All About Bitcoins
March 16, 2018

Bitcoin – background

Bitcoin is a virtual currency that is created from computer code. Unlike a real-world currency such as the US dollar or the Euro, it has no central bank and is not backed by any government. Instead, its community of users control and regulate it.

Bitcoin was launched in 2009 as a bit of encrypted software written by someone using the Japanese-sounding name Satoshi Nakamoto. In the year 2015, secretive Australian entrepreneur Craig Wright said he was the creator, however there are doubts over this. Other digital currencies followed but bitcoin was by far the most popular.

Just like other currencies, bitcoins can be exchanged for goods and services – or for other currencies – provided the other party is willing to accept them. Advocates say this makes it an efficient alternative to traditional currencies because it is not subject to the whims of a state that may wish to devalue its money to inflate away debt.

The way the Bitcoins operate:

  • Transactions happen when heavily encrypted codes (meaning – secret codes) travel across a computer network.
  • The network as a whole monitors and verifies the transaction in a process that is intended to ensure no single bitcoin can be spent in more than one place simultaneously.
  • Users can “mine” bitcoins which is to bring new ones into being by having their computers run complicated and increasingly difficult algorithms. However, the model is limited and only 21 million units will ever be created.
  • Like any other currency, a bitcoin fluctuates. But unlike most real-world currencies, bitcoin’s value has swung wildly in a short period.
  • When the unit first came into existence it was worth a few US cents. Its price topped out at $1,165.89 on the Bitcoin Price Index, an average of major exchanges, in 2013.
  • There are presently more than 16 million units in circulation. Because it is limited its price will increase in the long run, making it less useful as a currency and more as a vehicle to store value, like gold.

Blockchain Technology, the backbone of Bitcoins:

  • Blockchain is the formalization of the hawala system through Internet technology. (If you are a registered student, do watch the learning video on Hawala Transaction at Conduiraonline)
  • It allows for the money to move from one place to another through a trusted channel. Hence, a blockchain is a clearing system.

Blockchain Technology and Bitcoins:

  • Using blockchain technology a set of shares in a trading entity are created that had an initial set value and fixed number (much like the face value and number of shares offered in an initial public offering).
  • It is expected that these shares would become the medium of exchange through which people trade goods and services.
  • Since the number of shares is fixed, demand for them goes up over a period of time as more and more people use the shares to settle their transactions; so, the bet is that each bitcoin’s value goes up stratospherically since there will never ever be any more bitcoins issued.

The merits of Bitcoins:

  • Bitcoins act as a hedge against currencies that are weakening against the US dollar.
  • Bitcoins can be a virtual safe haven at a time of global economic uncertainty sparked by factors such as Donald Trump and Brexit, as well as country-specific issues such as the chaotic withdrawal of high-value notes in India, and Chinese controls on the purchase of foreign currency.
  • The currency can also be strengthened by the rise of digital payments and the dwindling supply of new bitcoins.
  • There might be initial teething problems, but this is the way for the next crypto currency.

The demerits of Bitcoins:

  • Volatility, Security Issues are the major flaws that might undermine the usability of the bitcoins.
  • Bitcoins are vulnerable to theft as they are stored in digital wallets. It is akin to stealing passwords and compromising users’ data on the internet. A major Hong Kong-based bitcoin exchange suspended trading after $65 million in the virtual unit was reportedly stolen by hackers.
  • The anonymous virtual currency movement can lead to dubious and malicious transactions. These include the use on the underground Silk Road website (anonymous drug market), where users could buy drugs and guns.

The regulatory mechanism of Bitcoins:

  • Regulation doesn’t know how to regulate Bitcoins and Blockchain. The challenge is that most regulations today are defined by the product they are meant to regulate.
  • The innovation by the blockchain has a horizontal dimension as it is a cross-cutting innovation that will affect many different sectors of society. But, regulation is vertical. It is to say that Regulation takes a single sphere and lays the rules top to bottom. But, when there are two spheres which are regulated by two systems, how these be considered together is the question to be answered.
  • Bitcoin is a decentralized payment system that operates independently of any government or central bank, people can exchange value on a peer-to-peer basis, without passing through any financial intermediary.
  • This means Bitcoin is agnostic to any jurisdictional rules.

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