If you have studied Bitcoins, used them, or traded them you know more about them than I do. But, I do know something about the nature of "money," "real money," fiduciary media, fiat currency, and the long, impassioned re-discovery—in our time—that who controls the money supply (or who can't) is a matter of economic life and death. And so, I grope toward comprehension of the Bitcoin.

No one who has read, for example, the writings of Henry Hazlitt or Ludwig von Mises, or the virtually legendary essay by Alan Greenspan (back when...), entitled "Gold and Economic Freedom" (The Objectivist, 1966), will miss that the creators of the Bitcoin concept KNOW ALL THAT. Who did launch the Bitcoin concept some five or more years ago? Not known, it seems; only a pseudonym is known. Still, probably lots of people know...

The Bitcoin is a digital currency, a computer notation, a supposed contract, and a set of definitions. Still, any currency can work, at least for a while, if the unit is known, its value (or process for changing its value) is agreed upon, and people will accept it in exchange for goods or services. For example, in utterly devastated Germany, after WWII, cigarettes, for a while, served as a currency. As we all know, there have been societies in which shells, cattle, and wampum were currency.

All worked, at least for a while. If you held these units of currency, you held wealth; in effect, it was "stored" in the currency, ready to spend. Bitcoins do function in all these ways, at least for now—not with widespread acceptance of legal tender, but within a sphere.

I can't rehearse, here, the history and theory of media of exchange. I address the initiated. It is crucial, a matter of economic life and death, that whatever is used as a currency is limited in its supply. And a somewhat rare supply is better, so each unit has a higher value and you don't have to lug around so much of it. By these rules, gold won hands down thousands of years ago and never has been bettered—ever. The centuries have done nothing but strengthen the case for gold; little in our world has been proved, so conclusively, as the superiority of gold as a medium of exchange.

[Must Read: Jon Matonis: Facts and Fiction Behind Bitcoin - What It Is and What It Isn't]

By contrast, the same centuries have proven that paper money—the printed promises of governments—unless freely exchangeable for gold—are on a one-way street, long or short, to becoming just paper. The venerable and once proud U.S. dollar, which could be exchanged for gold until the Roosevelt administration decreed otherwise in April, 1933 is far, far down the road to becoming mere paper. This is the essence: paper money issued by government, with "legal tender" laws that force it to be accepted, is a series of checks. Government can write as many checks as it wants; today, it doesn't even need paper, just a computer notation will do. We produce goods, provide services, and in return receive a government check that we can spend to get other goods and services. If government wants those goods and services, it just writes as many checks as it wants. And our checks steadily decline in value. It is called "inflation" and "depreciation" of the currency.

It is obvious to me that the creators of Bitcoins understand all this. At the root, the base of Bitcoins is the contractual limitation of the supply. Let us quote Wikipedia: "Growth of the Bitcoin money supply is predefined by the Bitcoin protocol, and in this way inflation is kept in check. Currently there are over twelve million Bitcoins in circulation with an approximate creation rate of 25 Bitcoins every ten minutes. The total supply is capped at 21 million, and every few years or so the creation rate is halved. This means new Bitcoins will continue to be released for more than a hundred years."

The intention—and I emphasize that—is to create a "fiat" currency, not a real good like gold or silver or cattle, but a fiat currency that no one can print or coin at random, at whim—as our government creates new dollars. The virtue of gold is that it is extraordinarily difficult and slow to mine, and so the money supply increases very slowly, ensuring price stability. In place of that restraint is the "Bitcoin protocol," which specifies and presumably guarantees that you know exactly how rapidly the units of exchange will be increased, and to what extent, over the next 100 years. It already, in theory, sounds a lot better than the dollar.

Bitcoin technology addresses the usual problems with money. For example, since your Bitcoin money exists not in your wallet but as a computer code, how do you protect it from theft? By keeping your private code private, secret. But there have been Bitcoin thefts and scams because people vary in how security-conscious they are about their money.

But remember, there are two fundamental uses of money. One is as a medium of exchange; the other is as a store of value. If I am a farmer who harvests his crop of vegetables, I could exchange them immediately for what I want. But I don't want to "spend," exchange, my crop all at once. I want to save some to spend later. And so I trade my vegetables for gold, the medium of exchange and savings, which cannot rot, rust, decay, and never loses its value. As the year goes on, I can spend the stored value of my vegetables, as gold, for what I need.

So far, Bitcoins have a big problem with store of value because the Bitcoin has become an instrument of extreme speculation, so that its exchange value—for, say, U.S. dollars—has leaped up from 32 cents to 32 dollars, then crashed...and more than once. How do you store value that way? You don't. The advocates of Bitcoins urge that this speculative volatility occurs because there are so few Bitcoins and the medium is so new. Fair enough, but right now they are not an instrument for savings, just extreme speculation.

It would help if Bitcoins were accepted as real money in payment for real goods and services—and you would be surprised, as I was, at the extent to which they ARE accepted. But, in the big picture, the acceptance is trivial. In fairness, every "real" currency doubtless went through this process of gaining acceptance. Except in the case of government fiat currencies, of course, where legal tender laws forced everyone to accept the new currency in satisfaction of "all debts public and private."

But the biggest problem with Bitcoin, today, may be its perceived virtue. If, in fact, it is proof against inflation, proof against government manipulation of the money supply, free from government currency controls, and free from the exchange controls governments raise against foreign currencies, then governments are going to hate it. What if you were the only person in a country legally allowed to print as much of its currency as you wished? How would you feel if a new currency appeared so people did not have to accept your currency (checks). They could protect themselves against your debasement of the currency. If you had the power of the police, you would come down hard. And that, perhaps, is the biggest problem of Bitcoin. The stories of FBI investigations and arrests are in the news.

The most recent headlines are arrests of Bitcoin entrepreneurs for letting the Bitcoin be used to purchase drugs. In other words, the creators of Bitcoins are held responsible for its use in purchasing illegal goods. Although government creates all of our dollars, it is never held responsible for their use; banks are expected to police the virtuous use of dollars.

What is most fascinating, to me, as I grope slowly toward understanding the Bitcoin, is that it is a virtual laboratory demonstration of the nature of money—its indispensable value in exchange and savings, its vulnerability to government monopoly and manipulation, what it requires to be "real," what the government purveyors of fiat currencies will do to stop it.

It suggests, to me, that a lot of (mostly) young people have caught on to the government's deadly racket as monopolist of money—and are way, way ahead of government in using technology, cryptography, contract, and private arrangements to protect wealth. Whether or not they have hit upon the answer, and whether or not governments can shut them down, remains to be seen.