Bitcoin: A new kind of money and its bumpy road forward

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Source: Coindesk.com

Kyle Riecker, Layout Editor

In 2012, one Bitcoin was worth around $10. Today, the digital currency is worth nearly 100 times that amount, breaking the $1,000 barrier over the New Year before slumping back on news of Chinese regulation.

Simply put by Andreas Antonopoulos, Bitcoin is the internet for money. It is analogous to the internet, but instead of transferring information, it transfers value.

Bitcoin was created in 2008 by Satoshi Nakamoto, an anonymous coder who submitted a concept paper on Bitcoin to a cryptography email list. The paper was developed into open-source software and launched as the Bitcoin network in 2009.

Many attempts have been made to crack Satoshi’s true identity, including a notable flubbed attempt by Newsweek that made their front page. It is probably to Satoshi’s benefit to remain anonymous, with all of the fuss that his creation has stirred up.

Satoshi is sitting on a treasure trove of digital gold. Satoshi mined many of the earliest Bitcoins when the network was small and there wasn’t much competition to mine the virtual currency. Satoshi mined around 1 million Bitcoin, an amount worth around $1 billion. The amount has remained unspent and dormant. It’s been theorized that Satoshi may be a group of coders, and not one single person or even wilder theories claim that Bitcoin is a clandestine CIA project.

Bitcoin is mined like gold, but instead of using pick axes and shovels, computing power is used to solve extremely complex math problems. Anyone who mines Bitcoin competes to solve the problem, and whoever is the first to do so is rewarded newly-minted Bitcoin. The amount of Bitcoins awarded decreases over time, and will eventually be zero. Additionally, there will only be 21 million Bitcoin ever created.   Decreasing the supply of Bitcoin has caused deflation, increasing the value of the currency.

Bitcoin keeps track of transactions on an open and distributed ledger, called a blockchain. A blockchain is much like a digital checkbook, keeping track of payments. The network continually talks to itself to verify that everyone has the same record of transactions. An interesting aspect of the blockchain is that it is completely public; every transaction in the history of Bitcoin is searchable.

The most profound innovation that blockchain technology achieves is a method of transferring value without a trusted third party. This means that bankers, The Federal Reserve, emperors, and the like, who have stood as gatekeepers for controlling monetary supply and distribution for all of recorded history, are becoming obsolete. Much like the horse drawn carriage, cassette tapes, and landlines, blockchain technology has started to phase out banks. By removing politicians and bankers’ potential to abuse authority, Bitcoin shifts power back to ordinary, working class people. It makes the individual their own bank. As with any new technology or idea, many challenges arise.

“Bitcoin holds great promise as a secure, globally-accepted currency” said Assistant Professor of Cybersecurity Austen Givens. “I don’t see Bitcoin going mainstream anytime soon, though. Governments everywhere, including the U.S., have a vested interest in maintaining a monopoly on the use of certain currencies. Bitcoin threatens that monopoly.”

Indeed, governments have struggled to regulate Bitcoin and other cryptocurrencies under traditional definitions.   The United States currently defines it as a commodity, like gold.

Much of Bitcoin’s value is driven by its largest market, China. China purposefully devalues its currency, the Yuan, in order to better position its massive exports market. It also has strict controls on moving currency in and out of the country. For these reasons, Chinese investors have flocked to Bitcoin as a way to store value, and to move money in and out of China without permission from the central bank. As a result, any news of Chinese regulation or cracking down on the use of Bitcoin sends its value into a freefall.

There are many positives and negatives to this technology. The first is its potential to revolutionize online retail. Bitcoin is accepted by tens of thousands of merchants online, including corporate giants such as Microsoft, Overstock.com, Dell, and Steam Games, as well as non-profits such as Mozilla and WikiLeaks. Merchants no longer have to pay hefty fees to a third party payment processor like Visa or Mastercard when they accept Bitcoin.

Bitcoin serves as a store of value in countries where inflation runs rampant, like Argentina. The national currency, the Argentine Peso (ARS), is notorious for hyperinflation, which can cause irrevocable damage to middle and lower class Argentinians’ savings. Strict currency controls are in place that prohibit moving savings out of the ARS. Many desperate Argentinians turn to seedy black market currency exchanges to change out the ARS for US dollars. This makes Bitcoin a promising alternative for their nest eggs.

Another potential use of the technology are micropayments to online content providers in place of ad revenue. A problem for online content providers in recent years has been getting consumers to purchase their content. Since adblockers have become increasingly popular, online ad revenue is on the decline.

One solution, which the Brave web browser has harnessed, allows viewers of a website to pay the content provider directly, with Bitcoin micropayments. It would be infeasible to charge a credit card or PayPal 10 cents to read an article or watch a video online.

Bitcoin is designed to send sums of any amount of money globally, for little to no fee, making micropayments a plausible solution for content providers.

On the negative side, Bitcoin has a bit of a shady reputation. This is because it is used by cybercriminals including online drug lords and hackers, because it is not easily traced. Many Ransomware hackers demand Bitcoin as a means of payment from their victims to unencrypt their infected hard drives. Hackers also have found ways to steal Bitcoin from those who hold the currency, with their main target being Bitcoin exchanges, which will change fiat currencies like the Euro or the dollar for Bitcoin.

“The Bitcoin market does not solve the counterparty risk – for instance, Bitcoins could be stolen from exchanges. Since these exchanges are lightly – if any- regulated, investors simply lost their entire holdings as the exchanges fall apart.” said Professor of Finance Zhaodan Huang,.

The most notorious Bitcoin heist took place in early 2014 when the largest Bitcoin exchange at the time, Toyko-based Mt. Gox, declared insolvency, losing 500,000 Bitcoin to an unknown hacker. Mt. Gox’s former CEO, Mark Karpeles, is facing criminal charges related to the heist. The hack sent the value of Bitcoin tumbling from $1,200 to a little over $200. It has taken nearly three years to undo the harm Mt. Gox caused to consumer confidence in Bitcoin.

Critics of Bitcoin have pronounced the project dead after Mt. Gox’s collapse and again on multiple occasions, yet it remains the most popular digital cryptocurrency, and by far the most valuable.

“Regardless (of) government’s position, In the long run, the technology and idea behind Bitcoin could serve as an innovative method to improve money payments and transfers.” Huang said.

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