What is Bitcoin?
Bitcoin has become one of the world’s most famous digital currencies. It was allegedly developed by a software engineer in 2009. It does not exist physically and so far, it is not regulated by any country or state bank. Users maintain and update information on bitcoin on the basis of the bitcoin protocol.
Advantages of Bitcoins
Limited circulation – The number of bitcoins in circulation are currently limited by bitcoin protocol to 21 million bitcoins. In contrast, central banks have the authority to issue additional currency, which, if not accompanied by GDP growth, may lead to a surge in inflation and related economic problems.
As of Jan 2018, there are 16.8 million bitcoins in circulation with a total value of $250 billion.
Low maintenance costs – It is very easy to set up a bitcoin account and it has no banking hurdles of KYC’s (know your customer and origin of the money!) It can be set up in seconds, is free of charge, and cannot be disabled by a third-party.
However, the anonymous nature of bitcoin, a byproduct of its decentralization, makes it a perfect tool for illegal activity. Two famous examples include:
Illegal drug trade: one of the most well-known examples of the use of bitcoins in the illegal drug trade stems from bitcoin-based transactions on the online drug bazaar Silk Road, which was launched in February 2011 and shut down by the US Federal Government in October 2013.
Terrorism: cyber terrorists have used bitcoins as the currency of choice to receive ransom payments. According to a Cyber Threat Alliance report, ransom payments made via the bitcoin network to hackers through the CryptoWall virus are estimated at $325 million total. Without meeting the essential prerequisite of trust in a currency, the widespread expansion remains doubtful.
Read more: Bitcoin | Soft and Vulnerable Underbelly
Is Bitcoin money?
Money has three major functions: it serves as (1) a means of payment for goods and services, (2) it acts as a store of value for our savings and finally (3) it is a unit of account by which it can be used to value goods and services.
Medium of exchange – Bitcoin is held electronically and can increasingly be used to buy goods and services on the internet. In Pakistan, an online service called Bitcoin.pk is providing services such as Easy loads via bitcoins, although the State Bank of Pakistan treats it as a commodity rather than a currency.
Barclays Bank in the UK has become the first bank in the country to accept bitcoins. The simplicity of bitcoin has also proven attractive to the Swiss city of Zag, which plans to initiate a 6-month pilot program in July under which local citizens may pay for public services with bitcoins.
Store of value and Unit of account – This requires the value of a currency to be relatively stable. So that if you tuck it away and come back after a while, it is still valuable. Well, in the case of Bitcoin – its been a rollercoaster ride – participants that saw astronomical gains over the past year are now seeing a precipitous decline.
However, a bitcoin itself is worth only what market participants value it as. Most people are buying it not because they believe it is a future global currency but because they expect it to continue to appreciate.
Unlike land that can be priced at zero but still have a value as a house can be built on it, or a currency that has sovereign guaranty whose value can change depending on government policies. A bitcoin in itself has no derivative value.
This leaves it open to a Ponzi style collapse scenario which requires it’s value to go up as more people jump in and buy it. Bitcoin was worth nothing for several years after it was launched in 2009 and stayed worthless until mid-2012.
It finally hit $100 in April 2013 and saw further price rises. However, in 2017 it rose exponentially from less than $900 from the start of the year to its highest price ever at $19,289 on 17th December 2017. In the last couple of weeks, it has lost over 40% of its value.
Its current value (early – February ) against the US dollar is around $6,000 on the Luxembourg-based Bitstamp exchange. After the spike in December, the price went down after China announced its ban and then further declined on South Korea announcement that it was thinking of banning cryptocurrency exchanges.
15% of all daily trading of Bitcoin is done in South Korea, with quantum AI technologies increasingly being used in the trading algorithms. Recently, India’s Finance Minister, Arun Jaitley, announced during his budget speech that the country would take steps to prevent the use of cryptocurrencies. Fears were expressed over their use in financing illegitimate activities.
Bitcoin’s price initially was driven by demand for the digital currency in China. Chinese investors were buying not only because the Yuan was weakening, but also because the Chinese government cracked down on corruption and money laundering. Bitcoin has the advantage that its holdings cannot be identified.
Tulip mania – often considered the first recorded speculative bubble. It saw within three years a rise in the price of Tulips from that of a common onion to equivalent to over 12-acre estates in Amsterdam and then falling back to that of the price of the onion! People lost fortunes.
Should we invest in it?
One of the world’s largest investors, Warren Buffet has predicted that he ‘sees it coming to a bad ending.’ And J.P. Morgan Chase CEO Jamie Dimon in September 2017 said it was a fraud, “it’s just not a real thing, eventually, it will be closed,” and “if you’re stupid enough to buy it, you’ll pay the price for it one day.” Noble Prize-winning Economist, Robert Shiller says Bitcoin is likely to totally collapse and be forgotten.
But maybe you know better?