A major Japanese insurance holding company, Mistui Sumitomo Insurance, has announced its intention to launch a new insurance on virtual currency thefts and disappearances as early as late November.

Insurance for virtual currencies is a new endeavor for Japan, and emerged as a response to increasing use of virtual currencies such as Bitcoin. This is expected to increase the penetration of virtual currencies, as it will give users comfort against the fear of cyber thefts. Bitcoin value has been rising in recent years, and in the last year the value of 1 Bitcoin went up from US$300 to US$800.

What Is Virtual Currency?

Bitcoin is a popular example of virtual currency that can be used in selected services. It is earned via a process called ‘mining’ (Internet software program decoding). The ‘mined’ Bitcoin is handled as data, and doesn’t involve coins or notes.

In economics, an item becomes currency when the people decide to accept it as a currency. So what is it that makes people accept something as a currency?

One factor is ‘trust in the issuer of the currency’. For instance, people use the British Pound as a currency because they trust the Bank of England, the British economy, and the value of work undertaken by British people.

With Bitcoin, however, the basis of trust in the currency lies in a system called blockchain: the public ledger of all Bitcoin transactions.

All Bitcoin transactions are recorded and therefore any falsified data appears clearly in the ledger. So the trust in Bitcoin and its subsequent popularity comes from the fact that the system brings to light any criminal actions: it’s popularity doesn’t stem from trust in the issuer.

The Principles of Money

To evaluate the merits of virtual currency, we need to go back to first principles and look at what ‘money’ actually is. Money is the materialization of the gratitude that a person feels for work provided. This gratitude appears in the form of payments, which circulates in the economy.

In comparison, virtual currencies such as Bitcoin are treated more like gambling. Therefore, as they currently stand, virtual currencies are inferior to money because money comes from a feeling of gratitude for a person contributing to society.

The use of virtual currencies will probably spread for some time, but it is important to keep questioning what it is that gives it value and trust.