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Waking From the Bitcoin Dream

NEW YORK (TheStreet) -- There was always something utopian about bitcoin, the idea that you could have money without government.

It attracted libertarians like an Ayn Rand seminar, a Ron Paul speech and a Rand Paul bumper sticker rolled into one.

The U.S. had nongovernment money for almost 80 years. From the fall of the Second Bank of the United States under Andrew Jackson in 1836, to the rise of the Federal Reserve under Woodrow Wilson 100 years ago, money in the U.S. was backed exclusively by gold.

When the government ran out of gold, as it did in 1895, it had to go to the market just like any other deadbeat. Those who protested this "cross of gold," such as William Jennings Bryan, were politically crucified on it.

But that pregovernment money was subject to sudden collapse, if the bankers backing it faced a sudden run by depositors. This happened repeatedly in the 19th century. It happened to bitcoin this week when the Mt. Gox exchange suddenly went dark.

Jens Finkhauser, who works at spriteCloud in Germany, says the Mt. Gox failure was a technical event, calling the Bitcoin protocol, "the worst documented of any I have seen in my career." Bitcoin blogger Ryan Selkis, writing as Ryan Galt, suggested something more nefarious was going on.

Other bitcoin players put out a statement at The Coinbase blog, saying they would coordinate to reassure the market, and calling for a higher bar on market makers:

"including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading."

The collapse even caused Sen. Tom Carper (D., Del.), a virtual currencies enthusiast, to go poetic with a statement calling on the government to "steer the boat away from nefarious actors," while industry partners "row the boat into law abiding waters."

What it all comes down to is this. For any medium of exchange to work, it needs a strong hand to back it up. Gold had J.P. Morgan, not the institution run by Jamie Dimon but the real man, in the flesh, rosacea'd nose and all.

Bitcoin doesn't have that.

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