bitcoin is too real for us. It is one thing to crowd-source photo-tagging, music-sharing, or even Mechanical-Turk-type grunt work. But crowd-sourcing our basis for economic value— couldn’t this go horribly, catastrophically wrong?

The answer is: yes. There are a thousand things that could go wrong, either politically, economically, or in something as “simple” as the incredibly complicated algorithm and public key encryption implementation of the program itself. Recently, there was a Bitcoin “crash”, in which the value of a Bitcoin decreased by as much as 30%. Were investors ruined? Did people lose millions? How could we know for sure? In a virtual currency with nearly anonymous users, how is it that we can say that there was any real value to lose, other than that it suddenly became significantly cheaper to buy one of these virtual tokens? Does this prove that Bitcoins lost value, or that they were never valuable to begin with? Is this a scam that failed, or a scam that succeeded? Part of the difficulty of knowing exactly how Bitcoin might fail is the nebulousness of any particular “failure state”.

But then when we compare this to something we supposedly understand, the muddle gets even deeper. Actual economies also fail, or at least get close to failing before being bailed out. Argentina was the poster-child of the International Monetary Fund before defaulting on 75% of its debt. The Euro, a real-world, actual currency, is currently unraveling the economies of several European countries because use-case scenarios that were deemed “highly unlikely” actually occurred. If there is anything that convinces me, at least at face value, that Bitcoin is not only a virtual currency, but a real currency and monetary system, it is that the amount of distrust, paranoia, misunderstanding, and general hand-wringing about Bitcoin rivals the same that is targeted towards the Federal Reserve. Adam Smith wrote The Wealth of Nations in 1776. Since then, have we come any closer to understanding how to run a national economy correctly? If we have, how would we know? Economics is only data analysis in the past-tense, and as such, it’s all a bit virtual. If we have to withhold judgement on Bitcoin until we actually see it either succeed or fail, then we’d only be in the same boat as the entire history of economic theory.

There is an appeal to Bitcoin. There is a certain distrust of the systems currently in place that makes us seek new systems, either in the virtual world or in revolutionary concepts for the actual world. This interest manifests in Bitcoin. There’s a part of us — either the virtual community Us, or the actual you and me, if not both — rooting for The Pirate Bay, that smiles in satisfaction at Anonymous’ antics. The appeal is The Future: the very literal newness of the ideas. This is something that has not been tried before. It very easily could be a failure, but even so, we would see a new type of failure, for a new type of system. It would most likely be an actual failure, not just a virtual one. The wholesale failure of Bitcoin would not be a science-fiction cataclysm--not a Y2K bug. But it would be as widespread as that which it encompasses with its system of value, as far as that extends; and therefore it would be a very real issue, with real consequences for those involved, insofar as anybody really is. Some people will no doubt lose, no matter what happens. And some will no doubt win. And we’ll all probably learn a few things, too.

We’ve survived zombie fiction breaching its way into flash mobs, increasingly life-like robots and animated avatars coming out of the screens and into our homes. We’ll probably survive this particular uncanny valley economy as well, as it breaks free from the pages of crypto-anarchism, rampaging into our online Real. It won’t be the last thing to create that uncanny sensation in the depths of our post-Platonic world views. What’s next on the horizon, that will make our heads hurt as we try to understand how we don’t understand it? We’ll know when we have it in our sights as it clambers over the barricade, and we can’t decide whether or not to fire.

Adam Rothstein writes at www.poszu.com and wherever else he can maintain a signal.